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G.R. No.

L-22973 January 30, 1968

MAMBULAO LUMBER COMPANY, plaintiff-appellant,


vs.
PHILIPPINE NATIONAL BANK and ANACLETO HERALDO Deputy Provincial Sheriff of Camarines Norte, defendants-appellees.

Ernesto P. Vilar and Arthur Tordesillas for plaintiff-appellant.


Tomas Besa and Jose B. Galang for defendants-appellees.

ANGELES, J.:

An appeal from a decision, dated April 2, 1964, of the Court of First Instance of Manila in Civil Case No. 52089, entitled "Mambulao Lumber
Company, plaintiff, versus Philippine National Bank and Anacleto Heraldo, defendants", dismissing the complaint against both defendants and
sentencing the plaintiff to pay to defendant Philippine National Bank (PNB for short) the sum of P3,582.52 with interest thereon at the rate of 6% per
annum from December 22, 1961 until fully paid, and the costs of suit.

In seeking the reversal of the decision, the plaintiff advances several propositions in its brief which may be restated as follows:

1. That its total indebtedness to the PNB as of November 21, 1961, was only P56,485.87 and not P58,213.51 as concluded by the court a quo;
hence, the proceeds of the foreclosure sale of its real property alone in the amount of P56,908.00 on that date, added to the sum of P738.59 it
remitted to the PNB thereafter was more than sufficient to liquidate its obligation, thereby rendering the subsequent foreclosure sale of its chattels
unlawful;
2. That it is not liable to pay PNB the amount of P5,821.35 for attorney's fees and the additional sum of P298.54 as expenses of the foreclosure sale;
3. That the subsequent foreclosure sale of its chattels is null and void, not only because it had already settled its indebtedness to the PNB at the time
the sale was effected, but also for the reason that the said sale was not conducted in accordance with the provisions of the Chattel Mortgage Law
and the venue agreed upon by the parties in the mortgage contract;
4. That the PNB, having illegally sold the chattels, is liable to the plaintiff for its value; and
5. That for the acts of the PNB in proceeding with the sale of the chattels, in utter disregard of plaintiff's vigorous opposition thereto, and in taking
possession thereof after the sale thru force, intimidation, coercion, and by detaining its "man-in-charge" of said properties, the PNB is liable to
plaintiff for damages and attorney's fees.

The antecedent facts of the case, as found by the trial court, are as follows:

On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the Naga Branch of defendant PNB and the former
offered real estate, machinery, logging and transportation equipments as collaterals. The application, however, was approved for a loan of
P100,000 only. To secure the payment of the loan, the plaintiff mortgaged to defendant PNB a parcel of land, together with the buildings
and improvements existing thereon, situated in the poblacion of Jose Panganiban (formerly Mambulao), province of Camarines Norte, and
covered by Transfer Certificate of Title No. 381 of the land records of said province, as well as various sawmill equipment, rolling unit and
other fixed assets of the plaintiff, all situated in its compound in the aforementioned municipality.

On August 2, 1956, the PNB released from the approved loan the sum of P27,500, for which the plaintiff signed a promissory note
wherein it promised to pay to the PNB the said sum in five equal yearly installments at the rate of P6,528.40 beginning July 31, 1957, and
every year thereafter, the last of which would be on July 31, 1961.

On October 19, 1956, the PNB made another release of P15,500 as part of the approved loan granted to the plaintiff and so on the
said date, the latter executed another promissory note wherein it agreed to pay to the former the said sum in five equal yearly installments
at the rate of P3,679.64 beginning July 31, 1957, and ending on July 31, 1961.

The plaintiff failed to pay the amortization on the amounts released to and received by it. Repeated demands were made upon the
plaintiff to pay its obligation but it failed or otherwise refused to do so. Upon inspection and verification made by employees of the PNB, it
was found that the plaintiff had already stopped operation about the end of 1957 or early part of 1958.

On September 27, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte requesting him to take possession of the
parcel of land, together with the improvements existing thereon, covered by Transfer Certificate of Title No. 381 of the land records of
Camarines Norte, and to sell it at public auction in accordance with the provisions of Act No. 3135, as amended, for the satisfaction of the
unpaid obligation of the plaintiff, which as of September 22, 1961, amounted to P57,646.59, excluding attorney's fees. In compliance with
the request, on October 16, 1961, the Provincial Sheriff of Camarines Norte issued the corresponding notice of extra-judicial sale and sent
a copy thereof to the plaintiff. According to the notice, the mortgaged property would be sold at public auction at 10:00 a.m. on November
21, 1961, at the ground floor of the Court House in Daet, Camarines Norte.

On November 6, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte requesting him to take possession of the
chattels mortgaged to it by the plaintiff and sell them at public auction also on November 21, 1961, for the satisfaction of the sum of
P57,646.59, plus 6% annual interest therefore from September 23, 1961, attorney's fees equivalent to 10% of the amount due and the
costs and expenses of the sale. On the same day, the PNB sent notice to the plaintiff that the former was foreclosing extrajudicially the
chattels mortgaged by the latter and that the auction sale thereof would be held on November 21, 1961, between 9:00 and 12:00 a.m., in
Mambulao, Camarines Norte, where the mortgaged chattels were situated.

On November 8, 1961, Deputy Provincial Sheriff Anacleto Heraldo took possession of the chattels mortgaged by the plaintiff and
made an inventory thereof in the presence of a PC Sergeant and a policeman of the municipality of Jose Panganiban. On November 9,
1961, the said Deputy Sheriff issued the corresponding notice of public auction sale of the mortgaged chattels to be held on November 21,
1961, at 10:00 a.m., at the plaintiff's compound situated in the municipality of Jose Panganiban, Province of Camarines Norte.

On November 19, 1961, the plaintiff sent separate letters, posted as registered air mail matter, one to the Naga Branch of the PNB
and another to the Provincial Sheriff of Camarines Norte, protesting against the foreclosure of the real estate and chattel mortgages on the
grounds that they could not be effected unless a Court's order was issued against it (plaintiff) for said purpose and that the foreclosure
proceedings, according to the terms of the mortgage contracts, should be made in Manila. In said letter to the Naga Branch of the PNB, it
was intimated that if the public auction sale would be suspended and the plaintiff would be given an extension of ninety (90) days, its
obligation would be settled satisfactorily because an important negotiation was then going on for the sale of its "whole interest" for an
amount more than sufficient to liquidate said obligation.

The letter of the plaintiff to the Naga Branch of the PNB was construed by the latter as a request for extension of the foreclosure sale
of the mortgaged chattels and so it advised the Sheriff of Camarines Norte to defer it to December 21, 1961, at the same time and place. A
copy of said advice was sent to the plaintiff for its information and guidance.

The foreclosure sale of the parcel of land, together with the buildings and improvements thereon, covered by Transfer Certificate of
Title No. 381, was, however, held on November 21, 1961, and the said property was sold to the PNB for the sum of P56,908.00, subject to
the right of the plaintiff to redeem the same within a period of one year. On the same date, Deputy Provincial Sheriff Heraldo executed a
certificate of sale in favor of the PNB and a copy thereof was sent to the plaintiff.

In a letter dated December 14, 1961 (but apparently posted several days later), the plaintiff sent a bank draft for P738.59 to the
Naga Branch of the PNB, allegedly in full settlement of the balance of the obligation of the plaintiff after the application thereto of the sum
of P56,908.00 representing the proceeds of the foreclosure sale of parcel of land described in Transfer Certificate of Title No. 381. In the
said letter, the plaintiff reiterated its request that the foreclosure sale of the mortgaged chattels be discontinued on the grounds that the
mortgaged indebtedness had been fully paid and that it could not be legally effected at a place other than the City of Manila.

In a letter dated December 16, 1961, the plaintiff advised the Provincial Sheriff of Camarines Norte that it had fully paid its obligation
to the PNB, and enclosed therewith a copy of its letter to the latter dated December 14, 1961.

On December 18, 1961, the Attorney of the Naga Branch of the PNB, wrote to the plaintiff acknowledging the remittance of P738.59
with the advice, however, that as of that date the balance of the account of the plaintiff was P9,161.76, to which should be added the
expenses of guarding the mortgaged chattels at the rate of P4.00 a day beginning December 19, 1961. It was further explained in said
letter that the sum of P57,646.59, which was stated in the request for the foreclosure of the real estate mortgage, did not include the 10%
attorney's fees and expenses of the sale. Accordingly, the plaintiff was advised that the foreclosure sale scheduled on the 21st of said
month would be stopped if a remittance of P9,161.76, plus interest thereon and guarding fees, would be made.

On December 21, 1961, the foreclosure sale of the mortgaged chattels was held at 10:00 a.m. and they were awarded to the PNB
for the sum of P4,200 and the corresponding bill of sale was issued in its favor by Deputy Provincial Sheriff Heraldo.

In a letter dated December 26, 1961, the Manager of the Naga Branch of the PNB advised the plaintiff giving it priority to repurchase
the chattels acquired by the former at public auction. This offer was reiterated in a letter dated January 3, 1962, of the Attorney of the Naga
Branch of the PNB to the plaintiff, with the suggestion that it exercise its right of redemption and that it apply for the condonation of the
attorney's fees. The plaintiff did not follow the advice but on the contrary it made known of its intention to file appropriate action or actions
for the protection of its interests.

On May 24, 1962, several employees of the PNB arrived in the compound of the plaintiff in Jose Panganiban, Camarines Norte, and
they informed Luis Salgado, Chief Security Guard of the premises, that the properties therein had been auctioned and bought by the PNB,
which in turn sold them to Mariano Bundok. Upon being advised that the purchaser would take delivery of the things he bought, Salgado
was at first reluctant to allow any piece of property to be taken out of the compound of the plaintiff. The employees of the PNB explained
that should Salgado refuse, he would be exposing himself to a litigation wherein he could be held liable to pay big sum of money by way of
damages. Apprehensive of the risk that he would take, Salgado immediately sent a wire to the President of the plaintiff in Manila, asking
advice as to what he should do. In the meantime, Mariano Bundok was able to take out from the plaintiff's compound two truckloads of
equipment.

In the afternoon of the same day, Salgado received a telegram from plaintiff's President directing him not to deliver the "chattels"
without court order, with the information that the company was then filing an action for damages against the PNB. On the following day,
May 25, 1962, two trucks and men of Mariano Bundok arrived but Salgado did not permit them to take out any equipment from inside the
compound of the plaintiff. Thru the intervention, however, of the local police and PC soldiers, the trucks of Mariano Bundok were able
finally to haul the properties originally mortgaged by the plaintiff to the PNB, which were bought by it at the foreclosure sale and
subsequently sold to Mariano Bundok.

Upon the foregoing facts, the trial court rendered the decision appealed from which, as stated in the first paragraph of this opinion, sentenced
the Mambulao Lumber Company to pay to the defendant PNB the sum of P3,582.52 with interest thereon at the rate of 6% per annum from
December 22, 1961 (day following the date of the questioned foreclosure of plaintiff's chattels) until fully paid, and the costs. Mambulao Lumber
Company interposed the instant appeal.

We shall discuss the various points raised in appellant's brief in seriatim.

The first question Mambulao Lumber Company poses is that which relates to the amount of its indebtedness to the PNB arising out of the
principal loans and the accrued interest thereon. It is contended that its obligation under the terms of the two promissory notes it had executed in
favor of the PNB amounts only to P56,485.87 as of November 21, 1961, when the sale of real property was effected, and not P58,213.51 as found
by the trial court.

There is merit to this claim. Examining the terms of the promissory note executed by the appellant in favor of the PNB, we find that the agreed
interest on the loan of P43,000.00 — P27,500.00 released on August 2, 1956 as per promissory note of even date (Exhibit C-3), and P15,500.00
released on October 19, 1956, as per promissory note of the same date (Exhibit C-4) — was six per cent (6%) per annum from the respective date of
said notes "until paid". In the statement of account of the appellant as of September 22, 1961, submitted by the PNB, it appears that in arriving at the
total indebtedness of P57,646.59 as of that date, the PNB had compounded the principal of the loan and the accrued 6% interest thereon each time
the yearly amortizations became due, and on the basis of these compounded amounts charged additional delinquency interest on them up to
September 22, 1961; and to this erroneously computed total of P57,646.59, the trial court added 6% interest per annum from September 23, 1961 to
November 21 of the same year. In effect, the PNB has claimed, and the trial court has adjudicated to it, interest on accrued interests from the time
the various amortizations of the loan became due until the real estate mortgage executed to secure the loan was extra-judicially foreclosed on
November 21, 1961. This is an error. Section 5 of Act No. 2655 expressly provides that in computing the interest on any obligation, promissory note
or other instrument or contract, compound interest shall not be reckoned, except by agreement, or in default thereof, whenever the debt is judicially
claimed. This is also the clear mandate of Article 2212 of the new Civil Code which provides that interest due shall earn legal interest only from the
time it is judicially demanded, and of Article 1959 of the same code which ordains that interest due and unpaid shall not earn interest. Of course, the
parties may, by stipulation, capitalize the interest due and unpaid, which as added principal shall earn new interest; but such stipulation is nowhere to
be found in the terms of the promissory notes involved in this case. Clearly therefore, the trial court fell into error when it awarded interest on accrued
interests, without any agreement to that effect and before they had been judicially demanded.

Appellant next assails the award of attorney's fees and the expenses of the foreclosure sale in favor of the PNB. With respect to the amount of
P298.54 allowed as expenses of the extra-judicial sale of the real property, appellant maintains that the same has no basis, factual or legal, and
should not have been awarded. It likewise decries the award of attorney's fees which, according to the appellant, should not be deducted from the
proceeds of the sale of the real property, not only because there is no express agreement in the real estate mortgage contract to pay attorney's fees
in case the same is extra-judicially foreclosed, but also for the reason that the PNB neither spent nor incurred any obligation to pay attorney's fees in
connection with the said extra-judicial foreclosure under consideration.

There is reason for the appellant to assail the award of P298.54 as expenses of the sale. In this respect, the trial court said:

The parcel of land, together with the buildings and improvements existing thereon covered by Transfer Certificate of Title No. 381,
was sold for P56,908. There was, however, no evidence how much was the expenses of the foreclosure sale although from the pertinent
provisions of the Rules of Court, the Sheriff's fees would be P1 for advertising the sale (par. k, Sec. 7, Rule 130 of the Old Rules) and
P297.54 as his commission for the sale (par. n, Sec. 7, Rule 130 of the Old Rules) or a total of P298.54.

There is really no evidence of record to support the conclusion that the PNB is entitled to the amount awarded as expenses of the extra-
judicial foreclosure sale. The court below committed error in applying the provisions of the Rules of Court for purposes of arriving at the amount
awarded. It is to be borne in mind that the fees enumerated under paragraphs k and n, Section 7, of Rule 130 (now Rule 141) are demandable, only
by a sheriff serving processes of the court in connection with judicial foreclosure of mortgages under Rule 68 of the new Rules, and not in cases of
extra-judicial foreclosure of mortgages under Act 3135. The law applicable is Section 4 of Act 3135 which provides that the officer conducting the
sale is entitled to collect a fee of P5.00 for each day of actual work performed in addition to his expenses in connection with the foreclosure sale.
Admittedly, the PNB failed to prove during the trial of the case, that it actually spent any amount in connection with the said foreclosure sale. Neither
may expenses for publication of the notice be legally allowed in the absence of evidence on record to support it. 1 It is true, as pointed out by the
appellee bank, that courts should take judicial notice of the fees provided for by law which need not be proved; but in the absence of evidence to
show at least the number of working days the sheriff concerned actually spent in connection with the extra-judicial foreclosure sale, the most that he
may be entitled to, would be the amount of P10.00 as a reasonable allowance for two day's work — one for the preparation of the necessary notices
of sale, and the other for conducting the auction sale and issuance of the corresponding certificate of sale in favor of the buyer. Obviously, therefore,
the award of P298.54 as expenses of the sale should be set aside.

But the claim of the appellant that the real estate mortgage does not provide for attorney's fees in case the same is extra-judicially foreclosed,
cannot be favorably considered, as would readily be revealed by an examination of the pertinent provision of the mortgage contract. The parties to
the mortgage appear to have stipulated under paragraph (c) thereof, inter alia:

. . . For the purpose of extra-judicial foreclosure, the Mortgagor hereby appoints the Mortgagee his attorney-in-fact to sell the
property mortgaged under Act 3135, as amended, to sign all documents and to perform all acts requisite and necessary to accomplish said
purpose and to appoint its substitute as such attorney-in-fact with the same powers as above specified. In case of judicial foreclosure, the
Mortgagor hereby consents to the appointment of the Mortgagee or any of its employees as receiver, without any bond, to take charge of
the mortgaged property at once, and to hold possession of the same and the rents, benefits and profits derived from the mortgaged
property before the sale, less the costs and expenses of the receivership; the Mortgagor hereby agrees further that in all cases, attorney's
fees hereby fixed at Ten Per cent (10%) of the total indebtedness then unpaid which in no case shall be less than P100.00 exclusive of all
fees allowed by law, and the expenses of collection shall be the obligation of the Mortgagor and shall with priority, be paid to the Mortgagee
out of any sums realized as rents and profits derived from the mortgaged property or from the proceeds realized from the sale of the said
property and this mortgage shall likewise stand as security therefor. . . .

We find the above stipulation to pay attorney's fees clear enough to cover both cases of foreclosure sale mentioned thereunder, i.e., judicially
or extra-judicially. While the phrase "in all cases" appears to be part of the second sentence, a reading of the whole context of the stipulation would
readily show that it logically refers to extra-judicial foreclosure found in the first sentence and to judicial foreclosure mentioned in the next sentence.
And the ambiguity in the stipulation suggested and pointed out by the appellant by reason of the faulty sentence construction should not be made to
defeat the otherwise clear intention of the parties in the agreement.

It is suggested by the appellant, however, that even if the above stipulation to pay attorney's fees were applicable to the extra-judicial
foreclosure sale of its real properties, still, the award of P5,821.35 for attorney's fees has no legal justification, considering the circumstance that the
PNB did not actually spend anything by way of attorney's fees in connection with the sale. In support of this proposition, appellant cites authorities to
the effect: (1) that when the mortgagee has neither paid nor incurred any obligation to pay an attorney in connection with the foreclosure sale, the
claim for such fees should be denied; 2 and (2) that attorney's fees will not be allowed when the attorney conducting the foreclosure proceedings is an
officer of the corporation (mortgagee) who receives a salary for all the legal services performed by him for the corporation. 3 These authorities are
indeed enlightening; but they should not be applied in this case. The very same authority first cited suggests that said principle is not absolute, for
there is authority to the contrary. As to the fact that the foreclosure proceeding's were handled by an attorney of the legal staff of the PNB, we are
reluctant to exonerate herein appellant from the payment of the stipulated attorney's fees on this ground alone, considering the express agreement
between the parties in the mortgage contract under which appellant became liable to pay the same. At any rate, we find merit in the contention of the
appellant that the award of P5,821.35 in favor of the PNB as attorney's fees is unconscionable and unreasonable, considering that all that the branch
attorney of the said bank did in connection with the foreclosure sale of the real property was to file a petition with the provincial sheriff of Camarines
Norte requesting the latter to sell the same in accordance with the provisions of Act 3135.

The principle that courts should reduce stipulated attorney's fees whenever it is found under the circumstances of the case that the same is
unreasonable, is now deeply rooted in this jurisdiction to entertain any serious objection to it. Thus, this Court has explained:

But the principle that it may be lawfully stipulated that the legal expenses involved in the collection of a debt shall be defrayed by the
debtor does not imply that such stipulations must be enforced in accordance with the terms, no matter how injurious or oppressive they
may be. The lawful purpose to be accomplished by such a stipulation is to permit the creditor to receive the amount due him under his
contract without a deduction of the expenses caused by the delinquency of the debtor. It should not be permitted for him to convert such a
stipulation into a source of speculative profit at the expense of the debtor.

Contracts for attorney's services in this jurisdiction stands upon an entirely different footing from contracts for the payment of
compensation for any other services. By express provision of section 29 of the Code of Civil Procedure, an attorney is not entitled in the
absence of express contract to recover more than a reasonable compensation for his services; and even when an express contract is
made the court can ignore it and limit the recovery to reasonable compensation if the amount of the stipulated fee is found by the court to
be unreasonable. This is a very different rule from that announced in section 1091 of the Civil Code with reference to the obligation of
contracts in general, where it is said that such obligation has the force of law between the contracting parties. Had the plaintiff herein made
an express contract to pay his attorney an uncontingent fee of P2,115.25 for the services to be rendered in reducing the note here in suit to
judgment, it would not have been enforced against him had he seen fit to oppose it, as such a fee is obviously far greater than is necessary
to remunerate the attorney for the work involved and is therefore unreasonable. In order to enable the court to ignore an express contract
for an attorney's fees, it is not necessary to show, as in other contracts, that it is contrary to morality or public policy (Art. 1255, Civil Code).
It is enough that it is unreasonable or unconscionable. 4

Since then this Court has invariably fixed counsel fees on a quantum meruit basis whenever the fees stipulated appear excessive,
unconscionable, or unreasonable, because a lawyer is primarily a court officer charged with the duty of assisting the court in administering impartial
justice between the parties, and hence, the fees should be subject to judicial control. Nor should it be ignored that sound public policy demands that
courts disregard stipulations for counsel fees, whenever they appear to be a source of speculative profit at the expense of the debtor or mortgagor. 5
And it is not material that the present action is between the debtor and the creditor, and not between attorney and client. As court have power to fix
the fee as between attorney and client, it must necessarily have the right to say whether a stipulation like this, inserted in a mortgage contract, is
valid. 6

In determining the compensation of an attorney, the following circumstances should be considered: the amount and character of the services
rendered; the responsibility imposed; the amount of money or the value of the property affected by the controversy, or involved in the employment;
the skill and experience called for in the performance of the service; the professional standing of the attorney; the results secured; and whether or
not the fee is contingent or absolute, it being a recognized rule that an attorney may properly charge a much larger fee when it is to be contingent
than when it is not. 7 From the stipulation in the mortgage contract earlier quoted, it appears that the agreed fee is 10% of the total indebtedness,
irrespective of the manner the foreclosure of the mortgage is to be effected. The agreement is perhaps fair enough in case the foreclosure
proceedings is prosecuted judicially but, surely, it is unreasonable when, as in this case, the mortgage was foreclosed extra-judicially, and all that the
attorney did was to file a petition for foreclosure with the sheriff concerned. It is to be assumed though, that the said branch attorney of the PNB
made a study of the case before deciding to file the petition for foreclosure; but even with this in mind, we believe the amount of P5,821.35 is far too
excessive a fee for such services. Considering the above circumstances mentioned, it is our considered opinion that the amount of P1,000.00 would
be more than sufficient to compensate the work aforementioned.

The next issue raised deals with the claim that the proceeds of the sale of the real properties alone together with the amount it remitted to the
PNB later was more than sufficient to liquidate its total obligation to herein appellee bank. Again, we find merit in this claim. From the foregoing
discussion of the first two errors assigned, and for purposes of determining the total obligation of herein appellant to the PNB as of November 21,
1961 when the real estate mortgage was foreclosed, we have the following illustration in support of this conclusion:

A. -
I. Principal Loan
(a) Promissory note dated August 2, 1956 P27,500.00
(1) Interest at 6% per annum from Aug. 2, 1956 to Nov. 21, 1961 8,751.78
(b) Promissory note dated October 19, 1956 P15,500.00
(1) Interest at 6% per annum from Oct.19, 1956 to Nov. 21, 1961 4,734.08
II. Sheriff's fees [for two (2) day's work] 10.00
III. Attorney's fee 1,000.00

Total obligation as of Nov. 21, 1961 P57,495.86


B. -
I. Proceeds of the foreclosure sale of the real estate mortgage on Nov. 21, 1961 P56,908.00
II. Additional amount remitted to the PNB on Dec. 18, 1961 738.59

Total amount of Payment made to PNB as of Dec. 18, 1961 P57,646.59

Deduct: Total obligation to the PNB P57,495.86

Excess Payment to the PNB P 150.73


========
From the foregoing illustration or computation, it is clear that there was no further necessity to foreclose the mortgage of herein appellant's
chattels on December 21, 1961; and on this ground alone, we may declare the sale of appellant's chattels on the said date, illegal and void. But we
take into consideration the fact that the PNB must have been led to believe that the stipulated 10% of the unpaid loan for attorney's fees in the real
estate mortgage was legally maintainable, and in accordance with such belief, herein appellee bank insisted that the proceeds of the sale of
appellant's real property was deficient to liquidate the latter's total indebtedness. Be that as it may, however, we still find the subsequent sale of
herein appellant's chattels illegal and objectionable on other grounds.

That appellant vigorously objected to the foreclosure of its chattel mortgage after the foreclosure of its real estate mortgage on November 21,
1961, can not be doubted, as shown not only by its letter to the PNB on November 19, 1961, but also in its letter to the provincial sheriff of
Camarines Norte on the same date. These letters were followed by another letter to the appellee bank on December 14, 1961, wherein herein
appellant, in no uncertain terms, reiterated its objection to the scheduled sale of its chattels on December 21, 1961 at Jose Panganiban, Camarines
Norte for the reasons therein stated that: (1) it had settled in full its total obligation to the PNB by the sale of the real estate and its subsequent
remittance of the amount of P738.59; and (2) that the contemplated sale at Jose Panganiban would violate their agreement embodied under
paragraph (i) in the Chattel Mortgage which provides as follows:

(i) In case of both judicial and extra-judicial foreclosure under Act 1508, as amended, the parties hereto agree that the corresponding
complaint for foreclosure or the petition for sale should be filed with the courts or the sheriff of the City of Manila , as the case may be; and
that the Mortgagor shall pay attorney's fees hereby fixed at ten per cent (10%) of the total indebtedness then unpaid but in no case shall it
be less than P100.00, exclusive of all costs and fees allowed by law and of other expenses incurred in connection with the said
foreclosure. [Emphasis supplied]

Notwithstanding the abovequoted agreement in the chattel mortgage contract, and in utter disregard of the objection of herein appellant to the
sale of its chattels at Jose Panganiban, Camarines Norte and not in the City of Manila as agreed upon, the PNB proceeded with the foreclosure sale
of said chattels. The trial court, however, justified said action of the PNB in the decision appealed from in the following rationale:

While it is true that it was stipulated in the chattel mortgage contract that a petition for the extra-judicial foreclosure thereof should be
filed with the Sheriff of the City of Manila, nevertheless, the effect thereof was merely to provide another place where the mortgage chattel
could be sold in addition to those specified in the Chattel Mortgage Law. Indeed, a stipulation in a contract cannot abrogate much less
impliedly repeal a specific provision of the statute. Considering that Section 14 of Act No. 1508 vests in the mortgagee the choice where
the foreclosure sale should be held, hence, in the case under consideration, the PNB had three places from which to select, namely: (1)
the place of residence of the mortgagor; (2) the place of the mortgaged chattels were situated; and (3) the place stipulated in the contract.
The PNB selected the second and, accordingly, the foreclosure sale held in Jose Panganiban, Camarines Norte, was legal and valid.

To the foregoing conclusion, We disagree. While the law grants power and authority to the mortgagee to sell the mortgaged property at a
public place in the municipality where the mortgagor resides or where the property is situated, 8 this Court has held that the sale of a mortgaged
chattel may be made in a place other than that where it is found, provided that the owner thereof consents thereto; or that there is an agreement to
this effect between the mortgagor and the mortgagee. 9 But when, as in this case, the parties agreed to have the sale of the mortgaged chattels in the
City of Manila, which, any way, is the residence of the mortgagor, it cannot be rightly said that mortgagee still retained the power and authority to
select from among the places provided for in the law and the place designated in their agreement over the objection of the mortgagor. In providing
that the mortgaged chattel may be sold at the place of residence of the mortgagor or the place where it is situated, at the option of the mortgagee,
the law clearly contemplated benefits not only to the mortgagor but to the mortgagee as well. Their right arising thereunder, however, are personal to
them; they do not affect either public policy or the rights of third persons. They may validly be waived. So, when herein mortgagor and mortgagee
agreed in the mortgage contract that in cases of both judicial and extra-judicial foreclosure under Act 1508, as amended, the corresponding
complaint for foreclosure or the petition for sale should be filed with the courts or the Sheriff of Manila, as the case may be , they waived their
corresponding rights under the law. The correlative obligation arising from that agreement have the force of law between them and should be
complied with in good faith. 10

By said agreement the parties waived the legal venue, and such waiver is valid and legally effective, because it, was merely a
personal privilege they waived, which is not contrary, to public policy or to the prejudice of third persons. It is a general principle that a
person may renounce any right which the law gives unless such renunciation is expressly prohibited or the right conferred is of such nature
that its renunciation would be against public policy. 11

On the other hand, if a place of sale is specified in the mortgage and statutory requirements in regard thereto are complied with, a
sale is properly conducted in that place. Indeed, in the absence of a statute to the contrary, a sale conducted at a place other than that
stipulated for in the mortgage is invalid, unless the mortgagor consents to such sale. 12

Moreover, Section 14 of Act 1508, as amended, provides that the officer making the sale should make a return of his doings which shall
particularly describe the articles sold and the amount received from each article. From this, it is clear that the law requires that sale be made article
by article, otherwise, it would be impossible for him to state the amount received for each item. This requirement was totally disregarded by the
Deputy Sheriff of Camarines Norte when he sold the chattels in question in bulk, notwithstanding the fact that the said chattels consisted of no less
than twenty different items as shown in the bill of sale. 13 This makes the sale of the chattels manifestly objectionable. And in the absence of any
evidence to show that the mortgagor had agreed or consented to such sale in gross, the same should be set aside.

It is said that the mortgagee is guilty of conversion when he sells under the mortgage but not in accordance with its terms, or where the
proceedings as to the sale of foreclosure do not comply with the statute. 14 This rule applies squarely to the facts of this case where, as earlier
shown, herein appellee bank insisted, and the appellee deputy sheriff of Camarines Norte proceeded with the sale of the mortgaged chattels at Jose
Panganiban, Camarines Norte, in utter disregard of the valid objection of the mortgagor thereto for the reason that it is not the place of sale agreed
upon in the mortgage contract; and the said deputy sheriff sold all the chattels (among which were a skagit with caterpillar engine, three GMC 6 x 6
trucks, a Herring Hall Safe, and Sawmill equipment consisting of a 150 HP Murphy Engine, plainer, large circular saws etc.) as a single lot in violation
of the requirement of the law to sell the same article by article. The PNB has resold the chattels to another buyer with whom it appears to have
actively cooperated in subsequently taking possession of and removing the chattels from appellant compound by force, as shown by the
circumstance that they had to take along PC soldiers and municipal policemen of Jose Panganiban who placed the chief security officer of the
premises in jail to deprive herein appellant of its possession thereof. To exonerate itself of any liability for the breach of peace thus committed, the
PNB would want us to believe that it was the subsequent buyer alone, who is not a party to this case, that was responsible for the forcible taking of
the property; but assuming this to be so, still the PNB cannot escape liability for the conversion of the mortgaged chattels by parting with its interest
in the property. Neither would its claim that it afterwards gave a chance to herein appellant to repurchase or redeem the chattels, improve its
position, for the mortgagor is not under obligation to take affirmative steps to repossess the chattels that were converted by the mortgagee. 15 As a
consequence of the said wrongful acts of the PNB and the Deputy Sheriff of Camarines Norte, therefore, We have to declare that herein appellant is
entitled to collect from them, jointly and severally, the full value of the chattels in question at the time they were illegally sold by them. To this effect
was the holding of this Court in a similar situation. 16

The effect of this irregularity was, in our opinion to make the plaintiff liable to the defendant for the full value of the truck at the time the
plaintiff thus carried it off to be sold; and of course, the burden is on the defendant to prove the damage to which he was thus
subjected. . . .

This brings us to the problem of determining the value of the mortgaged chattels at the time of their sale in 1961. The trial court did not make
any finding on the value of the chattels in the decision appealed from and denied altogether the right of the appellant to recover the same. We find
enough evidence of record, however, which may be used as a guide to ascertain their value. The record shows that at the time herein appellant
applied for its loan with the PNB in 1956, for which the chattels in question were mortgaged as part of the security therefore, herein appellant
submitted a list of the chattels together with its application for the loan with a stated value of P107,115.85. An official of the PNB made an inspection
of the chattels in the same year giving it an appraised value of P42,850.00 and a market value of P85,700.00. 17 The same chattels with some
additional equipment acquired by herein appellant with part of the proceeds of the loan were reappraised in a re-inspection conducted by the same
official in 1958, in the report of which he gave all the chattels an appraised value of P26,850.00 and a market value of P48,200.00. 18 Another re-
inspection report in 1959 gave the appraised value as P19,400.00 and the market value at P25,600.00. 19 The said official of the PNB who made the
foregoing reports of inspection and re-inspections testified in court that in giving the values appearing in the reports, he used a conservative method
of appraisal which, of course, is to be expected of an official of the appellee bank. And it appears that the values were considerably reduced in all the
re-inspection reports for the reason that when he went to herein appellant's premises at the time, he found the chattels no longer in use with some of
the heavier equipments dismantled with parts thereof kept in the bodega; and finding it difficult to ascertain the value of the dismantled chattels in
such condition, he did not give them anymore any value in his reports. Noteworthy is the fact, however, that in the last re-inspection report he made
of the chattels in 1961, just a few months before the foreclosure sale, the same inspector of the PNB reported that the heavy equipment of herein
appellant were "lying idle and rusty" but were "with a shed free from rains" 20 showing that although they were no longer in use at the time, they were
kept in a proper place and not exposed to the elements. The President of the appellant company, on the other hand, testified that its caterpillar
(tractor) alone is worth P35,000.00 in the market, and that the value of its two trucks acquired by it with part of the proceeds of the loan and included
as additional items in the mortgaged chattels were worth no less than P14,000.00. He likewise appraised the worth of its Murphy engine at
P16,000.00 which, according to him, when taken together with the heavy equipments he mentioned, the sawmill itself and all other equipment
forming part of the chattels under consideration, and bearing in mind the current cost of equipments these days which he alleged to have increased
by about five (5) times, could safely be estimated at P120,000.00. This testimony, except for the appraised and market values appearing in the
inspection and re-inspection reports of the PNB official earlier mentioned, stand uncontroverted in the record; but We are not inclined to accept such
testimony at its par value, knowing that the equipments of herein appellant had been idle and unused since it stopped operating its sawmill in 1958
up to the time of the sale of the chattels in 1961. We have no doubt that the value of chattels was depreciated after all those years of inoperation,
although from the evidence aforementioned, We may also safely conclude that the amount of P4,200.00 for which the chattels were sold in the
foreclosure sale in question was grossly unfair to the mortgagor. Considering, however, the facts that the appraised value of P42,850.00 and the
market value of P85,700.00 originally given by the PNB official were admittedly conservative; that two 6 x 6 trucks subsequently bought by the
appellant company had thereafter been added to the chattels; and that the real value thereof, although depreciated after several years of inoperation,
was in a way maintained because the depreciation is off-set by the marked increase in the cost of heavy equipment in the market, it is our opinion
that the market value of the chattels at the time of the sale should be fixed at the original appraised value of P42,850.00.

Herein appellant's claim for moral damages, however, seems to have no legal or factual basis. Obviously, an artificial person like herein
appellant corporation cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social
humiliation which are basis of moral damages. 21 A corporation may have a good reputation which, if besmirched, may also be a ground for the award
of moral damages. The same cannot be considered under the facts of this case, however, not only because it is admitted that herein appellant had
already ceased in its business operation at the time of the foreclosure sale of the chattels, but also for the reason that whatever adverse effects of
the foreclosure sale of the chattels could have upon its reputation or business standing would undoubtedly be the same whether the sale was
conducted at Jose Panganiban, Camarines Norte, or in Manila which is the place agreed upon by the parties in the mortgage contract.

But for the wrongful acts of herein appellee bank and the deputy sheriff of Camarines Norte in proceeding with the sale in utter disregard of the
agreement to have the chattels sold in Manila as provided for in the mortgage contract, to which their attentions were timely called by herein
appellant, and in disposing of the chattels in gross for the miserable amount of P4,200.00, herein appellant should be awarded exemplary damages
in the sum of P10,000.00. The circumstances of the case also warrant the award of P3,000.00 as attorney's fees for herein appellant.

WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed from should be, as hereby, it is set aside. The Philippine
National Bank and the Deputy Sheriff of the province of Camarines Norte are ordered to pay, jointly and severally, to Mambulao Lumber Company
the total amount of P56,000.73, broken as follows: P150.73 overpaid by the latter to the PNB, P42,850.00 the value of the chattels at the time of the
sale with interest at the rate of 6% per annum from December 21, 1961, until fully paid, P10,000.00 in exemplary damages, and P3,000.00 as
attorney's fees. Costs against both appellees.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro and Fernando, JJ., concur.
Bengzon, J.P. J., took no part.
G.R. No. 128690 January 21, 1999

ABS-CBN BROADCASTING CORPORATION, petitioner,


vs.
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA PRODUCTION, INC., and VICENTE DEL ROSARIO,
respondents.

DAVIDE, JR., CJ.:

In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp. (hereafter ABS-CBN) seeks to reverse and set aside the decision 1 of
31 October 1996 and the resolution 2 of 10 March 1997 of the Court of Appeals in CA-G.R. CV No. 44125. The former affirmed with modification the
decision 3 of 28 April 1993 of the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil Case No. Q-92-12309. The latter denied the motion
to reconsider the decision of 31 October 1996.

The antecedents, as found by the RTC and adopted by the Court of Appeals, are as follows:

In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh. "A") whereby Viva gave ABS-CBN an exclusive right to exhibit some
Viva films. Sometime in December 1991, in accordance with paragraph 2.4 [ sic] of said agreement stating that —.

1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) Viva films for TV telecast under such terms as may be agreed upon
by the parties hereto, provided, however, that such right shall be exercised by ABS-CBN from the actual offer in writing.

Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president Charo Santos-Concio, a list of three(3) film packages (36
title) from which ABS-CBN may exercise its right of first refusal under the afore-said agreement (Exhs. "1" par, 2, "2," "2-A'' and "2-B"-Viva).
ABS-CBN, however through Mrs. Concio, "can tick off only ten (10) titles" (from the list) "we can purchase" (Exh. "3" - Viva) and therefore did
not accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs. Concio are not the subject of the case at bar except the film
''Maging Sino Ka Man."

For further enlightenment, this rejection letter dated January 06, 1992 (Exh "3" - Viva) is hereby quoted:

6 January 1992
Dear Vic,
This is not a very formal business letter I am writing to you as I would like to express my difficulty in recommending the purchase of the three film
packages you are offering ABS-CBN.
From among the three packages I can only tick off 10 titles we can purchase. Please see attached. I hope you will understand my position. Most of
the action pictures in the list do not have big action stars in the cast. They are not for primetime. In line with this I wish to mention that I have not
scheduled for telecast several action pictures in out very first contract because of the cheap production value of these movies as well as the lack of
big action stars. As a film producer, I am sure you understand what I am trying to say as Viva produces only big action pictures.
In fact, I would like to request two (2) additional runs for these movies as I can only schedule them in our non-primetime slots. We have to cover the
amount that was paid for these movies because as you very well know that non-primetime advertising rates are very low. These are the unaired titles
in the first contract.
1. Kontra Persa [sic]. 5. Boy de Sabog
2. Raider Platoon. 6. Lady Commando
3. Underground guerillas 7. Batang Matadero
4. Tiger Command 8. Rebelyon
I hope you will consider this request of mine.
The other dramatic films have been offered to us before and have been rejected because of the ruling of MTRCB to have them aired at 9:00 p.m.
due to their very adult themes.
As for the 10 titles I have choosen [sic] from the 3 packages please consider including all the other Viva movies produced last year. I have quite an
attractive offer to make.
Thanking you and with my warmest regards.
(Signed)
Charo Santos-Concio
On February 27, 1992, defendant Del Rosario approached ABS-CBN's Ms. Concio, with a list consisting of 52 original movie titles ( i.e. not yet
aired on television) including the 14 titles subject of the present case, as well as 104 re-runs (previously aired on television) from which ABS-
CBN may choose another 52 titles, as a total of 156 titles, proposing to sell to ABS-CBN airing rights over this package of 52 originals and 52
re-runs for P60,000,000.00 of which P30,000,000.00 will be in cash and P30,000,000.00 worth of television spots (Exh. "4" to "4-C" Viva; "9"
-Viva).

On April 2, 1992, defendant Del Rosario and ABS-CBN general manager, Eugenio Lopez III, met at the Tamarind Grill Restaurant in Quezon
City to discuss the package proposal of Viva. What transpired in that lunch meeting is the subject of conflicting versions. Mr. Lopez testified that
he and Mr. Del Rosario allegedly agreed that ABS-CRN was granted exclusive film rights to fourteen (14) films for a total consideration of P36
million; that he allegedly put this agreement as to the price and number of films in a "napkin'' and signed it and gave it to Mr. Del Rosario (Exh.
D; TSN, pp. 24-26, 77-78, June 8, 1992). On the other hand, Del Rosario denied having made any agreement with Lopez regarding the 14 Viva
films; denied the existence of a napkin in which Lopez wrote something; and insisted that what he and Lopez discussed at the lunch meeting
was Viva's film package offer of 104 films (52 originals and 52 re-runs) for a total price of P60 million. Mr. Lopez promising [ sic]to make a
counter proposal which came in the form of a proposal contract Annex "C" of the complaint (Exh. "1"·- Viva; Exh. "C" - ABS-CBN).

On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-president for Finance discussed the terms and conditions of Viva's
offer to sell the 104 films, after the rejection of the same package by ABS-CBN.

On April 07, 1992, defendant Del Rosario received through his secretary, a handwritten note from Ms. Concio, (Exh. "5" - Viva), which reads:
"Here's the draft of the contract. I hope you find everything in order," to which was attached a draft exhibition agreement (Exh. "C''- ABS-CBN;
Exh. "9" - Viva, p. 3) a counter-proposal covering 53 films, 52 of which came from the list sent by defendant Del Rosario and one film was
added by Ms. Concio, for a consideration of P35 million. Exhibit "C" provides that ABS-CBN is granted films right to 53 films and contains a right
of first refusal to "1992 Viva Films." The said counter proposal was however rejected by Viva's Board of Directors [in the] evening of the same
day, April 7, 1992, as Viva would not sell anything less than the package of 104 films for P60 million pesos (Exh. "9" - Viva), and such rejection
was relayed to Ms. Concio.

On April 29, 1992, after the rejection of ABS-CBN and following several negotiations and meetings defendant Del Rosario and Viva's President
Teresita Cruz, in consideration of P60 million, signed a letter of agreement dated April 24, 1992. granting RBS the exclusive right to air 104
Viva-produced and/or acquired films (Exh. "7-A" - RBS; Exh. "4" - RBS) including the fourteen (14) films subject of the present case. 4

On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with a prayer for a writ of preliminary injunction and/or
temporary restraining order against private respondents Republic Broadcasting Corporation 5 (hereafter RBS ), Viva Production (hereafter VIVA),
and Vicente Del Rosario. The complaint was docketed as Civil Case No. Q-92-12309.

On 27 May 1992, RTC issued a temporary restraining order 6 enjoining private respondents from proceeding with the airing, broadcasting, and
televising of the fourteen VIVA films subject of the controversy, starting with the film Maging Sino Ka Man, which was scheduled to be shown on
private respondents RBS' channel 7 at seven o'clock in the evening of said date.

On 17 June 1992, after appropriate proceedings, the RTC issued an


order 7 directing the issuance of a writ of preliminary injunction upon ABS-CBN's posting of P35 million bond. ABS-CBN moved for the reduction of
the bond, 8 while private respondents moved for reconsideration of the order and offered to put up a counterbound. 9

In the meantime, private respondents filed separate answers with counterclaim. 10 RBS also set up a cross-claim against VIVA..

On 3 August 1992, the RTC issued an order 11 dissolving the writ of preliminary injunction upon the posting by RBS of a P30 million counterbond to
answer for whatever damages ABS-CBN might suffer by virtue of such dissolution. However, it reduced petitioner's injunction bond to P15 million as
a condition precedent for the reinstatement of the writ of preliminary injunction should private respondents be unable to post a counterbond.

At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of the court, agreed to explore the possibility of an amicable settlement. In the
meantime, RBS prayed for and was granted reasonable time within which to put up a P30 million counterbond in the event that no settlement would
be reached.

As the parties failed to enter into an amicable settlement RBS posted on 1 October 1992 a counterbond, which the RTC approved in its Order of 15
October 1992. 13

On 19 October 1992, ABS-CBN filed a motion for reconsideration 14 of the 3 August and 15 October 1992 Orders, which RBS opposed. 15

On 29 October 1992, the RTC conducted a pre-trial. 16


Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of Appeals a petition 17 challenging the RTC's Orders of 3 August
and 15 October 1992 and praying for the issuance of a writ of preliminary injunction to enjoin the RTC from enforcing said orders. The case was
docketed as CA-G.R. SP No. 29300.

On 3 November 1992, the Court of Appeals issued a temporary restraining order 18 to enjoin the airing, broadcasting, and televising of any or all of
the films involved in the controversy.

On 18 December 1992, the Court of Appeals promulgated a decision 19 dismissing the petition in CA -G.R. No. 29300 for being premature. ABS-CBN
challenged the dismissal in a petition for review filed with this Court on 19 January 1993, which was docketed as G.R. No. 108363.

20
In the meantime the RTC received the evidence for the parties in Civil Case No. Q-192-1209. Thereafter, on 28 April 1993, it rendered a decision
in favor of RBS and VIVA and against ABS-CBN disposing as follows:

WHEREFORE, under cool reflection and prescinding from the foregoing, judgments is rendered in favor of defendants and
against the plaintiff.

(1) The complaint is hereby dismissed; d) P5 million as and by way of moral damages;

(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the e) P5 million as and by way of exemplary damages;
following:
(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay
a) P107,727.00, the amount of premium paid by RBS to the P212,000.00 by way of reasonable attorney's fees.
surety which issued defendant RBS's bond to lift the
injunction; (4) The cross-claim of defendant RBS against defendant VIVA
is dismissed.
b) P191,843.00 for the amount of print advertisement for
"Maging Sino Ka Man" in various newspapers; (5) Plaintiff to pay the costs.

c) Attorney's fees in the amount of P1 million;

According to the RTC, there was no meeting of minds on the price and terms of the offer. The alleged agreement between Lopez III and Del Rosario
was subject to the approval of the VIVA Board of Directors, and said agreement was disapproved during the meeting of the Board on 7 April 1992.
Hence, there was no basis for ABS-CBN's demand that VIVA signed the 1992 Film Exhibition Agreement. Furthermore, the right of first refusal under
the 1990 Film Exhibition Agreement had previously been exercised per Ms. Concio's letter to Del Rosario ticking off ten titles acceptable to them,
which would have made the 1992 agreement an entirely new contract.

On 21 June 1993, this Court denied 21 ABS-CBN's petition for review in G.R. No. 108363, as no reversible error was committed by the Court of
Appeals in its challenged decision and the case had "become moot and academic in view of the dismissal of the main action by the court a quo in its
decision" of 28 April 1993.

Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals claiming that there was a perfected contract between ABS-CBN and
VIVA granting ABS-CBN the exclusive right to exhibit the subject films. Private respondents VIVA and Del Rosario also appealed seeking moral and
exemplary damages and additional attorney's fees.

In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the contract between ABS-CBN and VIVA had not been perfected,
absent the approval by the VIVA Board of Directors of whatever Del Rosario, it's agent, might have agreed with Lopez III. The appellate court did not
even believe ABS-CBN's evidence that Lopez III actually wrote down such an agreement on a "napkin," as the same was never produced in court. It
likewise rejected ABS-CBN's insistence on its right of first refusal and ratiocinated as follows:

As regards the matter of right of first refusal, it may be true that a Film Exhibition Agreement was entered into between Appellant ABS-CBN and
appellant VIVA under Exhibit "A" in 1990, and that parag. 1.4 thereof provides:

1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) VIVA films for TV telecast under such terms as may be agreed upon
by the parties hereto, provided, however, that such right shall be exercised by ABS-CBN within a period of fifteen (15) days from the actual offer
in writing (Records, p. 14).

[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still be subject to such terms as may be agreed upon by the
parties thereto, and that the said right shall be exercised by ABS-CBN within fifteen (15) days from the actual offer in writing.
Said parag. 1.4 of the agreement Exhibit "A" on the right of first refusal did not fix the price of the film right to the twenty-four (24) films, nor did it
specify the terms thereof. The same are still left to be agreed upon by the parties.

In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records, p. 89) stated that it can only tick off ten (10) films, and the draft contract
Exhibit "C" accepted only fourteen (14) films, while parag. 1.4 of Exhibit "A'' speaks of the next twenty-four (24) films.

The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-B; Records, pp. 86-88; Decision, p. 11, Records, p. 1150), when the first
list of VIVA films was sent by Mr. Del Rosario to ABS-CBN. The Vice President of ABS-CBN, Ms. Charo Santos-Concio, sent a letter dated
January 6, 1992 (Exhibit 3, Records, p. 89) where ABS-CBN exercised its right of refusal by rejecting the offer of VIVA.. As aptly observed by
the trial court, with the said letter of Mrs. Concio of January 6, 1992, ABS-CBN had lost its right of first refusal. And even if We reckon the fifteen
(15) day period from February 27, 1992 (Exhibit 4 to 4-C) when another list was sent to ABS-CBN after the letter of Mrs. Concio, still the fifteen
(15) day period within which ABS-CBN shall exercise its right of first refusal has already expired. 22

Accordingly, respondent court sustained the award of actual damages consisting in the cost of print advertisements and the premium payments for
the counterbond, there being adequate proof of the pecuniary loss which RBS had suffered as a result of the filing of the complaint by ABS-CBN. As
to the award of moral damages, the Court of Appeals found reasonable basis therefor, holding that RBS's reputation was debased by the filing of the
complaint in Civil Case No. Q-92-12309 and by the non-showing of the film "Maging Sino Ka Man." Respondent court also held that exemplary
damages were correctly imposed by way of example or correction for the public good in view of the filing of the complaint despite petitioner's
knowledge that the contract with VIVA had not been perfected, It also upheld the award of attorney's fees, reasoning that with ABS-CBN's act of
instituting Civil Case No, Q-92-1209, RBS was "unnecessarily forced to litigate." The appellate court, however, reduced the awards of moral
damages to P2 million, exemplary damages to P2 million, and attorney's fees to P500, 000.00.

On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's appeal because it was "RBS and not VIVA which was actually
prejudiced when the complaint was filed by ABS-CBN."

Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case, contending that the Court of Appeals gravely erred in

I. . . RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN PETITIONER AND PRIVATE RESPONDENT VIVA
NOTWITHSTANDING PREPONDERANCE OF EVIDENCE ADDUCED BY PETITIONER TO THE CONTRARY.
II. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF PRIVATE RESPONDENT RBS.
III. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF PRIVATE RESPONDENT RBS.
IV. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.

ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four titles under the 1990 Film Exhibition Agreement, as it had
chosen only ten titles from the first list. It insists that we give credence to Lopez's testimony that he and Del Rosario met at the Tamarind Grill
Restaurant, discussed the terms and conditions of the second list (the 1992 Film Exhibition Agreement) and upon agreement thereon, wrote the
same on a paper napkin. It also asserts that the contract has already been effective, as the elements thereof, namely, consent, object, and
consideration were established. It then concludes that the Court of Appeals' pronouncements were not supported by law and jurisprudence, as per
our decision of 1 December 1995 in Limketkai Sons Milling, Inc. v. Court of Appeals, 23 which cited Toyota Shaw, Inc. v. Court of Appeals, 24 Ang Yu
Asuncion v. Court of Appeals, 25 and Villonco Realty Company v. Bormaheco. Inc. 26

be argued that ABS-CBN compelled RBS to incur such expense. Besides, RBS had another available option, i.e., move for the dissolution or the
injunction; or if it was determined to put up a counterbond, it could have presented a cash bond. Furthermore under Article 2203 of the Civil Code,
the party suffering loss or injury is also required to exercise the diligence of a good father of a family to minimize the damages resulting from the act
or omission. As regards the cost of print advertisements, RBS had not convincingly established that this was a loss attributable to the non showing
"Maging Sino Ka Man"; on the contrary, it was brought out during trial that with or without the case or the injunction, RBS would have spent such an
amount to generate interest in the film.

ABS-CBN further contends that there was no clear basis for the awards of moral and exemplary damages. The controversy involving ABS-CBN and
RBS did not in any way originate from business transaction between them. The claims for such damages did not arise from any contractual dealings
or from specific acts committed by ABS-CBN against RBS that may be characterized as wanton, fraudulent, or reckless; they arose by virtue only of
the filing of the complaint, An award of moral and exemplary damages is not warranted where the record is bereft of any proof that a party acted
maliciously or in bad faith in filing an action. 27 In any case, free resort to courts for redress of wrongs is a matter of public policy. The law recognizes
the right of every one to sue for that which he honestly believes to be his right without fear of standing trial for damages where by lack of sufficient
evidence, legal technicalities, or a different interpretation of the laws on the matter, the case would lose ground. 28 One who makes use of his own
legal right does no injury. 29 If damage results front the filing of the complaint, it is damnum absque injuria. 30 Besides, moral damages are generally
not awarded in favor of a juridical person, unless it enjoys a good reputation that was debased by the offending party resulting in social humiliation. 31

As regards the award of attorney's fees, ABS-CBN maintains that the same had no factual, legal, or equitable justification. In sustaining the trial
court's award, the Court of Appeals acted in clear disregard of the doctrines laid down in Buan v. Camaganacan 32 that the text of the decision should
state the reason why attorney's fees are being awarded; otherwise, the award should be disallowed. Besides, no bad faith has been imputed on,
much less proved as having been committed by, ABS-CBN. It has been held that "where no sufficient showing of bad faith would be reflected in a
33
party' s persistence in a case other than an erroneous conviction of the righteousness of his cause, attorney's fees shall not be recovered as cost."

On the other hand, RBS asserts that there was no perfected contract between ABS-CBN and VIVA absent any meeting of minds between them
regarding the object and consideration of the alleged contract. It affirms that the ABS-CBN's claim of a right of first refusal was correctly rejected by
the trial court. RBS insist the premium it had paid for the counterbond constituted a pecuniary loss upon which it may recover. It was obliged to put
up the counterbound due to the injunction procured by ABS-CBN. Since the trial court found that ABS-CBN had no cause of action or valid claim
against RBS and, therefore not entitled to the writ of injunction, RBS could recover from ABS-CBN the premium paid on the counterbond. Contrary to
the claim of ABS-CBN, the cash bond would prove to be more expensive, as the loss would be equivalent to the cost of money RBS would forego in
case the P30 million came from its funds or was borrowed from banks.

RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled showing of the film "Maging Sino Ka Man" because the print
advertisements were put out to announce the showing on a particular day and hour on Channel 7, i.e., in its entirety at one time, not a series to be
shown on a periodic basis. Hence, the print advertisement were good and relevant for the particular date showing, and since the film could not be
shown on that particular date and hour because of the injunction, the expenses for the advertisements had gone to waste.

As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and secured injunctions purely for the purpose of harassing
and prejudicing RBS. Pursuant then to Article 19 and 21 of the Civil Code, ABS-CBN must be held liable for such damages. Citing Tolentino, 34
damages may be awarded in cases of abuse of rights even if the act done is not illicit and there is abuse of rights were plaintiff institutes and action
purely for the purpose of harassing or prejudicing the defendant.

In support of its stand that a juridical entity can recover moral and exemplary damages, private respondents RBS cited People v. Manero, 35 where it
was stated that such entity may recover moral and exemplary damages if it has a good reputation that is debased resulting in social humiliation. it
then ratiocinates; thus:

There can be no doubt that RBS' reputation has been debased by ABS-CBN's acts in this case. When RBS was not able to fulfill its commitment
to the viewing public to show the film "Maging Sino Ka Man" on the scheduled dates and times (and on two occasions that RBS advertised), it
suffered serious embarrassment and social humiliation. When the showing was canceled, late viewers called up RBS' offices and subjected
RBS to verbal abuse ("Announce kayo nang announce, hindi ninyo naman ilalabas," "nanloloko yata kayo") (Exh. 3-RBS, par. 3). This alone
was not something RBS brought upon itself. it was exactly what ABS-CBN had planned to happen.

The amount of moral and exemplary damages cannot be said to be excessive. Two reasons justify the amount of the award.

The first is that the humiliation suffered by RBS is national extent. RBS operations as a broadcasting company is [ sic] nationwide. Its clientele,
like that of ABS-CBN, consists of those who own and watch television. It is not an exaggeration to state, and it is a matter of judicial notice that
almost every other person in the country watches television. The humiliation suffered by RBS is multiplied by the number of televiewers who
had anticipated the showing of the film "Maging Sino Ka Man" on May 28 and November 3, 1992 but did not see it owing to the cancellation.
Added to this are the advertisers who had placed commercial spots for the telecast and to whom RBS had a commitment in consideration of the
placement to show the film in the dates and times specified.

The second is that it is a competitor that caused RBS to suffer the humiliation. The humiliation and injury are far greater in degree when caused
by an entity whose ultimate business objective is to lure customers (viewers in this case) away from the competition. 36

For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial court and the Court of Appeals do not support ABS-CBN's
claim that there was a perfected contract. Such factual findings can no longer be disturbed in this petition for review under Rule 45, as only questions
of law can be raised, not questions of fact. On the issue of damages and attorneys fees, they adopted the arguments of RBS.

The key issues for our consideration are (1) whether there was a perfected contract between VIVA and ABS-CBN, and (2) whether RBS is entitled to
damages and attorney's fees. It may be noted that the award of attorney's fees of P212,000 in favor of VIVA is not assigned as another error.

I.

The first issue should be resolved against ABS-CBN. A contract is a meeting of minds between two persons whereby one binds himself to give
something or to render some service to another 37 for a consideration. there is no contract unless the following requisites concur: (1) consent of the
contracting parties; (2) object certain which is the subject of the contract; and (3) cause of the obligation, which is established. 38 A contract
undergoes three stages:
(a) preparation, conception, or generation, which is the period of negotiation and bargaining, ending at the moment of agreement of the
parties;
(b) perfection or birth of the contract, which is the moment when the parties come to agree on the terms of the contract; and
(c) consummation or death, which is the fulfillment or performance of the terms agreed upon in the contract. 39

Contracts that are consensual in nature are perfected upon mere meeting of the minds, Once there is concurrence between the offer and the
acceptance upon the subject matter, consideration, and terms of payment a contract is produced. The offer must be certain. To convert the offer into
a contract, the acceptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal, unconditional, and without
variance of any sort from the proposal. A qualified acceptance, or one that involves a new proposal, constitutes a counter-offer and is a rejection of
the original offer. Consequently, when something is desired which is not exactly what is proposed in the offer, such acceptance is not sufficient to
generate consent because any modification or variation from the terms of the offer annuls the offer. 40

When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill on 2 April 1992 to discuss the package of films, said package of
104 VIVA films was VIVA's offer to ABS-CBN to enter into a new Film Exhibition Agreement. But ABS-CBN, sent, through Ms. Concio, a counter-
proposal in the form of a draft contract proposing exhibition of 53 films for a consideration of P35 million. This counter-proposal could be nothing less
than the counter-offer of Mr. Lopez during his conference with Del Rosario at Tamarind Grill Restaurant. Clearly, there was no acceptance of VIVA's
offer, for it was met by a counter-offer which substantially varied the terms of the offer.

ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of


Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is misplaced. In these cases, it was held that an acceptance may contain a request
for certain changes in the terms of the offer and yet be a binding acceptance as long as "it is clear that the meaning of the acceptance is positively
and unequivocally to accept the offer, whether such request is granted or not." This ruling was, however, reversed in the resolution of 29 March 1996,
43
which ruled that the acceptance of all offer must be unqualified and absolute, i.e., it "must be identical in all respects with that of the offer so as to
produce consent or meeting of the minds."

On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised counter-offer were not material but merely clarificatory of what
had previously been agreed upon. It cited the statement in Stuart v. Franklin Life Insurance Co. 44 that "a vendor's change in a phrase of the offer to
purchase, which change does not essentially change the terms of the offer, does not amount to a rejection of the offer and the tender of a counter-
offer." 45 However, when any of the elements of the contract is modified upon acceptance, such alteration amounts to a counter-offer.

In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence, they underwent a period of bargaining. ABS-CBN then
formalized its counter-proposals or counter-offer in a draft contract, VIVA through its Board of Directors, rejected such counter-offer, Even if it be
conceded arguendo that Del Rosario had accepted the counter-offer, the acceptance did not bind VIVA, as there was no proof whatsoever that Del
Rosario had the specific authority to do so.

Under Corporation Code, 46 unless otherwise provided by said Code, corporate powers, such as the power; to enter into contracts; are exercised by
the Board of Directors. However, the Board may delegate such powers to either an executive committee or officials or contracted managers. The
delegation, except for the executive committee, must be for specific purposes, 47 Delegation to officers makes the latter agents of the corporation;
accordingly, the general rules of agency as to the bindings effects of their acts would apply. 48 For such officers to be deemed fully clothed by the
corporation to exercise a power of the Board, the latter must specially authorize them to do so. That Del Rosario did not have the authority to accept
ABS-CBN's counter-offer was best evidenced by his submission of the draft contract to VIVA's Board of Directors for the latter's approval. In any
event, there was between Del Rosario and Lopez III no meeting of minds. The following findings of the trial court are instructive:

A number of considerations militate against ABS-CBN's claim that a contract was perfected at that lunch meeting on April 02, 1992 at the
Tamarind Grill.

FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred to the price and the number of films, which he wrote on a
napkin. However, Exhibit "C" contains numerous provisions which, were not discussed at the Tamarind Grill , if Lopez testimony was to be
believed nor could they have been physically written on a napkin. There was even doubt as to whether it was a paper napkin or a cloth napkin.
In short what were written in Exhibit "C'' were not discussed, and therefore could not have been agreed upon, by the parties. How then could
this court compel the parties to sign Exhibit "C" when the provisions thereof were not previously agreed upon?

SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the contract was 14 films. The complaint in fact prays for
delivery of 14 films. But Exhibit "C" mentions 53 films as its subject matter. Which is which If Exhibits "C" reflected the true intent of the parties,
then ABS-CBN's claim for 14 films in its complaint is false or if what it alleged in the complaint is true, then Exhibit "C" did not reflect what was
agreed upon by the parties. This underscores the fact that there was no meeting of the minds as to the subject matter of the contracts, so as to
preclude perfection thereof. For settled is the rule that there can be no contract where there is no object which is its subject matter (Art. 1318,
NCC).

THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. "D") states:
We were able to reach an agreement. VIVA gave us the exclusive license to show these fourteen (14) films, and we agreed to pay Viva the
amount of P16,050,000.00 as well as grant Viva commercial slots worth P19,950,000.00. We had already earmarked this P16, 050,000.00.

which gives a total consideration of P36 million (P19,950,000.00 plus P16,050,000.00. equals P36,000,000.00).

On cross-examination Mr. Lopez testified:

Q. What was written in this napkin?


A. The total price, the breakdown the known Viva movies, the 7 blockbuster movies and the other 7 Viva movies because the price was
broken down accordingly. The none [sic] Viva and the seven other Viva movies and the sharing between the cash portion and the
concerned spot portion in the total amount of P35 million pesos.

Now, which is which? P36 million or P35 million? This weakens ABS-CBN's claim.

FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted Exhibit "C" to Mr. Del Rosario with a handwritten note, describing
said Exhibit "C" as a "draft." (Exh. "5" - Viva; tsn pp. 23-24 June 08, 1992). The said draft has a well defined meaning.

Since Exhibit "C" is only a draft, or a tentative, provisional or preparatory writing prepared for discussion, the terms and conditions thereof could
not have been previously agreed upon by ABS-CBN and Viva Exhibit "C'' could not therefore legally bind Viva, not having agreed thereto. In
fact, Ms. Concio admitted that the terms and conditions embodied in Exhibit "C" were prepared by ABS-CBN's lawyers and there was no
discussion on said terms and conditions. . . .

As the parties had not yet discussed the proposed terms and conditions in Exhibit "C," and there was no evidence whatsoever that Viva agreed
to the terms and conditions thereof, said document cannot be a binding contract. The fact that Viva refused to sign Exhibit "C" reveals only two
[sic] well that it did not agree on its terms and conditions, and this court has no authority to compel Viva to agree thereto.

FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at the Tamarind Grill was only provisional, in the sense that it
was subject to approval by the Board of Directors of Viva. He testified:

Q. Now, Mr. Witness, and after that Tamarind meeting ... the second meeting wherein you claimed that you have the meeting of the minds
between you and Mr. Vic del Rosario, what happened?
A. Vic Del Rosario was supposed to call us up and tell us specifically the result of the discussion with the Board of Directors.
Q. And you are referring to the so-called agreement which you wrote in [ sic] a piece of paper?
A. Yes, sir.
Q. So, he was going to forward that to the board of Directors for approval?
A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)
Q. Did Mr. Del Rosario tell you that he will submit it to his Board for approval?
A. Yes, sir. (Tsn, p. 69, June 8, 1992).

The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del Rosario had no authority to bind Viva to a contract with ABS-CBN
until and unless its Board of Directors approved it. The complaint, in fact, alleges that Mr. Del Rosario "is the Executive Producer of defendant
Viva" which "is a corporation." (par. 2, complaint). As a mere agent of Viva, Del Rosario could not bind Viva unless what he did is ratified by its
Board of Directors. (Vicente vs. Geraldez, 52 SCRA 210; Arnold vs. Willets and Paterson, 44 Phil. 634). As a mere agent, recognized as such
by plaintiff, Del Rosario could not be held liable jointly and severally with Viva and his inclusion as party defendant has no legal basis. ( Salonga
vs. Warner Barner [sic] , COLTA , 88 Phil. 125; Salmon vs. Tan, 36 Phil. 556).

The testimony of Mr. Lopez and the allegations in the complaint are clear admissions that what was supposed to have been agreed upon at the
Tamarind Grill between Mr. Lopez and Del Rosario was not a binding agreement. It is as it should be because corporate power to enter into a
contract is lodged in the Board of Directors. (Sec. 23, Corporation Code). Without such board approval by the Viva board, whatever agreement
Lopez and Del Rosario arrived at could not ripen into a valid contract binding upon Viva ( Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA
763). The evidence adduced shows that the Board of Directors of Viva rejected Exhibit "C" and insisted that the film package for 140 films be
maintained (Exh. "7-1" - Viva ). 49

The contention that ABS-CBN had yet to fully exercise its right of first refusal over twenty-four films under the 1990 Film Exhibition Agreement and
that the meeting between Lopez and Del Rosario was a continuation of said previous contract is untenable. As observed by the trial court, ABS-CBN
right of first refusal had already been exercised when Ms. Concio wrote to VIVA ticking off ten films, Thus:

[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was sent, was for an entirely different package. Ms. Concio herself
admitted on cross-examination to having used or exercised the right of first refusal. She stated that the list was not acceptable and was indeed
not accepted by ABS-CBN, (TSN, June 8, 1992, pp. 8-10). Even Mr. Lopez himself admitted that the right of the first refusal may have been
already exercised by Ms. Concio (as she had). (TSN, June 8, 1992, pp. 71-75). Del Rosario himself knew and understand [ sic] that ABS-CBN
has lost its rights of the first refusal when his list of 36 titles were rejected (Tsn, June 9, 1992, pp. 10-11) 50

II

However, we find for ABS-CBN on the issue of damages. We shall first take up actual damages. Chapter 2, Title XVIII, Book IV of the Civil Code is
the specific law on actual or compensatory damages. Except as provided by law or by stipulation, one is entitled to compensation for actual damages
only for such pecuniary loss suffered by him as he has duly proved. 51 The indemnification shall comprehend not only the value of the loss suffered,
but also that of the profits that the obligee failed to obtain. 52 In contracts and quasi-contracts the damages which may be awarded are dependent on
whether the obligor acted with good faith or otherwise, It case of good faith, the damages recoverable are those which are the natural and probable
consequences of the breach of the obligation and which the parties have foreseen or could have reasonably foreseen at the time of the constitution
of the obligation. If the obligor acted with fraud, bad faith, malice, or wanton attitude, he shall be responsible for all damages which may be
reasonably attributed to the non-performance of the obligation. 53 In crimes and quasi-delicts, the defendant shall be liable for all damages which are
the natural and probable consequences of the act or omission complained of, whether or not such damages has been foreseen or could have
reasonably been foreseen by the defendant. 54

Actual damages may likewise be recovered for loss or impairment of earning capacity in cases of temporary or permanent personal injury, or for
injury to the plaintiff's business standing or commercial credit. 55

The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or quasi-delict. It arose from the fact of filing of the complaint
despite ABS-CBN's alleged knowledge of lack of cause of action. Thus paragraph 12 of RBS's Answer with Counterclaim and Cross-claim under the
heading COUNTERCLAIM specifically alleges:

12. ABS-CBN filed the complaint knowing fully well that it has no cause of action RBS. As a result thereof, RBS suffered actual damages in the
amount of P6,621,195.32. 56

Needless to state the award of actual damages cannot be comprehended under the above law on actual damages. RBS could only probably take
refuge under Articles 19, 20, and 21 of the Civil Code, which read as follows:

Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.

Art. 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the latter for tile same.

Art. 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.

It may further be observed that in cases where a writ of preliminary injunction is issued, the damages which the defendant may suffer by reason of
the writ are recoverable from the injunctive bond. 57 In this case, ABS-CBN had not yet filed the required bond; as a matter of fact, it asked for
reduction of the bond and even went to the Court of Appeals to challenge the order on the matter, Clearly then, it was not necessary for RBS to file a
counterbond. Hence, ABS-CBN cannot be held responsible for the premium RBS paid for the counterbond.

Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka Man" for lack of sufficient legal basis. The RTC issued a
temporary restraining order and later, a writ of preliminary injunction on the basis of its determination that there existed sufficient ground for the
issuance thereof. Notably, the RTC did not dissolve the injunction on the ground of lack of legal and factual basis, but because of the plea of RBS
that it be allowed to put up a counterbond.

As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's fees may be recovered as actual or compensatory damages
under any of the circumstances provided for in Article 2208 of the Civil Code. 58

The general rule is that attorney's fees cannot be recovered as part of damages because of the policy that no premium should be placed on the right
to litigate. 59 They are not to be awarded every time a party wins a suit. The power of the court to award attorney's fees under Article 2208 demands
factual, legal, and equitable justification. 60 Even when claimant is compelled to litigate with third persons or to incur expenses to protect his rights,
still attorney's fees may not be awarded where no sufficient showing of bad faith could be reflected in a party's persistence in a case other than
erroneous conviction of the righteousness of his cause. 61

As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code. Article 2217 thereof defines what are included in moral
damages, while Article 2219 enumerates the cases where they may be recovered, Article 2220 provides that moral damages may be recovered in
breaches of contract where the defendant acted fraudulently or in bad faith. RBS's claim for moral damages could possibly fall only under item (10)
of Article 2219, thereof which reads:

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

Moral damages are in the category of an award designed to compensate the claimant for actual injury suffered. and not to impose a penalty on the
wrongdoer. 62 The award is not meant to enrich the complainant at the expense of the defendant, but to enable the injured party to obtain means,
diversion, or amusements that will serve to obviate then moral suffering he has undergone. It is aimed at the restoration, within the limits of the
possible, of the spiritual status quo ante, and should be proportionate to the suffering inflicted. 63 Trial courts must then guard against the award of
exorbitant damages; they should exercise balanced restrained and measured objectivity to avoid suspicion that it was due to passion, prejudice, or
corruption on the part of the trial court. 64

The award of moral damages cannot be granted in favor of a corporation because, being an artificial person and having existence only in legal
contemplation, it has no feelings, no emotions, no senses, It cannot, therefore, experience physical suffering and mental anguish, which call be
experienced only by one having a nervous system. 65 The statement in People v. Manero 66 and Mambulao Lumber Co. v. PNB 67 that a corporation
may recover moral damages if it "has a good reputation that is debased, resulting in social humiliation" is an obiter dictum. On this score alone the
award for damages must be set aside, since RBS is a corporation.

The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the Civil Code. These are imposed by way of example or
correction for the public good, in addition to moral, temperate, liquidated or compensatory damages. 68 They are recoverable in criminal cases as
part of the civil liability when the crime was committed with one or more aggravating circumstances; 69 in quasi-contracts, if the defendant acted with
gross negligence; 70 and in contracts and quasi-contracts, if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
71

It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-contract, delict, or quasi-delict, Hence, the claims for
moral and exemplary damages can only be based on Articles 19, 20, and 21 of the Civil Code.

The elements of abuse of right under Article 19 are the following: (1) the existence of a legal right or duty, (2) which is exercised in bad faith, and (3)
for the sole intent of prejudicing or injuring another. Article 20 speaks of the general sanction for all other provisions of law which do not especially
provide for their own sanction; while Article 21 deals with acts contra bonus mores, and has the following elements; (1) there is an act which is legal,
(2) but which is contrary to morals, good custom, public order, or public policy, and (3) and it is done with intent to injure. 72

Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith implies a conscious and intentional design to do a wrongful
act for a dishonest purpose or moral obliquity. 73 Such must be substantiated by evidence. 74

There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was honestly convinced of the merits of its cause after it had
undergone serious negotiations culminating in its formal submission of a draft contract. Settled is the rule that the adverse result of an action does
not per se make the action wrongful and subject the actor to damages, for the law could not have meant to impose a penalty on the right to litigate. If
damages result from a person's exercise of a right, it is damnum absque injuria. 75

WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of Appeals in CA-G.R. CV No, 44125 is hereby REVERSED
except as to unappealed award of attorney's fees in favor of VIVA Productions, Inc. 1âwphi1.nêt

No pronouncement as to costs.

SO ORDERED.

Melo, Kapunan, Martinez and Pardo JJ., concur.


G.R. No. 141994
January 17, 2005

FILIPINAS BROADCASTING NETWORK, INC.,


Petitioner,
-versus-
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, attorney’s
fees and costs of suit.

The Antecedents

“Exposé” is a radio documentary[4] program hosted by Carmelo ‘Mel’ Rima (“Rima”) and Hermogenes ‘Jun’ Alegre (“Alegre”).[5] Exposé is aired
every morning over DZRC-AM which is owned by Filipinas Broadcasting Network, Inc. (“FBNI”). “Exposé” 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 AMEC’s 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
AMEC’s 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 you’ll 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, isn’t 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
latter’s 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 I’m 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. Don’t 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 – that’s 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 exposés, 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 FBNI’s 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 Rima’s only participation was when he agreed with Alegre’s exposé. The trial court found
Rima’s 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 attorney’s 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 court’s judgment with modification. The appellate court made Rima solidarily liable with FBNI and Alegre. The
appellate court denied Ago’s claim for damages and attorney’s 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 court’s 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 Alegre’s 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 AMEC’s 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 Ago’s claim for damages and attorney’s 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, attorney’s 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 ATTORNEY’S FEES IS PROPER; and

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

The Court’s 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 AMEC’s 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 Alegre’s remarks such as “greed for money on the part of AMEC’s 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 AMEC’s side and gave Ago the opportunity to defend AMEC and its administrators. FBNI
concludes that since there is no malice, there is no libel.

FBNI’s 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 exposé,[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 Alegre’s reckless disregard of whether their report was true or not.

Contrary to FBNI’s 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 republisher’s 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.

FBNI’s 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 AMEC’s 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. xxx

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 Court’s 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, AMEC’s 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 attorney’s fees is proper

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

The award of attorney’s fees is not proper because AMEC failed to justify satisfactorily its claim for attorney’s fees. AMEC did not adduce evidence to
warrant the award of attorney’s fees. Moreover, both the trial and appellate courts failed to explicitly state in their respective decisions the rationale
for the award of attorney’s 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 counsel’s fees are not to be
awarded every time a party wins a suit. The power of the court to award attorney’s 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
attorney’s fees.[51] (Emphasis supplied)

While it mentioned about the award of attorney’s 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, attorney’s fees and costs of suit

FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of damages and attorney’s 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 Alegre’s 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.” Rima’s accreditation lapsed due to his non-payment of the KBP annual fees while Alegre’s 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.

FBNI’s 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 FBNI’s radio
program Exposé 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.
FBNI’s 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 industry’s 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 FBNI’s “regimented process” of application. Furthermore, FBNI admits that
Rima and Alegre had deficiencies in their KBP accreditation,[56] which is one of FBNI’s requirements before it hires a broadcaster. Significantly,
membership in the KBP, while voluntary, indicates the broadcaster’s strong commitment to observe the broadcast industry’s rules and regulations.
Clearly, these circumstances show FBNI’s 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 attorney’s fees is deleted. Costs against petitioner.

SO ORDERED.

Davide, Jr., C.J., (Chairman) , Quisumbing, Ynares-Santiago, and Azcuna, JJ. , concur.
G.R. No. 118692 July 28, 2006

COASTAL PACIFIC TRADING, INC., petitioner,


vs.
SOUTHERN ROLLING MILLS, CO., INC. (now known as Visayan Integrated Steel Corporation), FAR EAST BANK & TRUST
COMPANY, PHILIPPINE COMMERCIAL INDUSTRIAL 1 BANK, EQUITABLE BANKING CORPORATION, PRUDENTIAL BANK, BOARD
OF TRUSTEES-CONSORTIUM OF BANKS-VISCO, UNITED COCONUT PLANTERS BANK, CITYTRUST BANKING CORPORATION,
ASSOCIATED BANK, INSULAR BANK OF ASIA AND AMERICA, INTERNATIONAL CORPORATE BANK, COMMER-CIAL BANK OF
MANILA, BANK OF THE PHILIPPINE ISLANDS, NATIONAL STEEL CORPORA-TION, THE PROVINCIAL SHERIFF OF BOHOL, and
DEPUTY SHERIFF JOVITO DIGAL, 2 respondents.

DECISION

PANGANIBAN, C.J. :

Directors owe loyalty and fidelity to the corporation they serve and to its creditors. When these directors sit on the board as representatives of
shareholders who are also major creditors, they cannot be allowed to use their offices to secure undue advantage for those shareholders, in fraud of
other creditors who do not have a similar representation in the board of directors.

The Case

Before us is a Petition for Review3 under Rule 45 of the Rules of Court, assailing the September 27, 1994 Decision 4 and the January 5, 1995
Resolution5 of the Court of Appeals (CA) in CA-GR CV No. 39385. The challenged Decision disposed as follows:

"WHEREFORE, the decision of the Regional Trial Court is hereby AFFIRMED in toto." 6

The challenged Resolution denied reconsideration.

The Facts

Respondent Southern Rolling Mills Co., Inc. was organized in 1959 for the purpose of engaging in a steel processing business. It was later renamed
Visayan Integrated Steel Corporation (VISCO).7

On December 11, 1961, VISCO obtained a loan from the Development Bank of the Philippines (DBP) in the amount of P836,000. This loan was
secured by a duly recorded Real Estate Mortgage over VISCO's three (3) parcels of land, including all the machineries and equipment found there. 8

On August 15, 1963, VISCO entered into a Loan Agreement 9 with respondent banks (later referred to as "Consortium" 10) for the amount of
US$5,776,186.71 or P21,745,707.36 (at the then prevailing exchange rate) to finance its importation of various raw materials. To secure the full and
faithful performance of its obligation, VISCO executed on August 3, 1965, a second mortgage 11 over the same land, machineries and equipment in
favor of respondent banks. This second mortgage remained unrecorded. 12

VISCO eventually defaulted in the performance of its obligation to respondent banks. This prompted the Consortium to file on January 26, 1966, Civil
Case No. 1841, which was a Petition for Foreclosure of Mortgage with Petition for Receivership. 13 This case was eventually dismissed for failure to
prosecute.14

Afterwards, negotiations were conducted between VISCO and respondent banks for the conversion of the unpaid loan into equity in the
corporation.15 Vicente Garcia, vice-president of VISCO and of Far East Bank and Trust Company (FEBTC), 16 testified that sometime in 1966, the
creditor banks were given management of and control over VISCO. 17 In time,18 in order to reorganize it, its principal creditors agreed to group
themselves into a creditors' consortium.19 As a result of the reorganized corporate structure of VISCO, respondent banks acquired more than 90
percent of its equity. Notwithstanding this conversion, it remained indebted to the Consortium in the amount of P16,123,918.02.20

Meanwhile from 1964 to 1965, VISCO also entered into a processing agreement with Petitioner Coastal Pacific Trading, Inc. ("Coastal"). Pursuant to
that agreement, petitioner delivered 3,000 metric tons of hot rolled steel coils to VISCO for processing into block iron sheets. Contrary to their
agreement, the latter was able to process and deliver to petitioner only 1,600 metric tons of those sheets. Hence, a total of 1,400 metric tons of hot
rolled steel coils remained unaccounted for.21 The fact that petitioner was among the major creditors of VISCO was recognized by the latter's vice-
president, Vicente Garcia.22 Indeed, on October 9, 1970, it forwarded to petitioner a proposal for a Compromise Agreement. 23 Subsequent
developments indicate, however, that the parties did not arrive at a compromise.

Two years later, on October 20, 1972, Garcia wrote Arturo P. Samonte, representative of FEBTC 24 and director of VISCO,25 a letter that reads as
follows:

"In the light of recent development on IISMI and Elirol which were taken over by the government, I suggest that we take certain
precautionary measures to protect the interests of the Consortium of Banks. One such step may be to insure the safety of the unexpended
funds of VISCO from any contingencies in the future. As of now VISCO's account with the Far East Bank is in the name of BOARD OF
TRUSTEES VISCO CONSORTIUM OF BANKS. It may be better to eliminate the term VISCO and just call the account BOARD OF
TRUSTEES CONSORTIUM OF BANKS."26

According to a notation on this letter, an FEBTC assistant cashier named Silverio duly complied with the above request. 27 Indeed, events would later
reveal that the bank held a deposit account in the name of the "Board of Trustees-Consortium of Banks." 28

On September 20, 1974, respondent banks held a luncheon meeting 29 in the FEBTC Boardroom to discuss how they would address the insistent
demands of the DBP for VISCO to settle its obligations. Jose B. Fernandez, Jr., VISCO's then chairman and concurrent FEBTC President, 30
expressed his apprehension that either the DBP or the government would soon pursue extra-judicial foreclosure against VISCO.

In this regard, Fernandez informed the members of the Consortium that he had received letter-offers from two corporations that were interested in
purchasing VISCO's generator sets.31 After deliberating on the matter, the members decided to approve the sale of these two generator sets to
Filmag (Phil.), Inc. It was also agreed that the proceeds of the sale would be used to pay VISCO's indebtedness to DBP and to secure the release of
the first mortgage.32 The Consortium agreed with Filmag on the following payment procedure:

"The payment procedure will be as follows: Filmag pays to VISCO; VISCO pays the Consortium; and then the Consortium pays the DBP
with the arrangement that the Consortium subrogates to the rights of the DBP as first mortgagee to the VISCO plant. The Consortium
further agreed to call a meeting of the VISCO board of directors for the purpose of considering and formally approving the proposed sale of
the 2 generators to Filmag."33

Accordingly, on October 4, 1974, the VISCO board of directors had a meeting in the FEBTC Boardroom. 34 The board was asked to decide how
VISCO would settle its debt to DBP: whether by asking the Consortium to put up the necessary amount or by accepting Filmag's offer to purchase
VISCO's generator sets.35 The latter option was unanimously chosen36 in a Resolution worded as follows:

"RESOLVED, That the offer of Filmag (Philippines) Inc. in their letters of December 14, 1973 and March 19, 1974 to purchase two (2) units
of generator sets, including standard accessories, of VISCO is hereby accepted under the following terms and conditions:

xxx xxx xxx

"2. The price for the two (2) generator sets is PESOS: ONE MILLION FIVE HUNDRED FIFTY THOUSAND FIVE HUNDRED SEVENTY
TWO ONLY (P1,550,572) x x x and shall be payable upon signing of a letter-agreement and which shall be later formalized into a Deed of
Sale. The amount, however, shall be held by the depositary bank of VISCO, Far East Bank and Trust Company, in escrow and shall be at
VISCO's disposal upon the signing of Filmag of the receipt/s of delivery of the said two (2) generator sets.

xxx xxx xxx

"FURTHER RESOLVED, That the sales proceeds of PESOS: ONE MILLION FIVE HUNDRED FIFTY THOUSAND FIVE HUNDRED
SEVENTY TWO ONLY (P1,550,572) shall be utilized to pay the liability of VISCO with the Development Bank of the Philippines." 37

The sale of the generator sets to Filmag took place and, according to the testimony of Garcia, the proceeds were deposited with FEBTC in a special
account held in trust for the Consortium.38

A year after, on May 22, 1975, petitioner filed with the Pasig Regional Trial Court (RTC) a Complaint 39 for Recovery of Property and Damages with
Preliminary Injunction and Attachment.40 Petitioner's allegation was that VISCO had fraudulently misapplied or converted the finished steel sheets
entrusted to it.41 On June 3, 1975, Judge Pedro A. Revilla issued a Writ of Preliminary Attachment over its properties that were not exempt from
execution.42

In compliance with the Writ, Sheriff Andres R. Bonifacio attempted to garnish the account of VISCO in FEBTC, 43 which denied holding that account.
Instead, the bank admitted that what it had was a deposit account in the name of the Board of Trustees-Consortium of Banks, particularly Account
No. 2479-1.44 FEBTC reported to Sheriff Bonifacio that it had instructed its accounting department to hold the account, "subject to the prior liens or
rights in favor of [FEBTC] and other entities."45

While petitioner's case was pending, VISCO's vice-president (Garcia) and director (Arturo Samonte) requested from FEBTC a cash advance of
P1,342,656.88 for the full settlement of VISCO's account with DBP.46 On June 29, 1976, FEBTC complied by issuing Check No. FE239249 for
P1,342,656.88, payable to "[DBP] for [the] account of VISCO." 47 On even date, DBP executed a Deed of Assignment of Mortgage Rights Interest and
Participation48 in favor of Respondent Consortium of Banks. The deed stated that, in consideration of the payment made, all of DBP's rights under
the mortgage agreement with VISCO were being transferred and conveyed to the Consortium. 49 Thus did the latter obtain DBP's recorded primary
lien over the real and chattel properties of VISCO.

On September 23, 1980, the Consortium filed a Petition for Extra-Judicial Foreclosure with the Office of the Provincial Sheriff of Bohol. 50 The Notice
of Extrajudicial Foreclosure of Mortgage, published in the Bohol Newsweek on October 10, 1980, announced that the auction sale was scheduled for
November 11, 1980.51

On November 3, 1980, Southern Industrial Projects, Inc. (SIP), which was a judgment creditor 52 of VISCO, filed Civil Case No. 3383. It was a
Complaint53 for Declaration of Nullity of the Mortgage and Injunction to Restrain the Consortium from Proceeding with the Auction Sale. SIP argued
that DBP had actually been paid by VISCO with the proceeds from the sale of the generator sets. Hence, the mortgage in favor of that bank had
been extinguished by the payment and could not have been assigned to the Consortium. 54 A temporary restraining order against the latter was thus
successfully obtained; the provincial sheriff could not proceed with the auction sale of the mortgaged assets. 55 But SIP's victory was short-lived. On
March 2, 1984, Civil Case No. 3383 was decided in favor of the Consortium. 56 Judge Andrew S. Namocatcat ruled thus:

"The evidence of the plaintiff is only anchored on the fact that the deed of assignment executed by the DBP in favor of the defendant banks
is an act which would defraud creditors. It is the thinking of the court that the payment of defendant banks to DBP of VISCO's loan and the
execution of the DBP of the deed of assignment of credit and rights to the defendant banks is in accordance with Article 1302 and 1303 of
the New Civil Code, and said transaction is not to defraud creditors because the defendant banks are also creditors of VISCO." 57

On June 14, 1985, this Decision was affirmed by the Intermediate Appellate Court in CA-GR No. 03719. 58

The auction sale of VISCO's mortgaged properties took place on March 19, 1985 and the Consortium emerged as the highest bidder. 59 The
Certificate of Sale60 in its favor was registered on May 22, 1985.61

On June 27, 1985, VISCO executed through Vicente Garcia, a Deed of Assignment of Right of Redemption 62 in favor of the National Steel
Corporation (NSC), in consideration of P100,000. 63 On the same day, the Consortium sold the foreclosed real and personal properties of VISCO to
the NSC.64

On August 16, 1985, petitioner filed against respondents Civil Case No. 3929, which was a Complaint for Annulment or Rescission of Sale, Damages
with Preliminary Injunction.65 Coastal alleged that, despite the Writ of Attachment issued in its favor in the still pending Civil Case No. 21272, the
Consortium had sold the properties to NSC. Further, despite the attachment of the properties, the Consortium was allegedly able to sell and place
them beyond the reach of VISCO's other creditors. 66 Thus imputing bad faith to respondent banks' actions, petitioner said that the sale was intended
to defraud VISCO's other creditors.

Petitioner further contended that the assignment in favor of the Consortium was fraudulent, because DBP had been paid with the proceeds from the
sale of the generator sets owned by VISCO, and not with the Consortium's own funds. 67 Petitioner offered as proof the minutes of the meeting 68 in
which the transaction was decided. Respondent Consortium countered that the minutes would in fact readily disclose that the intention of its
members was to apply the proceeds to a partial payment to DBP.69 Respondent insisted that it used its own funds to pay the bank. 70

On August 20, 1985, a temporary restraining order (TRO) 71 was issued by Judge Mercedes Gozo-Dadole against VISCO, enjoining it from
proceeding with the removal or disposal of its properties; the execution and/or consummation of the foreclosure sale; and the sale of the foreclosed
properties to NSC. On September 6, 1985, the trial court issued an Order requiring the Consortium to post a bond of P25 million in favor of Coastal
for damages that petitioner may suffer from the lifting of the TRO. The bond filed was then approved by the RTC in its Order of September 13,
1985.72

On December 15, 1986, Civil Case No. 21272 was finally decided by Judge Nicolas P. Lapena, Jr., in favor of Coastal. 73 VISCO was ordered to pay
petitioner the sum of P851,316.19 with interest at the legal rate, plus attorney's fees of P50,000.00 and costs.74 Coastal filed a Motion for
Execution,75 but the judgment has remained unsatisfied to date.

On January 5, 1992, a Decision76 on Civil Case No. 3929 was rendered as follows:
"WHEREFORE, this Court hereby renders judgment in favor of the defendants and against the plaintiff Coastal Pacific Trading, Inc. BY
WAY OF THE MAIN COMPLAINT, to wit:

"1. Declaring the extrajudicial foreclosure sale conducted by the sheriff and the corresponding certificate of sale executed by the
defendant sheriffs on March 15, 1985 relative to the real properties of the defendant SRM/VISCO of Cortes, Bohol, Philippines,
which were registered in the Register of Deeds of Bohol, on May 22, 1985 and the Transfer of Assignment to the defendant
National Steel Corporation of any or part of the foreclosed properties arising from the extrajudicial foreclosure sale as valid and
legal;

"2. Ordering the plaintiff Coastal Pacific Trading Inc. to pay the defendant Consortium of Banks[,] Southern Rolling Mills, Co.,
Inc., Far East Bank & Trust Company, Philippine Commercial Industrial Bank, Equitable Banking Corporation, Prudential Bank,
Board of Trustees-Consortium of Banks- [VISCO], United Coconut Planters Bank, City Trust Banking Corporation, Associated
Bank, Insular Bank of Asia and America, International Corporate Bank, Commercial Bank of Manila, Bank of the Philippine
Islands and the National Steel Corporation in the instant case the amount of FIVE HUNDRED THOUSAND PESOS
(P500,000.00) representing damages;

"3. Ordering the plaintiff The (sic) Coastal Pacific Trading Inc. to pay the defendants the amount of FIFTEEN THOUSAND
PESOS (P15,000.00) representing attorney's fees;

"4. Dismissing the Amended Complaint of the plaintiff;

"5. Ordering the plaintiff to pay the cost; AND

"BY WAY OF CROSS CLAIM INTERPOSED

"BY THE DEFENDANT National Steel Corporation against the Consortium of Banks and SRM/VISCO, the same is dismissed for lack of
merit, without pronouncement as to cost." 77

Insisting that the trial court erred in holding that it had failed to prove its case by preponderance of evidence, Coastal filed an appeal with the CA.
Allegedly, the purported insufficiency of proof was based on the sole ground that petitioner did not file an objection when the properties were sold on
execution. It contended that the court a quo had arrived at this erroneous conclusion by relying on inapplicable jurisprudence. 78

Additionally, Coastal argued that the trial court had erred in not annulling the foreclosure proceedings and sale for being fictitious and done to
defraud petitioner as VISCO's creditor. Supposedly, the DBP mortgage had already been extinguished by payment; thus, the bank could not have
assigned the contract to the Consortium.79

Petitioner also prayed for the annulment of the sale in favor of NSC on the ground that the latter was a party to the fraudulent foreclosure and,
hence, not a buyer in good faith.80

Ruling of the Court of Appeals

At the outset, the CA stressed that the validity of the Consortium's mortgage, foreclosure, and assignments had already been upheld in CA-GR CV
No. 03719, entitled Southern Industrial Projects v. United Coconut Planters Bank 81 Citing Valencia v. RTC of Quezon City, Br. 9082 and Vda. de Cruzo
v. Carriaga,83 the CA explained that the absolute identity of parties was not necessary for the application of res judicata. All that was required was a
shared identity of interests, as shown by the identity of reliefs sought by one person in a prior case and by another in a subsequent case.

While Coastal was not a party to Southern Industrial Projects, it should nevertheless be bound by that Decision, because it had raised substantially
the same claim and cause of action as SIP, according to the appellate court. The CA held that the basic reliefs sought by Coastal and SIP were
substantially the same: the nullification of the Deed of Assignment in favor of the Consortium, the foreclosure sale, and the subsequent sale to NSC.
Because this identity of reliefs sought showed an identity of interests, the CA concluded that it need not rule on those issues. 84

As to the issue that the DBP mortgage had been extinguished by payment, the CA quoted its earlier Decision in Southern Industrial Projects:

"The evidence shows that the proceeds of the sale of the two generating sets were applied by defendants-appellees in the payment of the
outstanding obligation of VISCO. It appears that said proceeds were deposited in the bank account of the consortium of creditors to avoid it
being garnished by the creditors notwithstanding the set-off, VISCO was still indebted to the defendants-appellees.
"The evidence x x x shows that upon VISCO's request for [cash] advance, the Far East Banks (sic) and Trust Co., the manager of the
consortium of creditors, issued FEBTC check No. 239249 on June 29, 1976 in the amount of P1,342,656.68 payable to the DBP to pay off
its loan to the latter.

xxx xxx xxx

"x x x. A public document celebrated with all the legal formalities under the safeguard of notarial certificate is evidence against a party, and
a high degree [of] proof is necessary to overcome the legal presumption that the recital is true. The biased and interested testimony of one
of the parties to such instrument who attempts to vary or repudiate what it purports to be, cannot overcome the evidentiary force of what is
recited in the document."85

The appellate court also rejected petitioner's contention that the Consortium's Petition for Extrajudicial Foreclosure was already barred by the earlier
resort to a judicial foreclosure. The CA clarified that in filing a Petition for Judicial Foreclosure, the Consortium had pursued its right as junior
encumbrancer. On the other hand, the Consortium filed a Petition for Extrajudicial Foreclosure as a first encumbrancer by virtue of DBP's assignment
in its favor.86

The CA also rejected petitioner's theory of extinguishment of obligation by merger. It observed that the merger could not have possibly taken place,
because respondent banks and VISCO were not creditors and debtors in their own right. 87

Petitioner's Motion for Reconsideration,88 which was received by the CA on November 15, 1994,89 was denied for lack of merit.

Hence, this Petition.90

Issues

Petitioner raises the following issues for our consideration:

"I

"Respondent Court of Appeals, seemingly to avoid the irrefutable evidence of fraud and collusion practised by [respondents] against
[Petitioner] Coastal, erroneously sustained the trial court's holding that the present case is barred by res judicata because of the previous
decision in the case of Southern Industrial Projects, Inc., vs. United Coconut Planters Bank , CA-G.R. No. 03719, considering that the
elements that call for the application of this rule are not present in the case at bar, and the exceptions allowed by this Honorable Supreme
Court are not applicable here for variance or distinction in facts and issues, x x x:" 91

"II

"Respondent Court of Appeals further erred in not annulling the Deed of Assignment of the DBP mortgage x x x, the extrajudicial
foreclosure proceedings of the two mortgages x x x, and the separate sale of the land and machineries as real and personal properties by
the foreclosing banks to NSC, as well as the assignment or waiver of SRM/Visco's legal right of redemption over the foreclosed properties,
for being fraudulently executed through collusion among the [respondents] and in fraud of SRM/Visco's creditor, [Petitioner] Coastal, x x
x;"92

Stripped of nonessentials, the two issues may be restated as follows:

1. Whether the present action is barred by res judicata

2. Whether respondents disposed of VISCO's assets in fraud of the creditors

The Court's Ruling

The Petition is meritorious.

First Issue:
Res judicata

The CA cited Valencia v. RTC of Quezon City93 to support the finding that SIP and Coastal were substantially the same parties. We distinguish.
In Valencia, the plaintiff-intervenor in the first case, Cariño, claimed Lot 4 based on an alleged purchase of Valencia's "squatter's rights" over the
property. The trial court dismissed the claim and held that no such purchase ever took place. 94 It also held that, on the assumption that a sale had
taken place, the sale was null and void for being contrary to the pertinent housing law. It also found that all current occupants of Lot 4 were illegal
squatters; thus, it ordered their ejectment.

When this first case attained finality, Carino's daughter, Catbagan, filed another suit against Valencia. Catbagan challenged the applicability of the
ejectment Order issued to her; as an occupant of the lot, she was allegedly not a party to the first case. Her Petition was denied for lack of merit. 95

The execution of the Decision in the first case was again forestalled when Llanes, Cariño's sister-in-law who was another occupant of Lot 4, filed
another suit against the same respondent. Like Cariño, Llanes insisted on having purchased the subject lot from Valencia. 96 This Court ruled that the
suit was barred by res judicata. There was a substantial identity of parties, because the right claimed by both Cariño and Llanes were based on each
one's alleged purchase of Valencia's "squatter's rights."97

In the first case, sales of "squatter's rights" were already categorically declared null and void for being contrary to law. Thus, Llanes' admission that
she had purchased Valencia's "squatter's rights" placed her in the same category as Cariño. The purchase could not be treated differently, because
the final and executory Decision held that all purchases of "squatter's rights" (regardless of who the purchasers were) were null and void.98

Further, the earlier ruling held that "the present occupants are illegal squatters." That ruling included Llanes, who was admittedly one of the
occupants.99 Simply put, she and Valencia were considered identical parties for purposes of res judicata, because they were obviously litigating
under the same void title and capacity as vendees of "squatter's rights" and as occupants of Lot 4.

Moreover, we held in Valencia that Llanes' suit was merely a clear attempt to prevent or delay the execution of the judgment in the first case, which
had become final by reason of the three affirmances by this Court. The pattern to obstruct the execution of the first judgment was obvious: after
Cariño lost the first case, her daughter filed a second one. When the daughter lost the second, the daughter-in-law filed a third case. It may be
observed that the three successive plaintiffs were all occupants of the same property and belonged to the same family; this fact was also indicative
of their privity.

Given this background, it becomes clear that the finding of a substantial identity of parties in Valencia was based on its peculiar factual
circumstances, which are different from those in the present case.

Unlike Llanes, Coastal is not asserting a right that has been categorically declared null and void in a prior case. In fact, its right based on the
processing agreement was upheld in Civil Case No. 21272. Clearly, Coastal cannot be treated in the same manner as Llanes.

The CA erred in applying Southern Industrial Projects v. United Coconut Planters Bank 100 as a bar by res judicata with respect to the present case.
For this principle to apply, the following elements must concur: a) the former judgment was final; b) the court that rendered it had jurisdiction over the
subject matter and the parties; c) the judgment was based on the merits; and, d) between the first and the second actions, there is an identity of
parties, subject matters, and causes of action.101

It is axiomatic that res judicata does not require an absolute, but only a substantial, identity of parties. There is a substantial identity when there is
privity between the two parties or they are successors-in-interest by title subsequent to the commencement of the action, litigating for the same thing,
under the same title, and in the same capacity.102 Petitioner was not acting in the same capacity as SIP when it filed Civil Case No. 3383, which
eventually became AC-GR CV No. 03719. It brought this latter action as a creditor under a processing agreement with VISCO; on the other hand, the
latter was sued by SIP, based on an alleged breach of their management contract. Very clearly, their rights were entirely distinct and separate from
each other. In no manner were these two creditors privies of each other.

The causes of action in the two Complaints were also different. Causes of action arise from violations of rights. A single right may be violated by
several acts or omissions, in which case the plaintiff has only one cause of action. Likewise, a single act or omission may violate several rights at the
same time, as when the act constitutes a violation of separate and distinct legal obligations. 103 The violation of each of these separate rights is a
separate cause of action in itself.104 Hence, although these causes of action arise from the same state of facts, they are distinct and independent and
may be litigated separately; recovery on one is not a bar to subsequent actions on the others. 105

In the present case, the right of SIP (arising from its management contract with VISCO) is totally distinct and separate from the right of Coastal
(arising from its processing contract with VISCO). SIP and Coastal are asserting distinct rights arising from different legal obligations of the debtor
corporation. Thus, VISCO's violation of those separate rights has given rise to separate causes of action.

The confusion in the resolution of the issue of identity of parties occurred, because the two creditors were assailing the same transactions of VISCO
on the same grounds. Since the two cases they filed presented similar legal issues, the appellate court held that its ruling in AC-GR CV No. 03719
was also applicable to the instant case.
Common but palpable is this misconception of the doctrine of res judicata. Persons do not become privies by the mere fact that they are interested in
the same question or in proving the same set of facts, or that one person is interested in the result of a litigation involving the other. Hence, several
creditors of one debtor cannot be considered as identical parties for the purpose of assailing the acts of the debtor. They have distinct credits, rights,
and interests, such that the failure of one to recover should not preclude the other creditors from also pursuing their legal remedies.

Further, petitioner, which was not a party to Southern Industrial Projects (their causes of action being separate and distinct), did not have the
opportunity to be heard in that case, much less to present its own evidence. Thus, to bind petitioner to the Decision in that case would clearly violate
its rights to due process. As a separate party, it has the right to have its arguments and evidence evaluated on their own merits.

Second Issue:
Fraud of Creditors

We now come to the heart of the Petition. Coastal alleges that the assignment of mortgage, the extrajudicial foreclosure proceedings, and the sale of
the properties of VISCO should all be rescinded on the ground that they were done to defraud the latter's creditors.

The CA found no merit in petitioner's arguments. It ruled that the assignment conformed to the requirements of law; that the consideration for the
assignment had allegedly been given by FEBTC; and that, hence, the Consortium had a right to foreclose on the mortgaged properties.

By focusing on the innate validity of these Contracts, the CA totally overlooked the issue of fraud as a ground for rescission. Elementary is the
principle that the validity of a contract does not preclude its rescission. Under Articles 1380 and 1381 (3) of the Civil Code, contracts that are
otherwise valid between the contracting parties may nonetheless be subsequently rescinded by reason of injury to third persons, like creditors. 106 In
fact, rescission implies that there is a contract that, while initially valid, produces a lesion or pecuniary damage to someone. 107 Thus, when the CA
confined itself to the issue of the validity of these contracts, it did not at all address the heart of petitioner's cause of action: whether these
transactions had been undertaken by the Consortium to defraud VISCO's other creditors.

There is more than a preponderance of evidence showing the Consortium's deliberate plan to defraud VISCO's other creditors.

Consortium Banks as Directors

It will be recalled that Respondent Consortium took over management and control of VISCO by acquiring 90 percent of the latter's equity. Thus, 9 out
of the 10 directors of the corporation were all officials of the Consortium, 108 which may thus be said to have effectively occupied and/or controlled the
board. Significantly, nowhere in the records can we find any denial by respondent of this allegation by petitioner. 109

As directors of VISCO, the officials of the Consortium were in a position of trust; thus, they owed it a duty of loyalty. This trust relationship sprang
from the fact that they had control and guidance over its corporate affairs and property.110 Their duty was more stringent when it became insolvent or
without sufficient assets to meet its outstanding obligations that arose. Because they were deemed trustees of the creditors in those instances, they
should have managed the corporation's assets with strict regard for the creditors' interests. When these directors became corporate creditors in their
own right, they should not have permitted themselves to secure any undue advantage over other creditors. 111 In the instant case, the Consortium
miserably failed to observe its duty of fidelity towards VISCO and its creditors.

Duty of the Consortium Banks


to VISCO's Creditors

Recall that as early as 1966, the Consortium, through its directors on the board of VISCO, had already assumed management and control over the
latter. Hence, when VISCO recognized its outstanding liability to petitioner in 1970 and offered a Compromise Agreement, 112 respondent banks were
already at the helm of the debtor corporation. The members of the Consortium, therefore, cannot deny that they were aware of those claims against
the corporation. Nonetheless, they did not adopt any measure to protect petitioner's credit.

Quite the opposite, they even took steps to hide VISCO's unexpended funds. Garcia's 1972 letter to Samonte unmistakably reveals that they kept
those funds in an account named "Board of Trustees VISCO Consortium of Banks." This fact alone shows an effort to hide, with the evident intent to
keep, those funds for themselves. The letter even says that, for the protection of the Consortium, the name "VISCO" should be eliminated entirely, so
that the account name would read "Board of Trustees Consortium of Banks." Clearly, this particular move was found to be necessary to avoid a
takeover by the government, which was also a creditor of VISCO. 113 This express intent of the latter, under the direction and for the benefit of the
Consortium, corroborated petitioner's contention that respondent banks had defrauded VISCO's creditors.

Assignment of Mortgage
in Favor of the Consortium Banks
The assignment of mortgage in favor of the Consortium also bears the earmarks of fraud. Initially, respondent banks had agreed that VISCO should
sell two of its generator sets, so that the proceeds could be utilized to pay DBP. This plan was direct, simple, and would extinguish the encumbrance
in favor of the bank.

Then, quite surprisingly, the Consortium set down the following payment procedure: Filmag would pay VISCO; the latter would pay the Consortium,
which would pay DBP; and the Consortium would then subrogate DBP to the latter's rights as first mortgagee. One is then led to ask: if the intention
was to pay DBP; from the sales proceeds of the generator sets, why did the money have to pass through the Consortium?

The answer lies in the nature of respondent's mortgage. It will be recalled that this mortgage remained unrecorded and not legally binding on the
other creditors.114 Thus, if DBP had been directly paid by VISCO, the latter could have freed up its properties to the satisfaction of all its other
creditors. This procedure would have been fair to all, but it was not followed by the Consortium.

Instead, the proceeds from the sale of the generator sets were first paid to respondent banks, which used the money to pay DBP. The last step in the
payment procedure explains the reason for this preferred though roundabout manner of payment. This final step entitled the Consortium to obtain
DBP's primary lien through an assignment by allowing it to pay VISCO's loan to the bank, without incurring additional expenses.

In the end, by collecting the money from VISCO, respondent banks recovered what they had ostensibly remitted to DBP. Moreover, the primary lien
that respondent banks acquired allowed them, as unsecured creditors of VISCO, to foreclose on the assets of the corporation without regard to its
inferior claims. It was a clever ruse that would have worked, were it not done by creditors who were duty-bound, as directors, not to take clever
advantage of other creditors.

To be sure, there was undue advantage. The payment scheme devised by the Consortium continued the efficacy of the primary lien, this time in its
favor, to the detriment of the other creditors. When one considers its knowledge that VISCO's assets might not be enough to meet its obligations to
several creditors,115 the intention to defraud the other creditors is even more striking. Fraud is present when the debtor knows that its actions would
cause injury.116

The assignment in favor of the Consortium was a rescissible contract for having been undertaken in fraud of creditors. 117 Article 1385 of the Civil
Code provides for the effect of rescission, as follows:

"Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its
interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore.

"Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who
did not act in bad faith.

"In this case, indemnity for damages may be demanded from the person causing the loss."

Indeed, mutual restitution is required in all cases involving rescission. But when it is no longer possible to return the object of the contract, an
indemnity for damages operates as restitution. The important consideration is that the indemnity for damages should restore to the injured party what
was lost.

In the case at bar, it is no longer possible to order the return of VISCO's properties. They have already been sold to the NSC, which has not been
shown to have acted in bad faith. The party alleging bad faith must establish it by competent proof. Sans that proof, purchasers are deemed to be in
good faith, and their interest in the subject property must not be disturbed. Purchasers in good faith are those who buy the property of another
without notice that some other person has a right to or interest in the property; and who pay the full and fair price for it at the time of the purchase, or
before they get notice of some other persons' claim of interest in the property.118

In the present case, petitioner failed to discharge its burden of proving bad faith on the part of NSC. There is insufficient evidence on record that the
latter participated in the design to defraud VISCO's creditors. To NSC, petitioner imputes fraud from the sole fact that the former was allegedly aware
that its vendor, the Consortium, had taken control over VISCO including the corporation's assets. 119 We cannot appreciate how knowledge of the
takeover would necessarily implicate anyone in the Consortium's fraudulent designs. Besides, NSC was not shown to be privy to the information that
VISCO had no other assets to satisfy other creditors' respective claims.

The right of an innocent purchaser for value must be respected and protected, even if its vendors obtained their title through fraud. 120 Pursuant to this
principle, the remedy of the defrauded creditor is to sue for damages against those who caused or employed the fraud. Hence, petitioner is entitled
to damages from the Consortium.

Award of Damages
It is essential that for damages to be awarded, a claimant must satisfactorily prove during the trial that they have a factual basis, and that the
defendant's acts have a causal connection to them. 121 Thus, the question of damages should normally call for a remand of the case to the lower court
for further proceedings. Considering, however, the length of time that petitioner's just claim has been thwarted, we find it in the best interest of
substantial justice to decide the issue of damages now on the basis of the available records. A remand for further proceedings would only result in a
needless delay.

Going over the records of the case, we find that petitioner has a final and executory judgment in its favor in Civil Case No. 21272. The judgment in
that case reads as follows:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs ordering defendant VISCO/SRM to pay the plaintiffs the sum of
P851,316.19 with interest thereon at the legal rate from the filing of this complaint, plus attorney's fees of P50,000.00 and to pay the
costs."122

The foregoing is the judgment credit that petitioner cannot enforce against VISCO because of Respondent Consortium's fraudulent disposition of the
corporation's assets. In other words, the above amounts define the extent of the actual damage suffered by Coastal and the amount that respondent
has to restore pursuant to Article 1385.

On the basis of the finding of fraud, the award of exemplary damages is in order, to serve as a warning to other creditors not to abuse their rights.
Under Article 2229 of the Civil Code, exemplary or corrective damages are imposed by way of example or correction for the public good. By their
nature, exemplary damages should be imposed in an amount sufficient and effective to deter possible future similar acts by respondent banks. The
court finds the amount of P250,000 sufficient in the instant case.

As a rule, a corporation is not entitled to moral damages because, not being a natural person, it cannot experience physical suffering or sentiments
like wounded feelings, serious anxiety, mental anguish and moral shock. 123 The only exception to this rule is when the corporation has a good
reputation that is debased, resulting in its humiliation in the business realm. 124 In the present case, the records do not show any evidence that the
name or reputation of petitioner has been sullied as a result of the Consortium's fraudulent acts. Accordingly, moral damages are not warranted.

WHEREFORE, the Petition is GRANTED . The assailed Decision of the Court of Appeals dated September 27, 1994, and its Resolution dated
January 5, 1995, are hereby REVERSED and SET ASIDE . Respondent Consortium of Banks is ordered to PAY Petitioner Coastal Pacific Trading,
Inc., the sum adjudged by the Regional Trial Court of Pasig, Branch 167, in Civil Case No. 21272 entitled Coastal Pacific Trading, Felix de la Costa,
and Aurora del Banco v. Visayan Integrated Corporation , to wit: "x x x the sum of P851,316.19 with interest thereon at the legal rate from the filing of
[the] [C]omplaint, plus attorney's fees of P50,000 and x x x the costs." Respondent Consortium of Banks is further ordered to pay petitioner
exemplary damages in the amount of P250,000.

SO ORDERED.

Ynares-Santiago, Austria-Martinez, Callejo, Sr., Chico-Nazario, J.J., concur.


G.R. No. 89561 September 13, 1990

BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M. CASTILLO, BERTILLA C. RADA, MARIETTA C. ABAÑEZ,
LEOVINA C. JALBUENA and SANTIAGO M. RIVERA, petitioners,
vs.
COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS MANUFACTURING CO., INC., respondents.

Edmundo T. Zepeda for petitioners.

Martin M. De Guzman for respondent BORMAHECO, Inc.

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

REGALADO, J.:

This is a petition to review the decision of respondent Court of Appeals, dated August 3, 1989, in CA-GR CV No. 15412, entitled "Buenaflor M.
Castillo Umali, et al. vs. Philippine Machinery Parts Manufacturing Co., Inc., et al.," 1 the dispositive portion whereof provides:

WHEREFORE, viewed in the light of the entire record, the judgment appealed from must be, as it is hereby REVERSED. In lieu
thereof, a judgment is hereby rendered-

1) Dismissing the complaint, with cost against plaintiffs;

2) Ordering plaintiffs-appellees to vacate the subject properties; and

3) Ordering plaintiffs-appellees to pay upon defendants' counterclaims:

a) To defendant-appellant PM Parts: (i) damages consisting of the value of the fruits in the subject parcels of
land of which they were deprived in the sum of P26,000.00 and (ii) attorney's fees of P15,000.00

b) To defendant-appellant Bormaheco: (i) expenses of litigation in the amount of P5,000.00 and (ii) attorney's
fees of P15,000.00.

SO ORDERED.

The original complaint for annulment of title filed in the court a quo by herein petitioners included as party defendants the Philippine Machinery Parts
Manufacturing Co., Inc. (PM Parts), Insurance Corporation of the Philippines (ICP), Bormaheco, Inc., (Bormaheco) and Santiago M. Rivera (Rivera).
A Second Amended Complaint was filed, this time impleading Santiago M. Rivera as party plaintiff.

During the pre-trial conference, the parties entered into the following stipulation of facts:

As between all parties: Plaintiff Buenaflor M. Castillo is the judicial administratrix of the estate of Felipe
Castillo in Special Proceeding No. 4053, pending before Branch IX, CFI of Quezon (per Exhibit A) which
intestate proceedings was instituted by Mauricia Meer Vda. de Castillo, the previous administratrix of the said
proceedings prior to 1970 (per exhibits A-1 and A-2) which case was filed in Court way back in 1964;

b) The four (4) parcels of land described in paragraph 3 of the Complaint were originally covered by TCT No.
T-42104 and Tax Dec. No. 14134 with assessed value of P3,100.00; TCT No. T 32227 and Tax Dec. No.
14132, with assessed value of P5,130,00; TCT No. T-31762 and Tax Dec. No. 14135, with assessed value of
P6,150.00; and TCT No. T-42103 with Tax Dec. No. 14133, with assessed value of P3,580.00 (per Exhibits
A-2 and B, B-1 to B-3 C, C-1 -to C3

c) That the above-enumerated four (4) parcels of land were the subject of the Deed of Extra-Judicial Partition
executed by the heirs of Felipe Castillo (per Exhibit D) and by virtue thereof the titles thereto has (sic) been
cancelled and in lieu thereof, new titles in the name of Mauricia Meer Vda. de Castillo and of her children,
namely: Buenaflor, Bertilla, Victoria, Marietta and Leovina, all surnamed Castillo has (sic) been issued,
namely: TCT No. T-12113 (Exhibit E ); TCT No. T-13113 (Exhibit F); TCT No. T-13116 (Exhibit G ) and TCT
No. T13117 (Exhibit H )

d) That mentioned parcels of land were submitted as guaranty in the Agreement of Counter-Guaranty with
Chattel-Real Estate Mortgage executed on 24 October 1970 between Insurance Corporation of the
Philippines and Slobec Realty Corporation represented by Santiago Rivera (Exhibit 1);

e) That based on the Certificate of Sale issued by the Sheriff of the Province of Quezon in favor of Insurance
Corporation of the Philippines it was able to transfer to itself the titles over the lots in question, namely: TCT
No. T-23705 (Exhibit M), TCT No. T 23706 (Exhibit N ), TCT No. T-23707 (Exhibit 0) and TCT No. T 23708
(Exhibit P);

f) That on 10 April 1975, the Insurance Corporation of the Philippines sold to PM Parts the immovables in
question (per Exhibit 6 for PM Parts) and by reason thereof, succeeded in transferring unto itself the titles
over the lots in dispute, namely: per TCT No. T-24846 (Exhibit Q ), per TCT No. T-24847 (Exhibit R ), TCT
No. T-24848 (Exhibit), TCT No. T-24849 (Exhibit T );

g) On 26 August l976, Mauricia Meer Vda. de Castillo' genther letter to Modesto N. Cervantes stating that
she and her children refused to comply with his demands (Exhibit V-2);

h) That from at least the months of October, November and December 1970 and January 1971, Modesto N.
Cervantes was the Vice-President of Bormaheco, Inc. later President thereof, and also he is one of the Board
of Directors of PM Parts; on the other hand, Atty. Martin M. De Guzman was the legal counsel of Bormaheco,
Inc., later Executive Vice-President thereof, and who also is the legal counsel of Insurance Corporation of the
Philippines and PM Parts; that Modesto N. Cervantes served later on as President of PM Parts, and that Atty.
de Guzman was retained by Insurance Corporation of the Philippines specifically for foreclosure purposes
only;

i) Defendant Bormaheco, Inc. on November 25, 1970 sold to Slobec Realty and Development, Inc.,
represented by Santiago Rivera, President, one (1) unit Caterpillar Tractor D-7 with Serial No. 281114
evidenced by a contract marked Exhibit J and Exhibit I for Bormaheco, Inc.;

j) That the Surety Bond No. 14010 issued by co-defendant ICP was likewise secured by an Agreement with
Counter-Guaranty with Real Estate Mortgage executed by Slobec Realty & Development, Inc., Mauricia
Castillo Meer, Buenaflor Castillo, Bertilla Castillo, Victoria Castillo, Marietta Castillo and Leovina Castillo, as
mortgagors in favor of ICP which document was executed and ratified before notary public Alberto R. Navoa
of the City of Manila on October 24,1970;

k) That the property mortgaged consisted of four (4) parcels of land situated in Lucena City and covered by
TCT Nos. T-13114, T13115,
T-13116 and T-13117 of the Register of Deeds of Lucena City;

l) That the tractor sold by defendant Bormaheco, Inc. to Slobec Realty & Development, Inc. was delivered to
Bormaheco, Inc. on or about October 2,1973, by Mr. Menandro Umali for purposes of repair;

m) That in August 1976, PM Parts notified Mrs. Mauricia Meer about its ownership and the assignment of Mr.
Petronilo Roque as caretaker of the subject property;

n) That plaintiff and other heirs are harvest fruits of the property (daranghita) which is worth no less than
Pl,000.00 per harvest.

As between plaintiffs and


defendant Bormaheco, Inc

o) That on 25 November 1970, at Makati, Rizal, Same Rivera, in representation of the Slobec Realty &
Development Corporation executed in favor of Bormaheco, Inc., represented by its Vice-President Modesto
N. Cervantes a Chattel Mortgage concerning one unit model CAT D7 Caterpillar Crawler Tractor as described
therein as security for the payment in favor of the mortgagee of the amount of P180,000.00 (per Exhibit K)
that Id document was superseded by another chattel mortgage dated January 23, 1971 (Exhibit 15);

p) On 18 December 1970, at Makati, Rizal, the Bormaheco, Inc., represented by its Vice-President Modesto
Cervantes and Slobec Realty Corporation represented by Santiago Rivera executed the sales agreement
concerning the sale of one (1) unit Model CAT D7 Caterpillar Crawler Tractor as described therein for the
amount of P230,000.00 (per Exhibit J) which document was superseded by the Sales Agreement dated
January 23,1971 (Exhibit 16);

q) Although it appears on the document entitled Chattel Mortgage (per Exhibit K) that it was executed on 25
November 1970, and in the document entitled Sales Agreement (per Exhibit J) that it was executed on 18
December 1970, it appears in the notarial register of the notary public who notarized them that those two
documents were executed on 11 December 1970. The certified xerox copy of the notarial register of Notary
Public Guillermo Aragones issued by the Bureau of Records Management is hereto submitted as Exhibit BB
That said chattel mortgage was superseded by another document dated January 23, 1971;

r) That on 23 January 1971, Slobec Realty Development Corporation, represented by Santiago Rivera,
received from Bormaheco, Inc. one (1) tractor Caterpillar Model D-7 pursuant to Invoice No. 33234 (Exhibits
9 and 9-A, Bormaheco, Inc.) and delivery receipt No. 10368 (per Exhibits 10 and 10-A for Bormaheco, Inc

s) That on 28 September 1973, Atty. Martin M. de Guzman, as counsel of Insurance Corporation of the
Philippines purchased at public auction for said corporation the four (4) parcels of land subject of tills case
(per Exhibit L), and which document was presented to the Register of Deeds on 1 October 1973;

t) Although it appears that the realties in issue has (sic) been sold by Insurance Corporation of the
Philippines in favor of PM Parts on 1 0 April 1975, Modesto N. Cervantes, formerly Vice- President and now
President of Bormaheco, Inc., sent his letter dated 9 August 1976 to Mauricia Meer Vda. de Castillo (Exhibit
V), demanding that she and her children should vacate the premises;

u) That the Caterpillar Crawler Tractor Model CAT D-7 which was received by Slobec Realty Development
Corporation was actually reconditioned and repainted. " 2

We cull the following antecedents from the decision of respondent Court of Appeals:

Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de Castillo. The Castillo family are the owners of a parcel
of land located in Lucena City which was given as security for a loan from the Development Bank of the Philippines. For their
failure to pay the amortization, foreclosure of the said property was about to be initiated. This problem was made known to
Santiago Rivera, who proposed to them the conversion into subdivision of the four (4) parcels of land adjacent to the mortgaged
property to raise the necessary fund. The Idea was accepted by the Castillo family and to carry out the project, a Memorandum
of Agreement (Exh. U p. 127, Record) was executed by and between Slobec Realty and Development, Inc., represented by its
President Santiago Rivera and the Castillo family. In this agreement, Santiago Rivera obliged himself to pay the Castillo family
the sum of P70,000.00 immediately after the execution of the agreement and to pay the additional amount of P400,000.00 after
the property has been converted into a subdivision. Rivera, armed with the agreement, Exhibit U , approached Mr. Modesto
Cervantes, President of defendant Bormaheco, and proposed to purchase from Bormaheco two (2) tractors Model D-7 and D-8
Subsequently, a Sales Agreement was executed on December 28,1970 (Exh. J, p. 22, Record).

On January 23, 1971, Bormaheco, Inc. and Slobec Realty and Development, Inc., represented by its President, Santiago Rivera,
executed a Sales Agreement over one unit of Caterpillar Tractor D-7 with Serial No. 281114, as evidenced by the contract
marked Exhibit '16'. As shown by the contract, the price was P230,000.00 of which P50,000.00 was to constitute a down
payment, and the balance of P180,000.00 payable in eighteen monthly installments. On the same date, Slobec, through Rivera,
executed in favor of Bormaheco a Chattel Mortgage (Exh. K, p. 29, Record) over the said equipment as security for the payment
of the aforesaid balance of P180,000.00. As further security of the aforementioned unpaid balance, Slobec obtained from
Insurance Corporation of the Phil. a Surety Bond, with ICP (Insurance Corporation of the Phil.) as surety and Slobec as principal,
in favor of Bormaheco, as borne out by Exhibit '8' (p. 111, Record). The aforesaid surety bond was in turn secured by an
Agreement of Counter-Guaranty with Real Estate Mortgage (Exhibit I, p. 24, Record) executed by Rivera as president of Slobec
and Mauricia Meer Vda. de Castillo, Buenaflor Castillo Umali, Bertilla Castillo-Rada, Victoria Castillo, Marietta Castillo and
Leovina Castillo Jalbuena, as mortgagors and Insurance Corporation of the Philippines (ICP) as mortgagee. In this agreement,
ICP guaranteed the obligation of Slobec with Bormaheco in the amount of P180,000.00. In giving the bond, ICP required that the
Castillos mortgage to them the properties in question, namely, four parcels of land covered by TCTs in the name of the
aforementioned mortgagors, namely TCT Nos. 13114, 13115, 13116 and 13117 all of the Register of Deeds for Lucena City.
On the occasion of the execution on January 23, 1971, of the Sales Agreement Exhibit '16', Slobec, represented by Rivera
received from Bormaheco the subject matter of the said Sales Agreement, namely, the aforementioned tractor Caterpillar Model
D-7 as evidenced by Invoice No. 33234 (Exhs. 9 and 9-A, p. 112, Record) and Delivery Receipt No. 10368 (Exhs. 10 and 10-A,
p. 113). This tractor was known by Rivera to be a reconditioned and repainted one [Stipulation of Facts, Pre-trial Order, par. (u)].

Meanwhile, for violation of the terms and conditions of the Counter-Guaranty Agreement (Exh. 1), the properties of the Castillos
were foreclosed by ICP As the highest bidder with a bid of P285,212.00, a Certificate of Sale was issued by the Provincial Sheriff
of Lucena City and Transfer Certificates of Title over the subject parcels of land were issued by the Register of Deeds of Lucena
City in favor of ICP namely, TCT Nos. T-23705, T 23706, T-23707 and T-23708 (Exhs. M to P, pp. 38-45). The mortgagors had
one (1) year from the date of the registration of the certificate of sale, that is, until October 1, 1974, to redeem the property, but
they failed to do so. Consequently, ICP consolidated its ownership over the subject parcels of land through the requisite affidavit
of consolidation of ownership dated October 29, 1974, as shown in Exh. '22'(p. 138, Rec.). Pursuant thereto, a Deed of Sale of
Real Estate covering the subject properties was issued in favor of ICP (Exh. 23, p. 139, Rec.).

On April 10, 1975, Insurance Corporation of the Phil. ICP sold to Phil. Machinery Parts Manufacturing Co. (PM Parts) the four (4)
parcels of land and by virtue of said conveyance, PM Parts transferred unto itself the titles over the lots in dispute so that said
parcels of land are now covered by TCT Nos. T-24846, T-24847, T-24848 and T-24849 (Exhs. Q-T, pp. 46-49, Rec.).

Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a letter dated August 9,1976 addressed to plaintiff Mrs.
Mauricia Meer Castillo requesting her and her children to vacate the subject property, who (Mrs. Castillo) in turn sent her reply
expressing her refusal to comply with his demands.

On September 29, 1976, the heirs of the late Felipe Castillo, particularly plaintiff Buenaflor M. Castillo Umali as the appointed
administratrix of the properties in question filed an action for annulment of title before the then Court of First Instance of Quezon
and docketed thereat as Civil Case No. 8085. Thereafter, they filed an Amended Complaint on January 10, 1980 (p. 444,
Record). On July 20, 1983, plaintiffs filed their Second Amended Complaint, impleading Santiago M. Rivera as a party plaintiff (p.
706, Record). They contended that all the aforementioned transactions starting with the Agreement of Counter-Guaranty with
Real Estate Mortgage (Exh. I), Certificate of Sale (Exh. L) and the Deeds of Authority to Sell, Sale and the Affidavit of
Consolidation of Ownership (Annexes F, G, H, I) as well as the Deed of Sale (Annexes J, K, L and M) are void for being entered
into in fraud and without the consent and approval of the Court of First Instance of Quezon, (Branch IX) before whom the
administration proceedings has been pending. Plaintiffs pray that the four (4) parcels of land subject hereof be declared as
owned by the estate of the late Felipe Castillo and that all Transfer Certificates of Title Nos. 13114,13115,13116,13117, 23705,
23706, 23707, 23708, 24846, 24847, 24848 and 24849 as well as those appearing as encumbrances at the back of the
certificates of title mentioned be declared as a nullity and defendants to pay damages and attorney's fees (pp. 71071 1, Record).

In their amended answer, the defendants controverted the complaint and alleged, by way of affirmative and special defenses that
the complaint did not state facts sufficient to state a cause of action against defendants; that plaintiffs are not entitled to the
reliefs demanded; that plaintiffs are estopped or precluded from asserting the matters set forth in the Complaint; that plaintiffs are
guilty of laches in not asserting their alleged right in due time; that defendant PM Parts is an innocent purchaser for value and
relied on the face of the title before it bought the subject property (p. 744, Record). 3

After trial, the court a quo rendered judgment, with the following decretal portion:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants, declaring the following
documents:

Agreement of Counter-Guaranty with Chattel-Real Estate Mortgage dated October 24,1970 (Exhibit 1);

Sales Agreement dated December 28, 1970 (Exhibit J)

Chattel Mortgage dated November 25, 1970 (Exhibit K)

Sales Agreement dated January 23, 1971 (Exhibit 16);

Chattel Mortgage dated January 23, 1971 (Exhibit 17);

Certificate of Sale dated September 28, 1973 executed by the Provincial Sheriff of Quezon in favor of
Insurance Corporation of the Philippines (Exhibit L);
null and void for being fictitious, spurious and without consideration. Consequently, Transfer Certificates of Title Nos. T 23705, T-
23706, T23707 and T-23708 (Exhibits M, N, O and P) issued in the name of Insurance Corporation of the Philippines, are
likewise null and void.

The sale by Insurance Corporation of the- Philippines in favor of defendant Philippine Machinery Parts Manufacturing Co., Inc.,
over Id four (4) parcels of land and Transfer Certificates of Title Nos. T 24846, T-24847, T-24848 and T-24849 subsequently
issued by virtue of said sale in the name of Philippine Machinery Parts Manufacturing Co., Inc., are similarly declared null and
void, and the Register of Deeds of Lucena City is hereby directed to issue, in lieu thereof, transfer certificates of title in the
names of the plaintiffs, except Santiago Rivera.

Orders the defendants jointly and severally to pay the plaintiffs moral damages in the sum of P10,000.00, exemplary damages in
the amount of P5,000.00, and actual litigation expenses in the sum of P6,500.00.

Defendants are likewise ordered to pay the plaintiffs, jointly and severally, the sum of P10,000.00 for and as attomey's fees. With
costs against the defendants.

SO ORDERED. 4

As earlier stated, respondent court reversed the aforequoted decision of the trial court and rendered the judgment subject of this petition-

Petitioners contend that respondent Court of Appeals erred:

1. In holding and finding that the actions entered into between petitioner Rivera with Cervantes are all fair and regular and
therefore binding between the parties thereto;

2. In reversing the decision of the lower court, not only based on erroneous conclusions of facts, erroneous presumptions not
supported by the evidence on record but also, holding valid and binding the supposed payment by ICP of its obligation to
Bormaheco, despite the fact that the surety bond issued it had already expired when it opted to foreclose extrajudically the
mortgage executed by the petitioners;

3. In aside the finding of the lower court that there was necessity to pierce the veil of corporate existence; and

4. In reversing the decision of the lower court of affirming the same 5

I. Petitioners aver that the transactions entered into between Santiago M. Rivera, as President of Slobec Realty and Development Company (Slobec)
and Mode Cervantes, as Vice-President of Bormaheco, such as the Sales Agreement, 6 Chattel Mortgage 7 and the Agreement of Counter-Guaranty
with Chattel/Real Estate Mortgage, 8 are all fraudulent and simulated and should, therefore, be declared nun and void. Such allegation is premised
primarily on the fact that contrary to the stipulations agreed upon in the Sales Agreement (Exhibit J), Rivera never made any advance payment, in
the alleged amount of P50,000.00, to Bormaheco; that the tractor was received by Rivera only on January 23, 1971 and not in 1970 as stated in the
Chattel Mortgage (Exhibit K); and that when the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage was executed on October 24,
1970, to secure the obligation of ICP under its surety bond, the Sales Agreement and Chattel Mortgage had not as yet been executed, aside from the
fact that it was Bormaheco, and not Rivera, which paid the premium for the surety bond issued by ICP

At the outset, it will be noted that petitioners submission under the first assigned error hinges purely on questions of fact. Respondent Court of
Appeals made several findings to the effect that the questioned documents are valid and binding upon the parties, that there was no fraud employed
by private respondents in the execution thereof, and that, contrary to petitioners' allegation, the evidence on record reveals that petitioners had every
intention to be bound by their undertakings in the various transactions had with private respondents. It is a general rule in this jurisdiction that
findings of fact of said appellate court are final and conclusive and, thus, binding on this Court in the absence of sufficient and convincing proof, inter
alia, that the former acted with grave abuse of discretion. Under the circumstances, we find no compelling reason to deviate from this long-standing
jurisprudential pronouncement.

In addition, the alleged failure of Rivera to pay the consideration agreed upon in the Sales Agreement, which clearly constitutes a breach of the
contract, cannot be availed of by the guilty party to justify and support an action for the declaration of nullity of the contract. Equity and fair play
dictates that one who commits a breach of his contract may not seek refuge under the protective mantle of the law.

The evidence of record, on an overall calibration, does not convince us of the validity of petitioners' contention that the contracts entered into by the
parties are either absolutely simulated or downright fraudulent.
There is absolute simulation, which renders the contract null and void, when the parties do not intend to be bound at all by the same. 9 The basic
characteristic of this type of simulation of contract is the fact that the apparent contract is not really desired or intended to either produce legal effects
or in any way alter the juridical situation of the parties. The subsequent act of Rivera in receiving and making use of the tractor subject matter of the
Sales Agreement and Chattel Mortgage, and the simultaneous issuance of a surety bond in favor of Bormaheco, concomitant with the execution of
the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage, conduce to the conclusion that petitioners had every intention to be bound
by these contracts. The occurrence of these series of transactions between petitioners and private respondents is a strong indication that the parties
actually intended, or at least expected, to exact fulfillment of their respective obligations from one another.

Neither will an allegation of fraud prosper in this case where petitioners failed to show that they were induced to enter into a contract through the
insidious words and machinations of private respondents without which the former would not have executed such contract. To set aside a document
solemnly executed and voluntarily delivered, the proof of fraud must be clear and convincing. 10 We are not persuaded that such quantum of proof
exists in the case at bar.

The fact that it was Bormaheco which paid the premium for the surety bond issued by ICP does not per se affect the validity of the bond. Petitioners
themselves admit in their present petition that Rivera executed a Deed of Sale with Right of Repurchase of his car in favor of Bormaheco and agreed
that a part of the proceeds thereof shall be used to pay the premium for the bond. 11 In effect, Bormaheco accepted the payment of the premium as
an agent of ICP The execution of the deed of sale with a right of repurchase in favor of Bormaheco under such circumstances sufficiently establishes
the fact that Rivera recognized Bormaheco as an agent of ICP Such payment to the agent of ICP is, therefore, binding on Rivera. He is now
estopped from questioning the validity of the suretyship contract.

II. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction that a corporation is an entity with a
juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as
a mere association of persons. The members or stockholders of the corporation will be considered as the corporation, that is, liability will attach
directly to the officers and stockholders. 12 The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, 13 or when it is made as a shield to confuse the legitimate issues 14 or where a corporation is the mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation. 15

In the case at bar, petitioners seek to pierce the V621 Of corporate entity of Bormaheco, ICP and PM Parts, alleging that these corporations
employed fraud in causing the foreclosure and subsequent sale of the real properties belonging to petitioners While we do not discount the possibility
of the existence of fraud in the foreclosure proceeding, neither are we inclined to apply the doctrine invoked by petitioners in granting the relief
sought. It is our considered opinion that piercing the veil of corporate entity is not the proper remedy in order that the foreclosure proceeding may be
declared a nullity under the circumstances obtaining in the legal case at bar.

In the first place, the legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or
obligation. In the instant case, petitioners do not seek to impose a claim against the individual members of the three corporations involved; on the
contrary, it is these corporations which desire to enforce an alleged right against petitioners. Assuming that petitioners were indeed defrauded by
private respondents in the foreclosure of the mortgaged properties, this fact alone is not, under the circumstances, sufficient to justify the piercing of
the corporate fiction, since petitioners do not intend to hold the officers and/or members of respondent corporations personally liable therefor.
Petitioners are merely seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained without having to disregard the
aforesaid corporate fiction attaching to respondent corporations. Secondly, petitioners failed to establish by clear and convincing evidence that
private respondents were purposely formed and operated, and thereafter transacted with petitioners, with the sole intention of defrauding the latter.

The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a justification for disregarding their separate
personalities, 16 absent sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons of their
rights.

III. The main issue for resolution is whether there was a valid foreclosure of the mortgaged properties by ICP Petitioners argue that the foreclosure
proceedings should be declared null and void for two reasons, viz.: (1) no written notice was furnished by Bormaheco to ICP anent the failure of
Slobec in paying its obligation with the former, plus the fact that no receipt was presented to show the amount allegedly paid by ICP to Bormaheco;
and (b) at the time of the foreclosure of the mortgage, the liability of ICP under the surety bond had already expired.

Respondent court, in finding for the validity of the foreclosure sale, declared:

Now to the question of whether or not the foreclosure by the ICP of the real estate mortgage was in the exercise of a legal right,
We agree with the appellants that the foreclosure proceedings instituted by the ICP was in the exercise of a legal right. First, ICP
has in its favor the legal presumption that it had indemnified Bormaheco by reason of Slobec's default in the payment of its
obligation under the Sales Agreement, especially because Bormaheco consented to ICPs foreclosure of the mortgage. This
presumption is in consonance with pars. R and Q Section 5, Rule 5, * New Rules of Court which provides that it is disputably
presumed that private transactions have been fair and regular. likewise, it is disputably presumed that the ordinary course of
business has been followed: Second, ICP had the right to proceed at once to the foreclosure of the mortgage as mandated by
the provisions of Art. 2071 Civil Code for these further reasons: Slobec, the principal debtor, was admittedly insolvent; Slobec's
obligation becomes demandable by reason of the expiration of the period of payment; and its authorization to foreclose the
mortgage upon Slobec's default, which resulted in the accrual of ICPS liability to Bormaheco. Third, the Agreement of Counter-
Guaranty with Real Estate Mortgage (Exh. 1) expressly grants to ICP the right to foreclose the real estate mortgage in the event
of 'non-payment or non-liquidation of the entire indebtedness or fraction thereof upon maturity as stipulated in the contract'. This
is a valid and binding stipulation in the absence of showing that it is contrary to law, morals, good customs, public order or public
policy. (Art. 1306, New Civil Code). 17

1. Petitioners asseverate that there was no notice of default issued by Bormaheco to ICP which would have entitled Bormaheco to demand payment
from ICP under the suretyship contract.

Surety Bond No. B-1401 0 which was issued by ICP in favor of Bormaheco, wherein ICP and Slobec undertook to guarantee the payment of the
balance of P180,000.00 payable in eighteen (18) monthly installments on one unit of Model CAT D-7 Caterpillar Crawler Tractor, pertinently provides
in part as follows:

1. The liability of INSURANCE CORPORATION OF THE PHILIPPINES, under this BOND will expire Twelve (I 2) months from
date hereof. Furthermore, it is hereby agreed and understood that the INSURANCE CORPORATION OF THE PHILIPPINES will
not be liable for any claim not presented in writing to the Corporation within THIRTY (30) DAYS from the expiration of this BOND,
and that the obligee hereby waives his right to bring claim or file any action against Surety and after the termination of one (1)
year from the time his cause of action accrues. 18

The surety bond was dated October 24, 1970. However, an annotation on the upper part thereof states: "NOTE: EFFECTIVITY DATE OF
THIS BOND SHALL BE ON JANUARY 22, 1971." 19

On the other hand, the Sales Agreement dated January 23, 1971 provides that the balance of P180,000.00 shall be payable in eighteen (18) monthly
installments. 20 The Promissory Note executed by Slobec on even date in favor of Bormaheco further provides that the obligation shall be payable on
or before February 23, 1971 up to July 23, 1972, and that non-payment of any of the installments when due shall make the entire obligation
immediately due and demandable. 21

It is basic that liability on a bond is contractual in nature and is ordinarily restricted to the obligation expressly assumed therein. We have repeatedly
held that the extent of a surety's liability is determined only by the clause of the contract of suretyship as well as the conditions stated in the bond. It
cannot be extended by implication beyond the terms the contract. 22

Fundamental likewise is the rule that, except where required by the provisions of the contract, a demand or notice of default is not required to fix the
surety's liability. 23 Hence, where the contract of suretyship stipulates that notice of the principal's default be given to the surety, generally the failure
to comply with the condition will prevent recovery from the surety. There are certain instances, however, when failure to comply with the condition will
not extinguish the surety's liability, such as a failure to give notice of slight defaults, which are waived by the obligee; or on mere suspicion of
possible default; or where, if a default exists, there is excuse or provision in the suretyship contract exempting the surety for liability therefor, or
where the surety already has knowledge or is chargeable with knowledge of the default. 24

In the case at bar, the suretyship contract expressly provides that ICP shag not be liable for any claim not filed in writing within thirty (30) days from
the expiration of the bond. In its decision dated May 25 1987, the court a quo categorically stated that '(n)o evidence was presented to show that
Bormaheco demanded payment from ICP nor was there any action taken by Bormaheco on the bond posted by ICP to guarantee the payment of
plaintiffs obligation. There is nothing in the records of the proceedings to show that ICP indemnified Bormaheco for the failure of the plaintiffs to pay
their obligation. " 25 The failure, therefore, of Bormaheco to notify ICP in writing about Slobec's supposed default released ICP from liability under its
surety bond. Consequently, ICP could not validly foreclose that real estate mortgage executed by petitioners in its favor since it never incurred any
liability under the surety bond. It cannot claim exemption from the required written notice since its case does not fall under any of the exceptions
hereinbefore enumerated.

Furthermore, the allegation of ICP that it has paid Bormaheco is not supported by any documentary evidence. Section 1, Rule 131 of the Rules of
Court provides that the burden of evidence lies with the party who asserts an affirmative allegation. Since ICP failed to duly prove the fact of
payment, the disputable presumption that private transactions have been fair and regular, as erroneously relied upon by respondent Court of
Appeals, finds no application to the case at bar.

2. The liability of a surety is measured by the terms of his contract, and, while he is liable to the full extent thereof, such liability is strictly limited to
that assumed by its terms. 26 While ordinarily the termination of a surety's liability is governed by the provisions of the contract of suretyship, where
the obligation of a surety is, under the terms of the bond, to terminate at a specified time, his obligation cannot be enlarged by an unauthorized
extension thereof. 27 This is an exception to the general rule that the obligation of the surety continues for the same period as that of the principal
debtor. 28
It is possible that the period of suretyship may be shorter than that of the principal obligation, as where the principal debtor is required to make
payment by installments. 29 In the case at bar, the surety bond issued by ICP was to expire on January 22, 1972, twelve (1 2) months from its
effectivity date, whereas Slobec's installment payment was to end on July 23, 1972. Therefore, while ICP guaranteed the payment by Slobec of the
balance of P180,000.00, such guaranty was valid only for and within twelve (1 2) months from the date of effectivity of the surety bond, or until
January 22, 1972. Thereafter, from January 23, 1972 up to July 23, 1972, the liability of Slobec became an unsecured obligation. The default of
Slobec during this period cannot be a valid basis for the exercise of the right to foreclose by ICP since its surety contract had already been
terminated. Besides, the liability of ICP was extinguished when Bormaheco failed to file a written claim against it within thirty (30) days from the
expiration of the surety bond. Consequently, the foreclosure of the mortgage, after the expiration of the surety bond under which ICP as surety has
not incurred any liability, should be declared null and void.

3. Lastly, it has been held that where The guarantor holds property of the principal as collateral surety for his personal indemnity, to which he may
resort only after payment by himself, until he has paid something as such guarantor neither he nor the creditor can resort to such collaterals. 30

The Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage states that it is being issued for and in consideration of the obligations
assumed by the Mortgagee-Surety Company under the terms and conditions of ICP Bond No. 14010 in behalf of Slobec Realty Development
Corporation and in favor of Bormaheco, Inc. 31 There is no doubt that said Agreement of Counter-Guaranty is issued for the personal indemnity of
ICP Considering that the fact of payment by ICP has never been established, it follows, pursuant to the doctrine above adverted to, that ICP cannot
foreclose on the subject properties,

IV. Private respondent PM Parts posits that it is a buyer in good faith and, therefore, it acquired a valid title over the subject properties. The
submission is without merit and the conclusion is specious

We have stated earlier that the doctrine of piercing the veil of corporate fiction is not applicable in this case. However, its inapplicability has no
bearing on the good faith or bad faith of private respondent PM Parts. It must be noted that Modesto N. Cervantes served as Vice-President of
Bormaheco and, later, as President of PM Parts. On this fact alone, it cannot be said that PM Parts had no knowledge of the aforesaid several
transactions executed between Bormaheco and petitioners. In addition, Atty. Martin de Guzman, who is the Executive Vice-President of Bormaheco,
was also the legal counsel of ICP and PM Parts. These facts were admitted without qualification in the stipulation of facts submitted by the parties
before the trial court. Hence, the defense of good faith may not be resorted to by private respondent PM Parts which is charged with knowledge of
the true relations existing between Bormaheco, ICP and herein petitioners. Accordingly, the transfer certificates of title issued in its name, as well as
the certificate of sale, must be declared null and void since they cannot be considered altogether free of the taint of bad faith.

WHEREFORE, the decision of respondent Court of Appeals is hereby REVERSED and SET ASIDE, and judgment is hereby rendered declaring the
following as null and void: (1) Certificate of Sale, dated September 28,1973, executed by the Provincial Sheriff of Quezon in favor of the Insurance
Corporation of the Philippines; (2) Transfer Certificates of Title Nos. T-23705, T-23706, T-23707 and T-23708 issued in the name of the Insurance
Corporation of the Philippines; (3) the sale by Insurance Corporation of the Philippines in favor of Philippine Machinery Parts Manufacturing Co., Inc.
of the four (4) parcels of land covered by the aforesaid certificates of title; and (4) Transfer Certificates of Title Nos. T-24846, T-24847, T-24848 and
T24849 subsequently issued by virtue of said sale in the name of the latter corporation.

The Register of Deeds of Lucena City is hereby directed to cancel Transfer Certificates of Title Nos. T-24846, T-24847, T24848 and T-24849 in the
name of Philippine Machinery Parts Manufacturing Co., Inc. and to issue in lieu thereof the corresponding transfer certificates of title in the name of
herein petitioners, except Santiago Rivera.

The foregoing dispositions are without prejudice to such other and proper legal remedies as may be available to respondent Bormaheco, Inc. against
herein petitioners.

SO ORDERED.

Melencio-Herrera (Chairman), Paras and Padilla, JJ., concur.

Sarmiento, J., is on leave.


G.R. No. L-15121 August 31, 1962

GREGORIO PALACIO, in his own behalf and in behalf of his minor child,
MARIO PALACIO, plaintiffs-appellants,
vs.
FELY TRANSPORTATION COMPANY, defendant-appellee.

Antonio A. Saba for plaintiffs-appellants.


Mercado, Ver and Reyes for defendant-appellee.

REGALA, J. :

This is an appeal by the plaintiffs from the decision of the Court of First Instance of Manila which dismissed their complaint.

Originally taken to the Court of Appeals, this appeal was certified to this Court on the ground that it raises purely questions of law.

The parties in this case adopt the following findings of fact of the lower court:

In their complaint filed with this Court on May 15, 1954, plaintiffs allege, among other things, "that about December, 1952, the defendant
company hired Alfredo Carillo as driver of AC-787 (687) (a registration for 1952) owned and operated by the said defendant company; that
on December 24, 1952, at about 11:30 a.m., while the driver Alfonso (Alfredo) Carillo was driving AC-687 at Halcon Street, Quezon City,
wilfully, unlawfully and feloniously and in a negligent, reckless and imprudent manner, run over a child Mario Palacio of the herein plaintiff
Gregorio Palacio; that on account of the aforesaid injuries, Mario Palacio suffered a simple fracture of the right tenor (sic), complete third,
thereby hospitalizing him at the Philippine Orthopedic Hospital from December 24, 1952, up to January 8, 1953, and continued to be
treated for a period of five months thereafter; that the plaintiff Gregorio Palacio herein is a welder by occupation and owner of a small
welding shop and because of the injuries of his child he has abandoned his shop where he derives income of P10.00 a day for the support
of his big family; that during the period that the plaintiff's (Gregorio Palacio's) child was in the hospital and who said child was under
treatment for five months in order to meet the needs of his big family, he was forced to sell one air compressor (heavy duty) and one heavy
duty electric drill, for a sacrifice sale of P150.00 which could easily sell at P350.00; that as a consequence of the negligent and reckless act
of the driver Alfredo Carillo of the herein defendant company, the herein plaintiffs were forced to litigate this case in Court for an agreed
amount of P300.00 for attorney's fee; that the herein plaintiffs have now incurred the amount of P500.00 actual expenses for
transportation, representation and similar expenses for gathering evidence and witnesses; and that because of the nature of the injuries of
plaintiff Mario Palacio and the fear that the child might become a useless invalid, the herein plaintiff Gregorio Palacio has suffered moral
damages which could be conservatively estimated at P1,200.00.

On May 23, 1956, defendant Fely Transportation Co., filed a Motion to Dismiss on the grounds (1) that there is no cause of action against
the defendant company, and (2) that the cause of action is barred by prior judgment..

In its Order, dated June 8, 1956, this Court deferred the determination of the grounds alleged in the Motion to Dismiss until the trial of this
case.

On June 20, 1956, defendant filed its answer. By way of affirmative defenses, it alleges (1) that complaint states no cause of action against
defendant, and (2) that the sale and transfer of the jeep AC-687 by Isabelo Calingasan to the Fely Transportation was made on December
24, 1955, long after the driver Alfredo Carillo of said jeep had been convicted and had served his sentence in Criminal Case No. Q-1084 of
the Court of First Instance of Quezon City, in which both the civil and criminal cases were simultaneously tried by agreement of the parties
in said case. In the Counterclaim of the Answer, defendant alleges that in view of the filing of this complaint which is a clearly unfounded
civil action merely to harass the defendant, it was compelled to engage the services of a lawyer for an agreed amount of P500.00.

During the trial, plaintiffs presented the transcript of the stenographic notes of the trial of the case of "People of the Philippines vs. Alfredo
Carillo, Criminal Case No. Q-1084," in the Court of First Instance of Rizal, Quezon City (Branch IV), as Exhibit "A". 1äwphï1.ñët

It appears from Exhibit "A" that Gregorio Palacio, one of the herein plaintiffs, testified that Mario Palacio, the other plaintiff, is his son; that
as a result of the reckless driving of accused Alfredo Carillo, his child Mario was injured and hospitalized from December 24, 1952, to
January 8, 1953; that during all the time that his child was in the hospital, he watched him during the night and his wife during the day; that
during that period of time he could not work as he slept during the day; that before his child was injured, he used to earn P10.00 a day on
ordinary days and on Sundays from P20 to P50 a Sunday; that to meet his expenses he had to sell his compressor and electric drill for
P150 only; and that they could have been sold for P300 at the lowest price.
During the trial of the criminal case against the driver of the jeep in the Court of First Instance of Quezon City (Criminal Case No. Q-1084)
an attempt was unsuccessfully made by the prosecution to prove moral damages allegedly suffered by herein plaintiff Gregorio Palacio.
Likewise an attempt was made in vain by the private prosecutor in that case to prove the agreed attorney's fees between him and plaintiff
Gregorio Palacio and the expenses allegedly incurred by the herein plaintiffs in connection with that case. During the trial of this case,
plaintiff Gregorio Palacio testified substantially to the same facts.

The Court of First Instance of Quezon City in its decision in Criminal Case No. 1084 (Exhibit "2") determined and thoroughly discussed the
civil liability of the accused in that case. The dispositive part thereof reads as follows:

IN VIEW OF THE FOREGOING, the Court finds the accused Alfredo Carillo y Damaso guilty beyond reasonable doubt of the crime
charged in the information and he is hereby sentenced to suffer imprisonment for a period of Two Months & One Day of Arresto Mayor; to
indemnify the offended party, by way of consequential damages, in the sum of P500.00 which the Court deems reasonable; with subsidiary
imprisonment in case of insolvency but not to exceed ¹/3 of the principal penalty imposed; and to pay the costs.

On the basis of these facts, the lower court held action is barred by the judgment in the criminal case and, that under Article 103 of the Revised
Penal Code, the person subsidiarily liable to pay damages is Isabel Calingasan, the employer, and not the defendant corporation.

Against that decision the plaintiffs appealed, contending that:

THE LOWER COURT ERRED IN NOT SUSTAINING THAT THE DEFENDANT-APPELLEE IS SUBSIDIARILY LIABLE FOR DAMAGES
AS A RESULT OF CRIMINAL CASE NO. Q-1084 OF THE COURT OF FIRST INSTANCE OF QUEZON CITY FOR THE REASON THAT
THE INCORPORATORS OF THE FELY TRANSPORTATION COMPANY, THE DEFENDANT-APPELLEE HEREIN, ARE ISABELO
CALINGASAN HIMSELF, HIS SON AND DAUGHTERS;

THE LOWER COURT ERRED IN NOT CONSIDERING THAT THE INTENTION OF ISABELO CALINGASAN IN INCORPORATING THE
FELY TRANSPORTATION COMPANY, THE DEFENDANT-APPELLEE HEREIN, WAS TO EVADE HIS CIVIL LIABILITY AS A RESULT OF
THE CONVICTION OF HIS DRIVER OF VEHICLE AC-687 THEN OWNED BY HIM:

THE LOWER COURT ERRED IN HOLDING THAT THE CAUSE OF ACTION OF THE PLAINTIFFS-APPELLANTS IS BARRED BY PRIOR
JUDGMENT.

With respect to the first and second assignments of errors, plaintiffs contend that the defendant corporate should be made subsidiarily liable for
damages in the criminal case because the sale to it of the jeep in question, after the conviction of Alfred Carillo in Criminal Case No. Q-1084 of the
Court of First Instance of Quezon City was merely an attempt on the part of Isabelo Calingasan its president and general manager, to evade his
subsidiary civil liability.

The Court agrees with this contention of the plaintiffs. Isabelo Calingasan and defendant Fely Transportation may be regarded as one and the same
person. It is evident that Isabelo Calingasan's main purpose in forming the corporation was to evade his subsidiary civil liability 1 resulting from the
conviction of his driver, Alfredo Carillo. This conclusion is borne out by the fact that the incorporators of the Fely Transportation are Isabelo
Calingasan, his wife, his son, Dr. Calingasan, and his two daughters. We believe that this is one case where the defendant corporation should not be
heard to say that it has a personality separate and distinct from its members when to allow it to do so would be to sanction the use of the fiction of
corporate entity as a shield to further an end subversive of justice. (La Campana Coffee Factory, et al. v. Kaisahan ng mga Manggagawa, etc., et al.,
G.R. No. L-5677, May 25, 1953) Furthermore, the failure of the defendant corporation to prove that it has other property than the jeep (AC-687)
strengthens the conviction that its formation was for the purpose above indicated.

And while it is true that Isabelo Calingasan is not a party in this case, yet, is held in the case of Alonso v. Villamor, 16 Phil. 315, this Court can
substitute him in place of the defendant corporation as to the real party in interest. This is so in order to avoid multiplicity of suits and thereby save
the parties unnecessary expenses and delay. (Sec. 2, Rule 17, Rules of Court; Cuyugan v. Dizon. 79 Phil. 80; Quison v. Salud, 12 Phil. 109.)

Accordingly, defendants Fely Transportation and Isabelo Calingasan should be held subsidiarily liable for P500.00 which Alfredo Carillo was ordered
to pay in the criminal case and which amount he could not pay on account of insolvency.

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

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes, Dizon and Makalintal, concur.
Reyes, J.B.L., J., took no part.
G.R. No. 141617 August 14, 2001

ADALIA B. FRANCISCO and MERRYLAND DEVELOPMENT CORPORATION, petitioners,


vs.
RITA C. MEJIA, as Executrix of Testate Estate of ANDREA CORDOVA VDA. DE GUTERREZ, respondent.

GONZAGA-REYES, J .:

In this petition for review by certiorari, petitioners pray for the setting aside of the Decision of the Court Appeals promulgated on 13 April 1999 and its
15 December 1999 Resolution in CA-G.R. CV No. 19281.

As culled from the decisions of the lower courts and the pleadings of the parties, the factual background of this case is as set out herein:

Andrea Cordova Vda. de Gutierrez (Gutierrez) was the registered owner of a parcel of land in Camarin, Caloocan City known as Lot 861 of the Tala
Estate. The land had an aggregate area of twenty-five (25) hectares and was covered by Transfer Certificate of Title (TCT) No. 5779 of the Registry
of Deeds of Caloocan City. The property was later subdivided into five lots with an area of five hectares each and pursuant thereto, TCT No. 5779
was cancelled and five new transfer certificates of title were issued in the name of Gutierrez, namely TCT No. 7123 covering Lot 861-A, TCT No.
7124 covering Lot 861-B, TCT No. 7125 covering Lot 861-C, TCT No. 7126 covering Lot 861-D and TCT No. 7127 covering Lot 861-E.

On 21 December 1964, Gutierrez and Cardale Financing and Realty Corporation (Cardale) executed a Deed of Sale with Mortgage relating to the
lots covered by TCT Nos. 7124, 7125, 7126 and 7127, for the consideration of P800,000.00. Upon the execution of the deed, Cardale paid Gutierrez
P171,000.00. It was agreed that the balance of P629,000.00 would be paid in several installments within five years from the date of the deed, at an
interest of nine percent per annum "based on the successive unpaid principal balances." Thereafter, the titles of Gutierrez were cancelled and in lieu
thereof TCT Nos. 7531 to 7534 were issued in favor of Cardale.

To secure payment of the balance of the purchase price, Cardale constituted a mortgage on three of the four parcels of land covered by TCT Nos.
7531, 7532 and 7533, encompassing fifteen hectares of land. 1 The encumbrance was annotated upon the certificates of title and the owner's
duplicate certificates. The owner's duplicates were retained by Gutierrez.

On 26 August 1968, owing to Cardale's failure to settle its mortgage obligation, Gutierrez filed a complaint for rescission of the contract with the
Quezon City Regional Trial Court (RTC), which was docketed as Civil Case No. Q-12366. 2 On 20 October 1969, during the pendency of the
rescission case, Gutierrez died and was substituted by her executrix, respondent Rita C. Mejia (Mejia). In 1971, plaintiff's presentation of evidence
was terminated. However, Cardale, which was represented by petitioner Adalia B. Francisco (Francisco) in her capacity as Vice-President and
Treasurer of Cardale, lost interest in proceeding with the presentation of its evidence and the case lapsed into inactive status for a period of about
fourteen years.

In the meantime, the mortgaged parcels of land covered by TCT Nos. 7532 and 7533 became delinquent in the payment of real estate taxes in the
amount of P102,300.00, while the other mortgaged property covered by TCT No. 7531 became delinquent in the amount of P89,231.37, which
culminated in their levy and auction sale on 1 and 12 September 1983, in satisfaction of the tax arrears. The highest bidder for the three parcels of
land was petitioner Merryland Development Corporation (Merryland), whose President and majority stockholder is Francisco. A memorandum based
upon the certificate of sale was then made upon the original copies of TCT Nos. 7531 to 7533.

On 13 August 1984, before the expiration of the one year redemption period, Mejia filed a Motion for Decision with the trial court. The hearing of said
motion was deferred, however, due to a Motion for Postponement filed by Cardale through Francisco, who signed the motion in her capacity as
"officer-in-charge," claiming that Cardale needed time to hire new counsel. However, Francisco did not mention the tax delinquencies and sale in
favor of Merryland. Subsequently, the redemption period expired and Merryland, acting through Francisco, filed petitions for consolidation of title, 3
which culminated in the issuance of certain orders 4 decreeing the cancellation of Cardales' TCT Nos. 7531 to 7533 and the issuance of new transfer
certificates of title "free from any encumbrance or third-party claim whatsoever" in favor of Merryland. Pursuant to such orders, the Register of Deeds
of Caloocan City issued new transfer certificates of title in the name of Merryland which did not bear a memorandum of the mortgage liens in favor of
Gutierrez.

Thereafter, sometime in June 1985, Francisco filed in Civil Case No. Q-12366 an undated Manifestation to the effect that the properties subject of
the mortgage and covered by TCT Nos. 7531 to 7533 had been levied upon by the local government of Caloocan City and sold at a tax delinquency
sale. Francisco further claimed that the delinquency sale had rendered the issues in Civil Case No. Q-12366 moot and academic. Agreeing with
Francisco, the trial court dismissed the case, explaining that since the properties mortgaged to Cardale had been transferred to Merryland which was
not a party to the case for rescission, it would be more appropriate for the parties to resolve their controversy in another action.
On 14 January 1987, Mejia, in her capacity as executrix of the Estate of Gutierrez, filed with the RTC of Quezon City a complaint for damages with
prayer for preliminary attachment against Francisco, Merryland and the Register of Deeds of Caloocan City. The case was docketed as Civil Case
No. Q-49766. On 15 April 1988, the trial court rendered a decision 5 in favor of the defendants, dismissing the complaint for damages filed by Mejia. It
was held that plaintiff Mejia, as executrix of Gutierrez's estate, failed to establish by clear and convincing evidence her allegations that Francisco
controlled Cardale and Merryland and that she had employed fraud by intentionally causing Cardale to default in its payment of real property taxes
on the mortgaged properties so that Merryland could purchase the same by means of a tax delinquency sale. Moreover, according to the trial court,
the failure to recover the property subject of the Deed of Sale with Mortgage was due to Mejia's failure to actively pursue the action for rescission
(Civil Case No. 12366), allowing the case to drag on for eighteen years. Thus, it ruled that —

xxx xxx xxx

The act of not paying or failing to pay taxes due the government by the defendant Adalia B. Francisco, as treasurer of Cardale Financing
and Realty Corporation do not, per se, constitute perpetration of fraud or an illegal act. It do [sic] not also constitute an act of evasion of an
existing obligation (to plaintiff) if there is no clear showing that such an act of non-payment of taxes was deliberately made despite its
(Cardale's) solvency and capability to pay. There is no evidence showing that Cardale Financing and Realty Corporation was financially
capable of paying said taxes at the time.

"There are times when the corporate fiction will be disregarded: (1) where all the members or stockholders commit illegal act; (2) where the
corporation is used as dummy to commit fraud or wrong; (3) where the corporation is an agency for a parent corporation; and (4) where the
stock of a corporation is owned by one person." (I, Fletcher, 58, 59, 61 and 63). None of the foregoing reasons can be applied to the
incidents in this case: (1) there appears no illegal act committed by the stockholders of defendant Merryland Development Corporation and
Cardale Financing and Realty Corporation; (2) the incidents proven by evidence of the plaintiff as well as that of the defendants do not
show that either or both corporations were used as dummies by defendant Adalia B. Francisco to commit fraud or wrong. To be used as [a]
dummy, there has to be a showing that the dummy corporation is controlled by the person using it. The evidence of plaintiff failed to prove
that defendant Adalia B. Francisco has controlling interest in either or both corporations. On the other hand, the evidence of defendants
clearly show that defendant Francisco has no control over either of the two corporations; (3) none of the two corporations appears to be an
agency for a parent (the other) corporation; and (4) the stock of either of the two corporation [sic] is not owned by one person (defendant
Adalia B. Francisco). Except for defendant Adalia B. Francisco, the incorporators and stockholders of one corporation are different from the
other.

xxx xxx xxx

The said case (Civil Case No. 12366) remained pending for almost 18 years before the then Court of First Instance, now the Regional Trial
Court. Even if the trial of the said case became protracted on account of the retirement and/or promotion of the presiding judge, as well as
the transfer of the case from one sala to another, and as claimed by the plaintiff "that the defendant lost interest", (which allegation is
unusual, so to speak), the court believe [sic] that it would not have taken that long to dispose [of] said case had plaintiff not slept on her
rights, and her duty and obligation to see to it that the case is always set for hearing so that it may be adjudicated [at] the earliest possible
time. This duty pertains to both parties, but plaintiff should have been more assertive, as it was her obligation, similar to the obligation of
plaintiff relative to the service of summons in other cases. The fact that Cardale Financing and Realty Corporation did not perform its
obligation as provided in the said "Deed of Sale with Mortgage" (Exhibit"A") is very clear. Likewise, the fact that Andrea Cordova, the
contracting party, represented by the plaintiff in this case, did not also perform her duties and/or obligation provided in the said contract is
also clear. This could have been the reason why the plaintiff in said case (Exhibit "E") slept on her rights and allowed the same to remain
pending for almost 18 years. However, and irrespective of any other reason behind the same, the court believes that plaintiff, indeed, is the
one to blame for the failure of the testate estate of the late Andrea Cordova Vda. de Gutierrez to recover the money or property due it on
the basis of Exhibit "A".

xxx xxx xxx

. . . Had the plaintiff not slept on her rights and had it not been for her failure to perform her commensurate duty to pursue vigorously her
case against Cardale Financing and Realty Corporation in said Civil Case No. 12366, she could have easily known said non-payment of
realty taxes on the said properties by said Cardale Financing and Realty Corporation, or, at least the auction sales that followed, and from
which she could have redeemed said properties within the one year period provided by law, or, have availed of remedies at the time to
protect the interest of the testate estate of the late Andrea Cordova Vda. de Gutierrez.

xxx xxx xxx

The dispositive portion of the trial court's decision states —


WHEREFORE, in view of all the foregoing consideration, the court hereby renders judgment in favor of the defendants Register of Deeds
of Caloocan City, Merryland Development Corporation and Adalia B. Francisco, and against plaintiff Rita C. Mejia, as Executrix of the
Testate Estate of Andrea Cordova Vda. De Gutierrez, and hereby orders:

1. That this case for damages be dismissed, at the same time, plaintiffs motion for reconsideration dated September 23, 1987 is denied;

2. Plaintiff pay the defendants Merryland Development Corporation and the Register of Deeds the sum of P20,000.00, and another sum of
P20,000.00 to the defendant Adalia B. Francisco, as and for attorney's fees and litigation expenses, and pay the costs of the proceedings.

SO ORDERED.

The Court of Appeals,6 in its decision7 promulgated on 13 April 1999, reversed the trial court, holding that the corporate veil of Cardale and Merryland
must be pierced in order to hold Francisco and Merryland solidarily liable since these two corporations were used as dummies by Francisco, who
employed fraud in allowing Cardale to default on the realty taxes for the properties mortgaged to Gutierrez so that Merryland could acquire the same
free from all liens and encumbrances in the tax delinquency sale and, as a consequence thereof, frustrating Gutierrez's rights as a mortgagee over
the subject properties. Thus, the Court of Appeals premised its findings of fraud on the following circumstances —

xxx xxx xxx

. . . Appellee Francisco knew that Cardale of which she was vice-president and treasurer had an outstanding obligation to Gutierrez for the
unpaid balance of the real properties covered by TCT Nos. 7531 to 7533, which Cardale purchased from Gutierrez which account, as of
December 1988, already amounted to P4,414,271.43 (Exh. K, pp. 39-44, record); she also knew that Gutierrez had a mortgage lien on the
said properties to secure payment of the aforesaid obligation; she likewise knew that the said mortgaged properties were under litigation in
Civil Case No. Q-12366 which was an action filed by Gutierrez against Cardale for rescission of the sale and/or recovery of said properties
(Exh. E). Despite such knowledge, appellee Francisco did not inform Gutierrez's Estate or the Executrix (herein appellant) as well as the
trial court that the mortgaged properties had incurred tax delinquencies, and that Final Notices dated July 9, 1982 had been sent by the
City Treasurer of Caloocan demanding payment of such tax arrears within ten (10) days from receipt thereof (Exhs. J & J-1, pp. 37-38,
record). Both notices which were addressed to —

Cardale Financing & Realty Corporation c/o Merryland Development Corporation

and sent to appellee Francisco's address at 83 Katipunan Road, White Plains, Quezon City, gave warning that if the taxes were not paid within the
aforesaid period, the properties would be sold at public auction to satisfy the tax delinquencies.

To reiterate, notwithstanding receipt of the aforesaid notices, appellee Francisco did not inform the Estate of Gutierrez or her executrix about the tax
delinquencies and of the impending auction sale of the said properties. Even a modicum of good faith and fair play should have encouraged appellee
Francisco to at least advise Gutierrez's Estate through her executrix (herein appellant) and the trial court which was hearing the complaint for
rescission and recovery of said properties of such fact, so that the Estate of Gutierrez, which had a real interest on the properties as mortgagee and
as plaintiff in the rescission and recovery suit, could at least take steps to forestall the auction sale and thereby preserve the properties and protect
its interests thereon. And not only did appellee Francisco allow the auction sale to take place, but she used her other corporation (Merryland) in
participating in the auction sale and in acquiring the very properties which her first corporation (Cardale) had mortgaged to Gutierrez. Again, appellee
Francisco did not thereafter inform the Estate of Gutierrez or its executrix (herein appellant) about the auction sale, thus precluding the Estate from
exercising its right of redemption. And it was only after the expiration of the redemption period that appellee Francisco filed a Manifestation in Civil
Case No. Q-12366 (Exh. 1, p. 36, record), in which she disclosed for the first time to the trial court and appellant that the properties subject of the
case and on which Gutierrez or her Estate had a mortgage lien, had been sold in a tax delinquency sale. And in order to further conceal her
deceptive maneuver, appellee Francisco did not divulge in her aforesaid Manifestation that it was her other corporation (Merryland) that acquired the
properties in the auction sale.

We are not impressed by appellee's submission that no evidence was adduced to prove that Cardale had the capacity to pay the tax
arrears and therefore she or Cardale may not be faulted for the tax delinquency sale of the properties in question. Appellee Francisco's bad
faith or deception did not necessarily lie in Cardale's or her failure to settle the tax deliquencies in question, but in not disclosing to
Gutierrez's estate or its executrix (herein appellant) which had a mortgage lien on said properties the tax delinquencies and the impending
auction sale of the encumbered properties.

Appellee Francisco's deception is further shown by her concealment of the tax delinquency sale of the properties from the estate or its
executrix, thus preventing the latter from availing of the right of redemption of said properties. That appellee Francisco divulged the auction
sale of the properties only after such redemption period had lapsed clearly betrays her intention to keep Gutierrez's Estate or its Executrix
from availing of such right. And as the evidence would further show, appellee Francisco had a hand in securing for Merryland consolidation
of its ownership of the properties and in seeing to it that Merryland's torrens certificates for the properties were free from liens and
encumbrances. All these appellee Francisco did even as she was fully aware that Gutierrez or her estate had a valid and subsisting
mortgage lien on the said properties.

It is likewise worthy of note that early on appellee Francisco had testified in the action for rescission of sale and recovery of possession
and ownership of the properties which Gutierrez filed against Cardale (Civil Case No. Q-12366) in her capacity as defendant Cardale's
vice-president and treasurer. But then, for no plausible reason whatsoever, she lost interest in continuing with the presentation of evidence
for defendant Cardale. And then, when appellant Mejia as executrix of Gutierrez's Estate filed on August 13, 1984 a Motion for Decision in
the aforesaid case, appellee Francisco moved to defer consideration of appellant's Motion on the pretext that defendant Cardale needed
time to employ another counsel. Significantly, in her aforesaid Motion for Postponement dated August 16, 1984 which appellee Francisco
personally signed as Officer-in-Charge of Cardale, she also did not disclose the fact that the properties subject matter of the case had long
been sold at a tax delinquency sale and acquired by her other corporation Merryland.

And as if what she had already accomplished were not enough fraudulence, appellee Francisco, acting in behalf of Merryland, caused the
issuance of new transfer certificates of title in the name of Merryland, which did not anymore bear the mortgage lien in favor of Gutierrez.
In the meantime, to further avoid payment of the mortgage indebtedness owing to Gutierrez's estate, Cardale corporation was dissolved.
Finally, to put the properties beyond the reach of the mortgagee, Gutierrez's estate, Merryland caused the subdivision of such properties,
which were subsequently sold on installment basis.

In its petition for certiorari, petitioners argue that there is no law requiring the mortgagor to inform the mortgagee of the tax delinquencies, if any, of
the mortgaged properties. Moreover, petitioners claim that Cardale's failure to pay the realty taxes, per se, does not constitute fraud since it was not
proven that Cardale was capable of paying the taxes' Petitioners also contend that if Mejia, as executrix of Gutierrez's estate, was not remiss in her
duty to pursue Civil Case No. 12366, she could have easily learned of the non-payment of realty taxes on the subject properties and of the auction
sale that followed and thus, have redeemed the properties or availed of some other remedy to conserve the estate of Gutierrez. In addition, Mejia
could have annotated a notice oflis pendens on the titles of the mortgaged properties, but she failed to do so. It is the stand of petitioners that
respondent has not adduced any proof that Francisco controlled both Cardale and Merryland and that she used these two corporations to perpetuate
a fraud upon Gutierrez or her estate. Petitioners maintain that the "evidence shows that, apart form the meager share of petitioner Francisco, the
stockholdings of both corporations comprise other shareholders, and the stockholders of either of them, aside from petitioner Francisco, are
composed of different persons." As to Civil Case No. 12366, petitioners insist that the decision of the trial court in that case constitutes res judicata to
the instant case.8

It is dicta in corporation law that a corporation is a juridical person with a separate and distinct personality from mat of the stockholders or members
who compose it9 However, when the legal fiction of the separate corporate personality is abused, such as when the same is used for fraudulent or
wrongful ends, the courts have not hesitated to pierce the corporate veil. One of the earliest formulations of this doctrine of piercing the corporate veil
was made in the American case ofUnited States v. Milwaukee Refrigerator Transit Co.10 —

If any general rule can be laid down, in the present state of authority, it is that a corporation will be looked upon as a legal entity as a
general rule, and until sufficient reason to the contrary appears; but, when the notion of legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons.

Since then a good number of cases have firmly implanted this doctrine in Philippine jurisprudence. 11 One such case isUmali v. Court of Appeals12
wherein the Court declared that —

Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction that a corporation is an entity
with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will
be considered as a mere association of persons. The members or stockholders of the corporation will be considered as the corporation,
that is, liability will attach directly to the officers and stockholders. The doctrine applies when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a
corporation is the merealter 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.

With specific regard to corporate officers, the general rule is that the officer cannot be held personally liable with the corporation, whether civilly or
otherwise, for the consequences of his acts, if he acted for and in behalf of the corporation, within the scope of his authority and in good faith. In such
cases, the officer's acts are properly attributed to the corporation. 13 However, if it is proven that the officer has used the corporate fiction to defraud a
third party,14 or that he has acted negligently, maliciously or in bad faith, 15 then the corporate veil shall be lifted and he shall be held personally liable
for the particular corporate obligation involved.

The Court, after an assiduous study of this case, is convinced that the totality of the circumstances appertaining conduce to the inevitable conclusion
that petitioner Francisco acted in bad faith. The events leading up to the loss by the Gutierrez estate of its mortgage security attest to this. It has
been established that Cardale failed to comply with its obligation to pay the balance of the purchase price for the four parcels of land it bought from
Gutierrez covered by TCT Nos. 7531 to 7534, which obligation was secured by a mortgage upon the lands covered by TCT Nos. 7531, 7532 and
7533. This prompted Gutierrez to file an action for rescission of the Deed of Sale with Mortgage (Civil Case No. Q-12366), but the case dragged on
for about fourteen years when Cardale, as represented by Francisco, who was Vice-President and Treasurer of the same, 16 lost interest in
completing its presentation of evidence.

Even before 1984 when Mejia, in her capacity as executrix of Gutierrez's estate, filed a Motion for Decision with the trial court, there is no question
that Francisco knew that the properties subject of the mortgage had become tax delinquent. In fact, as treasurer of Cardale, Francisco herself was
the officer charged with the responsibility of paying the realty taxes on the corporation's properties. This was admitted by the trial court in its
decision.17 In addition, notices dated 9 July 1982 from the City Treasurer of Caloocan demanding payment of the tax arrears on the subject
properties and giving warning that if the realty taxes were not paid within the given period then such properties would be sold at public auction to
satisfy the tax delinquencies were sent directly to Francisco's address in White Plains, Quezon City.18 Thus, as early as 1982, Francisco could have
informed the Gutierrez estate or the trial court in Civil Case No. Q-12366 of the tax arrears and of the notice from the City Treasurer so that the
estate could have taken the necessary steps to prevent the auction sale and to protect its interests in the mortgaged properties, but she did no such
thing. Finally, in 1983, the properties were levied upon and sold at public auction wherein Merryland — a corporation where Francisco is a
stockholder19 and concurrently acts as President and director 20 — was the highest bidder.

When Mejia filed the Motion for Decision in Civil Case No. Q-12366, 21 the period for redeeming the properties subject of the tax sale had not yet
expired.22 Under the Realty Property Tax Code,23 pursuant to which the tax levy and sale were prosecuted, 24 both the delinquent taxpayer and in his
absence, any person holding a lien or claim over the property shall have the right to redeem the property within one year from the date of registration
of the sale.25 However, if these persons fail to redeem the property within the time provided, then the purchaser acquires the property "free from any
encumbrance or third party claim whatsoever."26 Cardale made no attempts to redeem the mortgaged property during this time. Moreover, instead of
informing Mejia or the trial court in Q-12366 about the tax sale, the records show that Francisco filed a Motion for Postponement 27 in behalf of
Cardale — even signing the motion in her capacity as "officer-in-charge" — which worked to defer the hearing of Mejia's Motion for Decision. No
mention was made by Francisco of the tax sale in the motion for postponement. Only after the redemption period had expired did Francisco decide
to reveal what had transpired by filing a Manifestation stating that the properties subject of the mortgage in favor of Gutierrez had been sold at a tax
delinquency sale; however, Francisco failed to mention that it was Merryland that acquired the properties since she was probably afraid that if she
did so the court would see behind her fraudulent scheme. In this regard, it is also significant to note that it was Francisco herself who filed the
petitions for consolidation of title and who helped secure for Merryland titles over the subject properties "free from any encumbrance or third-party
claim whatsoever."

It is exceedingly apparent to the Court that the totality of Francisco's actions clearly betray an intention to conceal the tax delinquencies, levy and
public auction of the subject properties from the estate of Gutierrez and the trial court in Civil Case No. Q-12366 until after the expiration of the
redemption period when the remotest possibility for the recovery of the properties would be extinguished. 28 Consequently, Francisco had effectively
deprived the estate of Gutierrez of its rights as mortgagee over the three parcels of land which were sold to Cardale. If Francisco was acting in good
faith, then she should have disclosed the status of the mortgaged properties to the trial court in Civil Case No. Q-12366 —especially after Mejia had
filed a Motion for Decision, in response to which she filed a motion for postponement wherein she could easily have mentioned the tax sale — since
this action directly affected such properties which were the subject of both the sale and mortgage.

That Merryland acquired the property at the public auction only serves to shed more light upon Francisco's fraudulent purposes. Based on the
findings of the Court of Appeals, Francisco is the controlling stockholder and President of Merryland. 29 Thus, aside from the instrumental role she
played as an officer of Cardale, in evading that corporation's legitimate obligations to Gutierrez, it appears that Francisco's actions were also oriented
towards securing advantages for another corporation in which she had a substantial interest. We cannot agree, however, with the Court of Appeals'
decision to hold Merryland solidarily liable with Francisco. The only act imputable to Merryland in relation to the mortgaged properties is that it
purchased the same and this by itself is not a fraudulent or wrongful act. No evidence has been adduced to establish that Merryland was a mere
alter ego or business conduit of Francisco. Time and again it has been reiterated 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.30 Neither has it been alleged or proven that Merryland is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of Cardale. 31 Even assuming that the businesses of Cardale and Merryland are interrelated, this
alone is not justification for disregarding their separate personalities, absent any showing that Merryland was purposely used as a shield to defraud
creditors and third persons of their rights.32 Thus, Merryland's separate juridical personality must be upheld.

Based on a statement of account submitted by Mejia, the Court of Appeals awarded P4,314,271.43 in favor of the estate of Gutierrez which
represents the unpaid balance of the purchase price in the amount of P629,000.00 with an interest rate of nine percent (9% ) per annum, in
accordance with the agreement of the parties under the Deed of Sale with Mortgage, 33 as of December 1988.34 Therefore, in addition to the amount
awarded by the appellate court, Francisco should pay the estate of Gutierrez interest on the unpaid balance of the purchase price (in the amount of
P629,000.00) at the rate of nine percent (9%) per annum computed from January, 1989 until fully satisfied.

Finally, contrary to petitioner's assertions, we agree with the Court of Appeals that the decision of the trial court in Civil Case No. Q-12366 does not
constituteres judicata insofar as the present case is concerned because the decision in the first case was not a judgment on the merits. Rather, it
was merely based upon the premise that since Cardale had been dissolved and the property acquired by another corporation, the action for
rescission would not prosper. As a matter of fact, it was even expressly stated by the trial court that the parties should ventilate their issues in
another action.
WHEREFORE, the 13 April 1999 Decision of the Court of Appeals is hereby accordingly MODIFIED so as to hold ADALIA FRANCISCO solely liable
to the estate of Gutierrez for the amount of P4,314,271.43 and for interest on the unpaid balance of the purchase price (in the amount of
P629,000.00) at the rate of nine percent (9%) per annum computed from January, 1989 until fully satisfied. MERRYLAND is hereby absolved from all
liability.

SO ORDERED.

Melo, Vitug, Panganiban, and Sandoval-Gutierrez, JJ.,concur.


G.R. No. 142616 July 31, 2001

PHILIPPINE NATIONAL BANK, petitioner,


vs.
RITRATTO GROUP INC., RIATTO INTERNATIONAL, INC., and DADASAN GENERAL MERCHANDISE, respondents.

KAPUNAN, J .:

In a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner seeks to annul and set aside the Court of Appeals'
decision in C.A. CV G.R. S.P. No. 55374 dated March 27, 2000, affirming the Order issuing a writ of preliminary injunction of the Regional Trial Court
of Makati, Branch 147 dated June 30, 1999, and its Order dated October 4, 1999, which denied petitioner's motion to dismiss.

The antecedents of this case are as follows:

Petitioner Philippine National Bank is a domestic corporation organized and existing under Philippine law. Meanwhile, respondents Ritratto Group,
Inc., Riatto International, Inc. and Dadasan General Merchandise are domestic corporations, likewise, organized and existing under Philippine law.

On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a subsidiary company of PNB, organized and doing business in Hong Kong, extended a
letter of credit in favor of the respondents in the amount of US$300,000.00 secured by real estate mortgages constituted over four (4) parcels of land
in Makati City. This credit facility was later increased successively to US$1,140,000.00 in September 1996; to US$1,290,000.00 in November 1996;
to US$1,425,000.00 in February 1997; and decreased to US$1,421,316.18 in April 1998. Respondents made repayments of the loan incurred by
remitting those amounts to their loan account with PNB-IFL in Hong Kong.

However, as of April 30, 1998, their outstanding obligations stood at US$1,497,274.70. Pursuant to the terms of the real estate mortgages, PNB-IFL,
through its attorney-in-fact PNB, notified the respondents of the foreclosure of all the real estate mortgages and that the properties subject thereof
were to be sold at a public auction on May 27, 1999 at the Makati City Hall.

On May 25, 1999, respondents filed a complaint for injunction with prayer for the issuance of a writ of preliminary injunction and/or temporary
restraining order before the Regional Trial Court of Makati. The Executive Judge of the Regional Trial Court of Makati issued a 72-hour temporary
restraining order. On May 28, 1999, the case was raffled to Branch 147 of the Regional Trial Court of Makati. The trial judge then set a hearing on
June 8, 1999. At the hearing of the application for preliminary injunction, petitioner was given a period of seven days to file its written opposition to
the application. On June 15, 1999, petitioner filed an opposition to the application for a writ of preliminary injunction to which the respondents filed a
reply. On June 25, 1999, petitioner filed a motion to dismiss on the grounds of failure to state a cause of action and the absence of any privity
between the petitioner and respondents. On June 30, 1999, the trial court judge issued an Order for the issuance of a writ of preliminary injunction,
which writ was correspondingly issued on July 14, 1999. On October 4, 1999, the motion to dismiss was denied by the trial court judge for lack of
merit.

Petitioner, thereafter, in a petition for certiorari and prohibition assailed the issuance of the writ of preliminary injunction before the Court of Appeals.
In the impugned decision,1 the appellate court dismissed the petition. Petitioner thus seeks recourse to this Court and raises the following errors:

1.

THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE COMPLAINT A QUO, CONSIDERING THAT BY THE
ALLEGATIONS OF THE COMPLAINT, NO CAUSE OF ACTION EXISTS AGAINST PETITIONER, WHICH IS NOT A REAL PARTY IN
INTEREST BEING A MERE ATTORNEY-IN-FACT AUTHORIZED TO ENFORCE AN ANCILLARY CONTRACT.

2.

THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL COURT TO ISSUE IN EXCESS OR LACK OF JURISDICTION
A WRIT OF PRELIMINARY INJUNCTION OVER AND BEYOND WHAT WAS PRAYED FOR IN THE COMPLAINT A QUO CONTRARY TO
CHIEF OF STAFF, AFP VS. GUADIZ JR., 101 SCRA 827.2

Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000 and the trial court's Orders dated June 30, 1999 and October 4,
1999 be set aside and the dismissal of the complaint in the instant case. 3
In their Comment, respondents argue that even assuming arguendo that petitioner and PNB-IFL are two separate entities, petitioner is still the party-
in-interest in the application for preliminary injunction because it is tasked to commit acts of foreclosing respondents' properties. 4 Respondents
maintain that the entire credit facility is void as it contains stipulations in violation of the principle of mutuality of contracts. 5 In addition, respondents
justified the act of the court a quo in applying the doctrine of "Piercing the Veil of Corporate Identity" by stating that petitioner is merely an alter ego or
a business conduit of PNB-IFL.6

The petition is impressed with merit.

Respondents, in their complaint, anchor their prayer for injunction on alleged invalid provisions of the contract:

GROUNDS

THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE DISCRETION OF THE DEFENDANT PNB
CONTRAVENES THE PRINCIPAL OF MUTUALITY OF CONTRACTS.

II

THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE OF INTEREST AGREED UPON MAY BE UNILATERALLY
MODIFIED BY DEFENDANT, THERE WAS NO STIPULATION THAT THE RATE OF INTEREST SHALL BE REDUCED IN THE EVENT
THAT THE APPLICABLE MAXIMUM RATE OF INTEREST IS REDUCED BY LAW OR BY THE MONETARY BOARD. 7

Based on the aforementioned grounds, respondents sought to enjoin and restrain PNB from the foreclosure and eventual sale of the property in
order to protect their rights to said property by reason of void credit facilities as bases for the real estate mortgage over the said property. 8

The contract questioned is one entered into between respondent and PNB-IFL, not PNB. In their complaint, respondents admit that petitioner is a
mere attorney-in-fact for the PNB-IFL with full power and authority to, inter alia, foreclose on the properties mortgaged to secure their loan obligations
with PNB-IFL. In other words, herein petitioner is an agent with limited authority and specific duties under a special power of attorney incorporated in
the real estate mortgage. It is not privy to the loan contracts entered into by respondents and PNB-IFL.

The issue of the validity of the loan contracts is a matter between PNB-IFL, the petitioner's principal and the party to the loan contracts, and the
respondents. Yet, despite the recognition that petitioner is a mere agent, the respondents in their complaint prayed that the petitioner PNB be
ordered to re-compute the rescheduling of the interest to be paid by them in accordance with the terms and conditions in the documents evidencing
the credit facilities, and crediting the amount previously paid to PNB by herein respondents. 9

Clearly, petitioner not being a part to the contract has no power to re-compute the interest rates set forth in the contract. Respondents, therefore, do
not have any cause of action against petitioner.

The trial court, however, in its Order dated October 4, 1994, ruled that since PNB-IFL, is a wholly owned subsidiary of defendant Philippine National
Bank, the suit against the defendant PNB is a suit against PNB-IFL. 10 In justifying its ruling, the trial court, citing the case of Koppel Phil. Inc. vs.
Yatco,11 reasoned that the corporate entity may be disregarded where a corporation is the mere alter ego, or business conduit of a person or where
the corporation is so organized and controlled and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.12

We disagree.

The general rule is that as a legal entity, a corporation has a personality distinct and separate from its individual stockholders or members, and is not
affected by the personal rights, obligations and transactions of the latter.13 The mere fact that a corporation owns all of the stocks of another
corporation, taken alone is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary's separate
existence may be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective
business. The courts may in the exercise of judicial discretion step in to prevent the abuses of separate entity privilege and pierce the veil of
corporate entity.

We find, however, that the ruling in Koppel finds no application in the case at bar. In said case, this Court disregarded the separate existence of the
parent and the subsidiary on the ground that the latter was formed merely for the purpose of evading the payment of higher taxes. In the case at bar,
respondents fail to show any cogent reason why the separate entities of the PNB and PNB-IFL should be disregarded.
While there exists no definite test of general application in determining when a subsidiary may be treated as a mere instrumentality of the parent
corporation, some factors have been identified that will justify the application of the treatment of the doctrine of the piercing of the corporate veil. The
case of Garrett vs. Southern Railway Co.14 is enlightening. The case involved a suit against the Southern Railway Company. Plaintiff was employed
by Lenoir Car Works and alleged that he sustained injuries while working for Lenoir. He, however, filed a suit against Southern Railway Company on
the ground that Southern had acquired the entire capital stock of Lenoir Car Works, hence, the latter corporation was but a mere instrumentality of
the former. The Tennessee Supreme Court stated that as a general rule the stock ownership alone by one corporation of the stock of another does
not thereby render the dominant corporation liable for the torts of the subsidiary unless the separate corporate existence of the subsidiary is a mere
sham, or unless the control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation. Said Court then outlined
the circumstances which may be useful in the determination of whether the subsidiary is but a mere instrumentality of the parent-corporation:

The Circumstance rendering the subsidiary an instrumentality. It is manifestly impossible to catalogue the infinite variations of fact that can
arise but there are certain common circumstances which are important and which, if present in the proper combination, are controlling.

These are as follows:

(a) The parent corporation owns all or most of the capital stock of the subsidiary.

(b) The parent and subsidiary corporations have common directors or officers.

(c) The parent corporation finances the subsidiary.

(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation.

(e) The subsidiary has grossly inadequate capital.

(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.

(g) The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent
corporation.

(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the
parent corporation, or its business or financial responsibility is referred to as the parent corporation's own.

(i) The parent corporation uses the property of the subsidiary as its own.

(j) The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the
parent corporation.

(k) The formal legal requirements of the subsidiary are not observed.

The Tennessee Supreme Court thus ruled:

In the case at bar only two of the eleven listed indicia occur, namely, the ownership of most of the capital stock of Lenoir by Southern, and
possibly subscription to the capital stock of Lenoir. . . The complaint must be dismissed.

Similarly, in this jurisdiction, we have held that the doctrine of piercing the corporate veil is an equitable doctrine developed to address situations
where the separate corporate personality of a corporation is abused or used for wrongful purposes. The doctrine applies when the corporate fiction is
used to defeat public convenience, justify wrong, protect fraud or defend crime, or when it is made as a shield to confuse the legitimate issues, or
where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. 15

In Concept Builders, Inc. v. NLRC,16 we have laid the test in determining the applicability of the doctrine of piercing the veil of corporate fiction, to wit:

1. Control, not mere majority or complete control, but complete domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of
its own.
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive
legal duty, or dishonest and, unjust act in contravention of plaintiffs legal rights; and,

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

The absence of any one of these elements prevents "piercing the corporate veil." In applying the "instrumentality" or "alter ego" doctrine,
the courts are concerned with reality and not form, with how the corporation operated and the individual defendant's relationship to the
operation.17

Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is no showing of the indicative factors that the former
corporation is a mere instrumentality of the latter are present. Neither is there a demonstration that any of the evils sought to be prevented by the
doctrine of piercing the corporate veil exists. Inescapably, therefore, the doctrine of piercing the corporate veil based on the alter ego or
instrumentality doctrine finds no application in the case at bar.

In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal relationship involved in this case since the
petitioner was not sued because it is the parent company of PNB-IFL. Rather, the petitioner was sued because it acted as an attorney-in-fact of PNB-
IFL in initiating the foreclosure proceedings. A suit against an agent cannot without compelling reasons be considered a suit against the principal.
Under the Rules of Court, every action must be prosecuted or defended in the name of the real party-in-interest, unless otherwise authorized by law
or these Rules.18 In mandatory terms, the Rules require that "parties-in-interest without whom no final determination can be had, an action shall be
joined either as plaintiffs or defendants."19 In the case at bar, the injunction suit is directed only against the agent, not the principal.

Anent the issuance of the preliminary injunction, the same must be lifted as it is a mere provisional remedy but adjunct to the main suit. 20 A writ of
preliminary injunction is an ancillary or preventive remedy that may only be resorted to by a litigant to protect or preserve his rights or interests and
for no other purpose during the pendency of the principal action. The dismissal of the principal action thus results in the denial of the prayer for the
issuance of the writ. Further, there is no showing that respondents are entitled to the issuance of the writ. Section 3, Rule 58, of the 1997 Rules of
Civil Procedure provides:

SECTION 3. Grounds for issuance of preliminary injunction. — A preliminary injunction may be granted when it is established:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining the commission or
continuance of the act or acts complained of, or in requiring the performance of an act or acts, either for a limited period or perpetually,

(b) That the commission, continuance or non-performance of the acts or acts complained of during the litigation would probably work
injustice to the applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or suffering to be done, some act or
acts probably in violation of the rights of the applicant respecting the subject of the action or proceeding, and tending to render the
judgment ineffectual.

Thus, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences which cannot be remedied
under any standard compensation.21 Respondents do not deny their indebtedness. Their properties are by their own choice encumbered by real
estate mortgages. Upon the non-payment of the loans, which were secured by the mortgages sought to be foreclosed, the mortgaged properties are
properly subject to a foreclosure sale. Moreover, respondents questioned the alleged void stipulations in the contract only when petitioner initiated
the foreclosure proceedings. Clearly, respondents have failed to prove that they have a right protected and that the acts against which the writ is to
be directed are violative of said right.22 The Court is not unmindful of the findings of both the trial court and the appellate court that there may be
serious grounds to nullify the provisions of the loan agreement. However, as earlier discussed, respondents committed the mistake of filing the case
against the wrong party, thus, they must suffer the consequences of their error.

All told, respondents do not have a cause of action against the petitioner as the latter is not privy to the contract the provisions of which respondents
seek to declare void. Accordingly, the case before the Regional Trial Court must be dismissed and the preliminary injunction issued in connection
therewith, must be lifted.

IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The assailed decision of the Court of Appeals is hereby REVERSED. The Orders
dated June 30, 1999 and October 4, 1999 of the Regional Trial Court of Makati, Branch 147 in Civil Case No. 99-1037 are hereby ANNULLED and
SET ASIDE and the complaint in said case DISMISSED.

SO ORDERED.
Puno, Pardo and Santiago, JJ ., concur.
Davide, Jr., C .J ., on official leave.
G.R. No. 85416 July 24, 1990

FRANCISCO V. DEL ROSARIO, petitioner,


vs.
NATIONAL LABOR RELATIONS COMMISSION and LEONARDO V. ATIENZA, respondents.

Jardeleza, Sobreviñas, Diaz, Hayudini & Bodegon Law Offices for petitioner.

Lourdes T. Pagayatan for private respondent.

CORTES, J.:

In POEA Case No. 85-06-0394, the Philippine Overseas Employment Administration (POEA) promulgated a decision on February 4, 1986 dismissing
the complaint for money claims for lack of merit. The decision was appealed to the National Labor Relations Commission (NLRC), which on April 30,
1987 reversed the POEA decision and ordered Philsa Construction and Trading Co., Inc. (the recruiter) and Arieb Enterprises (the foreign employer)
to jointly and severally pay private respondent the peso equivalent of $16,039.00, as salary differentials, and $2,420.03, as vacation leave benefits.
The case was elevated to the Supreme Court, but the petition was dismissed on August 31, 1987 and entry of judgment was made on September
24, 1987.

A writ of execution was issued by the POEA but it was returned unsatisfied as Philsa was no longer operating and was financially incapable of
satisfying the judgment. Private respondent moved for the issuance of an alias writ against the officers of Philsa. This motion was opposed by the
officers, led by petitioner, the president and general manager of the corporation.

On February 12, 1988, the POEA issued a resolution, the dispositive portion of which read:

WHEREFORE, premises considered, let an alias writ of Execution be issued and the handling sheriff is ordered to execute
against the properties of Mr. Francisco V. del -Rosario and if insufficient, against the cash and/or surety bond of Bonding
Company concerned for the full satisfaction of the judgment awarded.

Petitioner appealed to the NLRC. On September 23, 1988, the NLRC dismissed the appeal. On October 21, 1988, petitioner's motion for
reconsideration was denied.

Thus, this petition was filed on October 28, 1988, alleging that the NLRC gravely abused its discretion. On November 10, 1988 the Court issued a
temporary restraining order enjoining the enforcement of the NLRC's decision dated September 23, 1988 and resolution dated October 21, 1988.
The petition was given due course on June 14, 1989.

After considering the undisputed facts and the arguments raised in the pleadings, the Court finds grave abuse of discretion on the part of the NLRC.

The action of the NLRC affirming the issuance of an alias writ of execution against petitioner, on the theory that the corporate personality of Philsa
should be disregarded, was founded primarily on the following findings of the POEA —

xxx xxx xxx

6. Per the certification issued by the Licensing Division of this Office, it appears that Philsa Construction & Trading Co., Inc., with
office address at 126 Pioneer St., Mandaluyong, Metro Manila, represented by Mr. Francisco V. del Rosario, President and
General Manager, was formerly a registered construction contractor whose authority was originally issued on July 21, 1978 but
was already delisted from the list of agencies/entities on August 15, 1986 for inactivity;

7. Per another certification issued by the Licensing Division of this Office, it also appears that another corporation, Philsa
International Placement & Services Corp., composed of practically the same set of incorporators/stockholders, was registered as
a licensed private employment agency whose license was issued on November 5, 1981, represented by the same Mr. Francisco
V. del Rosario as its President/ General Manager.

and an application of the ruling of the Court in A.C. Ransom Labor Union-CCLU v. NLRC, G.R. No. 69494, June 10, 1986, 142 SCRA 269.
However, we find that the NLRC's reliance on the findings of the POEA and the ruling in A. C. Ransom is totally misplaced.

1. Under the law a corporation is bestowed juridical personality, separate and distinct from its stockholders [Civil Code, Art. 44; Corporation Code,
sec. 2]. But when the juridical personality of the corporation is used to defeat public convenience, justify wrong, protect fraud or defend crime, the
corporation shall be considered as a mere association of persons [Koppel (Phil.), Inc. v. Yatco, 77 Phil. 496 (1946), citing 1 Fletcher, Cyclopedia of
Corporations, 135-136; see also Palay, Inc. v. Clave, G.R. No. 56076, September 21, 1983, 124 SCRA 638], and its responsible officers and/or
stockholders shall be held individually liable [Namarco v. Associated Finance Co., Inc., G.R. No. L-20886, April 27, 1967, 19 SCRA 962]. For the
same reasons, a corporation shall be liable for the obligations of a stockholder [Palacio v. Fely Transportation Company, G.R. No. L-15121, August
31, 1962, 5 SCRA 1011; Emilio Cano Enterprises, Inc. v. Court of Industrial Relations, G.R. No. L-20502, February 26, 1965, 13 SCRA 290], or a
corporation and its successor-in-interest shall be considered as one and the liability of the former shall attach to the latter [Koppel v. Yatco, supra;
Liddell & Co. v. Collector of Internal Revenue, G.R. No. L-9687, June 30, 1961, 2 SCRA 632].

But for the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot
be presumed.

In this regard we find the NLRC's decision wanting. The conclusion that Philsa allowed its license to expire so as to evade payment of private
respondent's claim is not supported by the facts. Philsa's corporate personality therefore remains inviolable.

Consider the following undisputed facts:

(1) Private respondent filed his complaint with the POEA on June 4, 1985;

(2) The last renewal of Philsa's license expired on October 12, 1985;

(3) The POEA dismissed private respondent's complaint on February 4, 1986;

(4) Philsa was delisted for inactivity on August 15, 1986; *

(5) The dismissal of the complaint was appealed to the NLRC and it was only on April 30, 1987 that the judgment awarding
differentials and benefits to private respondent was rendered.

Thus, at the time Philsa allowed its license to lapse in 1985 and even at the time it was delisted in 1986, there was yet no judgment in favor of private
respondent. An intent to evade payment of his claims cannot therefore be implied from the expiration of Philsa's license and its delisting.

Neither will the organization of Philsa International Placement and Services Corp. and its registration with the POEA as a private employment agency
imply fraud since it was organized and registered in 1981, several years before private respondent filed his complaint with the POEA in 1985. The
creation of the second corporation could not therefore have been in anticipation of private respondent's money claims and the consequent adverse
judgment against Philsa

Likewise, substantial identity of the incorporators of the two corporations does not necessarily imply fraud.

The circumstances of this case distinguish it from those in earlier decisions of the Court in labor cases where the veil of corporate fiction was
pierced.

In La Campana Coffee Factory, Inc. v. Kaisahan ng Manggagawa sa La Campana (KKM) 93 Phil. 160 (1953), La Campana Coffee Factory, Inc. and
La Campana Gaugau Packing were substantially owned by the same person. They had one office, one management, and a single payroll for both
businesses. The laborers of the gaugau factory and the coffee factory were also interchangeable, i.e., the workers in one factory worked also in the
other factory.

In Claparols v. Court of Industrial Relations, G.R. No. L-30822, July 31, 1975, 65 SCRA 613, the Claparols Steel and Nail Plant, which was ordered
to pay its workers backwages, ceased operations on June 30, 1957 and was succeeded on the next day, July 1, 1957 by the Claparols Steel
Corporation. Both corporations were substantially owned and controlled by the same person and there was no break or cessation in operations.
Moreover, all the assets of the steel and nail plant were transferred to the new corporation.

2. As earlier stated, we also find that, contrary to the NLRC'S holding, the ruling in A. C. Ransom is inapplicable to this case. In A. C. Ransom, the
Court said:
... In the instant case, it would appear that RANSOM, in 1969, foreseeing the possibility or probability of payment of back wages
to the 22 strikers, organized ROSARIO to replace RANSOM, with the latter to be eventually phased out if the 22 strikers win their
case. RANSOM actually ceased operations on May 1, 1973, after the December 19, 1972 Decision of the Court of Industrial
Relations was promulgated against RANSOM. [At p. 274.]

The distinguishing marks of fraud were therefore clearly apparent in A. C. Ransom. A new corporation was created, owned by the same family,
engaging in the same business and operating in the same compound.

Thus, considering that the non-payment of the workers was a continuing situation, the Court adjudged its President, the "responsible officer" of the
corporation, personally liable for the backwages awarded, he being the chief operation officer or "manager" who could be held criminally liable for
violations of Republic Act No. 602 (the old Minimum Wage Law.)

In the case now before us, not only has there been a failure to establish fraud, but it has also not been shown that petitioner is the corporate officer
responsible for private respondent's predicament. It must be emphasized that the claim for differentials and benefits was actually directed against the
foreign employer. Philsa became liable only because of its undertaking to be jointly and severally bound with the foreign employer, an undertaking
required by the rules of the POEA [Rule II, sec. 1(d) (3)], together with the filing of cash and surety bonds [Rule 11, sec. 4], in order to ensure that
overseas workers shall find satisfaction for awards in their favor.

At this juncture, the Court finds it appropriate to point out that a judgment against a recruiter should initially be enforced against the cash and surety
bonds filed with the POEA. As provided in the POEA Rules and Regulations —

... The bonds shall answer for all valid and legal claims arising from violations of the conditions for the grant and use of the
license or authority and contracts of employment. The bonds shall likewise guarantee compliance with the provisions of the
Labor Code and its implementing rules and regulations relating to recruitment and placement, the rules of the Administration and
relevant issuances of the Ministry and all liabilities which the Administration may impose. ... [Rule II, see. 4.]

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

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

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

SO ORDERED.

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


G.R. No. 142936 April 17, 2002

PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT CORPORATION, petitioners,


vs.
ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.

PANGANIBAN, J.:

Basic is the rule that a corporation has a legal personality distinct and separate from the persons and entities owning it. The corporate veil may be
lifted only if it has been used to shield fraud, defend crime, justify a wrong, defeat public convenience, insulate bad faith or perpetuate injustice.
Thus, the mere fact that the Philippine National Bank (PNB) acquired ownership or management of some assets of the Pampanga Sugar Mill
(PASUMIL), which had earlier been foreclosed and purchased at the resulting public auction by the Development Bank of the Philippines (DBP), will
not make PNB liable for the PASUMIL’s contractual debts to respondent.

Statement of the Case

Before us is a Petition for Review assailing the April 17, 2000 Decision 1 of the Court of Appeals (CA) in CA-GR CV No. 57610. The decretal portion of
the challenged Decision reads as follows:

"WHEREFORE, the judgment appealed from is hereby AFFIRMED."2

The Facts

The factual antecedents of the case are summarized by the Court of Appeals as follows:

"In its complaint, the plaintiff [herein respondent] alleged that it is a partnership duly organized, existing, and operating under the laws of
the Philippines, with office and principal place of business at Nos. 794-812 Del Monte [A]venue, Quezon City, while the defendant [herein
petitioner] Philippine National Bank (herein referred to as PNB), is a semi-government corporation duly organized, existing and operating
under the laws of the Philippines, with office and principal place of business at Escolta Street, Sta. Cruz, Manila; whereas, the other
defendant, the National Sugar Development Corporation (NASUDECO in brief), is also a semi-government corporation and the sugar arm
of the PNB, with office and principal place of business at the 2nd Floor, Sampaguita Building, Cubao, Quezon City; and the defendant
Pampanga Sugar Mills (PASUMIL in short), is a corporation organized, existing and operating under the 1975 laws of the Philippines, and
had its business office before 1975 at Del Carmen, Floridablanca, Pampanga; that the plaintiff is engaged in the business of general
construction for the repairs and/or construction of different kinds of machineries and buildings; that on August 26, 1975, the defendant PNB
acquired the assets of the defendant PASUMIL that were earlier foreclosed by the Development Bank of the Philippines (DBP) under LOI
No. 311; that the defendant PNB organized the defendant NASUDECO in September, 1975, to take ownership and possession of the
assets and ultimately to nationalize and consolidate its interest in other PNB controlled sugar mills; that prior to October 29, 1971, the
defendant PASUMIL engaged the services of plaintiff for electrical rewinding and repair, most of which were partially paid by the defendant
PASUMIL, leaving several unpaid accounts with the plaintiff; that finally, on October 29, 1971, the plaintiff and the defendant PASUMIL
entered into a contract for the plaintiff to perform the following, to wit –

‘(a) Construction of one (1) power house building;

‘(b) Construction of three (3) reinforced concrete foundation for three (3) units 350 KW diesel engine generating set[s];

‘(c) Construction of three (3) reinforced concrete foundation for the 5,000 KW and 1,250 KW turbo generator sets;

‘(d) Complete overhauling and reconditioning tests sum for three (3) 350 KW diesel engine generating set[s];

‘(e) Installation of turbine and diesel generating sets including transformer, switchboard, electrical wirings and pipe provided
those stated units are completely supplied with their accessories;

‘(f) Relocating of 2,400 V transmission line, demolition of all existing concrete foundation and drainage canals, excavation, and
earth fillings – all for the total amount of P543,500.00 as evidenced by a contract, [a] xerox copy of which is hereto attached as
Annex ‘A’ and made an integral part of this complaint;’
that aside from the work contract mentioned-above, the defendant PASUMIL required the plaintiff to perform extra work, and provide
electrical equipment and spare parts, such as:

‘(a) Supply of electrical devices;

‘(b) Extra mechanical works;

‘(c) Extra fabrication works;

‘(d) Supply of materials and consumable items;

‘(e) Electrical shop repair;

‘(f) Supply of parts and related works for turbine generator;

‘(g) Supply of electrical equipment for machinery;

‘(h) Supply of diesel engine parts and other related works including fabrication of parts.’

that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only P250,000.00, leaving an unpaid balance, as of June
27, 1973, amounting to P527,263.80, as shown in the Certification of the chief accountant of the PNB, a machine copy of which is
appended as Annex ‘C’ of the complaint; that out of said unpaid balance of P527,263.80, the defendant PASUMIL made a partial payment
to the plaintiff of P14,000.00, in broken amounts, covering the period from January 5, 1974 up to May 23, 1974, leaving an unpaid balance
of P513,263.80; that the defendant PASUMIL and the defendant PNB, and now the defendant NASUDECO, failed and refused to pay the
plaintiff their just, valid and demandable obligation; that the President of the NASUDECO is also the Vice-President of the PNB, and this
official holds office at the 10th Floor of the PNB, Escolta, Manila, and plaintiff besought this official to pay the outstanding obligation of the
defendant PASUMIL, inasmuch as the defendant PNB and NASUDECO now owned and possessed the assets of the defendant PASUMIL,
and these defendants all benefited from the works, and the electrical, as well as the engineering and repairs, performed by the plaintiff; that
because of the failure and refusal of the defendants to pay their just, valid, and demandable obligations, plaintiff suffered actual damages
in the total amount of P513,263.80; and that in order to recover these sums, the plaintiff was compelled to engage the professional
services of counsel, to whom the plaintiff agreed to pay a sum equivalent to 25% of the amount of the obligation due by way of attorney’s
fees. Accordingly, the plaintiff prayed that judgment be rendered against the defendants PNB, NASUDECO, and PASUMIL, jointly and
severally to wit:

‘(1) Sentencing the defendants to pay the plaintiffs the sum of P513,263.80, with annual interest of 14% from the time the
obligation falls due and demandable;

‘(2) Condemning the defendants to pay attorney’s fees amounting to 25% of the amount claim;

‘(3) Ordering the defendants to pay the costs of the suit.’

"The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint chiefly on the ground that the complaint failed to state
sufficient allegations to establish a cause of action against both defendants, inasmuch as there is lack or want of privity of contract
between the plaintiff and the two defendants, the PNB and NASUDECO, said defendants citing Article 1311 of the New Civil Code, and the
case law ruling in Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila Port Service, et al. v. Court of Appeals, et al., 20 SCRA 1214.

"The motion to dismiss was by the court a quo denied in its Order of November 27, 1980; in the same order, that court directed the
defendants to file their answer to the complaint within 15 days.

"In their answer, the defendant NASUDECO reiterated the grounds of its motion to dismiss, to wit:

‘That the complaint does not state a sufficient cause of action against the defendant NASUDECO because: (a) NASUDECO is
not x x x privy to the various electrical construction jobs being sued upon by the plaintiff under the present complaint; (b) the
taking over by NASUDECO of the assets of defendant PASUMIL was solely for the purpose of reconditioning the sugar central of
defendant PASUMIL pursuant to martial law powers of the President under the Constitution; (c) nothing in the LOI No. 189-A (as
well as in LOI No. 311) authorized or commanded the PNB or its subsidiary corporation, the NASUDECO, to assume the
corporate obligations of PASUMIL as that being involved in the present case; and, (d) all that was mentioned by the said letter of
instruction insofar as the PASUMIL liabilities [were] concerned [was] for the PNB, or its subsidiary corporation the NASUDECO,
to make a study of, and submit [a] recommendation on the problems concerning the same.’
"By way of counterclaim, the NASUDECO averred that by reason of the filing by the plaintiff of the present suit, which it [labeled] as
unfounded or baseless, the defendant NASUDECO was constrained to litigate and incur litigation expenses in the amount of P50,000.00,
which plaintiff should be sentenced to pay. Accordingly, NASUDECO prayed that the complaint be dismissed and on its counterclaim, that
the plaintiff be condemned to pay P50,000.00 in concept of attorney’s fees as well as exemplary damages.

"In its answer, the defendant PNB likewise reiterated the grounds of its motion to dismiss, namely: (1) the complaint states no cause of
action against the defendant PNB; (2) that PNB is not a party to the contract alleged in par. 6 of the complaint and that the alleged services
rendered by the plaintiff to the defendant PASUMIL upon which plaintiff’s suit is erected, was rendered long before PNB took possession of
the assets of the defendant PASUMIL under LOI No. 189-A; (3) that the PNB take-over of the assets of the defendant PASUMIL under LOI
189-A was solely for the purpose of reconditioning the sugar central so that PASUMIL may resume its operations in time for the 1974-75
milling season, and that nothing in the said LOI No. 189-A, as well as in LOI No. 311, authorized or directed PNB to assume the corporate
obligation/s of PASUMIL, let alone that for which the present action is brought; (4) that PNB’s management and operation under LOI No.
311 did not refer to any asset of PASUMIL which the PNB had to acquire and thereafter [manage], but only to those which were foreclosed
by the DBP and were in turn redeemed by the PNB from the DBP; (5) that conformably to LOI No. 311, on August 15, 1975, the PNB and
the Development Bank of the Philippines (DBP) entered into a ‘Redemption Agreement’ whereby DBP sold, transferred and conveyed in
favor of the PNB, by way of redemption, all its (DBP) rights and interest in and over the foreclosed real and/or personal properties of
PASUMIL, as shown in Annex ‘C’ which is made an integral part of the answer; (6) that again, conformably with LOI No. 311, PNB pursuant
to a Deed of Assignment dated October 21, 1975, conveyed, transferred, and assigned for valuable consideration, in favor of NASUDECO,
a distinct and independent corporation, all its (PNB) rights and interest in and under the above ‘Redemption Agreement.’ This is shown in
Annex ‘D’ which is also made an integral part of the answer; [7] that as a consequence of the said Deed of Assignment, PNB on October
21, 1975 ceased to managed and operate the above-mentioned assets of PASUMIL, which function was now actually transferred to
NASUDECO. In other words, so asserted PNB, the complaint as to PNB, had become moot and academic because of the execution of the
said Deed of Assignment; [8] that moreover, LOI No. 311 did not authorize or direct PNB to assume the corporate obligations of PASUMIL,
including the alleged obligation upon which this present suit was brought; and [9] that, at most, what was granted to PNB in this respect
was the authority to ‘make a study of and submit recommendation on the problems concerning the claims of PASUMIL creditors,’ under
sub-par. 5 LOI No. 311.

"In its counterclaim, the PNB averred that it was unnecessarily constrained to litigate and to incur expenses in this case, hence it is entitled
to claim attorney’s fees in the amount of at least P50,000.00. Accordingly, PNB prayed that the complaint be dismissed; and that on its
counterclaim, that the plaintiff be sentenced to pay defendant PNB the sum of P50,000.00 as attorney’s fees, aside from exemplary
damages in such amount that the court may seem just and equitable in the premises.

"Summons by publication was made via the Philippines Daily Express, a newspaper with editorial office at 371 Bonifacio Drive, Port Area,
Manila, against the defendant PASUMIL, which was thereafter declared in default as shown in the August 7, 1981 Order issued by the Trial
Court.

"After due proceedings, the Trial Court rendered judgment, the decretal portion of which reads:

‘WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendant Corporation, Philippine National Bank
(PNB) NATIONAL SUGAR DEVELOPMENT CORPORATION (NASUDECO) and PAMPANGA SUGAR MILLS (PASUMIL),
ordering the latter to pay jointly and severally the former the following:

‘1. The sum of P513,623.80 plus interest thereon at the rate of 14% per annum as claimed from September 25, 1980
until fully paid;

‘2. The sum of P102,724.76 as attorney’s fees; and,

‘3. Costs.

‘SO ORDERED.

‘Manila, Philippines, September 4, 1986.

'(SGD) ERNESTO S. TENGCO


‘Judge’"3

Ruling of the Court of Appeals


Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and equity for a corporation to take over and operate the
business of another corporation, while disavowing or repudiating any responsibility, obligation or liability arising therefrom. 4

Hence, this Petition.5

Issues

In their Memorandum, petitioners raise the following errors for the Court’s consideration:

"I

The Court of Appeals gravely erred in law in holding the herein petitioners liable for the unpaid corporate debts of PASUMIL, a corporation
whose corporate existence has not been legally extinguished or terminated, simply because of petitioners[’] take-over of the management
and operation of PASUMIL pursuant to the mandates of LOI No. 189-A, as amended by LOI No. 311.

"II

The Court of Appeals gravely erred in law in not applying [to] the case at bench the ruling enunciated in Edward J. Nell Co. v. Pacific
Farms, 15 SCRA 415."6

Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable for the unpaid debts of PASUMIL to respondent.

This Court’s Ruling

The Petition is meritorious.

Main Issue:

Liability for Corporate Debts

As a general rule, questions of fact may not be raised in a petition for review under Rule 45 of the Rules of Court. 7 To this rule, however, there are
some exceptions enumerated in Fuentes v. Court of Appeals.8 After a careful scrutiny of the records and the pleadings submitted by the parties, we
find that the lower courts misappreciated the evidence presented. 9 Overlooked by the CA were certain relevant facts that would justify a conclusion
different from that reached in the assailed Decision.10

Petitioners posit that they should not be held liable for the corporate debts of PASUMIL, because their takeover of the latter’s foreclosed assets did
not make them assignees. On the other hand, respondent asserts that petitioners and PASUMIL should be treated as one entity and, as such, jointly
and severally held liable for PASUMIL’s unpaid obligation. 1âwphi1.nêt

As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in
good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where the purchaser
expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the
purchasing corporation is merely a continuation of the selling corporation, and (4) where the transaction is fraudulently entered into in order to
escape liability for those debts.11

Piercing the Corporate

Veil Not Warranted

A corporation is an artificial being created by operation of law. It possesses the right of succession and such powers, attributes, and properties
expressly authorized by law or incident to its existence. 12 It has a personality separate and distinct from the persons composing it, as well as from
any other legal entity to which it may be related.13 This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of
a person or of another corporation.14 For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled 15 only when
it becomes a shield for fraud, illegality or inequity committed against third persons. 16
Hence, any application of the doctrine of piercing the corporate veil should be done with caution. 17 A court should be mindful of the milieu where it is
to be applied.18 It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against
another, in disregard of its rights.19 The wrongdoing must be clearly and convincingly established; it cannot be presumed. 20 Otherwise, an injustice
that was never unintended may result from an erroneous application. 21

This Court has pierced the corporate veil to ward off a judgment credit, 22 to avoid inclusion of corporate assets as part of the estate of the decedent, 23
to escape liability arising from a debt,24 or to perpetuate fraud and/or confuse legitimate issues 25 either to promote or to shield unfair objectives26 or to
cover up an otherwise blatant violation of the prohibition against forum-shopping. 27 Only in these and similar instances may the veil be pierced and
disregarded.28

The question of whether a corporation is a mere alter ego is one of fact. 29 Piercing the veil of corporate fiction may be allowed only if the following
elements concur: (1) control -- not mere stock control, but complete domination -- not only of finances, but of policy and business practice in respect
to the transaction attacked, must have been such that the corporate entity as to this transaction had at the time no separate mind, will or existence of
its own; (2) such control must have been used by the defendant to commit a fraud or a wrong to perpetuate the violation of a statutory or other
positive legal duty, or a dishonest and an unjust act in contravention of plaintiff’s legal right; and (3) the said control and breach of duty must have
proximately caused the injury or unjust loss complained of. 30

We believe that the absence of the foregoing elements in the present case precludes the piercing of the corporate veil. First, other than the fact that
petitioners acquired the assets of PASUMIL, there is no showing that their control over it warrants the disregard of corporate personalities. 31 Second,
there is no evidence that their juridical personality was used to commit a fraud or to do a wrong; or that the separate corporate entity was farcically
used as a mere alter ego, business conduit or instrumentality of another entity or person. 32 Third, respondent was not defrauded or injured when
petitioners acquired the assets of PASUMIL.33

Being the party that asked for the piercing of the corporate veil, respondent had the burden of presenting clear and convincing evidence to justify the
setting aside of the separate corporate personality rule. 34 However, it utterly failed to discharge this burden; 35 it failed to establish by competent
evidence that petitioner’s separate corporate veil had been used to conceal fraud, illegality or inequity. 36

While we agree with respondent’s claim that the assets of the National Sugar Development Corporation (NASUDECO) can be easily traced to
PASUMIL,37 we are not convinced that the transfer of the latter’s assets to petitioners was fraudulently entered into in order to escape liability for its
debt to respondent.38

A careful review of the records reveals that DBP foreclosed the mortgage executed by PASUMIL and acquired the assets as the highest bidder at the
public auction conducted.39 The bank was justified in foreclosing the mortgage, because the PASUMIL account had incurred arrearages of more than
20 percent of the total outstanding obligation. 40 Thus, DBP had not only a right, but also a duty under the law to foreclose the subject properties. 41

Pursuant to LOI No. 189-A42 as amended by LOI No. 311,43 PNB acquired PASUMIL’s assets that DBP had foreclosed and purchased in the normal
course. Petitioner bank was likewise tasked to manage temporarily the operation of such assets either by itself or through a subsidiary corporation. 44

PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets pursuant to Section 6 of Act No. 3135. 45 These assets were
later conveyed to PNB for a consideration, the terms of which were embodied in the Redemption Agreement. 46 PNB, as successor-in-interest,
stepped into the shoes of DBP as PASUMIL’s creditor.47 By way of a Deed of Assignment,48 PNB then transferred to NASUDECO all its rights under
the Redemption Agreement.

In Development Bank of the Philippines v. Court of Appeals ,49 we had the occasion to resolve a similar issue. We ruled that PNB, DBP and their
transferees were not liable for Marinduque Mining’s unpaid obligations to Remington Industrial Sales Corporation (Remington) after the two banks
had foreclosed the assets of Marinduque Mining. We likewise held that Remington failed to discharge its burden of proving bad faith on the part of
Marinduque Mining to justify the piercing of the corporate veil.

In the instant case, the CA erred in affirming the trial court’s lifting of the corporate mask. 50 The CA did not point to any fact evidencing bad faith on
the part of PNB and its transferee.51 The corporate fiction was not used to defeat public convenience, justify a wrong, protect fraud or defend crime. 52
None of the foregoing exceptions was shown to exist in the present case. 53 On the contrary, the lifting of the corporate veil would result in manifest
injustice. This we cannot allow.

No Merger or Consolidation

Respondent further claims that petitioners should be held liable for the unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and 311, which
expressly authorized PASUMIL and PNB to merge or consolidate. On the other hand, petitioners contend that their takeover of the operations of
PASUMIL did not involve any corporate merger or consolidation, because the latter had never lost its separate identity as a corporation.
A consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger, on the other hand, is a
union whereby one or more existing corporations are absorbed by another corporation that survives and continues the combined business. 54

The merger, however, does not become effective upon the mere agreement of the constituent corporations. 55 Since a merger or consolidation
involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express provision of law
authorizing them.56 For a valid merger or consolidation, the approval by the Securities and Exchange Commission (SEC) of the articles of merger or
consolidation is required.57 These articles must likewise be duly approved by a majority of the respective stockholders of the constituent
corporations.58

In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL and PNB. The procedure prescribed under Title IX of the
Corporation Code59 was not followed.

In fact, PASUMIL’s corporate existence, as correctly found by the CA, had not been legally extinguished or terminated. 60 Further, prior to PNB’s
acquisition of the foreclosed assets, PASUMIL had previously made partial payments to respondent for the former’s obligation in the amount of
P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to respondent and, from January 5, 1974 to May 23, 1974, another P14,000.

Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to respondent. 61 LOI No. 11 explicitly provides that PNB shall
study and submit recommendations on the claims of PASUMIL’s creditors. 62 Clearly, the corporate separateness between PASUMIL and PNB
remains, despite respondent’s insistence to the contrary.63

WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE . No pronouncement as to costs.

SO ORDERED.

Vitug, Sandoval-Gutierrez, and Carpio, JJ., concur.


Melo, J., Abroad, on official leave.
G.R. No. L-20214 March 17, 1923

G. C. ARNOLD, plaintiff-appellant,
vs.
WILLITS & PATTERSON, LTD., defendant-appellee.

Fisher, DeWitt, Perkins and Brady for appellant.


Ross and Lawrence for appellee.

STATEMENT

For a number of years prior to the times alleged in the complaint, the plaintiff was in the employ of the International Banking Corporation of Manila,
and it is conceded that he is a competent and experienced business man. July 31, 1916, C. D. Willits and I. L. Patterson were partners doing
business in San Francisco, California, under the name of Willits & Patterson. The plaintiff was then in San Francisco, and as a result of negotiations
the plaintiff and the firm entered into a written contract, known in the record as Exhibit A, by which the plaintiff was employed as the agent of the firm
in the Philippine Islands for certain purposes for the period of five years at a minimum salary of $200 per month and travelling expenses. The plaintiff
returned to Manila and entered on the discharge of his duties under the contract. As a result of plaintiff's employment and the world war conditions,
the business of the firm in the Philippines very rapidly increased and grew beyond the fondest hopes of either party. A dispute arose between the
plaintiff and the firm as to the construction of Exhibit A as to the amount which plaintiff should receive for his services. Meanwhile Patterson retired
from the firm and Willits became the sole owner of its assets. For convenience of operation and to serve his own purpose, Willits organized a
corporation under the laws of California with its principal office at San Francisco, in and by which he subscribed for, and became the exclusive owner
of all the capital stock except a few shares for organization purposes only, and the name of the firm was used as the name of the corporation. A short
time after that Willits came to Manila and organized a corporation here known as Willits & Patterson, Ltd., in and to which he again subscribed for all
of the capital stock except the nominal shares necessary to qualify the directors. In legal effect, the San Francisco corporation took over and
acquired all of the assets and liabilities of the Manila corporation. At the time that Willits was in Manila and while to all intents and purposes he was
the sole owner of the stock of corporations, there was a conference between him and the plaintiff over the disputed construction of Exhibit A. As a
result of which another instrument, known in the record as Exhibit B, was prepared in the form of a letter which the plaintiff addressed to Willits at
Manila on November 10, 1919, the purpose of which was to more clearly define and specify the compensation which the plaintiff was to receive for
his services. Willits received and confirmed this letter by signing the name of Willits & Patterson, By C.d. Willits. At the time both corporations were
legally organized, and there is nothing in the corporate minutes to show that Exhibit B was ever formally ratified or approved by either corporation.
After its organization, the Manila corporation employed a regular accountant whose duty it was to audit the accounts of the company and render
financial statements both for the use of the local banks and the local and parent corporations at San Francisco. From time to time and in the ordinary
course of business such statements of account were prepared by the accountant and duly forwarded to the home office, and among other things was
a statement of July 31, 1921, showing that there was due and owing the plaintiff under Exhibit B the sum of P106,277.50. A short time previous to
that date, the San Francisco corporation became involved in financial trouble, and all of its assets were turned over to a "creditors' committee." When
this statement was received, the "creditors' committee" immediately protested its allowance. An attempt was made without success to adjust the
matter on a friendly basis and without litigation. January 10, 1922, the plaintiff brought this action to recover from the defendant the sum of
P106,277.50 with legal interest and costs, and written instruments known in the record as Exhibits A and B were attached to, and made a part of, the
complaint.

For answer, the defendant admits the formal parts of the complaint, the execution of Exhibit A and denies each and every other allegation, except as
specifically admitted, and alleges that what is known as Exhibit B was signed by Willits without the authority of the defendant corporation or the firm
of Willits & Patterson, and that it is not an agreement which was ever entered into with the plaintiff by the defendant or the firm, and, as a separate
defense and counterclaim, it alleges that on the 30th of June, 1920, there was a balance due and owing the plaintiff from the defendant under the
contract Exhibit A of the sum of P8,741.05. That his salary from June 30, 1920, to July 31, 1921, under Exhibit A was $400 per month, or a total of
P10,400. That about July 6, 1921, the plaintiff wrongfully took P30,000 from the assets of the firm, and that he is now indebted to the firm in the sum
of P10,858.95, with interest and costs, from which it prays judgement.

The plaintiff admits that he withdrew the P30,000, but alleges that it was with the consent and authority of the defendant, and denies all other new
matter in the answer.

Upon such issues a trial was had, and the lower court rendered judgment in favor of the defendant as prayed for in its counterclaim, from which the
plaintiff appeals, contending that the trial court erred in not holding that the contract between the parties is that which is embodied in Exhibits A and
B, and that the defendant assumed all partnership obligations, and in failing to render judgment for the plaintiff, as prayed for, and in dismissing his
complaint, and denying plaintiff's motion for a new trial.
JOHNS, J.:

In their respective briefs opposing counsel agree that the important questions involved are "what was the contract under which the plaintiff rendered
services for five years ending July 31, 1921," and "what is due the plaintiff under that contract." Plaintiff contends that his services were performed
under Exhibits A and B, and that the defendant assumed all of the obligations of the original partnership under Exhibit A, and is now seeking to deny
its liability under, and repudiate, Exhibit B. The defendant admits that Exhibit A was the original contract between Arnold and the firm of Willits &
Patterson by which he came to the Philippine Islands, and that it was therein agreed that he was to be employed for a period of five years as the
agent of Willits & Patterson in the Philippine Islands to operate a certain oil mill, and to do such other business as might be deemed advisable for
which he was to receive, first, the travelling expenses of his wife and self from San Francisco to Manila, second, the minimum salary of $200 per
month, third, a brokerage of 1 per cent upon all purchases and sales of merchandise, except for the account of the coconut oil mill, fourth, one-half of
the profits on any transaction in the name of the firm or himself not provided for in the agreement. That the agreement also provided that if it be
found that the business was operated at a loss, Arnold should receive a monthly salary of $400 during such period. That the business was operated
at a loss from June 30, 1920, to July 31, 1921, and that for such reason, he was entitled to nothing more than a salary of $400 per month, or for that
period P10,400. Adding this amount to the P8,741.05, which the defendant admits he owed Arnold on June 30, 1920, makes a total of P19,141.05,
leaving a balance due the defendant as set out in the counterclaim. In other words, that the plaintiff's compensation was measured by, and limited to,
the above specified provisions in the contract Exhibit A, and that the defendant corporation is not bound by the terms or provisions of Exhibit B,
which is as follows:

WILLITS & PATTERSON, LTD.

MANILA, P. I., Nov. 10, 1919.

CHAS. D. WILLITS, Esq.,

Present.

DEAR MR. WILLITS: My understanding of the intent of my agreement with Willits & Patterson is as under:

Commissions. Willits & Patterson, San Francisco, pay me a commission of one per cent on all purchases made for them in the
Philippines or sales made to them by Manila and one per cent on all sales made for them in the Philippines, or purchases made
from them by Manila. If such purchases or sales are on an f. o. b. basis the commission is on the f. o. b. price; if on a c. i. f. basis
the commission is computed on the c. i. f. price

These commissions are credited to me in San Francisco.

I do not participate in any profits on business transacted between Willits & Patterson, San Francisco, and Willits & Patterson,
Ltd., Manila.

Profits. On all business transacted between Willits & Patterson, Ltd. and others than Willits & Patterson, San Francisco, half the
profits are to be credited to my account and half to the Profit & Loss account of Willits & Patterson, Ltd., Manila.

On all other business, such as the Cooperative Coconut Products Co. account, or any other business we may undertake as
agents or managers, half the profits are to be credited to my account and half to the Profit & Loss account of Willits & Patterson,
Ltd., Manila.

Where Willits & Patterson, San Francisco, or Willits & Patterson, Ltd., Manila, have their own funds invested in the capital stock
or a corporation, I of course do not participate in the earnings of such stock, any more than Willits & Patterson would participate
in the earnings of stock held by me on my account.

If the foregoing conforms to your understanding of our agreement, please confirm below.

Yours faithfully,

(Sgd.) G. C. ARNOLD

Confirmed:

WILLITS & PATTERSON


By (Sgd.) CHAS. D. WILLITS

There is no dispute about any of the following facts: That at the inception C.D. Willits and I. L. Patterson constituted the firm of Willits & Patterson
doing business in the City of San Francisco; that later Patterson retired from the firm, and Willits acquired all of his interests and thereafter continued
the business under the name and style of Willits & Patterson; that the original contract Exhibit A was made between the plaintiff and the old firm at
San Francisco on July 31, 1916, to cover a period of five years from that date; that plaintiff entered upon the discharged of his duties and continued
his services in the Philippine Islands to someone for the period of five years; that on November 10, 1919, and as a result of conferences between
Willits and the plaintiff, Exhibit B was addressed and signed in the manner and form above stated in the City of Manila. A short time prior to that date
Willits organized a corporation in San Francisco, in the State of California, which took over and acquired all of the assets of the firm's business in
California then being conducted under the name and style of Willits & Patterson; that he subscribed for all of the capital stock of the corporation, and
that in truth and in fact he was the owner of all of its capital stock. After this was done he caused a new corporation to be organized under the laws of
the Philippine Islands with principal office at Manila, which took over and acquired all the business and assets of the firm of Willits & Patterson in the
Philippine Islands, in and to which, in legal effect, he subscribed for all of its capital stock, and was the owner of all of its stock. After both
corporations were organized the above letter was drafted and signed. The plaintiff contends that the signing of Exhibit B in the manner and under the
conditions in which it was signed, and through the subsequent acts and conduct of the parties, was ratified and, in legal effect, became and is now
binding upon the defendant.

It will be noted that Exhibit B was executed in Manila, and that at the time it was signed by Willits, he was to all intents and purposes the legal owner
of all the stock in both corporations. It also appears from the evidence that the parent corporation at San Francisco took over and acquired all of the
assets and liabilities of the local corporation at Manila. That after it was organized the Manila corporation kept separate records and account books
of its own, and that from time to time financial statements were made and forwarded to the home office, from which it conclusively appears that
plaintiff was basing his claim for services upon Exhibit A, as it was modified by Exhibit B. That at no time after Exhibit B was signed was there ever
any dispute between plaintiff and Willits as to the compensation for plaintiff's services. That is to say, as between the plaintiff and Willits, Exhibit B
was approved, followed and at all times in force and effect, after it was signed November 10, 1919. It appears from an analysis of Exhibit B that it
was for the mutual interest of both parties. From a small beginning, the business was then in a very flourishing conditions and growing fast, and the
profits were very large and were running into big money.

Among other things, Exhibit A provided: "(a) That the net profits from said coconut oil business shall be divided in equal shares between the said
parties hereto; (b) that Arnold should receive a brokerage of 1 per cent from all purchases and sales of merchandise, except for the account of the
coconut mills; (c) that the net profits from all other business should be divided in equal half shares between the parties hereto."

Under the above provisions, the plaintiff might well contend that he was entitled to one-half of all the profits and a brokerage of 1 per cent from all
purchases and sales, except those for the account of the coconut oil mills, which under the volume of business then existing would run into a very
large sum of money. It was for such reason and after personal conferences between them, and to settle all disputed questions, that Exhibit B was
prepared and signed.

The record recites that "the defendant admits that from July 31, 1916 to July 31, 1921, the plaintiff faithfully performed all the duties incumbent upon
him under his contract of employment, it being understood, however, that this admission does not include an admission that the plaintiff placed a
proper interpretation upon his right to remuneration under said contract of employment."

It being admitted that the plaintiff worked "under his contract of employment" for the period of five years, the question naturally arises, for whom was
he working? His contract was made with the original firm of Willits & Patterson, and that firm was dissolved and it ceased to exist, and all of its assets
were merged in, and taken over by, the parent corporation at San Francisco. In the very nature of things, after the corporation was formed, the
plaintiff could not and did not continue to work for the firm, and, yet, he continued his employment for the full period of five years. For whom did he
work after the partnership was merged in the corporation and ceased to exist?

It is very apparent that, under the conditions then existing, the signing of Exhibit B was for the mutual interests of both parties, and that if the contract
Exhibit A was to be enforced according to its terms, that Arnold might well contend for a much larger sum of money for his services. In truth and in
fact Willits and both corporations recognized his employment and accepted the benefits of his services. He continued his employment and rendered
his services after the corporation were organized and Exhibit B was signed just the same as he did before, and both corporations recognized and
accepted his services. Although the plaintiff was president of the local corporation, the testimony is conclusive that both of them were what is known
as a one man corporation, and Willits, as the owner of all of the stock, was the force and dominant power which controlled them. After Exhibit B was
signed it was recognized by Willits that the plaintiff's services were to be performed and measured by its term and provisions, and there never was
any dispute between plaintiff and Willits upon that question.

The controversy first arose after the corporation was in financial trouble and the appointment of what is known in the record as a "creditors'
committee." There is no claim or pretense that there was any fraud or collusion between plaintiff and Willits, and it is very apparent that Exhibit B was
to the mutual interest of both parties. It is elementary law that if Exhibit B is a binding contract between the plaintiff and Willits and the corporations, it
is equally binding upon the creditors' committee. It would not have any higher or better legal right than the corporation itself, and could not make any
defense which it could not make. It is very significant that the claim or defense which is now interposed by the creditors' committee was never made
or asserted at any previous time by the defendant, and that it never was made by Willits, and it is very apparent that if he had remained in control of
the corporation, it would never have made the defense which is now made by the creditors' committee. The record is conclusive that at the time he
signed Exhibit B, Willits was, in legal effect, the owner and holder of all the stock in both corporations, and that he approved it in their interest, and to
protect them from the plaintiff having and making a much larger claim under Exhibit A. As a matter of fact, it appears from the statement of Mr.
Larkin, the accountant, in the record that if plaintiff's cause of action was now founded upon Exhibit A, he would have a claim for more than
P160,000.

Thompson on Corporations, 2d ed., vol. I, section 10, says:

The proposition that a corporation has an existence separate and distinct from its membership has its limitations. It must be noted that this
separate existence is for particular purposes. It must also be remembered that there can be no corporate existence without persons to
compose it; there can be no association without associates. This separate existence is to a certain extent a legal fiction. Whenever
necessary for the interests of the public or for the protection or enforcement of the rights of the membership, courts will disregard this legal
fiction and operate upon both the corporation and the persons composing it.

In the same section, the author quotes from a decision in 49 Ohio State, 137 1; 15 L. R. A., 145, in which the Supreme Court of Ohio says:

"So long as a proper use is made of the fiction that a corporation is an entity apart from its shareholders, it is harmless, and, because
convenient, should not be called in question; but where it is urged to an end subversive of its policy, or such is the issue, the fiction must be
ignored, and the question determined whether the act in question, though done by shareholders, — that is to say, by the persons uniting in
one body, — was done simply as individuals, and with respect to their individual interest as shareholders, or was done ostensibly as such,
but, as a matter of fact, to control the corporation, and affect the transaction of its business, in the same manner as if the act had been
clothed with all the formalities of a corporate act. This must be so, because, the stockholders having a dual capacity, and capable of acting
in either, and a possible interest to conceal their character when acting in their corporate capacity, the absence of the formal evidence of
the character of the act cannot preclude judicial inquiry on the subject. If it were otherwise, then in that department of the law fraud would
enjoy an immunity awarded to it in no other."

Where the stock of a corporation is owned by one person whereby the corporation functions only for the benefit of such individual owner,
the corporation and the individual should be deemed to be the same. (U. S. Gypsum Co. vs. Mackay Wall Plaster Co., 199 Pac., 249.)

Ruling Case Law, vol. 7, section 663, says:

While of course a corporation cannot ratify a contract which is strictly ultra vires, and which it in the first instance could not have made, it
may by ratification render binding on it a contract, entered into on its behalf by its officers or agents without authority. As a general rule
such ratification need not be manifested by any voted or formal resolution of the corporation or be authenticated by the corporate seal; no
higher degree of evidence is requisite in establishing ratification on the part of a corporation, than is requisite in showing an antecedent
authorization.

xxx xxx xxx

SEC. 666. The assent or approval of a corporation to acts done on its account may be inferred in the same manner that the absent of a
natural person may be, and it is well settled that where a corporation with full knowledge of the unauthorized act of its officer or agents
acquiesces in and consents to such acts, it thereby ratifies them, especially where the acquiescence results in prejudice to a third person.

xxx xxx xxx

SEC. 669. So, when, in the usual course of business of a corporation, an officer has been allowed in his official capacity to manage its
affair, his authority to represent the corporation may be inferred from the manner in which he has been permitted by the directors to
transact its business.

SEC. 656. In accordance with a well-known rule of the law of agency, notice to corporate officers or agents within the scope or apparent
scope of their authority is attributed to the corporation.

SEC. 667. As a general rule, if a corporation with knowledge of its agents unauthorized act received and enjoys the benefits thereof, it
impliedly ratifies the unauthorized act if it is one capable of ratification by parol.

In its article on corporations, Corpus Juris, in section 2241 says:


Ratification by a corporation of a transaction not previously authorized is more easily inferred where the corporation receives and retains
property under it, and as a general rule where a corporation, through its proper officers or board, takes and retains the benefits of the
unauthorized act or contract of an officer or agent, with full knowledge of all the material facts, it thereby ratifies and becomes bound by
such act of contract, together with all the liabilities and burdens resulting therefrom, and in some jurisdiction this rule is, in effect, declared
by statute. Thus the corporation is liable on the ground of ratification where, with knowledge of the facts, it accepts the benefit of services
rendered under an unauthorized contract of employment . . . .

Applying the law to the facts.

Mr. Larkin, an experienced accountant, was employed by the local corporation, and from time to time and in the ordinary course of business made
and prepared financial statements showing its assets and liabilities, true copies of which were sent to the home office in San Francisco. It appears
upon their face that plaintiff's compensation was made and founded on Exhibit B, and that such statements were made and prepared by the
accountant on the assumption that Exhibit B was in full force and effect as between the plaintiff and the defendant. In the course of business in the
early part of 1920, plaintiff, as manager of the defendant, sold 500 tons of oil for future delivery at P740 per ton. Due to break in the market, plaintiff
was able to purchase the oil at P380 per ton or a profit of P180,000.

It appears from Exhibit B under the heading of "Profits" that:

On all the business transacted between Willits & Patterson, Ltd. and others than Willits & Patterson, San Francisco, half the profit are to be
credited to may account and half to the Profit & Loss account Willits & Patterson, Ltd., Manila.

The purchasers paid P105,000 on the contracts and gave their notes for P75,000, and it was agreed that all of the oil purchased should be held as
security for the full payment of the purchase price. As a result, the defendant itself received the P105,000 in cash, P75,000 in notes, and still holds
the 500 tons of oil as security for the balance of the purchase price. This transaction was shown in the semi-annual financial statement for the period
ending December 31, 1920. That is to say, the business was transacted by and through the plaintiff, and the defendant received and accepted all of
the profits on the deal, and the statement which was rendered gave him a credit for P90,737.88, or half the profit as provided in the contract Exhibit
B, with interest.

Although the previous financial statements show upon their face that the account of plaintiff was credit with several small items on the same basis, it
was not until the 23d of March, 1921, that any objection was ever made by anyone, and objection was made for the first time by the creditors'
committee in a cable of that date.

As we analyze the facts Exhibit B was, in legal effect, ratified and approved and is now binding upon the defendant corporation, and the plaintiff is
entitled to recover for his services on that writing as it modified the original contract Exhibit A.

It appears from the statement prepared by accountant Larkin founded upon Exhibit B that the plaintiff is entitled to recover P106,277.50. It is very
apparent that his statement was based upon the assumption that there was a net profit of P180,000 on the 500 tons of oil, of which the plaintiff was
entitled to one-half.

In the absence of any other proof, we have the right to assume that the 500 tons of oil was worth the amount which the defendant paid for them at
the time of the purchase or P380 per ton, and the record shows that the defendant took and now has the possession of all of the oil secure the
payment of the price at which it was sold. Hence, the profit on the deal to the defendant at the time of the sale would amount to the difference
between what the defendant paid for the oil and the amount which it received for the oil at the time it sold the oil. It appears that at the time of the
sale the defendant only received P105,000 in cash, and that it took and accepted the promissory notes of Cruz & Tan Chong Say, the purchasers, for
P75,000 more which have been collected and may never be. Hence, it must follow that the amount evidence by the notes cannot now be deemed or
treated as profits on the deal and cannot be until such times as the notes are paid.

The judgment of the lower court is reversed, and a money judgment will be entered here in favor of the plaintiff and against the defendant for the
sum of P68,527.50, with thereon at the rate of 6 per cent per annum from the 10th day of January, 1922. In addition thereto, judgment will be
rendered against the defendant in substance and to the effect that the plaintiff is the owner of an undivided one-half interest in the promissory notes
for P75,000 which were executed by Cruz & Tan Chong Say, as a part of the purchase price of the oil, and that he is entitled to have and receive
one-half of all the proceeds from the notes or either of them, and that also he have judgment against the defendant for costs. So ordered.

Araullo, C. J., Street, Malcolm, Avanceña, Ostrand, and Romualdez, JJ., concur.
G.R. No. 100812 June 25, 1999

FRANCISCO MOTORS CORPORATION, petitioner,


vs.
COURT OF APPEALS and SPOUSES GREGORIO and LIBRADA MANUEL, respondents.

QUISUMBING, J.:

This petition for review on certiorari, under Rule 45 of the Rules of Court, seeks to annul the decision 1 of the Court of Appeals in C.A. G.R. CV No.
10014 affirming the decision rendered by Branch 135, Regional Trial Court of Makati, Metro Manila. The procedural antecedents of this petition are
as follows:

On January 23, 1985, petitioner filed a complaint 2 against private respondents to recover three thousand four hundred twelve and six centavos
(P3,412.06), representing the balance of the jeep body purchased by the Manuels from petitioner; an additional sum of twenty thousand four
hundred fifty-four and eighty centavos (P20,454.80) representing the unpaid balance on the cost of repair of the vehicle; and six thousand pesos
(P6,000.00) for cost of suit and attorney's fees. 3 To the original balance on the price of jeep body were added the costs of repair. 4 In their answer,
private respondents interposed a counterclaim for unpaid legal services by Gregorio Manuel in the amount of fifty thousand pesos (P50,000) which
was not paid by the incorporators, directors and officers of the petitioner. The trial court decided the case on June 26, 1985, in favor of petitioner in
regard to the petitioner's claim for money, but also allowed the counter-claim of private respondents. Both parties appealed. On April 15, 1991, the
Court of Appeals sustained the trial court's decision. 5 Hence, the present petition.

For our review in particular is the propriety of the permissive counterclaim which private respondents filed together with their answer to petitioner's
complaint for a sum of money. Private respondent Gregorio Manuel alleged as an affirmative defense that, while he was petitioner's Assistant Legal
Officer, he represented members of the Francisco family in the intestate estate proceedings of the late Benita Trinidad. However, even after the
termination of the proceedings, his services were not paid. Said family members, he said, were also incorporators, directors and officers of petitioner.
Hence to petitioner's collection suit, he filed a counter permissive counterclaim for the unpaid attorney's fees. 6

For failure of petitioner to answer the counterclaim, the trial court declared petitioner in default on this score, and evidence ex-parte was presented
on the counterclaim. The trial court ruled in favor of private respondents and found that Gregorio Manuel indeed rendered legal services to the
Francisco family in Special Proceedings Number 7803 — "In the Matter of Intestate Estate of Benita Trinidad". Said court also found that his legal
services were not compensated despite repeated demands, and thus ordered petitioner to pay him the amount of fifty thousand (P50,000.00) pesos.
7

Dissatisfied with the trial court's order, petitioner elevated the matter to the Court of Appeals, posing the following issues:

I.

WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS NULL AND VOID AS IT NEVER ACQUIRED
JURISDICTION OVER THE PERSON OF THE DEFENDANT.

II.

WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN THE ALLEGED PERMISSIVE COUNTERCLAIM
SHOULD BE HELD LIABLE TO THE CLAIM OF DEFENDANT-APPELLEES.

III.

WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-APPELLANT TO ANSWER THE ALLEGED
PERMISSIVE COUNTERCLAIM. 8

Petitioner contended that the trial court did not acquire jurisdiction over it because no summons was validly served on it together with the copy of the
answer containing the permissive counterclaim. Further, petitioner questions the propriety of its being made party to the case because it was not the
real party in interest but the individual members of the Francisco family concerned with the intestate case.
In its assailed decision now before us for review, respondent Court of Appeals held that a counterclaim must be answered in ten (10) days, pursuant
to Section 4, Rule 11, of the Rules of Court; and nowhere does it state in the Rules that a party still needed to be summoned anew if a counterclaim
was set up against him. Failure to serve summons, said respondent court, did not effectively negate trial court's jurisdiction over petitioner in the
matter of the counterclaim. It likewise pointed out that there was no reason for petitioner to be excused from answering the counterclaim. Court
records showed that its former counsel, Nicanor G. Alvarez, received the copy of the answer with counterclaim two (2) days prior to his withdrawal as
counsel for petitioner. Moreover when petitioner's new counsel, Jose N. Aquino, entered his appearance, three (3) days still remained within the
period to file an answer to the counterclaim. Having failed to answer, petitioner was correctly considered in default by the trial
court. 9 Even assuming that the trial court acquired no jurisdiction over petitioner, respondent court also said, but having filed a motion for
reconsideration seeking relief from the said order of default, petitioner was estopped from further questioning the trial court's jurisdiction. 10

On the question of its liability for attorney's fees owing to private respondent Gregorio Manuel, petitioner argued that being a corporation, it should
not be held liable therefor because these fees were owed by the incorporators, directors and officers of the corporation in their personal capacity as
heirs of Benita Trinidad. Petitioner stressed that the personality of the corporation, vis-a-vis the individual persons who hired the services of private
respondent, is separate and distinct, 11 hence, the liability of said individuals did not become an obligation chargeable against petitioner.

Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:

However, this distinct and separate personality is merely a fiction created by law for convenience and to promote justice.
Accordingly, this separate personality of the corporation may be disregarded, or the veil of corporate fiction pierced, in cases
where it is used as a cloak or cover for found (sic) illegality, or to work an injustice, or where necessary to achieve equity or when
necessary for the protection of creditors. (Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347) Corporations are composed of
natural persons and the legal fiction of a separate corporate personality is not a shield for the commission of injustice and
inequity. (Chemplex Philippines, Inc. vs. Pamatian, 57 SCRA 408).

In the instant case, evidence shows that the plaintiff-appellant Francisco Motors Corporation is composed of the heirs of the late
Benita Trinidad as directors and incorporators for whom defendant Gregorio Manuel rendered legal services in the intestate
estate case of their deceased mother. Considering the aforestated principles and circumstances established in this case, equity
and justice demands plaintiff-appellant's veil of corporate identity should be pierced and the defendant be compensated for legal
services rendered to the heirs, who are directors of the plaintiff-appellant corporation. 12

Now before us, petitioner assigns the following errors:

I.

THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY.

II.

THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS JURISDICTION OVER PETITIONER WITH RESPECT
TO THE COUNTERCLAIM. 13

Petitioner submits that respondent court should not have resorted to piercing the veil of corporate fiction because the transaction concerned only
respondent Gregorio Manuel and the heirs of the late Benita Trinidad. According to petitioner, there was no cause of action by said respondent
against petitioner; personal concerns of the heirs should be distinguished from those involving corporate affairs. Petitioner further contends that the
present case does not fall among the instances wherein the courts may look beyond the distinct personality of a corporation. According to petitioner,
the services for which respondent Gregorio Manuel seeks to collect fees from petitioner are personal in nature. Hence, it avers the heirs should have
been sued in their personal capacity, and not involve the corporation. 14

With regard to the permissive counterclaim, petitioner also insists that there was no proper service of the answer containing the permissive
counterclaim. It claims that the counterclaim is a separate case which can only be properly served upon the opposing party through summons.
Further petitioner states that by nature, a permissive counterclaim is one which does not arise out of nor is necessarily connected with the subject of
the opposing party's claim. Petitioner avers that since there was no service of summons upon it with regard to the counterclaim, then the court did
not acquire jurisdiction over petitioner. Since a counterclaim is considered an action independent from the answer, according to petitioner, then in
effect there should be two simultaneous actions between the same parties: each party is at the same time both plaintiff and defendant with respect to
the other, 15 requiring in each case separate summonses.

In their Comment, private respondents focus on the two questions raised by petitioner. They defend the propriety of piercing the veil of corporate
fiction, but deny the necessity of serving separate summonses on petitioner in regard to their permissive counterclaim contained in the answer.
Private respondents maintain both trial and appellate courts found that respondent Gregorio Manuel was employed as assistant legal officer of
petitioner corporation, and that his services were solicited by the incorporators, directors and members to handle and represent them in Special
Proceedings No. 7803, concerning the Intestate Estate of the late Benita Trinidad. They assert that the members of petitioner corporation took
advantage of their positions by not compensating respondent Gregorio Manuel after the termination of the estate proceedings despite his repeated
demands for payment of his services. They cite findings of the appellate court that support piercing the veil of corporate identity in this particular
case. They assert that the corporate veil may be disregarded when it is used to defeat public convenience, justify wrong, protect fraud, and defend
crime. It may also be pierced, according to them, where the corporate entity is being used as an alter ego, adjunct, or business conduit for the sole
benefit of the stockholders or of another corporate entity. In these instances, they aver, the corporation should be treated merely as an association of
individual persons. 16

Private respondents dispute petitioner's claim that its right to due process was violated when respondents' counterclaim was granted due course,
although no summons was served upon it. They claim that no provision in the Rules of Court requires service of summons upon a defendant in a
counterclaim. Private respondents argue that when the petitioner filed its complaint before the trial court it voluntarily submitted itself to the
jurisdiction of the court. As a consequence, the issuance of summons on it was no longer necessary. Private respondents say they served a copy of
their answer with affirmative defenses and counterclaim on petitioner's former counsel, Nicanor G. Alvarez. While petitioner would have the Court
believe that respondents served said copy upon Alvarez after he had withdrawn his appearance as counsel for the petitioner, private respondents
assert that this contention is utterly baseless. Records disclose that the answer was received two (2) days before the former counsel for petitioner
withdrew his appearance, according to private respondents. They maintain that the present petition is but a form of dilatory appeal, to set off
petitioner's obligations to the respondents by running up more interest it could recover from them. Private respondents therefore claim damages
against petitioner. 17

To resolve the issues in this case, we must first determine the propriety of piercing the veil of corporate fiction.

Basic in corporation law is the principle that a corporation has a separate personality distinct from its stockholders and from other corporations to
which it may be connected. 18 However, under the doctrine of piercing the veil of corporate entity, the corporation's separate juridical personality may
be disregarded, for example, when the corporate identity is used to defeat public convenience, justify wrong, protect fraud, or defend crime. Also,
where the corporation is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation, then its distinct personality may be ignored.
19
In these circumstances, the courts will treat the corporation as a mere aggrupation of persons and the liability will directly attach to them. The legal
fiction of a separate corporate personality in those cited instances, for reasons of public policy and in the interest of justice, will be justifiably set
aside.

In our view, however, given the facts and circumstances of this case, the doctrine of piercing the corporate veil has no relevant application here.
Respondent court erred in permitting the trial court's resort to this doctrine. The rationale behind piercing a corporation's identity in a given case is to
remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the
corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar, instead of holding certain individuals or
persons responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to
answer for the personal liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has
been turned upside down because of its erroneous invocation. Note that according to private respondent Gregorio Manuel his services were solicited
as counsel for members of the Francisco family to represent them in the intestate proceedings over Benita Trinidad's estate. These estate
proceedings did not involve any business of petitioner.

Note also that he sought to collect legal fees not just from certain Francisco family members but also from petitioner corporation on the claims that its
management had requested his services and he acceded thereto as an employee of petitioner from whom it could be deduced he was also receiving
a salary. His move to recover unpaid legal fees through a counterclaim against Francisco Motors Corporation, to offset the unpaid balance of the
purchase and repair of a jeep body could only result from an obvious misapprehension that petitioner's corporate assets could be used to answer for
the liabilities of its individual directors, officers, and incorporators. Such result if permitted could easily prejudice the corporation, its own creditors,
and even other stockholders; hence, clearly inequitous to petitioner.

Furthermore, considering the nature of the legal services involved, whatever obligation said incorporators, directors and officers of the corporation
had incurred, it was incurred in their personal capacity. When directors and officers of a corporation are unable to compensate a party for a personal
obligation, it is far-fetched to allege that the corporation is perpetuating fraud or promoting injustice, and be thereby held liable therefor by piercing its
corporate veil. While there are no hard and fast rules on disregarding separate corporate identity, we must always be mindful of its function and
purpose. A court should be careful in assessing the milieu where the doctrine of piercing the corporate veil may be applied. Otherwise an injustice,
although unintended, may result from its erroneous application.

The personality of the corporation and those of its incorporators, directors and officers in their personal capacities ought to be kept separate in this
case. The claim for legal fees against the concerned individual incorporators, officers and directors could not be properly directed against the
corporation without violating basic principles governing corporations. Moreover, every action — including a counterclaim — must be prosecuted or
defended in the name of the real party in interest. 20 It is plainly an error to lay the claim for legal fees of private respondent Gregorio Manuel at the
door of petitioner (FMC) rather than individual members of the Francisco family.
However, with regard to the procedural issue raised by petitioner's allegation, that it needed to be summoned anew in order for the court to acquire
jurisdiction over it, we agree with respondent court's view to the contrary. Section 4, Rule 11 of the Rules of Court provides that a counterclaim or
cross-claim must be answered within ten (10) days from service. Nothing in the Rules of Court says that summons should first be served on the
defendant before an answer to counterclaim must be made. The purpose of a summons is to enable the court to acquire jurisdiction over the person
of the defendant. Although a counterclaim is treated as an entirely distinct and independent action, the defendant in the counterclaim, being the
plaintiff in the original complaint, has already submitted to the jurisdiction of the court. Following Rule 9, Section 3 of the 1997 Rules of Civil
Procedure, 21 if a defendant (herein petitioner) fails to answer the counterclaim, then upon motion of plaintiff, the defendant may be declared in
default. This is what happened to petitioner in this case, and this Court finds no procedural error in the disposition of the appellate court on this
particular issue. Moreover, as noted by the respondent court, when petitioner filed its motion seeking to set aside the order of default, in effect it
submitted itself to the jurisdiction of the court. As well said by respondent court:

Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he records show that upon its request, plaintiff-appellant was
granted time to file a motion for reconsideration of the disputed decision. Plaintiff-appellant did file its motion for reconsideration
to set aside the order of default and the judgment rendered on the counterclaim.

Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the counterclaim, as it vigorously insists, plaintiff-
appellant is considered to have submitted to the court's jurisdiction when it filed the motion for reconsideration seeking relief from
the court. (Soriano vs. Palacio, 12 SCRA 447). A party is estopped from assailing the jurisdiction of a court after voluntarily
submitting himself to its jurisdiction. (Tejones vs. Gironella, 159 SCRA 100). Estoppel is a bar against any claims of lack of
jurisdiction. (Balais vs. Balais, 159 SCRA 37). 22

WHEREFORE, the petition is hereby GRANTED and the assailed decision is hereby REVERSED insofar only as it held Francisco Motors
Corporation liable for the legal obligation owing to private respondent Gregorio Manuel; but this decision is without prejudice to his filing the proper
suit against the concerned members of the Francisco family in their personal capacity. No pronouncement as to costs. 1âwphi1.nêt

SO ORDERED.

Bellosillo, Puno, Mendoza and Buena, JJ., concur.


G.R. No. 108734 May 29, 1996

CONCEPT BUILDERS, INC., petitioner,


vs.
THE NATIONAL LABOR RELATIONS COMMISSION, (First Division); and Norberto Marabe; Rodolfo Raquel, Cristobal Riego, Manuel
Gillego, Palcronio Giducos, Pedro Aboigar, Norberto Comendador, Rogelio Salut, Emilio Garcia, Jr., Mariano Rio, Paulina Basea,
Alfredo Albera, Paquito Salut, Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana, Gavino Sualibio, Moreno
Escares, Ferdinand Torres, Felipe Basilan, and Ruben Robalos, respondents.

HERMOSISIMA, JR., J.:p

The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of a person or of another
corporation. Where badges of fraud exist; where public convenience is defeated; where a wrong is sought to be justified thereby, the corporate fiction
or the notion of legal entity should come to naught. The law in these instances will regard the corporation as a mere association of persons and, in
case of two corporations, merge them into one.

Thus, where a sister corporation is used as a shield to evade a corporation's subsidiary liability for damages, the corporation may not be heard to say
that it has a personality separate and distinct from the other corporation. The piercing of the corporate veil comes into play.

This special civil action ostensibly raises the question of whether the National Labor Relations Commission committed grave abuse of discretion
when it issued a "break-open order" to the sheriff to be enforced against personal property found in the premises of petitioner's sister company.

Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road, Valenzuela, Metro Manila, is engaged in the
construction business. Private respondents were employed by said company as laborers, carpenters and riggers.

On November, 1981, private respondents were served individual written notices of termination of employment by petitioner, effective on November
30, 1981. It was stated in the individual notices that their contracts of employment had expired and the project in which they were hired had been
completed.

Public respondent found it to be, the fact, however, that at the time of the termination of private respondent's employment, the project in which they
were hired had not yet been finished and completed. Petitioner had to engage the services of sub-contractors whose workers performed the
functions of private respondents.

Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and non-payment of their legal holiday pay, overtime pay
and thirteenth-month pay against petitioner.

On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering petitioner to reinstate private respondents and to pay them back wages
equivalent to one year or three hundred working days.

On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the motion for reconsideration filed by petitioner on the ground
that the said decision had already become final and executory. 2

On October 16, 1986, the NLRC Research and Information Department made the finding that private respondents' back wages amounted to
P199,800.00. 3

On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute the Decision, dated December 19, 1984. The writ
was partially satisfied through garnishment of sums from petitioner's debtor, the Metropolitan Waterworks and Sewerage Authority, in the amount of
P81,385.34. Said amount was turned over to the cashier of the NLRC.

On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff to collect from herein petitioner the sum of
P117,414.76, representing the balance of the judgment award, and to reinstate private respondents to their former positions.

On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of execution on petitioner through the security guard on duty
but the service was refused on the ground that petitioner no longer occupied the premises.
On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a second alias writ of execution.

The said writ had not been enforced by the special sheriff because, as stated in his progress report, dated November 2, 1989:

1. All the employees inside petitioner's premises at 355 Maysan Road, Valenzuela, Metro Manila, claimed that they were employees of Hydro Pipes
Philippines, Inc. (HPPI) and not by respondent;

2. Levy was made upon personal properties he found in the premises;

3. Security guards with high-powered guns prevented him from removing the properties he had levied upon. 4

The said special sheriff recommended that a "break-open order" be issued to enable him to enter petitioner's premises so that he could proceed with
the public auction sale of the aforesaid personal properties on November 7, 1989.

On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter alleging that the properties sought to be levied
upon by the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice-President.

On November 23, 1989, private respondents filed a "Motion for Issuance of a Break-Open Order," alleging that HPPI and petitioner corporation were
owned by the same incorporator/stockholders. They also alleged that petitioner temporarily suspended its business operations in order to evade its
legal obligations to them and that private respondents were willing to post an indemnity bond to answer for any damages which petitioner and HPPI
may suffer because of the issuance of the break-open order.

In support of their claim against HPPI, private respondents presented duly certified copies of the General Informations Sheet, dated May 15, 1987,
submitted by petitioner to the Securities Exchange Commission (SEC) and the General Information Sheet, dated May 25, 1987, submitted by HPPI
to the Securities and Exchange Commission.

The General Information Sheet submitted by the petitioner revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

HPPI P 6,999,500.00

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 O. 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 P 400,000.00

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 C. 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 petitioner's 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 petitioner's 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 instances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It
must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place.
Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows:

1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business
practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind,
will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or
other positive legal duty or dishonest and unjust act in contravention of plaintiff's legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

The absence of any one of these elements prevents "piercing the corporate veil." In applying the "instrumentality" or "alter ego"
doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant's
relationship to that operation. 14

Thus the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a sham or a subterfuge is purely one of fact. 15

In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations on April 29, 1986, it filed an Information Sheet with
the Securities and Exchange Commission on May 15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the
other hand, HPPI, the third-party claimant, submitted on the same day, a similar information sheet stating that its office address is at 355 Maysan
Road, Valenzuela, Metro Manila.

Furthermore, the NLRC stated that:

Both information sheets were filed by the same Virgilio O. Casiño 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 back wages and to bar their reinstatement
to their former positions. HPPI is obviously a business conduit of petitioner corporation and its emergence was skillfully orchestrated to avoid the
financial liability that already attached to petitioner corporation.

The facts in this case are analogous to Claparols v. Court of Industrial Relations, 17 where we had the occasion to rule:

Respondent court's findings that indeed the Claparols Steel and Nail Plant, which ceased operation of June 30, 1957, was
SUCCEEDED by the Claparols Steel Corporation effective the next day, July 1, 1957, up to December 7, 1962, when the latter
finally ceased to operate, were not disputed by petitioner. It is very clear that the latter corporation was a continuation and
successor of the first entity . . . . Both predecessors and successor were owned and controlled by petitioner Eduardo Claparols
and there was no break in the succession and continuity of the same business. This "avoiding-the-liability" scheme is very patent,
considering that 90% of the subscribed shares of stock of the Claparols Steel Corporation (the second corporation) was owned
by respondent . . . Claparols himself, and all the assets of the dissolved Claparols Steel and Nail plant were turned over to the
emerging Claparols Steel Corporation.

It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil in the present case
could, and should, be pierced as it was deliberately and maliciously designed to evade its financial obligation to its employees.

In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of the execution, private respondents had no other
recourse but to apply for a break-open order after the third-party claim of HPPI was dismissed for lack of merit by the NLRC. This is in consonance
with Section 3, Rule VII of the NLRC Manual of Execution of Judgment which provides that:

Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his representative entry to the place where
the property subject of execution is located or kept, the judgment creditor may apply to the Commission or Labor Arbiter
concerned for a break-open order.

Furthermore, our perusal of the records shows that the twin requirements of due notice and hearing were complied with. Petitioner and the third-
party claimant were given the opportunity to submit evidence in support of their claim.

Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open order issued by the Labor Arbiter.

Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial agencies supported by substantial evidence are binding on
this Court and are entitled to great respect, in the absence of showing of grave abuse of a discretion. 18
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April 23, 1992 and December 3, 1992, are AFFIRMED.

SO ORDERED.

Padilla, Bellosillo, Vitug and Kapunan, JJ., concur.


G.R. No. L-57767 January 31, 1984

ALBERTO S. SUNIO and ILOCOS COMMERCIAL CORPORATION, petitioners,


vs.
NATIONAL LABOR RELATIONS COMMISSION, NEMESIO VALENTON, SANTOS DEL ROSARIO, VICENTE TAPUCOL, ANDRES
SOLIS, CRESCENCIO SOLLER, CECILIO LABUNI, SOTERO L. TUMANG, in his capacity as Asst. Regional Director for Arbitration,
Regional Office No. 1, Ministry of Labor & Employment, and AMBROSIO B. SISON, in his capacity as Acting Regional Sheriff,
Regional Office No. 1, Ministry of Labor & Employment, respondents.

Yolanda Bustamante for petitioners.

The Solicitor General for respondent NLRC.

Benjamin F. Baterina for private respondents,

MELENCIO-HERRERA, J.:

In this special civil action for certiorari and Prohibition with Preliminary Injunction, petitioners Alberto Sunio and Ilocos Commercial Corporation seek
to set aside the Resolution of March 24, 1981 of the National Labor Relations Commission (NLRC), which affirmed the Decision of the Assistant
Regional Director, dated November 5, 1979, in NLRC Case No. RB-1-1228-78, directing petitioners and Cabugao Ice Plant Incorporated to reinstate
private respondents to their former position without loss of seniority and privileges and to pay them backwages from February 1, 1978 to the date of
their actual reinstatement.

The controversy arose from the following antecedents:

On July 30,1973, EM Ramos & Company, Inc. (EMRACO for brevity) and Cabugao Ice Plant, Inc. (CIPI for short), sister corporations, sold an ice
plant to Rizal Development and Finance Corporation RDFC with a mortgage on the same properties constituted by the latter in favor of the former to
secure the payment of the balance of the purchase price. 1

By virtue of that sale, EMRACO-CIPI terminated the services of all their employees including private respondents herein, and paid them their
separation pay. RDFC hired its own own employees and operated the plant.

On November 28, 1973, RDFC sold the ice plant to petitioner Ilocos Commercial Corporation ICC headed by its President and General Manager,
petitioner Alberto S. Sunio. Petitioners also hired their own employees as private respondents were no longer in the plant. The sale was subject to
the mortgage in favor of EMRACO-CIPI. Both RDFC-ICC failed to pay the balance of the purchase price, as a consequence of which, EMRACO-CIPI
instituted extrajudicial foreclosure proceedings. The properties were sold at public auction on August 30, 1974, the highest bidders being EMRACO
CIPI. On the same date, said companies obtained an ex-parte Writ of Possession from the Court of First Instance of Ilocos Sur in Civil Case No.
3026-V.

On the same date, August 30, 1974, EMRACO-CIPI sold the ice plant to Nilo Villanueva, subject to the right of redemption of RDFC. Nilo Villanueva
then re-hired private respondents.

On August 27, 1975, RDFC redeemed the ice plant. Because of the gate to Nilo Villanueva, EMRACO-CIPI were unable to turn over possession to
RDFC and/or petitioners, prompting the latter to file a complaint for recovery of possession against EMRACO-CIPI with the then Court of First
Instance of Ilocos Sur (Civil Case No. 81-KC). Nilo Villanueva intervened

Said Court ordered the issuance of a Writ of Preliminary Mandatory Injunction placing RDFC in possession of the ice plant. EMPRACO-CIPI and
Villanueva appealed to the Court of Appeals (CA-GR No. 05880- SP which upheld the questionee, Order. A Petition for certiorari with this Court (L-
46376) assailing that Resolution was denied for lack of merit or January 6, 1978.

On February 1, 1978, RDFC and petitioners finally obtains possession of the ice plant by virtue of the Mandatory Injunction previously issued, which
ordered defendant "particularly Nilo C. Villanueva and his agents representatives, or any person found in the premises to vacate and surrender the
property in litigation." 2 Petitioners did not re-employ private respondents.
Private respondents filed complaints against petitioners for illegal dismissal with the Regional Office, Ministry of Labor & Employment, San
Fernando, La Union.

On November 5, 1979, the Assistant Regional Director rendered a decision the decretal portion of which reads:

IN VIEW OF THE FOREGOING CONSIDERATIONS, respondents Cabugao Ice Plant, Inc., Ilocos Commercial Corporation
and/or Alberto Sunio, are hereby directed to reinstate the complainants to their former positions without loss of seniority
privileges and to pay their backwages from February 1, 1978 to the date when they are actually reinstated

Petitioners appealed to the NLRC, which affirmed the Regional Director's decision and dismissed the appeal for lack of merit on March 24, 1981
reasoning that when RDFC took possession of the property and private respondents were terminated in 1973, the latter already had a vested right to
their security of tenure, and when they were rehired those rights continued. 3

Petitioners are now before us assailing the Asst. Regional Director's Decision, dated November 5, 1979, the Resolution of the NLRC, Second
Division, dated March 24, 1981, as well as the Writ of Execution issued pursuant thereto dated July 14, 1981, for P156,720.80 representing
backwages. They raise as lone issue:

That respondent National Labor Relations Commission and/or Asst. Regional Director Sotero Tumang acted in excess of
jurisdiction and/or with grave abuse of discretion amounting to lack of jurisdiction in rendering the decision and the resolution in
NLRC Case No. RB-1-1228-78, and in ordering the execution of said decision

We issued a Temporary Restraining Order to maintain the status quo, resolved to give due course to the Petition, and required the parties to submit
their respective Briefs. Only petitioners have complied.

Did public respondents' act with grave abuse of on amounting to lack of jurisdiction in ordering the reinstatement of private respondents and the
payment of their backwages?

Petitioners deny any employer-employee relationship with private respondents arguing that no privity of contract exists between them, the latter
being the employees of Nilo Villanueva who re-hired them when he took over the operation of the ice plant from CIPI; that private respondents
should go after Nilo Villanueva for whatever rights they may be entitled to, or the CIPI which is still existing, that no succession of rights and
obligations took place between Villanueva and petitioners as the transfer of possession was a consequence of the exercise of the right of
redemption; that the amount of backwages was determined without petitioners being given a chance to be heard and that granting that respondents
are entitled to the reliefs adjudged, such award cannot be enforced against petitioner Sunio, who was impleaded in the complaint as the General
Manager of ICC.

Public respondent, in its Comment, countered that the sale of a business of 'a going concern does not ipso facto terminate employer-employee
relations when the successor-employer continues the business operation of the predecessor-employer in an essentially unchanged manner. Private
respondents argue that the change of management or ownership of a business entity is not one of the just causes for the termination of services of
employees under Article 283 of the Labor Code, as amended. Both respondents additionally claim that petitioner Sunio, as the General Manager of
ICC and owner of one half (1/2) of its interest, is personally liable for his malicious act of illegally dismissing private respondents, for no ground exists
to justify their termination.

We sustain petitioners.

It is true that the sale of a business of a going concern does not ipso facto terminate the employer-employee relations insofar as the successor-
employer is concerned, and that change of ownership or management of an establishment or company is not one of the just causes provided by law
for termination of employment. The situation here, however, was not one of simple change of ownership. Of note is the fact that when, on July 30,
1973, EMRACO-CIPI sold the plant to RDFC, CIPI had terminated the services of its employees, including herein private respondents, giving them
their separation pay which they had accepted. When RDFC took over ownership and management, therefore, it hired its own employees, not the
private respondents, who were no longer there. RDFC subsequently sold the property to petitioners on November 28, 1973. But by reason of their
failure to pay the balance of the purchase price, EMRACO-CIPI foreclosed on the mortgage over the ice plant; the property was sold at public
auction to EMRACO-CIPI as the highest bidders, and they eventually re-possessed the plant on August 30, 1974. During all the period that RDFC
and petitioners were operating the plant from July 30, 1973 to August 30, 1974, they had their own employees. CIPI-EMRACO then sold the plant,
also on August 30, 1974, to Nilo Villanueva, subject to RDFC's right of redemption. Nilo Villanueva then rehired private respondents as employees of
the plant, also in 1974.

In 1975, RDFC redeemed the property and demanded possession but EMRACO-CIPI and Nilo Villanueva resisted so that petitioners were
compelled to sue for recovery of possession, obtaining it, however, only in 1978.
Under those circumstances, it cannot be justifiably said that the plant together with its staff and personnel moved from one ownership to another. No
succession of employment rights and obligations can be said to have taken place between EMRACO-CIPI-Nilo Villanueva, on the one hand, and
petitioners on the other. Petitioners eventually acquired possession by virtue of the exercise of their right of redemption and of a Mandatory
Injunction in their favor which ordered Nilo Villanueva and "any person found in the premises" to vacate. What is more, when EMRACO-CIPI sold the
ice plant to RDFC in 1973, private respondents' employment was terminated by EMRACO-CIPI and they were given their separation pay, which they
accepted. During the thirteen months, therefore, that RDFC and petitioners were in possession and operating the plant up to August, 1974, they
hired their own employees, not the private respondents. In fact, it may even be said that private respondents had slept on their rights when they
failed to contest such termination at the time of sale, if they believed they had rights to protect. Further, Nilo Villanueva rehired private respondents in
August, 1974, subject to a resolutory condition. That condition having arisen, the rights of private respondents who claim under him mast be deemed
to have also ceased.

Private respondents can neither successfully invoke security of tenure in their favor. Their tenure should not be reckoned from 1967 because they
were already terminated in 1973. Private respondents were only rehired in 1974 by Nilo Villanueva. Petitioners took over by judicial process in 1978
so that private respondents had actually only four years of rehired employment with Nilo Villanueva, during all of which period, petitioners fought hard
against Nilo Villanueva to recover possession of the plant. Insofar as petitioners are concerned therefore, there was no tenurial security to speak of
that would entitle private respondents to reinstatement and backwages. We come now to the personal liability of petitioner, Sunio, who was made
jointly and severally responsible with petitioner company and CIPI for the payment of the backwages of private respondents. This is reversible error.
The Assistant Regional Director's Decision failed to disclose the reason why he was made personally liable. Respondents, however, alleged as
grounds thereof, his being the owner of one-half (1/2) interest of said corporation, and his alleged arbitrary dismissal of private respondents.
Petitioner Sunio was impleaded in the Complaint his capacity as General Manager of petitioner corporation. where appears to be no evidence on
record that he acted maliciously or in bad faith in terminating the services of private respondents. His act, therefore, was within the scope of his
authority and was a corporate act.

It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of
any other legal entity to which it may be related. 4 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. 5 Petitioner Sunio, therefore, should not
have been made personally answerable for the payment of private respondents' back salaries.

WHEREFORE, the assailed Decision and Resolution, dated November 5, 1979 and March 24, 1981, respectively, and the consequent Writ of
Execution are hereby SET ASIDE and the Temporary Restraining Order heretofore issued by this Court hereby made permanent. Public respondents
are hereby ordered to return to petitioners the latter's levied properties in their possession. No costs.

SO ORDERED.

Teehankee (Chairman), Plana, Relova and Gutierrez, Jr., JJ., concur.

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