CORPORATION LAW CASES
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INTRODUCTION/ CLASSIFICATION OF PRIVATE
CORPORATIONS
G.R. No. L-64013 November 28, 1983
UNION GLASS & CONTAINER CORPORATION and CARLOS
PALANCA, JR., in his capacity as President of Union Glass
& Container Corporation, petitioners, 
 On April 1, 1981, Carolina Hofileña filed a complaint before
vs. THE SECURITIES AND EXCHANGE COMMISSION and
CAROLINA HOFILEÑA, respondents.
ESCOLIN, J.:
This petition for certiorari and prohibition seeks to annul
and set aside the Order of the Securities and Exchange
Commission, dated September 25, 1981, upholding its
jurisdiction in SEC Case No. 2035, entitled "Carolina
Hofileña, Complainant, versus Development Bank of the
Philippines, et al., Respondents."
Private respondent Carolina Hofileña, complainant in SEC
Case No. 2035, is a stockholder of Pioneer Glass
Manufacturing Corporation, Pioneer Glass for short, a
domestic corporation engaged in the operation of silica
mines and the manufacture of glass and glassware. Since
1967, Pioneer Glass had obtained various loan
accommodations from the Development Bank of the
Philippines [DBP], and also from other local and foreign
sources which DBP guaranteed.
As security for said loan accommodations, Pioneer Glass
mortgaged and/or assigned its assets, real and personal, to
the DBP, in addition to the mortgages executed by some of
its corporate officers over their personal assets. The
proceeds of said financial exposure of the DBP were used in
the construction of a glass plant in Rosario, Cavite, and the
operation of seven silica mining claims owned by the
corporation.
It appears that through the conversion into equity of the
accumulated unpaid interests on the various loans
amounting to P5.4 million as of January 1975, and
subsequently increased by another P2.2 million in 1976, the
DBP was able to gain control of the outstanding shares of
common stocks of Pioneer Glass, and to get two, later
three, regular seats in the corporation's board of directors.
Sometime in March, 1978, when Pioneer Glass suffered
serious liquidity problems such that it could no longer meet
its financial obligations with DBP, it entered into a dacion
en pago agreement with the latter, whereby all its assets
mortgaged to DBP were ceded to the latter in full
satisfaction of the corporation's obligations in the total
Page 1 of 160
amount of P59,000,000.00. Part of the assets transferred to
the DBP was the glass plant in Rosario, Cavite, which DBP
leased and subsequently sold to herein petitioner Union
Glass and Container Corporation, hereinafter referred to as
Union Glass.
the respondent Securities and Exchange Commission against
the DBP, Union Glass and Pioneer Glass, docketed as SEC
Case No. 2035. Of the five causes of action pleaded
therein, only the first cause of action concerned petitioner
Union Glass as transferee and possessor of the glass plant.
Said first cause of action was based on the alleged illegality
of the aforesaid dacion en pago resulting from: [1] the
supposed unilateral and unsupported undervaluation of the
assets of Pioneer Glass covered by the agreement; [2] the
self-dealing indulged in by DBP, having acted both as
stockholder/director and secured creditor of Pioneer Glass;
and [3] the wrongful inclusion by DBP in its statement of
account of P26M as due from Pioneer Glass when the same
had already been converted into equity.
Thus, with respect to said first cause of action, respondent
Hofileña prayed that the SEC issue an order:
1. Holding that the so called dacion en pago
conveying all the assets of Pioneer Glass and the
Hofileña personal properties to Union Glass be
declared null and void on the ground that the said
conveyance was tainted with.
A. Self-dealing on the part of DBP which was
acting both as a controlling stockholder/
director and as secured creditor of the Pioneer
Glass, all to its advantage and to that of Union
Glass, and to the gross prejudice of the Pioneer
Glass,
B. That the dacion en pago is void because
there was gross undervaluation of the assets
included in the so-called dacion en pago by
more than 100% to the prejudice of Pioneer
Glass and to the undue advantage of DBP and
Union Glass;
C. That the DBP unduly favored Union Glass
over another buyer, San Miguel Corporation,
notwithstanding the clearly advantageous terms
offered by the latter to the prejudice of
Pioneer Glass, its other creditors and so-called
'Minority stockholders.'
MAYORDO, M.
2. Holding that the assets of the Pioneer Glass
taken over by DBP and part of which was delivered
to Union Glass particularly the glass plant to be
returned accordingly.
3. That the DBP be ordered to accept and recognize
the appraisal conducted by the Asian Appraisal Inc.
in 1975 and again in t978 of the asset of Pioneer
Glass. 1
In her common prayer, Hofileña asked that DBP be
sentenced to pay Pioneer Glass actual, consequential,
moral and exemplary damages, for its alleged illegal acts
and gross bad faith; and for DBP and Union Glass to pay her
a reasonable amount as attorney's fees. 2
On April 21, 1981, Pioneer Glass filed its answer. On May 8,
1981, petitioners moved for dismissal of the case on the
ground that the SEC had no jurisdiction over the subject
matter or nature of the suit. Respondent Hofileña filed her
opposition to said motion, to which herein petitioners filed
a rejoinder.
On July 23, 1981, SEC Hearing Officer Eugenio E. Reyes, to
whom the case was assigned, granted the motion to dismiss
for lack of jurisdiction. However, on September 25, 1981,
upon motion for reconsideration filed by respondent
Hofileña, Hearing Officer Reyes reversed his original order
by upholding the SEC's jurisdiction over the subject matter
and over the persons of petitioners. Unable to secure a
reconsideration of the Order as well as to have the same
reviewed by the Commission En Banc, petitioners filed the
instant petition for certiorari and prohibition to set aside
the order of September 25, 1981, and to prevent
respondent SEC from taking cognizance of SEC Case No.
2035.
The issue raised in the petition may be propounded thus: Is
it the regular court or the SEC that has jurisdiction over the
case?
In upholding the SEC's jurisdiction over the case Hearing
Officer Reyes rationalized his conclusion thus:
As correctly pointed out by the complainant, the
present action is in the form of a derivative suit
instituted by a stockholder for the benefit of the
c o r p o r a t i o n , r e s p o n d e n t Pi o n e e r G l a s s a n d
Manufacturing Corporation, principally against another
stockholder, respondent Development Bank of the
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Philippines, for alleged illegal acts and gross bad faith
which resulted in the dacion en pago arrangement now
being questioned by complainant. These alleged illegal
acts and gross bad faith came about precisely by virtue
of respondent Development Bank of the Philippine's
status as a stockholder of co-respondent Pioneer Glass
Manufacturing Corporation although its status as such
stockholder, was gained as a result of its being a
creditor of the latter. The derivative nature of this
instant action can also be gleaned from the common
prayer of the complainant which seeks for an order
directing respondent Development Bank of the
Philippines to pay co-respondent Pioneer Glass
Manufacturing Corporation damages for the alleged
illegal acts and gross bad faith as above-mentioned.
As far as respondent Union Glass and Container
Corporation is concerned, its inclusion as a party-
respondent by virtue of its being an indispensable party
to the present action, it being in possession of the
assets subject of the dacion en pago and, therefore,
situated in such a way that it will be affected by any
judgment thereon, 3
In the ordinary course of things, petitioner Union Glass, as
transferee and possessor of the glass plant covered by the
dacion en pago agreement, should be joined as party-
defendant under the general rule which requires the
joinder of every party who has an interest in or lien on the
property subject matter of the dispute. 4 Such joinder of
parties avoids multiplicity of suits as well as ensures the
convenient, speedy and orderly administration of justice.
But since petitioner Union Glass has no intra-corporate
relation with either the complainant or the DBP, its joinder
as party-defendant in SEC Case No. 2035 brings the cause of
action asserted against it outside the jurisdiction of the
respondent SEC.
The jurisdiction of the SEC is delineated by Section 5 of PD
No. 902-A as follows:
Sec. 5. In addition to the regulatory and adjudicative
function of the Securities and Exchange Commission
over corporations, partnerships and other forms of
associations registered with it as expressly granted
under existing laws and devices, it shall have original
and exclusive jurisdiction to hear and decide cases
involving:
a] Devices and schemes employed by or any acts, of the
board of directors, business associates, its officers or
Page 2 of 160
partners, amounting to fraud and misrepresentation
which may be detrimental to the interest of the public
and/or the stockholders, partners, members of
associations or organizations registered with the
Commission
b] Controversies arising out of intra-corporate or
partnership relations, between and among
stockholders, members or associates; between any or
all of them and the corporation, partnership, or
association of which they are stockholders, members or
associates, respectively; and between such corporation,
partnership or association and the state insofar as it
concerns their individual franchise or right to exist as
such entity;
c] Controversies in the election or appointments of
directors, trustees, officers or managers of such
corporations, partnerships or associations.
This grant of jurisdiction must be viewed in the light of the
nature and function of the SEC under the law. Section 3 of
PD No. 902-A confers upon the latter "absolute jurisdiction,
supervision, and control over all corporations, partnerships
or associations, who are grantees of primary franchise and/
or license or permit issued by the government to operate in
the Philippines ... " The principal function of the SEC is the
supervision and control over corporations, partnerships and
associations with the end in view that investment in these
entities may be encouraged and protected, and their
activities pursued for the promotion of economic
development. 5
It is in aid of this office that the adjudicative power of the
SEC must be exercised. Thus the law explicitly specified
and delimited its jurisdiction to matters intrinsically
connected with the regulation of corporations, partnerships
and associations and those dealing with the internal affairs
of such corporations, partnerships or associations.
Otherwise stated, in order that the SEC can take
cognizance of a case, the controversy must pertain to any
of the following relationships: [a] between the corporation,
partnership or association and the public; [b] between the
corporation, partnership or association and its
stockholders, partners, members, or officers; [c] between
the corporation, partnership or association and the state in
so far as its franchise, permit or license to operate is
concerned; and [d] among the stockholders, partners or
associates themselves.
MAYORDO, M.A
The fact that the controversy at bar involves the rights of
petitioner Union Glass who has no intra-corporate relation
either with complainant or the DBP, places the suit beyond
the jurisdiction of the respondent SEC. The case should be
tried and decided by the court of general jurisdiction, the
Regional Trial Court. This view is in accord with the
rudimentary principle that administrative agencies, like the
SEC, are tribunals of limited jurisdiction 6 and, as such,
could wield only such powers as are specifically granted to
them by their enabling statutes. 7 As We held in Sunset
View Condominium Corp. vs. Campos, Jr.: 8
Inasmuch as the private respondents are not
shareholders of the petitioner condominium
corporation, the instant cases for collection cannot be
a 'controversy arising out of intra-corporate or
partnership relations between and among stockholders,
members or associates; between any or all of them and
the corporation, partnership or association of which
they are stockholders, members or associates,
respectively,' which controversies are under the original
and exclusive jurisdiction of the Securities & Exchange
Commission, pursuant to Section 5 [b] of P.D. No. 902-
A. ...
As heretofore pointed out, petitioner Union Glass is
involved only in the first cause of action of Hofileñas
complaint in SEC Case No, 2035. While the Rules of Court,
which applies suppletorily to proceedings before the SEC,
allows the joinder of causes of action in one complaint,
such procedure however is subject to the rules regarding
jurisdiction, venue and joinder of parties. 9 Since petitioner
has no intra-corporate relationship with the complainant, it
cannot be joined as party-defendant in said case as to do so
would violate the rule or jurisdiction. Hofileñas complaint
against petitioner for cancellation of the sale of the glass
plant should therefore be brought separately before the
regular court But such action, if instituted, shall be
suspended to await the final outcome of SEC Case No.
2035, for the issue of the validity of the dacion en pago
posed in the last mentioned case is a prejudicial question,
the resolution of which is a logical antecedent of the issue
involved in the action against petitioner Union Glass. Thus,
Hofileñas complaint against the latter can only prosper if
final judgment is rendered in SEC Case No. 2035, annulling
the dacion en pago executed in favor of the DBP.
WHEREFORE, the instant petition is hereby granted, and
the questioned Orders of respondent SEC, dated September
25, 1981, March 25, 1982 and May 28, 1982, are hereby set
aside. Respondent Commission is ordered to drop petitioner
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Union Glass from SEC Case No. 2035, without prejudice to
the filing of a separate suit before the regular court of
justice. No pronouncement as to costs.
SO ORDERED.
G.R. No. L-63558 May 19, 1987
SPOUSES JOSE ABEJO AND AURORA ABEJO, TELEC.
TRONIC SYSTEMS, INC., petitioners, vs. HON. RAFAEL DE
LA CRUZ, JUDGE OF THE REGIONAL TRIAL COURT
(NATIONAL CAPITAL JUDICIAL REGION, BRANCH CLX-
PASIG), SPOUSES AGAPITO BRAGA AND VIRGINIA BRAGA,
VIRGILIO BRAGA AND NORBERTO BRAGA, respondents.
No. L-68450-51 May 19, 1987
POCKET BELL PHILIPPINES, INC., AGAPITO T. BRAGA,
VIRGILIO T. BRAGA, NORBERTO BRAGA, and VIRGINIA
BRAGA, petitioners, vs. THE HONORABLE SECURITIES AND
EXCHANGE COMMISSION, TELECTRONIC SYSTEMS, INC.,
JOSE ABEJO, JOSE LUIS SANTIAGO, SIMEON A. MIRAVITE,
SR., ANDRES T. VELARDE AND L. QUIDATO BANDOLINO,
respondents.
TEEHANKEE, C.J.:
These two cases, jointly heard, are jointly herein decided.
They involve the question of who, between the Regional
Trial Court and the Securities and Exchange Commission
(SEC), has original and exclusive jurisdiction over the
dispute between the principal stockholders of the
corporation Pocket Bell Philippines, Inc. (Pocket Bell), a
"tone and voice paging corporation," namely, the spouses
Jose Abejo and Aurora Abejo (hereinafter referred to as the
Abejos) and the purchaser, Telectronic Systems, Inc.
(hereinafter referred to as Telectronics) of their 133,000
minority shareholdings (for P5 million) and of 63,000 shares
registered in the name of Virginia Braga and covered by
five stock certificates endorsed in blank by her (for
P1,674,450.00), and the spouses Agapito Braga and Virginia
Braga (hereinafter referred to as the Bragas), erstwhile
majority stockholders. With the said purchases,
Telectronics would become the majority stockholder,
holding 56% of the outstanding stock and voting power of
the corporation Pocket Bell.
With the said purchases in 1982, Telectronics requested the
corporate secretary of the corporation, Norberto Braga, to
register and transfer to its name, and those of its nominees
the total 196,000 Pocket Bell shares in the corporation's
transfer book, cancel the surrendered certificates of stock
and issue the corresponding new certificates of stock in its
name and those of its nominees.
Page 3 of 160
Norberto Braga, the corporate secretary and son of the
Bragas, refused to register the aforesaid transfer of shares
in t e corporate oo s, asserting that the Bragas claim
preemptive rights over the 133,000 Abejo shares and that
Virginia Braga never transferred her 63,000 shares to
Telectronics but had lost the five stock certificates
representing those shares.
This triggered off the series of intertwined actions between
the protagonists, all centered on the question of
jurisdiction over the dispute, which were to culminate in
the filing of the two cases at bar.
The Bragas assert that the regular civil court has original
and exclusive jurisdiction as against the Securities and
Exchange Commission, while the Abejos claim the contrary.
A summary of the actions resorted to by the parties follows:
A. ABEJOS ACTIONS IN SEC
1. The Abejos and Telectronics and the latter's nominees, as
new majority shareholders, filed SEC Cases Nos. 02379 and
02395 against the Bragas on December 17, 1982 and
February 14, 1983, respectively.
2. In SEC Case No. 02379, they prayed for mandamus from
the SEC ordering Norberto Braga, as corporate secretary of
Pocket Bell to register in their names the transfer and sale
of the aforesaid 196,000 Pocket Bell shares (of the Abejos 1
and Virginia Braga 2, cancel the surrendered certificates as
duly endorsed and to issue new certificates in their names.
3. In SEC Case No.02395, they prayed for injunction and a
temporary restraining order that the SEC enjoin the Bragas
from disbursing or disposing funds and assets of Pocket Bell
and from performing such other acts pertaining to the
functions of corporate officers.
4. Pocket Bell's corporate secretary, Norberto Braga, filed a
Motion to Dismiss the mandamus case (SEC Case No. 02379)
contending that the SEC has no jurisdiction over the nature
of the action since it does not involve an intracorporate
controversy between stockholders, the principal petitioners
therein, Telectronics, not being a stockholder of record of
Pocket Bell.
5. On January 8, 1983, SEC Hearing Officer Joaquin
Garaygay denied the motion. On January 14, 1983, the
corporate secretary filed a Motion for Reconsideration. On
March 21, 1983, SEC Hearing Officer Joaquin Garaygay
MAYORDO, M.A
issued an order granting Braga's motion for reconsideration
and dismissed SEC Case No. 02379.
6. On February 11, 1983, the Bragas filed their Motion to
Dismiss the injunction case, SEC Case No. 02395. On April 8,
1985, the SEC Director, Eugenio Reyes, acting upon the
Abejos'ex-parte motion, created a three-man committee
composed of Atty. Emmanuel Sison as Chairman and Attys.
Alfredo Oca and Joaquin Garaygay as members, to hear and
decide the two SEC cases (Nos. 02379 and 02395).
7. On April 13, 1983, the SEC three-man committee issued
an order reconsidering the aforesaid order of March 21,
1983 of the SEC Hearing Officer Garaygay (dismissing the
mandamus petition SEC Case No. 02379) and directing
corporate secretary Norberto Braga to file his answer to the
petitioner therein.
B. BRAGAS' ACTION IN SEC
8. On December 12, 1983, the Bragas filed a petition for
certiorari, prohibition and mandamus with the SEC en banc,
SEC Case No. EB #049, seeking the dismissal of SEC Cases
Nos.' 02379 and 02395 for lack of jurisdiction of the Comn-
iission and the setting aside of the various orders issued by
the SEC three-man committee in the course of the
proceedings in the two SEC cases.
9. On May 15, 1984, the SEC en banc issued an order
dismissing the Bragas' petition in SEC Case No. EB#049 for
lack of merit and at the same time ordering the SEC
Hearing Committee to continue with the hearings of the
Abejos and Telectronics SEC Cases Nos. 02379 and 02395,
ruhng that the "issue is not the ownership of shares but
rather the nonperformance by the Corporate Secretary of
the ministerial duty of recording transfers of shares of
stock of the corporation of which he is secretary."
10. On May 15, 1984 the Bragas filed a motion for
reconsideration but the SEC en banc denied the same on
August 9, 1984.
C. BRAGAS' ACTION IN CFI (NOWRTC)
11. On November 25, 1982, following the corporate
secretary's refusal to register the transfer of the shares in
question, the Bragas filed a complaint against the Abejos
and Telectronics in the Court of First Instance of Pasig,
Branch 21 (now the Regional Trial Court, Branch 160)
docketed as Civil Case No. 48746 for: (a) rescission and
annulment of the sale of the shares of stock in Pocket Bell
CORPORATION LAW CASES
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made by the Abejos in favor of Telectronics on the ground
that it violated the Bragas' alleged pre-emptive right over
the Abej os' shareholdings and an alleged perfected
contract with the Abejos to sell the same shares in their
(Bragas) favor, (Ist cause of action); plus damages for bad
faith; and (b) declaration ofnullity of any transfer,
assignment or endorsement of Virginia Bragas' stock
certificates for 63,000 shares in Pocket Ben to Telectronics
for want of consent and consideration, alleging that said
stock certificates, which were intended as security for a
loan application and were thus endorsed by her in blank,
had been lost (2nd cause of action).
12. On January 4, 1983, the Abejos filed a Motion to Dismiss
the complaint on the ground that it is the SEC that is
vested under PD 902-A with original and exclusive
jurisdiction to hear and decide cases involving, among
others, controversies "between and among stockholders"
and that the Bragas' suit is such a controversy as the issues
involved therein are the stockholders' alleged pre-emptive
rights, the validity of the transfer and endorsement of
certificates of stock, the election of corporate officers and
the management and control of the corporation's
operations. The dismissal motion was granted by Presiding
Judge G. Pineda on January 14, 1983.
13. On January 24, 1983, the Bragas filed a motion for
reconsideration. The Abejos opposed. Meanwhile,
respondent Judge Rafael de la Cruz was appointed
presiding judge of the court (renamed Regional Trial Court)
in place of Judge G. Pineda.
14. On February 14, 1983, respondent Judge de la Cruz
issued an order rescinding the January 14, 1983 order and
reviving the temporary restraining order previously issued
on December 23, 1982 restraining Telectronics' agents or
representatives from enforcing their resolution constituting
themselves as the new set of officers of Pocket Bell and
from assuming control of the corporation and discharging
their functions.
15. On March 2, 1983, the Abejos filed a motion for
reconsideration, which motion was duly opposed by the
Bragas. On March 11, 1983, respondent Judge denied the
motion for reconsideration.
D. ABEJOS' PETITION AT BAR
16. On March 26, 1983, the Abejos, alleging that the acts of
respondent Judge in refusing to dismiss the complaint
despite clear lack of jurisdiction over the action and in
refusing to reconsider his erroneous position were
Page 4 of 160
performed without jurisdiction and with grave abuse of
discretion, filed their herein Petition for certiorari and
Prohibition with Preliminary Injunction. They prayed that
the challenged orders of respondent Judge dated February
14, 1983 and March 11, 1983 be set aside for lack of
jurisdiction and that he be ordered to permanently desist
from further proceedings in Civil Case No. 48746.
Respondent judge desisted from further proceedings in the
case, dispensing with the need of issuing any restraining
order.
E. BRAGAS' PETITION AT BAR
17. On August 29, 1984, the Bragas, alleging in turn that
the SEC has no jurisdiction over SEC Cases Nos. 02379 and
02395 and that it acted arbitrarily, whimsically and
capriciously in dismissing their petition (in SEC Case No. EB
#049) for dismissal of the said cases, filed their herein
Petition for certiorari and Prohibition with Preliminary
Injunction or TRO. The petitioner seeks the reversal and/or
setting aside of the SEC Order dated May 15, 1984
dismissing their petition in said SEC Case No. EB #049 and
sustaining its jurisdiction over SEC Cases Nos. 02379 and
02395, filed by the Abejos. On September 24, 1984, this
Court issued a temporary restraining order to maintain the
status quo and restrained the SEC and/or any of its officers
or hearing committees from further proceeding with the
hearings in SEC Cases Nos. 02379 and 02395 and from
enforcing any and all orders and/or resolutions issued in
connection with the said cases.
The cases, having been given due course, were jointly
heard by the Court on March 27, 1985 and the parties
thereafter filed on April 16, 1985 their respective
memoranda in amplification of oral argument on the points
of law that were crystalled during the hearing,
The Court rules that the SEC has original and exclusive
jurisdiction over the dispute between the principal
stockholders of the corporation Pocket Bell, namely, the
Abejos and Telectronics, the purchasers of the 56% majority
stock (supra, at page 2) on the one hand, and the Bragas,
erstwhile majority stockholders, on the other, and that the
SEC, through its en banc Resolution of May 15, 1984
co"ectly ruled in dismissing the Bragas' Petition questioning
its jurisdiction, that "the issue is not the ownership of
shares but rather the nonperformance by the Corporate
Secretary of the ministerial duty of recording transfers of
shares of stock of the Corporation of which he is secretary."
MAYORDO, M.A
1. The SEC ruling upholding its primary and exclusive
jurisdiction over the dispute is correctly premised on, and
fully supported by, the applicable provisions of P.D. No.
902-A which reorganized the SEC with additional powers "in
line with the government's policy of encouraging
investments, both domestic and foreign, and more active
publicParticipation in the affairs of private corporations
and enterprises through which desirable activities may be
pursued for the promotion of economic development; and,
to promote a wider and more meaningful equitable
distribution of wealth," and accordingly provided that:
SEC. 3. The Commission shall have absolute
jurisdiction, supervision and control ouer all
corporations, partnerships or associations, who are
the grantees of primary franchise and/or a license
or permit issued by the government to operate in
the Philippines; ...
SEC. 5. In addition to the regulatory and
adjudicative functions of the Securities and
Exchange Commission over corporations,
partnerships and other forms of associations
registered with it as expressly granted under
existing laws and decrees, it shall have original and
exclusive jurisdiction to hear and decide cases
involving:
a) Devices or schemes employed by or any acts,
of the board of directors, business associations,
its officers or partners, amounting to fruud and
misrepresentation which may be detrimental to
the interest of the public andlor of the
stockholder, partners, members of associations
or organizations registered with the
Commission.
b) Controversies arising out of intracorporate
or partnership relations, between and among
stockholders, members, or associates; between
any andlor all of them and the corporation,
partnership or association of which they are
stockholders, members or assmiates,
respectively; and between such corporation,
partnership or assmiation and the state insofar
as it concems their individual franchise or right
to exist as such entity;
c) Controversies in the election or
appointments of directors, trustees, officers or
CORPORATION LAW CASES
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managers of such corporations, partnerships or
associations. 3
Section 6 further grants the SEC "in order to effectively
exercise such jurisdiction," the power, inter alia, "to issue
preliminary or permanent injunctions, whether prohibitory
or mandatory, in all cases in which it has jurisdiction, and
in which cases the pertinent provisions of the Rules of
Court shall apply."
2. Basically and indubitably, the dispute at bar, as held by
the SEC, is an intracorporate dispute that has arisen
between and among the principal stockholders of the
corporation Pocket Bell due to the refusal of the corporate
secretary, backed up by his parents as erstwhile majority
shareholders, to perform his "ministerial duty" to record the
transfers of the corporation's controlling (56%) shares of
stock, covered by duly endorsed certificates of stock, in
favor of Telectronics as the purchaser thereof. mandamus
in the SEC to compel the corporate secretary to register
the transfers and issue new certificates in favor of
Telectronics and its nominees was properly resorted to
under Rule XXI, Section 1 of the SEC's New Rules of
Procedure, 4 which provides for the filing of such petitions
with the SEC. Section 3 of said Rules further authorizes the
SEC to "issue orders expediting the proceedings ... and also
[to] grant a preliminary injunction for the preservation of
the rights of the parties pending such proceedings, "
The claims of the Bragas, which they assert in their
complaint in the Regional Trial Court, praying for rescission
and annulment of the sale made by the Abejos in favor of
Telectronics on the ground that they had an alleged
perfected preemptive right over the Abejos' shares as well
as for annulment of sale to Telectronics of Virginia Braga's
shares covered by street certificates duly endorsed by her
in blank, may in no way deprive the SEC of its primary and
exclusive jurisdiction to grant or not the writ of mandamus
ordering the registration of the shares so transferred. The
Bragas' contention that the question of ordering the
recording of the transfers ultimately hinges on the question
of ownership or right thereto over the shares
notwithstanding, the jurisdiction over the dispute is clearly
vested in the SEC.
3. The very complaint of the Bragas for annulment of the
sales and transfers as filed by them in the regular court
questions the validity of the transfer and endorsement of
the certificates of stock, claiming alleged pre-emptive
rights in the case of the Abejos' shares and alleged loss of
thio certificates and lack of consent and consideration in
Page 5 of 160
the case of Virginia Braga's shares. Such dispute c learly
involve's controversies "between and among stockholders, "
as to the Abej os' right to sell and dispose of their shares to
Telectronics, the validity of the latter's acquisition of
Virginia Braga's shares, who between the Bragas and the
Abejos' transferee should be recognized as the controlling
shareholders of the corporation, with the right to elect the
corporate officers and the management and control of its
operations. Such a dispute and case clearly fag within the
original and exclusive jurisdiction of the SEC to decide,
under Section 5 of P.D. 902-A, above-quoted. The
restraining order issued by the Regional Trial Court
restraining Telectronics agents and representatives from
enforcing their resolution constituting themselves as the
new set of officers of Pocket Bell and from assuming
control of the corporation and discharging their functions
patently encroached upon the SEC's exclusive jurisdiction
over such specialized corporate controversies calling for its
special competence. As stressed by the Solicitor General on
behalf of the SEC, the Court has held that "Nowhere does
the law [PD 902-A] empower any Court of First Instance
[now Regional Trial Court] to interfere with the orders of
the Commission," 5 and consequently "any ruling by the trial
court on the issue of ownership of the shares of stock is not
binding on the Commission 6 for want of jurisdiction.
4. The dispute therefore clearly falls within the general
classification of cases within the SEC's original and
exclusive jurisdiction to hear and decide, under the
aforequoted governing section 5 of the law. Insofar as the
Bragas and their corporate secretary's refusal on behalf of
the corporation Pocket Bell to record the transfer of the
56% majority shares to Telectronics may be deemed a
device or scheme amounting to fraud and
misrepresentation emplolyed by them to keep themselves
in control of the corporation to the detriment of
Telectronics (as buyer and substantial investor in the
corporate stock) and the Abejos (as substantial
stockholders-sellers), the case falls under paragraph (a).
The dispute is likewise an intra-corporate controversy
between and among the majority and minority stockholders
as to the transfer and disposition of the controlling shares
of the corporation, failing under paragraph (b). As stressed
by the Court in DMRC Enterprises v. Este del Sol Mountain
Reserve, Inc, 7 Considering the announced policy of PD 902-
A, the expanded jurisdiction of the respondent Securities
and Exchange Commission under said decree extends
exclusively to matters arising from contracts involving
investments in private corporations, partnerships and
associations." The dispute also concerns the fundamental
issue ofwhether the Bragas or Telectronics have the right to
MAYORDO, M.A
elect the corporate directors and officers and manage its
business and operations, which falls under paragraph (c).
5. Most of the cases that have come to this Court involve
those under paragraph (b), i.e. whether the controversy is
an intra-corporate one, arising "between and among
stockholders" or "between any or allof them and the
corporation." The parties have focused their arguments on
this question. The Bragas' contention in his field must
likewise fail. In Philex Mining Corp. v. Reyes, 8 the Court
spelled out that"'an intra-corporate controversy is one
which arises between a stockholder and the corporation.
There is no distinction, qualification, nor any exemption
whatsoever. The provision is broad and covers all kinds of
controversies between stockholders and corporations. The
issue of whether or not a corporation is bound to replace a
stockholder's lost certificate of stock is a matter purely
between a stockholder and the corporation. It is a typical
intra-corporate dispute. The quqsjion of damage's raised is
merely incidental to that main issue. The Court rejected
the stockholders' theory of excluding his complaint (for
replacement of a lost stock [dividend] certificate which he
claimed to have never received) from the classification of
intra-corporate controversies as one that "does not square
with the intent of the law, which is to segregate from the
general jurisdiction of regular Courts controversies
involving corporations and their stockholders and to bring
them to the SEC for exclusive resolution, in much the same
way that labor disputes are now brought to the Ministry-of
Labor and Employment (MOLE) and the National Labor
Relations Commission (NLRC), and not to the Courts."
(a) The Bragas contend that Telectronics, as
buyertransferee of the 56% majority shares is not a
registered stockholder, because they, through their
son the corporate secretary, appear to have refused
to perform "the ministerial duty of recording
transfers of shares of stock of the corporation of
which he is the secretary," and that the dispute is
therefore, not an intracorporate one. This
contention begs the question which must properly
be resolved by the SEC, but which they would
prevent by their own act, through their son, of
blocking the due recording of the transfer and
cannot be sanctioned. It can be seen from their
very complaint in the regular courts that they with
their two sons constituting the plaintiffs are all
stockholders while the defendants are the Abejos
who are also stockholders whose sale of the shares
to Telectronics they would annul.
CORPORATION LAW CASES
LLB 3
(b) There can be no question that the dispute
between the Abejos and the Bragas as to the sale
and transfer of the former's shares to Telectronics
for P5 million is an intracorporate one under
section 5 (b), prescinding from the applicability of
section 5 (a) and (c), (supra, par. 4) lt is the SEC
which must resolve the Bragas' claim in their own
complaint in the court case filed by them of an
alleged pre-emptive right to buy the Abejos' shares
by virtue of "on-going negotiations," which they
may submit as their defense to the mandamus
petition to register the sale of the shares to
Telectronics. But asserting such preemptive rights
and asking that the same be enforced is a far cry
from the Bragas' claim that "the case relates to
questions of ownership" over the shares in question.
9 (Not to mention, as pointed out by the Abejos,
that the corporation is not a close corporation, and
no restriction over the free transferability of the
shares appears in the Articles of Incorporation, as
well as in the by-laws 10 and the certificates of
stock themselves, as required by law for the
enforcement of such restriction. See Go Soc & Sons,
etc. v. IAC, G.R. No. 72342, Resolution of February
19, 1987.)
(c) The dispute between the Bragas and
Telectronics as to the sale and transfer for
P1,674,450.00 of Virginia Braga's 63.000 shares
covered by Street certificates duly endorsed in
blank by her is within the special competence and
jurisdiction of the SEC, dealing as it does with the
free transferability of corporate shares, particularly
street certificates," as guaranteed by the
Corporation Code and its proclaimed policy of
encouraging foreign and domestic investments in
Philippine private corpora. tions and more active
public participation therein for the Promotion of
economic development. Here again, Virginia Braga's
claim of loss of her street certificates 11 or theft
thereof (denounced by Telectronics as 11
perjurious" 12 ) must be pleaded by her as a
defense against Telectronics'petition for mandamus
and recognition now as the controlling stockholder
of the corporation in the light of the joint affidavit
of Geneml Cerefino S. Carreon of the National
Telecommunications Commission and private
respondent Jose Luis Santiago of Telectronics
narrating the facts and circumstances of how the
former sold and delivered to Telectronics on behalf
of his compadres, the Bragas, Virginia Braga's street
Page 6 of 160
certificates for 63,000 shares equivalent to 18% of
the corporation's outstanding stock and received
the cash price thereof. 13 But as to the sale and
transfer of the Abejos' shares, the Bragas cannot
oust the SEC of its original and exclusive
jurisdiction to hear and decide the case, by
blocking through the corporate secretary, their son,
the due recording of the transfer and sale of the
shares in question and claiming that Telectronics is
not a stockholder of the corporation – which is the
very issue that the SEC is called upon to resolve. As
the SEC maintains, "There is no requirement that a
stockholder of a corporation must be a registered
one in order that,the Securities and Exchange
Commission may take cognizance of a suit seeking
to enforce his rights as such stockholder." 14 This is
because the SEC by express mandate has "absolute
jurisdiction, supervision and control over all
corporations" and is called upon to enforce the
provisions of the Corporation Code, among which is
the stock purchaser's right to secure the
corresponding certificate in his name under the
provisions of Section 63 of the Code. Needless to
say, any problem encountered in securing the
certificates of stock representing the investment
made by the buyer must be expeditiously dealt with
through administrative mandamus proceedings with
the SEC, rather than through the usual tedious
regular court procedure. Furthermore, as stated in
the SEC order of April 13, 1983, notice given to the
corporation of the sale of the shares and
presentation of the certificates for transfer
is ,equivalent to registration: "Whether the refusal
of the (corporation) to effect the same is ivalid or
not is still subject to the outcome of the hearing on
the merits of the case. 15
6. In the fifties, the Court taking cognizance of the move to
vest jurisdiction in administrative commissions and boards
the power to resolve specialized disputes in the field of
labor (as in corporations, public transportation and public
utilities) ruled that Congress in requiring the Industrial
Court's intervention in the resolution of labor-management
controversies likely to cause strikes or lockouts meant such
jurisdiction to be exclusive, although it did not so expressly
state in the law. The Court held that under the "sense-
making and expeditious doctrine of primary jurisdiction ...
the courts cannot or will n6t determine a controversy
involving a question which is within the jurisdiction of an
administrative tribunal, where the question demands the
exercise of sound administrative discretion requiring the
MAYORDO, M.A
special knowledge, experience, and seruices of the
administratiue tribunal to determine technical and
intricate matters of fact, and a uniformity of ruling is
essential to comply uith the purposes of the regulatory
statute administered " 16
In this era of clogged court dockets, the need for
specialized administrative boards or commissions with the
special knowledge, experience and capability to hear and
determine promptly disputes on technical matters or
essentially factual matters, subject to judicial review in
case of grave abuse of discretion, has become well nigh
indispensable. Thus, in 1984, the Court noted that
"between the power lodged in an administrative body and a
court, the unmistakable trend has been to refer it to the
former. 'Increasingly, this Court has been committed to the
view that unless the law speaks clearly and unequivocably,
the choice should fall on [an administrative agency.]' " 17
The Court in the earlier case of Ebon vs. De Guzman 18
noted that the lawmaking authority, in restoring to the
labor arbiters and the NLRC their jurisdiction to award all
kinds of damages in labor cases, as against the previous
P.D. amendment splitting their jurisdiction with the regular
courts, "evidently ... had second thoughts about depriving
the Labor Arbiters and the NLRC of the jurisdiction to
award damages in labor cases because that setup would
mean duplicity of suits, splitting the cause of action and
possible conflicting findings and conclusions by two
tribunals on one and the same claim."
7. Thus, the Corporation Code (B.P. No. 178) enacted on
May 1, 1980 specifically vests the SEC with the Rule-making
power in the discharge of its task of implementing the
provisions of the Code and particularly charges it with the
duty of preventing fraud and abuses on the part of
controlling stockholders, directors and officers, as follows:
SEC. 143. Rule-making power of the Securities and
Exchange Commission. — The Securities and
Exchange Commission shall have the power and
authority to implement the provisions of this Code,
and to promulgate rules and regulations reasonably
necessary to enable it to perform its duties
hereunder, particularly in the prevention of fraud
and abuses on the part of the controlling
stockholders, members, directors, trustees or
officers. (Emphasis supplied)
The dispute between the contending parties for control of
thecorporation manifestly fans within the primary and
exclusive jurisdiction of the SEC in whom the law has
CORPORATION LAW CASES
LLB 3
reserved such jurisdiction as an administrative agency of
special competence to deal promptly and expeditiously
therewith.
As the Court stressed in Union Glass & Container Corp. v.
SEC, 19 "This grant of jurisdiction [in Section 51 must be
viewed in the light of the nature and functions of the SEC
under the law. Section 3 of PD No. 902-A confers upon the
latter 'absolute jurisdiction, supervision, and control over
all corporations, partnerships or associations, who are
grantees of primary franchise and/or license or permit
issued by the government to operate in the Philippines ...
The principal function of the SEC is the supervision and
control over corporations, partnerships and associations
with the end in view that investment in these entities may
be encouraged and protected, and their activities pursued
for the promotion of economic development.
"It is in aid of this office that the adjudicative power of the
SEC must be exercised. Thus the law explicitly specified
and delin-dted its jurisdiction to matters intrinsically
connected with the regulation of corporations, partnerships
and associations and those dealing with the internal affairs
of such corporations, partnerships or associations.
"Otherwise stated, in order that the SEC can take
cognizance of a case, the controversy must pertain to any
of the following relationships: [al between the corporation,
partnership or association and the public; [b] between the
corporation, partnership or association and its
stockholders, partners, members, or officers; [c] between
the corporation, partnership or association and the state in
so far as its franchise, permit or license to operate is
concerned; and Id] among the stockholders, partners or
associates themselves." 20
Parenthetically, the cited case of Union Glass illustrates by
way of contrast what disputes do not fall within the special
jurisdiction of the SEC. In this case, the SEC had properly
assumed jurisdiction over the dissenting stockholders' com.
Plaint against the corporation Pioneer Glass questioning its
dacion en pago of its glass plant and all its assets in favor
of the DBP which was clearly an intra-corporate controversy
dealing with its internal affairs. But the Court held that the
SEC had no jurisdiction over petitioner Union Glass Corp.,
imPle,aded as third party purchaser of the plant from DBP
in the action to annul the dacion en pago. The Court held
that such action for recovery of the glass plant could be
brought by the dissenting stockholder to the regular courts
only if and when the SE C rendered final judgment
annulling the dacion en pago and furthermore subject to
Page 7 of 160
Union Glass' defenses as a third party buyer in good faith.
Similarly, in the DMRC case, therein petitioner's,tomplaint
for collection of the amounts due to it as payment of
rentals for the lease of its heavy equipment in the form
mainly of cash and part in shares of stock of the debtor-
defendant corporation was held to be not covered by the
SEC's exclusive jurisdiction over intracorporate disputes,
since "to pass upon a money claim under a lease contract
would be beyond the competence Of the Securities and
Exchange Commission and to separate the claim for money
from the claim for shares of stock would be splitting a
single cause of action resulting in a multiplicity of suitS." 21
Such an action for collection of a debt does not involve
enforcement Of rights and obligations under the
Corporation Code nor the in. temal or intracorporate affairs
of the debtor corporation. But in aR disputes affecting and
dealing With the interests of the corporation and its
stockholders, following the trend and clear legislative
intent of entmsting all disputes of a specialized nature to
administrative agencies possessing. the requisite
competence, special knowledge, experience and services
and facilities to expeditiously resolve them and determine
the essential facts including technical and intricate
matters, as in labor and public utilities rates disputes, the
SEC has been given "the original and exclusive jurisdiction
to hear anddecide" them (under section 5 of P.D. 902-A) "in
addition to [its] regulatory and adjudicative
functions" (under Section 3, vesting in it "absolute
jurisdiction, supervision and control over all corporations"
and the Rule-making power granted it in Section 143 of the
Corporation Code, supra). As stressed by the Court in the
Philex case, supra, "(T)here is no distinction, qualification,
nor any exemption whatsoever. The provision is broad and
covers all kinds of controversies between stockholders and
corporations."
It only remains now to deal with the Order dated April 15,
1983 (Annex H, Petition) 22 of the SEC's three-member
Hearing Conunittee granting Telectronics' motion for
creation of a receivership or management committee with
the ample powers therein enumerated for the preservation
pendente lite of the corporation's assets and in discharge of
its "power and duty to preserve the rights of the parties,
the stockholders, the public availing of the corporation's
services and the rights of creditors," as well as "for reasons
of equity and justice ... (and) to prevent possible
paralization of corporate business." The said Order has not
been implemented notwithstanding its having been upheld
per the SEC en banc's Order of May 15, 1984 (Annex "V",
Petition) dismissing for lack of merit the petition for
certiorari, prohibition and mandamus with prayer for
MAYORDO, M.A
restraining order or injunction filed by the Bragas seeking
the disbandment of the Hearing Committee and the setting
aside of its Orders, and its Resolution of August 9, 1984,
denying reconsideration (Annex "X", Petition), due to the
Bragas' filing of the petition at bar.
Prescinding from the great concern of damage and
prejudice expressed by Telectronics due to the Bragas
having remained in control of the corporation and having
allegedly committed acts of gross mismanagement and
misapplication of funds, the Court finds that under the
facts and circumstances of record, it is but fair and just
that the SEC's order creating a receivership committee be
implemented forthwith, in accordance with its terms, as
follows:
The three-man receivership committee shall be
composed of a representative from the commission,
in the person of the Director, Examiners and
Appraisers Department or his designated
representative, and a representative from the
petitioners and a representative of the respondent.
The petitioners and respondent are therefore
directed to sub. mit to the Commission the name of
their designated representative within three (3)
days from receipt of this order. The Conunission
shall appoint the other representatives if either or
both parties fafl to comply with the requirement
within the stated time.
ACCORDINGLY, judgment is hereby rendered:
(a) Granting the petition in G.R. No. 63558,
annulling the challenged Orders of respondent
Judge clated February 14, 1983 and March i 1, 1983
(Annexes "L" and "P" of the Abejos' petition) and
prohibiting respondent Judge from further
proceeding in Civil Case No. 48746 filed in his Court
other than to dismiss the same for lack or
jurisdiction over the subject-matter;
(b) Dismissing the petition in G.R. Nos. 68450-51
and lifting the temporary restraining order issued
on September 24, 1984, effective immediately upon
promulgation hereof,
(c) Directing the SEC through its Hearing Committee
to proceed immediately with hearing and resolving
the pending mandamus petition for recording in the
corporate books the transfer to Telectronics and its
CORPORATION LAW CASES
LLB 3
nominees of the majority (56%) shares of stock of
the corporation Pocket Bell pertaining to the Abejos
and Virginia Braga and all related issues, taking into
consideration, without need of resubmittal to it,
the pleadings, annexes and exhibits filed by the
contending parties in the cases at bar; and
(d) Likewise directing the SEC through its Hearing
Committee to proceed immediately with the
implementation of its receivership or management
committee Order of April 15, 1983 in SEC Case No.
2379 and for the purpose, the contending parties
are ordered to submit to said Hearing Committee
the name of their designated representatives in the
receivership/management committee within three
(3) days from receipt of this decision, on pain of
forfeiture of such right in case of failure to comply
herewith, as provided in the said Order; and
ordering the Bragas to perform only caretaker acts
in the corporation pending the organization of such
receivership/management committee and
assumption of its functions.
This decision shall be immediately executory upon its
promulgation.
SO ORDERED.
G.R. No. 87135 May 22, 1992
ALMA MAGALAD, petitioner, vs. PREMIERE FINANCING
CORP., respondent.
PARAS, J.:
This is an appeal originally filed with the Court of Appeals
but certified to this court for disposition since it involves
purely questions of law from the decision of the Regional
Trial Court (RTC), Branch LXXXV, Quezon City, dated May
22, 1984, in Civil Case No. Q-40392, ordering the
defendant-appellant Premiere Financing Corporation
(Premiere for short) to pay to the plaintiff-appellee Alma
Magalad (Magalad for short) the sum of: 
 reads:
(a) P50,000.00, the principal obligation, plus interest at the
legal rate from September 12, 1983, until the full amount is
paid; (b) P10,000.00, both for moral and exemplary
damages; (c) P5,000.00, for and as attorney's fees and (d)
the costs of suit.
The antecedent facts of the case are as follows:
Premiere is a financing company engaged in soliciting and
accepting money market placements or deposits (Original
Record, p. 29).
Page 8 of 160
On September 12, 1983 with expired permit to issue
commercial papers (Ibid., p. 8) and with intention not to
pay or defraud its creditors, Premiere induced and misled
Magalad into making a money market placement of
P50,000.00 at 22% interest per annum for which it issued a
receipt (Ibid., Exh. "B", p. 8). Aside from the receipt,
Premier likewise issued two (2) post-dated checks in the
total sum of P51,079.00 (Ibid., Exh. "C", p. 9) and assigned
to Magalad its receivable from a certain David Saman for
the same amount (Ibid., Exh. "C", p. 10).
When the said checks were presented for payment on their
due dates, the drawee bank dishonored the checks for lack
of sufficient funds to cover the amount (Ibid., Exhs. "D-1",
"E-1", pp. 11-12). Despite demands by Magalad for the
replacement of said checks with cash, Premiere, for no
valid reason, failed and refused to honor such demands and
due to fraudulent acts of Premiere, Magalad suffered
sleepless nights, mental anguish, fright, serious anxiety,
considering the fact that the money she invested is blood
money and is the only source of support for her family
(Ibid., p. 4).
Magalad in order to seek redress and retrieve her blood
money, availed of the service of counsel for which she
agreed to pay twenty percent (20%) of the amount due as
and for attorney's fees (Ibid.)
On January 10, 1984, Magalad filed a complaint for
damages with prayer for writ of preliminary attachment
with the RTC, Branch LXXXV, Quezon City, docketed as Civil
Case No. Q-40392 against herein Premiere (Ibid., p. 3-6).
Premiere having failed to file an answer and acting on
Magalad's motion, the lower court declared Premiere in
default by virtue of an order dated April 5, 1984 allowing
Magalad to present evidence ex-parte (Ibid., pp. 21; 22)
On May 22, 1984 the lower court rendered a default
judgment against Premiere, the dispositive portion of which
From the foregoing evidence, the court finds that
plaintiff has fully established her claim that
defendant had indeed acted fraudulently in
incurring the obligation and considering that no
evidence has been adduced by the defendant to
contradict the same, judgment is hereby rendered
ordering the defendant to pay plaintiff as follows:
MAYORDO, M.A
(a) P50,000.00, the principal obligation, plus
interest at the legal rate from September 12, 1983
until the full amount is paid;
(b) P10,000.00 both for moral and exemplary
damages;
(c) P5,000.00 for and as attorney's fees; and
(d) the costs of suit.
SO ORDERED. (Ibid., p. 30)
Premiere filed a motion for reconsideration of the foregoing
decision, based principally on a question of law alleging
that the Securities and Exchange Commission (SEC) has
exclusive and original jurisdiction over a corporation under
a state of suspension of payments (Ibid., pp. 32-41).
Magalad filed an opposition to the motion for
reconsideration on January 8, 1985 alleging among others
that the regular court has jurisdiction over the case to the
exclusion of the SEC. (Ibid., pp. 51-53).
On May 28, 1986 the lower court issued an order denying
the motion for reconsideration (Ibid., p. 61).
On June 11, 1986 Premiere filed his notice of appeal which
led to the issuance of the order of the lower court dated
July 29, 1986 elevating the case to the Court of Appeals
(CA) (Ibid., pp. 62-63).
The Court of Appeals in its resolution dated September 8,
1987 dismissed the case for failure of Premiere to file its
brief despite the ninety-day extension granted to it, which
expired on June 10, 1987 (Rollo, p. 16).
An omnibus motion for reconsideration and admission of
late filing of Premiere's brief was filed on September 22,
1987 (Rollo, pp. 17-19; 32).
On September 30, 1987 the Court of Appeals issued a
resolution which reconsidered its previous resolution dated
September 5, 1987 and admitted the Premiere's brief
(Rollo, p. 26).
On January 31, 1989 the Court of Appeals issued a
resolution certifying the instant case to this Court on the
ground that the case involves a question of law, the
dispositive part of which stating:
ACCORDINGLY, pursuant to Rule 50, Sec. 3, in
relation to the Judiciary Act of 1948, Sec. 17, par.
4(3) (4), the Appeal in this case is hereby certified
to the Supreme Court on the ground that the only
CORPORATION LAW CASES
LLB 3
issue raised concerns the jurisdiction of the trial
court and only a question of law. (Rollo, p. 33)
Hence, this appeal.
The pivotal issue in this case is whether or not the court a
quo had jurisdiction to try the instant case.
At the very core of this appeal assailing the aforesaid
pronouncement of the lower court, and around which
revolve the arguments of the parties, is the applicability of
Presidential Decree No. 902-A (Reorganization of the SEC
with Additional Powers), as amended by Presidential
Decrees Nos. 1653, 1758 and 1799. Magalad submits that
the legal suit which she has brought against Premiere is an
ordinary action for damages with the preliminary
attachment cognizable solely by the RTC. Premiere, on the
other hand, espouses the original and exclusive jurisdiction
of the Securities and Exchange Commission.
Presidential Decree No. 902-A, Section 3, provides:
Sec. 3. The Commission shall have absolute
jurisdiction, supervision and control over all
corporations, partnerships or associations, who are
the grantees of primary franchises and/or a license
or permit issued by the government to operate in
the Philippines; and in the exercise of its authority,
it shall have the power to enlist the aid and support
of and to deputize any and all enforcement
agencies of the government, civil or military as well
as any private institution, corporation, firm,
association or person. (As amended by Presidential
Decree No. 1758).
Sec. 3 of Pres. Decree No. 902-A should also be read in
conjunction with Sec. 5 of the same law, providing:
Sec. 5. In addition to the regulatory and
adjudicative functions of the Securities and
Exchange Commission over corporations,
partnerships and other forms of associations
registered with it as expressly granted under the
existing laws and decrees, it shall have original and
exclusive jurisdiction to hear and decide cases
involving:
a) Devises or schemes employed by or any acts
of the Board of Directors, business associates,
its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to
Page 9 of 160
the public and/or to the stockholders, partners,
members of associations or organizations
registered with the Commission. (Emphasis
supplied)
Considering that Magalad's complaint sufficiently alleges
acts amounting to fraud and misrepresentation committed
by Premiere, the SEC must be held to retain its original and
exclusive jurisdiction over the case, despite the fact that
the suit involves collection of sums of money paid to said
corporation, the recovery of which would ordinarily fall
within the jurisdiction of regular courts. The fraud
committed is detrimental to the interest of the public and,
therefore, encompasses a category of relationship within
the SEC jurisdiction.
Otherwise stated, in order that the SEC can take
cognizance of a case, the controversy must pertain to any
of the following relationships: (a) between the corporation,
partnership or association and the public; (b) between the
corporation, partnership or association and its
stockholders, partners, members or officers; (c) between
the corporation, partnership or association and the state so
far as its franchise, permit or license to operate is
concerned; and (d) among the stockholders, partners or
associates themselves (Union Glass & Container Corp. v.
SEC, 126 SCRA 31; 38; 1983; Abejo v. De la Cruz, 149 SCRA
654, 1987).
In this case, the recitals of the complaint sufficiently allege
that devices or schemes amounting to fraud and
misrepresentation detrimental to the interest of the public
have been resorted to by Premiere Corporation. It can not
but be conceded, therefore, that the SEC may exercise its
adjudicative powers pursuant to Sec. 5(a) of Pres. Decree
No. 902-A (Supra).
The fact that Premiere's authority to engage in financing
already expired will not have the effect of divesting the
SEC of its original and exclusive jurisdiction. The expanded
jurisdiction of the SEC was conceived primarily to protect
the interest of the investing public. That Magalad's money
placements were in the nature of investments in Premiere
can not be gainsaid. Magalad had reasonably expected to
receive returns from moneys she had paid to Premiere.
Unfortunately, however, she was the victim of alleged fraud
and misrepresentation.
Reliance by Magalad on the cases of DMRC v. Este del Sol,
(132 SCRA 293) and Union Glass & Container Corp. v. SEC
(126 SCRA 31), where the jurisdiction of the ordinary Courts
was upheld, is misplaced for, as explicitly stated in those
MAYORDO, M.A
cases, nowhere in the complaints therein is found any
averment of fraud or misrepresentation committed by the
respective corporations involved. The causes of action,
therefore, were nothing more than simple money claims.
Further bolstering the jurisdiction of the SEC in this case is
the fact that said agency had already appointed a
Rehabilitation Receiver for Premiere and has directed all
proceedings or claims against it be suspended. This,
pursuant to Sec. 6(c) of Pres. Decree No. 902-A providing
that "upon appointment of a . . . rehabilitation
receiver . . . all actions for claims against corporations . . .
under receivership pending before any court, tribunal,
board or body shall be suspended accordingly."
By so doing, SEC has exercised its original and exclusive
jurisdiction to hear and decide cases involving:
a) Petitions of corporations, partnerships or
associations to be declared in the state of
suspension of payments in cases where the
corporation, partnership or association possesses
sufficient property to cover all its debts but
foresees the impossibility of meeting them when
they respectively fall due or in cases where the
corporation, partnership or association has no
sufficient assets to cover its liabilities but is under
the management of a Rehabilitation Receiver or
Management of a Rehabilitation Receiver or
Management Committee created pursuant to this
Decree. (Section 5(d) of Pres. Decree No. 902-A as
added by Pres. Decree 1758).
In fine, the adjudicative powers of the SEC being clearly
defined by law, its jurisdiction over this case has to be
upheld.
PREMISES CONSIDERED, the instant appeal is GRANTED, and
the order of the Presiding Judge of the Regional Trial Court,
Quezon City, Branch LXXXV dated May 22, 1984, in Civil
Case No. Q-40392 is REVERSED and SET ASIDE, without
prejudice to the filing by Alma Magalad of the appropriate
complaint against Premiere Financing Corporation with the
Securities and Exchange Commission.
SO ORDERED.
G.R. No. L-12719             May 31, 1962
THE COLLECTOR OF INTERNAL REVENUE, petitioner, 

vs. THE CLUB FILIPINO, INC. DE CEBU, respondent.
PAREDES, J.:
CORPORATION LAW CASES
LLB 3
This is a petition to review the decision of the Court of Tax
Appeals, reversing the decision of the Collector of Internal
Revenue, assessing against and demanding from the "Club
Filipino, Inc. de Cebu", the sum of P12,068.84 as fixed and
percentage taxes, surcharge and compromise penalty,
allegedly due from it as a keeper of bar and restaurant.
As found by the Court of Tax Appeals, the "Club Filipino,
Inc. de Cebu," (Club, for short), is a civic corporation
organized under the laws of the Philippines with an original
authorized capital stock of P22,000.00, which was
subsequently increased to P200,000.00, among others, to it
"proporcionar, operar, y mantener un campo de golf, tenis,
gimnesio (gymnasiums), juego de bolos (bowling alleys),
mesas de billar y pool, y toda clase de juegos no prohibidos
por leyes generales y ordenanzas generales; y desarollar y
cultivar deportes de toda clase y denominacion cualquiera
para el recreo y entrenamiento saludable de sus miembros
y accionistas" (sec. 2, Escritura de Incorporacion del Club
Filipino, Inc. Exh. A). Neither in the articles or by-laws is
there a provision relative to dividends and their
distribution, although it is covenanted that upon its
dissolution, the Club's remaining assets, after paying debts,
shall be donated to a charitable Philippine Institution in
Cebu (Art. 27, Estatutos del Club, Exh. A-a.).
The Club owns and operates a club house, a bowling alley, a
golf course (on a lot leased from the government), and a
bar-restaurant where it sells wines and liquors, soft drinks,
meals and short orders to its members and their guests.
The bar-restaurant was a necessary incident to the
operation of the club and its golf-course. The club is
operated mainly with funds derived from membership fees
and dues. Whatever profits it had, were used to defray its
overhead expenses and to improve its golf-course. In 1951.
as a result of a capital surplus, arising from the re-
valuation of its real properties, the value or price of which
increased, the Club declared stock dividends; but no actual
cash dividends were distributed to the stockholders. In
1952, a BIR agent discovered that the Club has never paid
percentage tax on the gross receipts of its bar and
restaurant, although it secured B-4, B-9(a) and B-7 licenses.
In a letter dated December 22, 1852, the Collector of
Internal Revenue assessed against and demanded from the
Club, the following sums: —
As percentage tax on its gross
receipts 
 P9,599.0
during the tax years 1946 to 1951 7 "business"; Coll. of Int. Rev. v. Sweeney, et al. [International
Surcharge therein 2,399.77
Page 10 of 160
As fixed tax for the years 1946 to
70.00
1952
Compromise penalty 500.00
The Club wrote the Collector, requesting for the
cancellation of the assessment. The request having been
denied, the Club filed the instant petition for review.
The dominant issues involved in this case are twofold:
1. Whether the respondent Club is liable for the payment of
the sum of 12,068.84, as fixed and percentage taxes and
surcharges prescribed in sections 182, 183 and 191 of the
Tax Code, under which the assessment was made, in
connection with the operation of its bar and restaurant,
during the periods mentioned above; and
2. Whether it is liable for the payment of the sum of
P500.00 as compromise penalty.
Section 182, of the Tax Code states, "Unless otherwise
provided, every person engaging in a business on which the
percentage tax is imposed shall pay in full a fixed annual
tax of ten pesos for each calendar year or fraction thereof
in which such person shall engage in said business." Section
183 provides in general that "the percentage taxes on
business shall be payable at the end of each calendar
quarter in the amount lawfully due on the business
transacted during each quarter; etc." And section 191,
same Tax Code, provides "Percentage tax . . . Keepers of
restaurants, refreshment parlors and other eating places
shall pay a tax three per centum, and keepers of bar and
cafes where wines or liquors are served five per centum of
their gross receipts . . .". It has been held that the liability
for fixed and percentage taxes, as provided by these
sections, does not ipso facto attach by mere reason of the
operation of a bar and restaurant. For the liability to
attach, the operator thereof must be engaged in the
business as a barkeeper and restaurateur. The plain and
ordinary meaning of business is restricted to activities or
affairs where profit is the purpose or livelihood is the
motive, and the term business when used without
qualification, should be construed in its plain and ordinary
meaning, restricted to activities for profit or livelihood
(The Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE
[Manila Elks Club] & Court of Tax Appeals, G.R. No.
L-11176, June 29, 1959, giving full definitions of the word
Club of Iloilo, Inc.], G.R. No. L-12178, Aug. 21, 1959, the
MAYORDO, M.A
facts of which are similar to the ones at bar; Manila Polo
Club v. B. L. Meer, etc., No. L-10854, Jan. 27, 1960).
Having found as a fact that the Club was organized to
develop and cultivate sports of all class and denomination,
for the healthful recreation and entertainment of its
stockholders and members; that upon its dissolution, its
remaining assets, after paying debts, shall be donated to a
charitable Philippine Institution in Cebu; that it is operated
mainly with funds derived from membership fees and dues;
that the Club's bar and restaurant catered only to its
members and their guests; that there was in fact no cash
dividend distribution to its stockholders and that whatever
was derived on retail from its bar and restaurant was used
to defray its overall overhead expenses and to improve its
golf-course (cost-plus-expenses-basis), it stands to reason
that the Club is not engaged in the business of an operator
of bar and restaurant (same authorities, cited above).
It is conceded that the Club derived profit from the
operation of its bar and restaurant, but such fact does not
necessarily convert it into a profit-making enterprise. The
bar and restaurant are necessary adjuncts of the Club to
foster its purposes and the profits derived therefrom are
necessarily incidental to the primary object of developing
and cultivating sports for the healthful recreation and
entertainment of the stockholders and members. That a
Club makes some profit, does not make it a profit-making
Club. As has been remarked a club should always strive,
whenever possible, to have surplus (Jesus Sacred Heart
College v. Collector of Int. Rev., G.R. No. L-6807, May 24,
1954; Collector of Int. Rev. v. Sinco Educational Corp., G.R.
No. L-9276, Oct. 23, 1956).
It is claimed that unlike the two cases just cited (supra),
which are non-stock, the appellee Club is a stock
corporation. This is unmeritorious. The facts that the
capital stock of the respondent Club is divided into shares,
does not detract from the finding of the trial court that it is
not engaged in the business of operator of bar and
restaurant. What is determinative of whether or not the
Club is engaged in such business is its object or purpose, as
stated in its articles and by-laws. It is a familiar rule that
the actual purpose is not controlled by the corporate form
or by the commercial aspect of the business prosecuted,
but may be shown by extrinsic evidence, including the by-
laws and the method of operation. From the extrinsic
evidence adduced, the Tax Court concluded that the Club is
not engaged in the business as a barkeeper and
restaurateur.
CORPORATION LAW CASES
LLB 3
Moreover, for a stock corporation to exist, two requisites
must be complied with, to wit: (1) a capital stock divided
into shares and (2) an authority to distribute to the holders
of such shares, dividends or allotments of the surplus
profits on the basis of the shares held (sec. 3, Act No.
1459). In the case at bar, nowhere in its articles of
incorporation or by-laws could be found an authority for
the distribution of its dividends or surplus profits. Strictly
speaking, it cannot, therefore, be considered a stock
corporation, within the contemplation of the corporation
law.
A tax is a burden, and, as such, it should not be deemed
imposed upon fraternal, civic, non-profit, nonstock
organizations, unless the intent to the contrary is manifest
and patent" (Collector v. BPOE Elks Club, et al., supra),
which is not the case in the present appeal.
Having arrived at the conclusion that respondent Club is not
engaged in the business as an operator of a bar and
restaurant, and therefore, not liable for fixed and
percentage taxes, it follows that it is not liable for any
penalty, much less of a compromise penalty.
WHEREFORE, the decision appealed from is affirmed
without costs.
G.R. No. 91889 August 27, 1993
MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY
AND NEPOMUCENO REDOVAN, petitioners, 
 The counterclaim of defendants Virgilio E. Dulay
vs. THE HONORABLE COURT OF APPEALS, EDGARDO D.
PABALAN, MANUEL A. TORRES, JR., MARIA THERESA V.
VELOSO AND CASTRENSE C. VELOSO, respondents.
NOCON, J.:
This is a petition for review on certiorari to annul and set
aside the decision 1 of the Court of Appeals affirming the
decision2 of the Regional Trial Court of Pasay, Branch 114
Civil Cases Nos. 8198-P, and 2880-P, the dispositive portion
of which reads, as follows:
Wherefore, in view of all the foregoing
considerations, in this Court hereby renders
judgment, as follows:
In Civil Case No. 2880-P, the petition filed by
Manuel R. Dulay Enterprises, Inc. and Virgilio E.
Dulay for annulment or declaration of nullity of the
decision of the Metropolitan Trial Court, Branch 46,
Pasay City, in its Civil Case No. 38-81 entitled
Page 11 of 160
"Edgardo D. Pabalan, et al., vs. Spouses Florentino
Manalastas, et al.," is dismissed for lack of merits;
In Civil Case No. 8278-P, the complaint filed by
Manuel R. Dulay Enterprises, Inc. for cancellation of
title of Manuel A. Torres, Jr. (TCT No. 24799 of the
Register of Deeds of Pasay City) and reconveyance,
is dismissed for lack or merit, and,
In Civil Case No. 8198-P, defendants Manuel R.
Dulay Enterprises, Inc. and Virgilio E. Dulay are
ordered to surrender and deliver possession of the
parcel of land, together with all the improvements
thereon, described in Transfer Certificate of Title
No. 24799 of the Register of Deeds of Pasay City, in
favor of therein plaintiffs Manuel A. Torres, Jr. as
owner and Edgardo D. Pabalan as real estate
administrator of said Manuel A. Torres, Jr.; to
account for and return to said plaintiffs the rentals
from dwelling unit No. 8-A of the apartment
building (Dulay Apartment) from June 1980 up to
the present, to indemnify plaintiffs, jointly and
severally, expenses of litigation in the amount of
P4,000.00 and attorney's fees in the sum of
P6,000.00, for all the three (3) cases. Co-defendant
Nepomuceno Redovan is ordered to pay the current
and subsequent rentals on the premises leased by
him to plaintiffs.
and Manuel R. Dulay Enterprises, Inc. and N.
Redovan, dismissed for lack of merit. With costs
against the three (3) aforenamed defendants. 3
The facts as found by the trial court are as follows:
Petitioner Manuel R. Dulay Enterprises, Inc, a domestic
corporation with the following as members of its Board of
Directors: Manuel R. Dulay with 19,960 shares and
designated as president, treasurer and general manager,
Atty. Virgilio E. Dulay with 10 shares and designated as
vice-president; Linda E. Dulay with 10 shares; Celia Dulay-
Mendoza with 10 shares; and Atty. Plaridel C. Jose with 10
shares and designated as secretary, owned a property
covered by TCT No. 17880 4 and known as Dulay Apartment
consisting of sixteen (16) apartment units on a six hundred
eighty-nine (689) square meters lot, more or less, located
at Seventh Street (now Buendia Extension) and F.B.
Harrison Street, Pasay City.
MAYORDO, M.A
Petitioner corporation through its president, Manuel Dulay,
obtained various loans for the construction of its hotel
project, Dulay Continental Hotel (now Frederick Hotel). It
even had to borrow money from petitioner Virgilio Dulay to
be able to continue the hotel project. As a result of said
loan, petitioner Virgilio Dulay occupied one of the unit
apartments of the subject property since property since
1973 while at the same time managing the Dulay Apartment
at his shareholdings in the corporation was subsequently
increased by his father. 5
On December 23, 1976, Manuel Dulay by virtue of Board
Resolution No 186 of petitioner corporation sold the subject
property to private respondents spouses Maria Theresa and
Castrense Veloso in the amount of P300,000.00 as
evidenced by the Deed of Absolute Sale.7 Thereafter, TCT
No. 17880 was cancelled and TCT No. 23225 was issued to
private respondent Maria Theresa Veloso. 8 Subsequently,
Manuel Dulay and private respondents spouses Veloso
executed a Memorandum to the Deed of Absolute Sale of
December 23, 1976 9 dated December 9, 1977 giving Manuel
Dulay within (2) years or until December 9, 1979 to
repurchase the subject property for P200,000.00 which
was, however, not annotated either in TCT No. 17880 or
TCT No. 23225.
On December 24, 1976, private respondent Maria Veloso,
without the knowledge of Manuel Dulay, mortgaged the
subject property to private respondent Manuel A. Torres for
a loan of P250,000.00 which was duly annotated as Entry
No. 68139 in TCT No. 23225. 10
Upon the failure of private respondent Maria Veloso to pay
private respondent Torres, the subject property was sold on
April 5, 1978 to private respondent Torres as the highest
bidder in an extrajudicial foreclosure sale as evidenced by
the Certificate of Sheriff's Sale 11 issued on April 20, 1978.
On July 20, 1978, private respondent Maria Veloso executed
a Deed of Absolute Assignment of the Right to Redeem 12 in
favor of Manuel Dulay assigning her right to repurchase the
subject property from private respondent Torres as a result
of the extra sale held on April 25, 1978.
As neither private respondent Maria Veloso nor her assignee
Manuel Dulay was able to redeem the subject property
within the one year statutory period for redemption,
private respondent Torres filed an Affidavit of Consolidation
of Ownership 13 with the Registry of Deeds of Pasay City and
TCT No. 24799 14 was subsequently issued to private
respondent Manuel Torres on April 23, 1979.
CORPORATION LAW CASES
LLB 3
On October 1, 1979, private respondent Torres filed a
petition for the issuance of a writ of possession against
private respondents spouses Veloso and Manuel Dulay in
LRC Case No. 1742-P. However, when petitioner Virgilio
Dulay was never authorized by the petitioner corporation to
sell or mortgage the subject property, the trial court
ordered private respondent Torres to implead petitioner
corporation as an indispensable party but the latter moved
for the dismissal of his petition which was granted in an
Order dated April 8, 1980.
On June 20, 1980, private respondent Torres and Edgardo
Pabalan, real estate administrator of Torres, filed an action
against petitioner corporation, Virgilio Dulay and
Nepomuceno Redovan, a tenant of Dulay Apartment Unit
No. 8-A for the recovery of possession, sum of money and
damages with preliminary injunction in Civil Case, No.
8198-P with the then Court of First Instance of Rizal.
On July 21, 1980, petitioner corporation filed an action
against private respondents spouses Veloso and Torres for
the cancellation of the Certificate of Sheriff's Sale and TCT
No. 24799 in Civil Case No. 8278-P with the then Court of
First Instance of Rizal.
On January 29, 1981, private respondents Pabalan and
Torres filed an action against spouses Florentino and Elvira
Manalastas, a tenant of Dulay Apartment Unit No. 7-B, with
petitioner corporation as intervenor for ejectment in Civil
Case No. 38-81 with the Metropolitan Trial Court of Pasay
City which rendered a decision on April 25, 1985,
dispositive portion of which reads, as follows:
Wherefore, judgment is hereby rendered in favor of
the plaintiff (herein private respondents) and
against the defendants:
1. Ordering the defendants and all persons claiming
possession under them to vacate the premises.
2. Ordering the defendants to pay the rents in the
sum of P500.000 a month from May, 1979 until they
shall have vacated the premises with interest at the
legal rate;
3. Ordering the defendants to pay attorney's fees in
the sum of P2,000.00 and P1,000.00 as other
expenses of litigation and for them to pay the costs
of the suit.15
Page 12 of 160
Thereafter or on May 17, 1985, petitioner corporation and
Virgilio Dulay filed an action against the presiding judge of
the Metropolitan Trial Court of Pasay City, private
respondents Pabalan and Torres for the annulment of said
decision with the Regional Trial Court of Pasay in Civil Case
No. 2880-P.
Thereafter, the three (3) cases were jointly tried and the
trial court rendered a decision in favor of private
respondents.
Not satisfied with said decision, petitioners appealed to the
Court of Appeals which rendered a decision on October 23,
1989, the dispositive portion of which reads, as follows:
PREMISES CONSIDERED, the decision being appealed
should be as it is hereby AFFIRMED in full. 16
On November 8, 1989, petitioners filed a Motion for
Reconsideration which was denied on January 26, 1990.
Hence, this petition.
During the pendency of this petition, private respondent
Torres died on April 3, 1991 as shown in his death
certificate 17 and named Torres-Pabalan Realty &
Development Corporation as his heir in his holographic will
18 dated October 31, 1986.
Petitioners contend that the respondent court had acted
with grave abuse of discretion when it applied the doctrine
of piercing the veil of corporate entity in the instant case
considering that the sale of the subject property between
private respondents spouses Veloso and Manuel Dulay has
no binding effect on petitioner corporation as Board
Resolution No. 18 which authorized the sale of the subject
property was resolved without the approval of all the
members of the board of directors and said Board
Resolution was prepared by a person not designated by the
corporation to be its secretary.
We do not agree.
Section 101 of the Corporation Code of the Philippines
provides:
Sec. 101. When board meeting is unnecessary or
improperly held. Unless the by-laws provide
otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be
deemed valid if:
MAYORDO, M.A
1. Before or after such action is taken, written
consent thereto is signed by all the directors, or
2. All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
3. The directors are accustomed to take informal
action with the express or implied acquiese of all
the stockholders, or
4. All the directors have express or implied
knowledge of the action in question and none of
them makes prompt objection thereto in writing.
If a directors' meeting is held without call or notice,
an action taken therein within the corporate
powers is deemed ratified by a director who failed
to attend, unless he promptly files his written
objection with the secretary of the corporation
after having knowledge thereof.
In the instant case, petitioner corporation is classified as a
close corporation and consequently a board resolution
authorizing the sale or mortgage of the subject property is
not necessary to bind the corporation for the action of its
president. At any rate, corporate action taken at a board
meeting without proper call or notice in a close corporation
is deemed ratified by the absent director unless the latter
promptly files his written objection with the secretary of
the corporation after having knowledge of the meeting
which, in his case, petitioner Virgilio Dulay failed to do.
It is relevant to note that although a corporation is an
entity which has a personality distinct and separate from
its individual stockholders or members, 19 the veil of
corporate fiction may be pierced when it is used to defeat
public convenience justify wrong, protect fraud or defend
crime. 20 The privilege of being treated as an entity distinct
and separate from its stockholder or members is therefore
confined to its legitimate uses and is subject to certain
limitations to prevent the commission of fraud or other
illegal or unfair act. When the corporation is used merely
as an alter ego or business conduit of a person, the law will
regard the corporation as the act of that person. 21 The
Supreme Court had repeatedly disregarded the separate
personality of the corporation where the corporate entity
was used to annul a valid contract executed by one of its
members.
Petitioners' claim that the sale of the subject property by
its president, Manuel Dulay, to private respondents spouses
CORPORATION LAW CASES
LLB 3
Veloso is null and void as the alleged Board Resolution No.
18 was passed without the knowledge and consent of the
other members of the board of directors cannot be
sustained. As correctly pointed out by the respondent Court
of Appeals:
Appellant Virgilio E. Dulay's protestations of
complete innocence to the effect that he never
participated nor was even aware of any meeting or
resolution authorizing the mortgage or sale of the
subject premises (see par. 8, affidavit of Virgilio E.
Dulay, dated May 31, 1984, p. 14, Exh. "21") is
difficult to believe. On the contrary, he is very
much privy to the transactions involved. To begin
with, he is a incorporator and one of the board of
directors designated at the time of the organization
of Manuel R. Dulay Enterprise, Inc. In ordinary
parlance, the said entity is loosely referred to as a
"family corporation". The nomenclature, if
imprecise, however, fairly reflects the cohesiveness
of a group and the parochial instincts of the
individual members of such an aggrupation of which
Manuel R. Dulay Enterprises, Inc. is typical: four-
fifths of its incorporators being close relatives
namely, three (3) children and their father whose
name identifies their corporation (Articles of
Incorporation of Manuel R. Dulay Enterprises, Inc.
Exh. "31-A"). 22
Besides, the fact that petitioner Virgilio Dulay on June 24,
1975 executed an affidavit 23 that he was a signatory
witness to the execution of the post-dated Deed of
Absolute Sale of the subject property in favor of private
respondent Torres indicates that he was aware of the
transaction executed between his father and private
respondents and had, therefore, adequate knowledge about
the sale of the subject property to private respondents.
Consequently, petitioner corporation is liable for the act of
Manuel Dulay and the sale of the subject property to
private respondents by Manuel Dulay is valid and binding.
As stated by the trial court:
. . . the sale between Manuel R. Dulay Enterprises,
Inc. and the spouses Maria Theresa V. Veloso and
Castrense C. Veloso, was a corporate act of the
former and not a personal transaction of Manuel R.
Dulay. This is so because Manuel R. Dulay was not
only president and treasurer but also the general
manager of the corporation. The corporation was a
closed family corporation and the only non-relative
in the board of directors was Atty. Plaridel C. Jose
Page 13 of 160
who appeared on paper as the secretary. There is
no denying the fact, however, that Maria Socorro R.
Dulay at times acted as secretary. . . ., the Court
can not lose sight of the fact that the Manuel R.
Dulay Enterprises, Inc. is a closed family
corporation where the incorporators and directors
belong to one single family. It cannot be concealed
that Manuel R. Dulay as president, treasurer and
general manager almost had absolute control over
the business and affairs of the corporation. 24
Moreover, the appellate courts will not disturb the findings
of the trial judge unless he has plainly overlooked certain
facts of substance and value that, if considered, might
affect the result of the case, 25 which is not present in the
instant case.
Petitioners' contention that private respondent Torres never
acquired ownership over the subject property since the
latter was never in actual possession of the subject
property nor was the property ever delivered to him is also
without merit.
Paragraph 1, Article 1498 of the New Civil Code provides:
When the sale is made through a public instrument,
the execution thereof shall be equivalent to the
delivery of the thing which is the object of the
contract, if from the deed the contrary do not
appear or cannot clearly be inferred.
Under the aforementioned article, the mere execution of
the deed of sale in a public document is equivalent to the
delivery of the property. Likewise, this Court had held that:
It is settled that the buyer in a foreclosure sale
becomes the absolute owner of the property
purchased if it is not redeemed during the period of
one year after the registration of the sale. As such,
he is entitled to the possession of the said property
and can demand it at any time following the
consolidation of ownership in his name and the
issuance to him of a new transfer certificate of
title. The buyer can in fact demand possession of
the land even during the redemption period except
that he has to post a bond in accordance with
Section 7 of Act No. 3133 as amended. No such
bond is required after the redemption period if the
property is not redeemed. Possession of the land
then becomes an absolute right of the purchaser as
confirmed owner. 26
MAYORDO, M.A
Therefore, prior physical delivery or possession is not
legally required since the execution of the Deed of Sale in
deemed equivalent to delivery.
Finally, we hold that the respondent appellate court did not
err in denying petitioner's motion for reconsideration
despite the fact that private respondents failed to submit
their comment to said motion as required by the
respondent appellate court from resolving petitioners'
motion for reconsideration without the comment of the
private respondent which was required merely to aid the
court in the disposition of the motion. The courts are as
much interested as the parties in the early disposition of
cases before them. To require otherwise would
unnecessarily clog the courts' dockets.
WHEREFORE, the petition is DENIED and the decision
appealed from is hereby AFFIRMED.
SO ORDERED.
[G.R. Nos. 84132-33 :  December 10, 1990.]
192 SCRA 257
NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX,
INC., Petitioners, vs.  PHILIPPINE VETERANS BANK, THE
EX-OFFICIO SHERIFF and GODOFREDO QUILING, in his
capacity as Deputy Sheriff of Calamba, Laguna,
Respondents.
DECISION
CRUZ, J.:
 
This case involves the constitutionality of a presidential
decree which, like all other issuances of President Marcos
during his regime, was at that time regarded as sacrosanct.
It is only now, in a freer atmosphere, that his acts are being
tested by the touchstone of the fundamental law that even
then was supposed to limit presidential action.
The particular enactment in question is Pres. Decree No.
1717, which ordered the rehabilitation of the Agrix Group
of Companies to be administered mainly by the National
Development Company. The law outlined the procedure for
filing claims against the Agrix companies and created a
Claims Committee to process these claims. Especially
relevant to this case, and noted at the outset, is Sec. 4(1)
thereof providing that "all mortgages and other liens
presently attaching to any of the assets of the dissolved
corporations are hereby extinguished."
CORPORATION LAW CASES
LLB 3
Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in
favor of private respondent Philippine Veterans Bank a real
estate mortgage dated July 7, 1978, over three (3) parcels
of land situated in Los Baños, Laguna. During the existence
of the mortgage, AGRIX went bankrupt. It was for the
expressed purpose of salvaging this and the other Agrix
companies that the aforementioned decree was issued by
President Marcos.
Pursuant thereto, the private respondent filed a claim with
the AGRIX Claims Committee for the payment of its loan
credit. In the meantime, the New Agrix, Inc. and the
National Development Company, petitioners herein,
invoking Sec. 4 (1) of the decree, filed a petition with the
Regional Trial Court of Calamba, Laguna, for the
cancellation of the mortgage lien in favor of the private
respondent. For its part, the private respondent took steps
to extrajudicially foreclose the mortgage, prompting the
petitioners to file a second case with the same court to
stop the foreclosure. The two cases were consolidated.
After the submission by the parties of their respective
pleadings, the trial court rendered the impugned decision.
Judge Francisco Ma. Guerrero annulled not only the
challenged provision, viz., Sec. 4 (1), but the entire Pres.
Decree No. 1717 on the grounds that: (1) the presidential
exercise of legislative power was a violation of the
principle of separation of powers; (2) the law impaired the
obligation of contracts; and (3) the decree violated the
equal protection clause. The motion for reconsideration of
this decision having been denied, the present petition was
filed.
The petition was originally assigned to the Third Division of
this Court but because of the constitutional questions
involved it was transferred to the Court en banc. On August
30, 1988, the Court granted the petitioner's prayer for a
temporary restraining order and instructed the respondents
to cease and desist from conducting a public auction sale of
the lands in question. After the Solicitor General and the
private respondent had filed their comments and the
petitioners their reply, the Court gave due course to the
petition and ordered the parties to file simultaneous
memoranda. Upon compliance by the parties, the case was
deemed submitted.
The petitioners contend that the private respondent is now
estopped from contesting the validity of the decree. In
support of this contention, it cites the recent case of
Mendoza v. Agrix Marketing, Inc., 1 where the
constitutionality of Pres. Decree No. 1717 was also raised
Page 14 of 160
but not resolved. The Court, after noting that the
petitioners had already filed their claims with the AGRIX
Claims Committee created by the decree, had simply
dismissed the petition on the ground of estoppel.
The petitioners stress that in the case at bar the private
respondent also invoked the provisions of Pres. Decree No.
1717 by filing a claim with the AGRIX Claims Committee.
Failing to get results, it sought to foreclose the real estate
mortgage executed by AGRIX in its favor, which had been
extinguished by the decree. It was only when the
petitioners challenged the foreclosure on the basis of Sec.
4 (1) of the decree, that the private respondent attacked
the validity of the provision. At that stage, however,
consistent with Mendoza, the private respondent was
already estopped from questioning the constitutionality of
the decree.
The Court does not agree that the principle of estoppel is
applicable.
It is not denied that the private respondent did file a claim
with the AGRIX Claims Committee pursuant to this decree.
It must be noted, however, that this was done in 1980,
when President Marcos was the absolute ruler of this
country and his decrees were the absolute law. Any judicial
challenge to them would have been futile, not to say
foolhardy. The private respondent, no less than the rest of
the nation, was aware of that reality and knew it had no
choice under the circumstances but to conform.
It is true that there were a few venturesome souls who
dared to question the dictator's decisions before the courts
of justice then. The record will show, however, that not a
single act or issuance of President Marcos was ever
declared unconstitutional, not even by the highest court, as
long as he was in power. To rule now that the private
respondent is estopped for having abided with the decree
instead of boldly assailing it is to close our eyes to a cynical
fact of life during that repressive time.
This case must be distinguished from Mendoza, where the
petitioners, after filing their claims with the AGRIX Claims
Committee, received in settlement thereof shares of stock
valued at P40,000.00 without protest or reservation. The
herein private respondent has not been paid a single
centavo on its claim, which was kept pending for more than
seven years for alleged lack of supporting papers.
Significantly, the validity of that claim was not questioned
by the petitioner when it sought to restrain the
extrajudicial foreclosure of the mortgage by the private
MAYORDO, M.A
respondent. The petitioner limited itself to the argument
that the private respondent was estopped from questioning
the decree because of its earlier compliance with its
provisions.
Independently of these observations, there is the
consideration that an affront to the Constitution cannot be
allowed to continue existing simply because of procedural
inhibitions that exalt form over substance.
The Court is especially disturbed by Section 4(1) of the
decree, quoted above, extinguishing all mortgages and
other liens attaching to the assets of AGRIX. It also notes,
with equal concern, the restriction in Subsection (ii)
thereof that all "unsecured obligations shall not bear
interest" and in Subsection (iii) that "all accrued interests,
penalties or charges as of date hereof pertaining to the
obligations, whether secured or unsecured, shall not be
recognized."
These provisions must be read with the Bill of Rights, where
it is clearly provided in Section 1 that "no person shall be
deprived of life, liberty or property without due course of
law nor shall any person be denied the equal protection of
the law" and in Section 10 that "no law impairing the
obligation of contracts shall be passed."
In defending the decree, the petitioners argue that
property rights, like all rights, are subject to regulation
under the police power for the promotion of the common
welfare. The contention is that this inherent power of the
state may be exercised at any time for this purpose so long
as the taking of the property right, even if based on
contract, is done with due process of law.
This argument is an over-simplification of the problem
before us. The police power is not a panacea for all
constitutional maladies. Neither does its mere invocation
conjure an instant and automatic justification for every act
of the government depriving a person of his life, liberty or
property.
A legislative act based on the police power requires the
concurrence of a lawful subject and a lawful method. In
more familiar words, a) the interests of the public
generally, as distinguished from those of a particular class,
should justify the interference of the state; and b) the
means employed are reasonably necessary for the
accomplishment of the purpose and not unduly oppressive
upon individuals. 2
CORPORATION LAW CASES
LLB 3
Applying these criteria to the case at bar, the Court finds
first of all that the interests of the public are not
sufficiently involved to warrant the interference of the
government with the private contracts of AGRIX. The
decree speaks vaguely of the "public, particularly the small
investors," who would be prejudiced if the corporation
were not to be assisted. However, the record does not state
how many there are of such investors, and who they are,
and why they are being preferred to the private respondent
and other creditors of AGRIX with vested property rights.
The public interest supposedly involved is not identified or
explained. It has not been shown that by the creation of
the New Agrix, Inc. and the extinction of the property
rights of the creditors of AGRIX, the interests of the public
as a whole, as distinguished from those of a particular
class, would be promoted or protected. The indispensable
link to the welfare of the greater number has not been
established. On the contrary, it would appear that the
decree was issued only to favor a special group of investors
who, for reasons not given, have been preferred to the
legitimate creditors of AGRIX.
Assuming there is a valid public interest involved, the Court
still finds that the means employed to rehabilitate AGRIX
fall far short of the requirement that they shall not be
unduly oppressive. The oppressiveness is patent on the face
of the decree. The right to property in all mortgages, liens,
interests, penalties and charges owing to the creditors of
AGRIX is arbitrarily destroyed. No consideration is paid for
the extinction of the mortgage rights. The accrued
interests and other charges are simply rejected by the
decree. The right to property is dissolved by legislative fiat
without regard to the private interest violated and, worse,
in favor of another private interest.
A mortgage lien is a property right derived from contract
and so comes under the protection of the Bill of Rights. So
do interests on loans, as well as penalties and charges,
which are also vested rights once they accrue. Private
property cannot simply be taken by law from one person
and given to another without compensation and any known
public purpose. This is plain arbitrariness and is not
permitted under the Constitution.
And not only is there arbitrary taking, there is
discrimination as well. In extinguishing the mortgage and
other liens, the decree lumps the secured creditors with
the unsecured creditors and places them on the same level
in the prosecution of their respective claims. In this
respect, all of them are considered unsecured creditors.
Page 15 of 160
The only concession given to the secured creditors is that
their loans are allowed to earn interest from the date of
the decree, but that still does not justify the cancellation
of the interests earned before that date. Such interests,
whether due to the secured or the unsecured creditors, are
all extinguished by the decree. Even assuming such
cancellation to be valid, we still cannot see why all kinds of
creditors, regardless of security, are treated alike.
Under the equal protection clause, all persons or things
similarly situated must be treated alike, both in the
privileges conferred and the obligations imposed.
Conversely, all persons or things differently situated should
be treated differently. In the case at bar, persons
differently situated are similarly treated, in disregard of
the principle that there should be equality only among
equals.- nad
One may also well wonder why AGRIX was singled out for
government help, among other corporations where the
stockholders or investors were also swindled. It is not clear
why other companies entitled to similar concern were not
similarly treated. And surely, the stockholders of the
private respondent, whose mortgage lien had been
cancelled and legitimate claims to accrued interests
rejected, were no less deserving of protection, which they
did not get. The decree operated, to use the words of a
celebrated case, 3 "with an evil eye and an uneven hand."
On top of all this, New Agrix, Inc. was created by special
decree notwithstanding the provision of Article XIV, Section
4 of the 1973 Constitution, then in force, that:
SEC. 4. The Batasang Pambansa shall not, except by general
law, provide for the formation, organization, or regulation
of private corporations, unless such corporations are owned
or controlled by the Government or any subdivision or
instrumentality thereof. 4
The new corporation is neither owned nor controlled by the
government. The National Development Corporation was
merely required to extend a loan of not more than
P10,000,000.00 to New Agrix, Inc. Pending payment
thereof, NDC would undertake the management of the
corporation, but with the obligation of making periodic
reports to the Agrix board of directors. After payment of
the loan, the said board can then appoint its own
management. The stocks of the new corporation are to be
issued to the old investors and stockholders of AGRIX upon
proof of their claims against the abolished corporation.
They shall then be the owners of the new corporation. New
MAYORDO, M.A
Agrix, Inc. is entirely private and so should have been
organized under the Corporation Law in accordance with
the above-cited constitutional provision.
The Court also feels that the decree impairs the obligation
of the contract between AGRIX and the private respondent
without justification. While it is true that the police power
is superior to the impairment clause, the principle will
apply only where the contract is so related to the public
welfare that it will be considered congenitally susceptible
to change by the legislature in the interest of the greater
number. 5 Most present-day contracts are of that nature.
But as already observed, the contracts of loan and
mortgage executed by AGRIX are purely private
transactions and have not been shown to be affected with
public interest. There was therefore no warrant to amend
their provisions and deprive the private respondent of its
vested property rights.
It is worth noting that only recently in the case of the
Development Bank of the Philippines v. NLRC, 6 we
sustained the preference in payment of a mortgage creditor
as against the argument that the claims of laborers should
take precedence over all other claims, including those of
the government. In arriving at this ruling, the Court
recognized the mortgage lien as a property right protected
by the due process and contract clauses notwithstanding
the argument that the amendment in Section 110 of the
Labor Code was a proper exercise of the police power.
The Court reaffirms and applies that ruling in the case at
bar.
Our finding, in sum, is that Pres. Decree No. 1717 is an
invalid exercise of the police power, not being in
conformity with the traditional requirements of a lawful
subject and a lawful method. The extinction of the
mortgage and other liens and of the interest and other
charges pertaining to the legitimate creditors of AGRIX
constitutes taking without due process of law, and this is
compounded by the reduction of the secured creditors to
the category of unsecured creditors in violation of the
equal protection clause. Moreover, the new corporation,
being neither owned nor controlled by the Government,
should have been created only by general and not special
law. And insofar as the decree also interferes with purely
private agreements without any demonstrated connection
with the public interest, there is likewise an impairment of
the obligation of the contract.
With the above pronouncements, we feel there is no more
need to rule on the authority of President Marcos to
promulgate Pres. Decree No. 1717 under Amendment No. 6
CORPORATION LAW CASES
LLB 3
of the 1973 Constitution. Even if he had such authority, the
decree must fall just the same because of its violation of
the Bill of Rights.
WHEREFORE, the petition is DISMISSED. Pres. Decree No.
1717 is declared UNCONSTITUTIONAL. The temporary
restraining order dated August 30, 1988, is LIFTED. Costs
against the petitioners.
SO ORDERED.
G.R. No. 84197 July 28, 1989
PIONEER INSURANCE & SURETY CORPORATION, petitioner, 
 P20,000.00 to Constancio B. Maglana as attorney's
vs. THE HON. COURT OF APPEALS, BORDER MACHINERY &
HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M.
MAGLANA and JACOB S. LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner, 
 Cervanteses and Constancio B. Maglana, is
vs. COURT OF APPEALS, PIONEER INSURANCE AND SURETY
CORPORATION, BORDER MACHINERY and HEAVY
EQUIPMENT CO., INC,, FRANCISCO and MODESTO
CERVANTES and CONSTANCIO MAGLANA, respondents.
GUTIERREZ, JR., J.:
The subject matter of these consolidated petitions is the
decision of the Court of Appeals in CA-G.R. CV No. 66195
which modified the decision of the then Court of First
Instance of Manila in Civil Case No. 66135. The plaintiffs
complaint (petitioner in G.R. No. 84197) against all
defendants (respondents in G.R. No. 84197) was dismissed
but in all other respects the trial court's decision was
affirmed.
The dispositive portion of the trial court's decision reads as
follows:
WHEREFORE, judgment is rendered against
defendant Jacob S. Lim requiring Lim to pay
plaintiff the amount of P311,056.02, with interest
at the rate of 12% per annum compounded monthly;
plus 15% of the amount awarded to plaintiff as
attorney's fees from July 2,1966, until full payment
is made; plus P70,000.00 moral and exemplary
damages.
It is found in the records that the cross party
plaintiffs incurred additional miscellaneous
expenses aside from Pl51,000.00,,making a total of
P184,878.74. Defendant Jacob S. Lim is further
required to pay cross party plaintiff, Bormaheco,
the Cervanteses one-half and Maglana the other
Page 16 of 160
half, the amount of Pl84,878.74 with interest from
the filing of the cross-complaints until the amount
is fully paid; plus moral and exemplary damages in
the amount of P184,878.84 with interest from the
filing of the cross-complaints until the amount is
fully paid; plus moral and exemplary damages in
the amount of P50,000.00 for each of the two
Cervanteses.
Furthermore, he is required to pay P20,000.00 to
Bormaheco and the Cervanteses, and another
fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of
plaintiff Pioneer against defendants Bormaheco, the
dismissed. Instead, plaintiff is required to
indemnify the defendants Bormaheco and the
Cervanteses the amount of P20,000.00 as attorney's
fees and the amount of P4,379.21, per year from
1966 with legal rate of interest up to the time it is
paid.
Furthermore, the plaintiff is required to pay
Constancio B. Maglana the amount of P20,000.00 as
attorney's fees and costs.
No moral or exemplary damages is awarded against
plaintiff for this action was filed in good faith. The
fact that the properties of the Bormaheco and the
Cervanteses were attached and that they were
required to file a counterbond in order to dissolve
the attachment, is not an act of bad faith. When a
man tries to protect his rights, he should not be
saddled with moral or exemplary damages.
Furthermore, the rights exercised were provided
for in the Rules of Court, and it was the court that
ordered it, in the exercise of its discretion.
No damage is decided against Malayan Insurance
Company, Inc., the third-party defendant, for it
only secured the attachment prayed for by the
plaintiff Pioneer. If an insurance company would be
liable for damages in performing an act which is
clearly within its power and which is the reason for
its being, then nobody would engage in the
insurance business. No further claim or counter-
claim for or against anybody is declared by this
Court. (Rollo - G.R. No. 24197, pp. 15-16)
MAYORDO, M.A
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was
engaged in the airline business as owner-operator of
Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines
(JDA) and Lim entered into and executed a sales contract
(Exhibit A) for the sale and purchase of two (2) DC-3A Type
aircrafts and one (1) set of necessary spare parts for the
total agreed price of US $109,000.00 to be paid in
installments. One DC-3 Aircraft with Registry No. PIC-718,
arrived in Manila on June 7,1965 while the other aircraft,
arrived in Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation
(Pioneer, petitioner in G.R. No. 84197) as surety executed
and issued its Surety Bond No. 6639 (Exhibit C) in favor of
JDA, in behalf of its principal, Lim, for the balance price of
the aircrafts and spare parts.
It appears that Border Machinery and Heavy Equipment
Company, Inc. (Bormaheco), Francisco and Modesto
Cervantes (Cervanteses) and Constancio Maglana
(respondents in both petitions) contributed some funds
used in the purchase of the above aircrafts and spare parts.
The funds were supposed to be their contributions to a new
corporation proposed by Lim to expand his airline business.
They executed two (2) separate indemnity agreements
(Exhibits D-1 and D-2) in favor of Pioneer, one signed by
Maglana and the other jointly signed by Lim for SAL,
Bormaheco and the Cervanteses. The indemnity agreements
stipulated that the indemnitors principally agree and bind
themselves jointly and severally to indemnify and hold and
save harmless Pioneer from and against any/all damages,
losses, costs, damages, taxes, penalties, charges and
expenses of whatever kind and nature which Pioneer may
incur in consequence of having become surety upon the
bond/note and to pay, reimburse and make good to Pioneer,
its successors and assigns, all sums and amounts of money
which it or its representatives should or may pay or cause
to be paid or become liable to pay on them of whatever
kind and nature.
On June 10, 1965, Lim doing business under the name and
style of SAL executed in favor of Pioneer as deed of chattel
mortgage as security for the latter's suretyship in favor of
the former. It was stipulated therein that Lim transfer and
convey to the surety the two aircrafts. The deed (Exhibit D)
was duly registered with the Office of the Register of Deeds
of the City of Manila and with the Civil Aeronautics
Administration pursuant to the Chattel Mortgage Law and
CORPORATION LAW CASES
LLB 3
the Civil Aeronautics Law (Republic Act No. 776),
respectively.
Lim defaulted on his subsequent installment payments
prompting JDA to request payments from the surety.
Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial
foreclosure of the said chattel mortgage before the Sheriff
of Davao City. The Cervanteses and Maglana, however, filed
a third party claim alleging that they are co-owners of the
aircrafts, On July 19, 1966, Pioneer filed an action for
judicial foreclosure with an application for a writ of
preliminary attachment against Lim and respondents, the
Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses
filed cross-claims against Lim alleging that they were not
privies to the contracts signed by Lim and, by way of
counterclaim, sought for damages for being exposed to
litigation and for recovery of the sums of money they
advanced to Lim for the purchase of the aircrafts in
question.
After trial on the merits, a decision was rendered holding
Lim liable to pay Pioneer but dismissed Pioneer's complaint
against all other defendants.
As stated earlier, the appellate court modified the trial
court's decision in that the plaintiffs complaint against all
the defendants was dismissed. In all other respects the trial
court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers
that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY
ERRED WHEN IT DISMISSED THE APPEAL OF
P E T I T I O N E R O N T H E S O L E G R O U N D T H AT
PETITIONER HAD ALREADY COLLECTED THE
PROCEEDS OF THE REINSURANCE ON ITS BOND IN
FAVOR OF THE JDA AND THAT IT CANNOT REPRESENT
A REINSURER TO RECOVER THE AMOUNT FROM
HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN
THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)
The petitioner questions the following findings of the
appellate court:
Page 17 of 160
We find no merit in plaintiffs appeal. It is
undisputed that plaintiff Pioneer had reinsured its
risk of liability under the surety bond in favor of
JDA and subsequently collected the proceeds of
such reinsurance in the sum of P295,000.00.
Defendants' alleged obligation to Pioneer amounts
to P295,000.00, hence, plaintiffs instant action for
the recovery of the amount of P298,666.28 from
defendants will no longer prosper. Plaintiff Pioneer
is not the real party in interest to institute the
instant action as it does not stand to be benefited
or injured by the judgment.
Plaintiff Pioneer's contention that it is representing
the reinsurer to recover the amount from
defendants, hence, it instituted the action is
utterly devoid of merit. Plaintiff did not even
present any evidence that it is the attorney-in-fact
of the reinsurance company, authorized to institute
an action for and in behalf of the latter. To qualify
a person to be a real party in interest in whose
name an action must be prosecuted, he must
appear to be the present real owner of the right
sought to be enforced (Moran, Vol. I, Comments on
the Rules of Court, 1979 ed., p. 155). It has been
held that the real party in interest is the party who
would be benefited or injured by the judgment or
the party entitled to the avails of the suit (Salonga
v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By
real party in interest is meant a present substantial
interest as distinguished from a mere expectancy or
a future, contingent, subordinate or consequential
interest (Garcia v. David, 67 Phil. 27; Oglleaby v.
Springfield Marine Bank, 52 N.E. 2d 1600, 385 III,
414; Flowers v. Germans, 1 NW 2d 424; Weber v.
City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V.
35).
Based on the foregoing premises, plaintiff Pioneer
cannot be considered as the real party in interest
as it has already been paid by the reinsurer the sum
of P295,000.00 — the bulk of defendants' alleged
obligation to Pioneer.
In addition to the said proceeds of the reinsurance
received by plaintiff Pioneer from its reinsurer, the
former was able to foreclose extra-judicially one of
the subject airplanes and its spare engine, realizing
the total amount of P37,050.00 from the sale of the
mortgaged chattels. Adding the sum of P37,050.00,
to the proceeds of the reinsurance amounting to
MAYORDO, M.A
P295,000.00, it is patent that plaintiff has been
overpaid in the amount of P33,383.72 considering
that the total amount it had paid to JDA totals to
only P298,666.28. To allow plaintiff Pioneer to
recover from defendants the amount in excess of
P298,666.28 would be tantamount to unjust
enrichment as it has already been paid by the
reinsurance company of the amount plaintiff has
paid to JDA as surety of defendant Lim vis-a-vis
defendant Lim's liability to JDA. Well settled is the
rule that no person should unjustly enrich himself
at the expense of another (Article 22, New Civil
Code). (Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where
respondent court based its finding that petitioner was paid
by its reinsurer in the aforesaid amount, as this matter has
never been raised by any of the parties herein both in their
answers in the court below and in their respective briefs
with respondent court; (Rollo, p. 11) (2) even assuming
hypothetically that it was paid by its reinsurer, still none of
the respondents had any interest in the matter since the
reinsurance is strictly between the petitioner and the re-
insurer pursuant to section 91 of the Insurance Code; (3)
pursuant to the indemnity agreements, the petitioner is
entitled to recover from respondents Bormaheco and
Maglana; and (4) the principle of unjust enrichment is not
applicable considering that whatever amount he would
recover from the co-indemnitor will be paid to the
reinsurer.
The records belie the petitioner's contention that the issue
on the reinsurance money was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows
that two of the issues threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants
with respect to so much of its obligations to JDA as
has been paid with reinsurance money?
2. If the answer to the preceding question is in the
negative, has Pioneer still any claim against
defendants, considering the amount it has realized
from the sale of the mortgaged properties? (Record
on Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following
findings:
It appearing that Pioneer reinsured its risk of
liability under the surety bond it had executed in
CORPORATION LAW CASES
LLB 3
favor of JDA, collected the proceeds of such
reinsurance in the sum of P295,000, and paid with
the said amount the bulk of its alleged liability to
JDA under the said surety bond, it is plain that on
this score it no longer has any right to collect to the
extent of the said amount.
On the question of why it is Pioneer, instead of the
reinsurance (sic), that is suing defendants for the
amount paid to it by the reinsurers,
notwithstanding that the cause of action pertains to
the latter, Pioneer says: The reinsurers opted
instead that the Pioneer Insurance & Surety
Corporation shall pursue alone the case.. . . .
Pioneer Insurance & Surety Corporation is
representing the reinsurers to recover the amount.'
In other words, insofar as the amount paid to it by
the reinsurers Pioneer is suing defendants as their
attorney-in-fact.
But in the first place, there is not the slightest
indication in the complaint that Pioneer is suing as
attorney-in- fact of the reinsurers for any amount.
Lastly, and most important of all, Pioneer has no
right to institute and maintain in its own name an
action for the benefit of the reinsurers. It is well-
settled that an action brought by an attorney-in-
fact in his own name instead of that of the principal
will not prosper, and this is so even where the name
of the principal is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court
provides that 'Every action must be prosecuted
in the name of the real party in interest.' This
provision is mandatory. The real party in
interest is the party who would be benefitted
or injured by the judgment or is the party
entitled to the avails of the suit.
This Court has held in various cases that an
attorney-in-fact is not a real party in interest,
that there is no law permitting an action to be
brought by an attorney-in-fact. Arroyo v.
Granada and Gentero, 18 Phil. Rep. 484;
Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep.
12; Filipinos Industrial Corporation v. San Diego
G.R. No. L- 22347,1968, 23 SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is
P299,666.29. Since Pioneer has collected
P295,000.00 from the reinsurers, the uninsured
Page 18 of 160
portion of what it paid to JDA is the difference
between the two amounts, or P3,666.28. This is the
amount for which Pioneer may sue defendants,
assuming that the indemnity agreement is still valid
and effective. But since the amount realized from
the sale of the mortgaged chattels are P35,000.00
for one of the airplanes and P2,050.00 for a spare
engine, or a total of P37,050.00, Pioneer is still
overpaid by P33,383.72. Therefore, Pioneer has no
more claim against defendants. (Record on Appeal,
pp. 360-363).
The payment to the petitioner made by the reinsurers was
not disputed in the appellate court. Considering this
admitted payment, the only issue that cropped up was the
effect of payment made by the reinsurers to the petitioner.
Therefore, the petitioner's argument that the respondents
had no interest in the reinsurance contract as this is strictly
between the petitioner as insured and the reinsuring
company pursuant to Section 91 (should be Section 98) of
the Insurance Code has no basis.
In general a reinsurer, on payment of a loss acquires
the same rights by subrogation as are acquired in
similar cases where the original insurer pays a loss
(Universal Ins. Co. v. Old Time Molasses Co. C.C.A.
La., 46 F 2nd 925).
The rules of practice in actions on original
insurance policies are in general applicable to
actions or contracts of reinsurance. (Delaware, Ins.
Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126
GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil
Code, to wit:
Art. 2207. If the plaintiffs property has been
insured, and he has received indemnity from the
insurance company for the injury or loss arising out
of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the
rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount
paid by the insurance company does not fully cover
the injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the person
causing the loss or injury.
Interpreting the aforesaid provision, we ruled in the case of
Phil. Air Lines, Inc. v. Heald Lumber Co. (101 Phil. 1031
[1957]) which we subsequently applied in Manila Mahogany
MAYORDO, M.A
Manufacturing Corporation v. Court of Appeals (154 SCRA
650 [1987]):
Note that if a property is insured and the owner
receives the indemnity from the insurer, it is
provided in said article that the insurer is deemed
subrogated to the rights of the insured against the
wrongdoer and if the amount paid by the insurer
does not fully cover the loss, then the aggrieved
party is the one entitled to recover the deficiency.
Evidently, under this legal provision, the real party
in interest with regard to the portion of the
indemnity paid is the insurer and not the insured.
(Emphasis supplied).
It is clear from the records that Pioneer sued in its own
name and not as an attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a
reversible error in dismissing the petitioner's complaint as
against the respondents for the reason that the petitioner
was not the real party in interest in the complaint and,
therefore, has no cause of action against the respondents.
Nevertheless, the petitioner argues that the appeal as
regards the counter indemnitors should not have been
dismissed on the premise that the evidence on record
shows that it is entitled to recover from the counter
indemnitors. It does not, however, cite any grounds except
its allegation that respondent "Maglanas defense and
evidence are certainly incredible" (p. 12, Rollo) to back up
its contention.
On the other hand, we find the trial court's findings on the
matter replete with evidence to substantiate its finding
that the counter-indemnitors are not liable to the
petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity
agreement ceased to be valid and effective after
the execution of the chattel mortgage.
Testimonies of defendants Francisco Cervantes and
Modesto Cervantes.
Pioneer Insurance, knowing the value of the
aircrafts and the spare parts involved, agreed to
issue the bond provided that the same would be
mortgaged to it, but this was not possible because
the planes were still in Japan and could not be
mortgaged here in the Philippines. As soon as the
CORPORATION LAW CASES
LLB 3
aircrafts were brought to the Philippines, they
would be mortgaged to Pioneer Insurance to cover
the bond, and this indemnity agreement would be
cancelled.
The following is averred under oath by Pioneer in
the original complaint:
The various conflicting claims over the
mortgaged properties have impaired and
rendered insufficient the security under the
chattel mortgage and there is thus no other
sufficient security for the claim sought to be
enforced by this action.
This is judicial admission and aside from the chattel
mortgage there is no other security for the claim
sought to be enforced by this action, which
necessarily means that the indemnity agreement
had ceased to have any force and effect at the time
this action was instituted. Sec 2, Rule 129, Revised
Rules of Court.
Prescinding from the foregoing, Pioneer, having
foreclosed the chattel mortgage on the planes and
spare parts, no longer has any further action
against the defendants as indemnitors to recover
any unpaid balance of the price. The indemnity
agreement was ipso jure extinguished upon the
foreclosure of the chattel mortgage. These
defendants, as indemnitors, would be entitled to be
subrogated to the right of Pioneer should they make
payments to the latter. Articles 2067 and 2080 of
the New Civil Code of the Philippines.
Independently of the preceding proposition
Pioneer's election of the remedy of foreclosure
precludes any further action to recover any unpaid
balance of the price.
SAL or Lim, having failed to pay the second to the
eight and last installments to JDA and Pioneer as
surety having made of the payments to JDA, the
alternative remedies open to Pioneer were as
provided in Article 1484 of the New Civil Code,
known as the Recto Law.
Pioneer exercised the remedy of foreclosure of the
chattel mortgage both by extrajudicial foreclosure
and the instant suit. Such being the case, as
provided by the aforementioned provisions, Pioneer
shall have no further action against the purchaser
Page 19 of 160
to recover any unpaid balance and any agreement
to the contrary is void.' Cruz, et al. v. Filipinas
Investment & Finance Corp. No. L- 24772, May
27,1968, 23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be
escaped from through the contention that Pioneer
is not the vendor but JDA. The reason is that
Pioneer is actually exercising the rights of JDA as
vendor, having subrogated it in such rights. Nor may
the application of the provision be validly opposed
on the ground that these defendants and defendant
Maglana are not the vendee but indemnitors.
Pascual, et al. v. Universal Motors Corporation, G.R.
No. L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim,
thru the change of their maturity dates discharged
these defendants from any liability as alleged
indemnitors. The change of the maturity dates of
the obligations of Lim, or SAL extinguish the
original obligations thru novations thus discharging
the indemnitors.
The principal hereof shall be paid in eight equal
successive three months interval installments,
the first of which shall be due and payable 25
August 1965, the remainder of which ... shall
be due and payable on the 26th day x x x of
each succeeding three months and the last of
which shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced
a memorandum executed by SAL or Lim and JDA,
modifying the maturity dates of the obligations, as
follows:
The principal hereof shall be paid in eight equal
successive three month interval installments
the first of which shall be due and payable 4
September 1965, the remainder of which ...
shall be due and payable on the 4th day ... of
each succeeding months and the last of which
shall be due and payable 4th June 1967.
Not only that, Pioneer also produced eight
purported promissory notes bearing maturity dates
different from that fixed in the aforesaid
memorandum; the due date of the first installment
appears as October 15, 1965, and those of the rest
of the installments, the 15th of each succeeding
MAYORDO, M.A
three months, that of the last installment being
July 15, 1967.
These restructuring of the obligations with regard
to their maturity dates, effected twice, were done
without the knowledge, much less, would have it
believed that these defendants Maglana (sic).
Pioneer's official Numeriano Carbonel would have it
believed that these defendants and defendant
Maglana knew of and consented to the modification
of the obligations. But if that were so, there would
have been the corresponding documents in the form
of a written notice to as well as written conformity
of these defendants, and there are no such
document. The consequence of this was the
extinguishment of the obligations and of the surety
bond secured by the indemnity agreement which
was thereby also extinguished. Applicable by
analogy are the rulings of the Supreme Court in the
case of Kabankalan Sugar Co. v. Pacheco, 55 Phil.
553, 563, and the case of Asiatic Petroleum Co. v.
Hizon David, 45 Phil. 532, 538.
Art. 2079. An extension granted to the debtor
by the creditor without the consent of the
guarantor extinguishes the guaranty The mere
failure on the part of the creditor to demand
payment after the debt has become due does
not of itself constitute any extension time
referred to herein, (New Civil Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp.
562-563, M.F. Stevenson & Co., Ltd., v. Climacom et
al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already
p re s c ri b e d w h e n Pi on e e r p a i d t h e s a m e .
Consequently, Pioneer has no more cause of action
to recover from these defendants, as supposed
indemnitors, what it has paid to JDA. By virtue of
an express stipulation in the surety bond, the
failure of JDA to present its claim to Pioneer within
ten days from default of Lim or SAL on every
installment, released Pioneer from liability from
the claim.
Therefore, Pioneer is not entitled to exact
reimbursement from these defendants thru the
indemnity.
CORPORATION LAW CASES
LLB 3
Art. 1318. Payment by a solidary debtor shall
not entitle him to reimbursement from his co-
debtors if such payment is made after the
obligation has prescribed or became illegal.
These defendants are entitled to recover damages
and attorney's fees from Pioneer and its surety by
reason of the filing of the instant case against them
and the attachment and garnishment of their
properties. The instant action is clearly unfounded
insofar as plaintiff drags these defendants and
defendant Maglana.' (Record on Appeal, pp.
363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these
findings.
Hence, it is our conclusion that the petition in G.R. No.
84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among
co-investors whose agreement was to do business
through the corporate vehicle but who failed to
incorporate the entity in which they had chosen to
invest? How are the losses to be treated in
situations where their contributions to the intended
'corporation' were invested not through the
corporate form? This Petition presents these
fundamental questions which we believe were
resolved erroneously by the Court of Appeals ('CA').
(Rollo, p. 6).
These questions are premised on the petitioner's theory
that as a result of the failure of respondents Bormaheco,
Spouses Cervantes, Constancio Maglana and petitioner Lim
to incorporate, a de facto partnership among them was
created, and that as a consequence of such relationship all
must share in the losses and/or gains of the venture in
proportion to their contribution. The petitioner, therefore,
questions the appellate court's findings ordering him to
reimburse certain amounts given by the respondents to the
petitioner as their contributions to the intended
corporation, to wit:
However, defendant Lim should be held liable to
pay his co-defendants' cross-claims in the total
amount of P184,878.74 as correctly found by the
trial court, with interest from the filing of the
cross-complaints until the amount is fully paid.
Page 20 of 160
Defendant Lim should pay one-half of the said
amount to Bormaheco and the Cervanteses and the
other one-half to defendant Maglana. It is
established in the records that defendant Lim had
duly received the amount of Pl51,000.00 from
defendants Bormaheco and Maglana representing
the latter's participation in the ownership of the
subject airplanes and spare parts (Exhibit 58). In
addition, the cross-party plaintiffs incurred
additional expenses, hence, the total sum of P
184,878.74.
We first state the principles.
While it has been held that as between themselves
the rights of the stockholders in a defectively
incorporated association should be governed by the
supposed charter and the laws of the state relating
thereto and not by the rules governing partners
(Cannon v. Brush Electric Co., 54 A. 121, 96 Md.
446, 94 Am. S.R. 584), it is ordinarily held that
persons who attempt, but fail, to form a
corporation and who carry on business under the
corporate name occupy the position of partners
inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. 615,
Ann. Cas. 1913A 1065). Thus, where persons
associate themselves together under articles to
purchase property to carry on a business, and their
organization is so defective as to come short of
creating a corporation within the statute, they
become in legal effect partners inter se, and their
rights as members of the company to the property
acquired by the company will be recognized (Smith
v. Schoodoc Pond Packing Co., 84 A. 268,109 Me.
555; Whipple v. Parker, 29 Mich. 369). So, where
certain persons associated themselves as a
corporation for the development of land for
irrigation purposes, and each conveyed land to the
corporation, and two of them contracted to pay a
third the difference in the proportionate value of
the land conveyed by him, and no stock was ever
issued in the corporation, it was treated as a
trustee for the associates in an action between
them for an accounting, and its capital stock was
treated as partnership assets, sold, and the
proceeds distributed among them in proportion to
the value of the property contributed by each
(Shorb v. Beaudry, 56 Cal. 446). However, such a
relation does not necessarily exist, for ordinarily
persons cannot be made to assume the relation of
partners, as between themselves, when their
MAYORDO, M.A
purpose is that no partnership shall exist (London
Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S.
461, 472, 29 L.Ed. 688), and it should be implied
only when necessary to do justice between the
parties; thus, one who takes no part except to
subscribe for stock in a proposed corporation which
is never legally formed does not become a partner
with other subscribers who engage in business
under the name of the pretended corporation, so
as to be liable as such in an action for settlement
of the alleged partnership and contribution (Ward
v. Brigham, 127 Mass. 24). A partnership relation
between certain stockholders and other
stockholders, who were also directors, will not be
implied in the absence of an agreement, so as to
make the former liable to contribute for payment
of debts illegally contracted by the latter (Heald v.
Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris
Secundum, Vol. 68, p. 464). (Italics supplied).
In the instant case, it is to be noted that the petitioner was
declared non-suited for his failure to appear during the
pretrial despite notification. In his answer, the petitioner
denied having received any amount from respondents
Bormaheco, the Cervanteses and Maglana. The trial court
and the appellate court, however, found through Exhibit
58, that the petitioner received the amount of P151,000.00
representing the participation of Bormaheco and Atty.
Constancio B. Maglana in the ownership of the subject
airplanes and spare parts. The record shows that defendant
Maglana gave P75,000.00 to petitioner Jacob Lim thru the
Cervanteses.
It is therefore clear that the petitioner never had the
intention to form a corporation with the respondents
despite his representations to them. This gives credence to
the cross-claims of the respondents to the effect that they
were induced and lured by the petitioner to make
contributions to a proposed corporation which was never
formed because the petitioner reneged on their agreement.
Maglana alleged in his cross-claim:
... that sometime in early 1965, Jacob Lim
proposed to Francisco Cervantes and Maglana to
expand his airline business. Lim was to procure two
DC-3's from Japan and secure the necessary
certificates of public convenience and necessity as
well as the required permits for the operation
thereof. Maglana sometime in May 1965, gave
Cervantes his share of P75,000.00 for delivery to
Lim which Cervantes did and Lim acknowledged
CORPORATION LAW CASES
LLB 3
receipt thereof. Cervantes, likewise, delivered his
share of the undertaking. Lim in an undertaking
sometime on or about August 9,1965, promised to
incorporate his airline in accordance with their
agreement and proceeded to acquire the planes on
his own account. Since then up to the filing of this
answer, Lim has refused, failed and still refuses to
set up the corporation or return the money of
Maglana. (Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged
in their answer, counterclaim, cross-claim and third party
complaint:
Sometime in April 1965, defendant Lim lured and
induced the answering defendants to purchase two
airplanes and spare parts from Japan which the latter
considered as their lawful contribution and
participation in the proposed corporation to be known
as SAL. Arrangements and negotiations were
undertaken by defendant Lim. Down payments were
advanced by defendants Bormaheco and the
Cervanteses and Constancio Maglana (Exh. E- 1).
Contrary to the agreement among the defendants,
defendant Lim in connivance with the plaintiff, signed
and executed the alleged chattel mortgage and surety
bond agreement in his personal capacity as the alleged
proprietor of the SAL. The answering defendants
learned for the first time of this trickery and
misrepresentation of the other, Jacob Lim, when the
herein plaintiff chattel mortgage (sic) allegedly
executed by defendant Lim, thereby forcing them to
file an adverse claim in the form of third party claim.
Notwithstanding repeated oral demands made by
defendants Bormaheco and Cervanteses, to defendant
Lim, to surrender the possession of the two planes and
their accessories and or return the amount advanced by
the former amounting to an aggregate sum of P
178,997.14 as evidenced by a statement of accounts,
the latter ignored, omitted and refused to comply with
them. (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the
facts of the case, necessarily, no de facto partnership was
created among the parties which would entitle the
petitioner to a reimbursement of the supposed losses of the
proposed corporation. The record shows that the petitioner
was acting on his own and not in behalf of his other would-
be incorporators in transacting the sale of the airplanes and
spare parts.
Page 21 of 160
WHEREFORE, the instant petitions are DISMISSED. The
questioned decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
FORMATION AND ORGANIZATION OF CORPORATION
G.R. No. 96161 February 21, 1992
PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC.
and PHILIPS INDUSTRIAL DEVELOPMENT,
INC., petitioners, 
 In its Answer, dated 7 March 1985, Private Respondent
vs. COURT OF APPEALS, SECURITIES & EXCHANGE
COMMISSION and STANDARD PHILIPS
CORPORATION, respondents.
MELENCIO-HERRERA, J.:
Petitioners challenge the Decision of the Court of Appeals,
dated 31 July 1990, in CA-GR Sp. No. 20067, upholding the
Order of the Securities and Exchange Commission, dated 2
January 1990, in SEC-AC No. 202, dismissing petitioners'
prayer for the cancellation or removal of the word "PHILIPS"
from private respondent's corporate name.
Petitioner Philips Export B.V. (PEBV), a  foreign corporation
organized under the laws of the Netherlands, although not
engaged in business here,  is the  registered owner of the
trademarks PHILIPS and  PHILIPS SHIELD EMBLEM under
Certificates of Registration Nos. R-1641 and R-1674,
respectively issued by the Philippine Patents Office
(presently known as the Bureau of Patents, Trademarks and
Technology Transfer). Petitioners Philips Electrical Lamps,
Inc. (Philips Electrical, for brevity) and Philips Industrial
Developments, Inc. (Philips Industrial, for short),
authorized users of the trademarks PHILIPS and PHILIPS
SHIELD EMBLEM, were incorporated on 29 August 1956 and
25 May 1956, respectively. All petitioner corporations
belong to the PHILIPS Group of Companies.
Respondent Standard Philips Corporation (Standard Philips),
on the other hand, was issued a Certificate of Registration
by respondent Commission on 19 May 1982.
On 24 September 1984, Petitioners filed a letter complaint
with the Securities & Exchange Commission (SEC) asking for
the cancellation of the word "PHILIPS" from Private
Respondent's corporate name in view of the prior
registration with the Bureau of Patents of the trademark
"PHILIPS" and the logo "PHILIPS SHIELD EMBLEM" in the name
of Petitioner, PEBV, and the previous registration of
Petitioners Philips Electrical and Philips Industrial with the
SEC.
MAYORDO, M.A
As a result of Private Respondent's refusal to amend its
Articles of Incorporation, Petitioners filed with the SEC, on
6 February 1985, a Petition (SEC Case No. 2743) praying for
the issuance of a Writ of Preliminary Injunction, alleging,
among others, that Private Respondent's use of the word
PHILIPS amounts to an infringement and clear violation of
Petitioners' exclusive right to use the same considering that
both parties engage in the same business.
countered that Petitioner PEBV has no legal capacity to
sue; that its use of its corporate name is not at all similar
to Petitioners' trademark PHILIPS when considered in its
entirety; and that its products consisting of chain rollers,
belts, bearings and cutting saw are grossly different from
Petitioners' electrical products.
After conducting hearings with respect to the prayer for
Injunction; the SEC Hearing Officer, on 27 September 1985,
ruled against the issuance of such Writ.
On 30 January 1987, the same Hearing Officer dismissed
the Petition for lack of merit. In so ruling, the latter
declared that inasmuch as the SEC found no sufficient
ground for the granting of injunctive relief on the basis of
the testimonial and documentary evidence presented, it
cannot order the removal or cancellation of the word
"PHILIPS" from Private Respondent's corporate name on the
basis of the same evidence adopted in toto during trial on
the merits. Besides, Section 18 of the Corporation Code
(infra) is applicable only when the corporate names in
question are identical. Here, there is no confusing
similarity between Petitioners' and Private Respondent's
corporate names as those of the Petitioners contain at least
two words different from that of the Respondent.
Petitioners' Motion for Reconsideration was likewise denied
on 17 June 1987.
On appeal, the SEC  en banc  affirmed the dismissal
declaring that the corporate names of Petitioners and
Private Respondent hardly breed confusion inasmuch as
each contains at least two different words and, therefore,
rules out any possibility of confusing one for the other.
On 30 January 1990, Petitioners sought an extension of
time to file a Petition for Review on Certiorari before this
Court, which Petition was later referred to the Court of
Appeals in a Resolution dated 12 February 1990.
In deciding to dismiss the petition on 31 July 1990, the
Court of Appeals1  swept aside Petitioners' claim that
CORPORATION LAW CASES
LLB 3
following the ruling in  Converse Rubber Corporation v.
Universal Converse Rubber Products, Inc., et al, (G. R. No.
L-27906, January 8, 1987, 147 SCRA 154), the word PHILIPS
cannot be used as part of Private Respondent's corporate
name as the same constitutes a dominant part of
Petitioners' corporate names. In so holding, the Appellate
Court observed that the  Converse  case is not four-square
with the present case inasmuch as the contending parties
in  Converse  are engaged in a similar business, that is, the
manufacture of rubber shoes. Upholding the SEC, the
Appellate Court concluded that "private respondents'
products consisting of chain rollers, belts, bearings and
cutting saw are unrelated and non-competing with
petitioners' products  i.e.  electrical lamps such that
consumers would not in any probability mistake one as the
source or origin of the product of the other."
The Appellate Court denied Petitioners' Motion for
Reconsideration on 20 November 1990, hence, this Petition
which was given due course on 22 April 1991, after which
the parties were required to submit their memoranda, the
latest of which was received on 2 July 1991. In December
1991, the SEC was also required to elevate its records for
the perusal of this Court, the same not having been
apparently before respondent Court of Appeals.
We find basis for petitioners' plea.
As early as Western Equipment and Supply Co. v. Reyes, 51
Phil. 115 (1927), the Court declared that a corporation's
right to use its corporate and trade name is a property
right, a right  in rem,  which it may assert and protect
against the world in the same manner as it may protect its
tangible property, real or personal, against trespass or
conversion. It is regarded, to a certain extent, as a
property right and one which cannot be impaired or
defeated by subsequent appropriation by another
corporation in the same field (Red Line Transportation Co.
vs. Rural Transit Co., September 8, 1934, 20 Phil 549).
A name is peculiarly important as necessary to the very
existence of a corporation (American Steel Foundries vs.
Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160; Lauman
vs. Lebanon Valley R. Co., 30 Pa 42; First National Bank vs.
Huntington Distilling Co. 40 W Va 530, 23 SE 792). Its name
is one of its attributes, an element of its existence, and
essential to its identity (6 Fletcher [Perm Ed], pp. 3-4). The
general rule as to corporations is that each corporation
must have a name by which it is to sue and be sued and do
all legal acts. The name of a corporation in this respect
designates the corporation in the same manner as the name
Page 22 of 160
of an individual designates the person (Cincinnati
Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538; Newport
Mechanics Mfg. Co. vs. Starbird. 10 NH 123); and the right
to use its corporate name is as much a part of the
corporate franchise as any other privilege granted (Federal
Secur. Co. vs. Federal Secur.Corp., 129 Or 375, 276 P 1100,
66 ALR 934; Paulino vs. Portuguese Beneficial Association,
18 RI 165, 26 A 36).
A corporation acquires its name by choice and need not
select a name identical with or similar to one already
appropriated by a senior corporation while an individual's
name is thrust upon him (See  Standard Oil Co. of New
Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973,
977). A corporation can no more use a corporate name in
violation of the rights of others than an individual can use
his name legally acquired so as to mislead the public and
injure another (Armington vs. Palmer, 21 RI 109. 42 A 308).
Our own Corporation Code, in its Section 18, expressly
provides that:
No corporate name may be allowed by the
Securities and Exchange Commission if the proposed
name is  identical or deceptively or confusingly
similar to that of any existing corporation or to any
other name already protected by law or is patently
deceptive, confusing or contrary to existing
law.  Where a change in a corporate name is
approved, the commission shall issue an amended
certificate of incorporation under the amended
name. (Emphasis supplied)
The statutory prohibition cannot be any clearer. To come
within its scope, two requisites must be proven, namely:
(1) that the complainant corporation acquired a prior right
over the use of such corporate name; and
(2) the proposed name is either:
(a) identical; or
(b) deceptively or confusingly similar to that of any
existing corporation or to any other name already
protected by law; or
(c) patently deceptive, confusing or contrary to
existing law.
The right to the exclusive use of a corporate name with
freedom from infringement by similarity is determined by
priority of adoption (1 Thompson, p. 80  citing  Munn v.
Americana Co., 82 N. Eq. 63, 88 Atl. 30; San Francisco
MAYORDO, M.A
Oyster House v. Mihich, 75 Wash. 274, 134 Pac. 921). In this
regard, there is no doubt with respect to Petitioners' prior
adoption of' the name ''PHILIPS" as part of its corporate
name. Petitioners Philips Electrical and Philips Industrial
were incorporated on 29 August 1956 and 25 May 1956,
respectively, while Respondent Standard Philips was issued
a Certificate of Registration on 12 April 1982, twenty-six
(26) years later (Rollo, p. 16). Petitioner PEBV has also used
the trademark "PHILIPS" on electrical lamps of all types and
their accessories since 30 September 1922, as evidenced by
Certificate of Registration No. 1651.
The second requisite no less exists in this case. In
determining the existence of confusing similarity in
corporate names, the test is whether the similarity is such
as to mislead a person, using ordinary care and
discrimination. In so doing, the Court must look to the
record as well as the names themselves (Ohio Nat. Life Ins.
Co. v. Ohio Life Ins. Co., 210 NE 2d 298). While the
corporate names of Petitioners and Private Respondent are
not identical, a reading of Petitioner's corporate names, to
wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC.
and PHILIPS INDUSTRIAL DEVELOPMENT, INC., inevitably
leads one to conclude that "PHILIPS" is, indeed, the
dominant word in that all the companies affiliated or
associated with the principal corporation, PEBV, are known
in the Philippines and abroad as the PHILIPS Group of
Companies.
Respondents maintain, however, that Petitioners did not
present an iota of proof of actual confusion or deception of
the public much less a single purchaser of their product
who has been deceived or confused or showed any
likelihood of confusion. It is settled, however, that proof of
actual confusion need not be shown. It suffices that
confusion is probably or likely to occur (6 Fletcher [Perm
Ed], pp. 107-108, enumerating a long line of cases).
It may be that Private Respondent's products also consist of
chain rollers, belts, bearing and the like, while petitioners
deal principally with electrical products. It is significant to
note, however, that even the Director of Patents had
denied Private Respondent's application for registration of
the trademarks "Standard Philips & Device" for chain,
rollers, belts, bearings and cutting saw. That office held
that PEBV, "had shipped to its subsidiaries in the Philippines
equipment, machines and their parts which fall under
international class where "chains, rollers, belts, bearings
and cutting saw," the goods in connection with which
Respondent is seeking to register 'STANDARD PHILIPS' . . .
CORPORATION LAW CASES
LLB 3
also belong" ( Inter Partes Case No. 2010, June 17, 1988,
SEC Rollo).
Furthermore, the records show that among Private
Respondent's primary purposes in its Articles of
Incorporation (Annex D, Petition p. 37,  Rollo) are the
following:
To  buy, sell, barter, trade, manufacture, import,
export, or otherwise acquire, dispose of, and deal
in and deal with any kind  of goods, wares, and
merchandise such as but not limited to plastics,
carbon products, office stationery and supplies,
hardware parts, electrical wiring devices, electrical
component parts, and/or complement of industrial,
agricultural or commercial machineries,
constructive supplies,  electrical supplies  and other
merchandise which are or may become articles of
commerce except food, drugs and cosmetics and to
carry on such business as manufacturer, distributor,
d e a l e r, i n d e n t o r, f a c t o r, m a n u f a c t u r e r ' s
representative capacity for domestic or foreign
companies. (emphasis ours)
For its part, Philips Electrical also includes, among its
primary purposes, the following:
To develop manufacture and deal in electrical
products, including electronic, mechanical and
other similar products . . . (p. 30, Record of SEC
Case No. 2743)
Given Private Respondent's aforesaid underlined primary
purpose, nothing could prevent it from dealing in the same
line of business of electrical devices, products or supplies
which fall under its primary purposes. Besides, there is
showing that Private Respondent not only manufactured
and sold ballasts for fluorescent lamps with their corporate
name printed thereon but also advertised the same as,
among others, Standard Philips (TSN, before the SEC, pp.
14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25,
1985). As aptly pointed out by Petitioners, [p]rivate
respondent's choice of "PHILIPS" as part of its corporate
name [STANDARD PHILIPS CORPORATION] . . . tends to show
said respondent's intention to ride on the popularity and
established goodwill of said petitioner's business throughout
the world" (Rollo, p. 137). The subsequent appropriator of
the name or one confusingly similar thereto usually seeks
an unfair advantage, a free ride of another's goodwill
(American Gold Star Mothers, Inc. v. National Gold Star
Mothers, Inc., et al, 89 App DC 269, 191 F 2d 488).
Page 23 of 160
In allowing Private Respondent the continued use of its
corporate name, the SEC maintains that the corporate
names of Petitioners PHILIPS ELECTRICAL LAMPS. INC. and
PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain at least
two words different from that of the corporate name of
respondent STANDARD PHILIPS CORPORATION, which words
will readily identify Private Respondent from Petitioners
and vice-versa.
True, under the Guidelines in the Approval of Corporate and
Partnership Names formulated by the SEC, the proposed
name "should not be similar to one already used by another
corporation or partnership. If the proposed name contains a
word already used as part of the firm name or style of a
registered company;  the proposed name must contain two
other words different from the company already
registered"  (Emphasis ours). It is then pointed out that
Petitioners Philips Electrical and Philips Industrial have two
words different from that of Private Respondent's name.
What is lost sight of, however, is that PHILIPS is a
trademark or trade name which was registered as far back
as 1922. Petitioners, therefore, have the exclusive right to
its use which must be free from any infringement by
similarity. A corporation has an exclusive right to the use of
its name, which may be protected by injunction upon a
principle similar to that upon which persons are protected
in the use of trademarks and tradenames (18 C.J.S. 574).
Such principle proceeds upon the theory that it is a fraud
on the corporation which has acquired a right to that name
and perhaps carried on its business thereunder, that
another should attempt to use the same name, or the same
name with a slight variation in such a way as to induce
persons to deal with it in the belief that they are dealing
with the corporation which has given a reputation to the
name (6 Fletcher [Perm Ed], pp. 39-40,  citing  Borden Ice
Cream Co. v. Borden's Condensed Milk Co., 210 F 510).
Notably, too, Private Respondent's name actually contains
only a single word, that is, "STANDARD", different from that
of Petitioners inasmuch as the inclusion of the term
"Corporation" or "Corp." merely serves the Purpose of
distinguishing the corporation from partnerships and other
business organizations.
The fact that there are other companies engaged in other
lines of business using the word "PHILIPS" as part of their
corporate names is no defense and does not warrant the
use by Private Respondent of such word which constitutes
an essential feature of Petitioners' corporate name
previously adopted and registered and-having acquired the
MAYORDO, M.A
status of a well-known mark in the Philippines and
internationally as well (Bureau of Patents Decision No.
88-35 [TM], June 17, 1988, SEC Records).
In support of its application for the registration of its
Articles of Incorporation with the SEC, Private Respondent
had submitted an undertaking "manifesting its willingness
to change its corporate name in the event another person,
firm or entity has acquired a prior right to the use of the
said firm name or one deceptively or confusingly similar to
it." Private respondent must now be held to its undertaking.
As a general rule, parties organizing a corporation
must choose a name at their peril; and the use of a
name similar to one adopted by another
corporation, whether a business or a nonbusiness or
non-profit organization if misleading and likely to
injure it in the exercise in its corporate functions,
regardless of intent, may be prevented by the
corporation having the prior right, by a suit for
injunction against the new corporation to prevent
the use of the name (American Gold Star Mothers,
Inc. v. National Gold Star Mothers, Inc., 89 App DC
269, 191 F 2d 488, 27 ALR 2d 948).
WHEREFORE, the Decision of the Court of Appeals dated 31
July 1990, and its Resolution dated 20 November 1990, are
SET ASIDE and a new one entered ENJOINING private
respondent from using "PHILIPS" as a feature of its
corporate name, and ORDERING the Securities and
Exchange Commission to amend private respondent's
Articles of Incorporation by deleting the word PHILIPS from
the corporate name of private respondent.
No costs.
SO ORDERED.
G.R. No. 101897. March 5, 1993.
LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT
OF APPEALS, LYCEUM OF APARRI, LYCEUM OF CABAGAN,
LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF LALLO,
INC., LYCEUM OF TUAO, INC., BUHI LYCEUM, CENTRAL
LYCEUM OF CATANDUANES, LYCEUM OF SOUTHERN
PHILIPPINES, LYCEUM OF EASTERN MINDANAO, INC. and
WESTERN PANGASINAN LYCEUM, INC., respondents.
SYLLABUS
1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION
OF PROPOSED NAME WHICH IS IDENTICAL OR CONFUSINGLY
SIMILAR TO THAT OF ANY EXISTING CORPORATION,
PROHIBITED; CONFUSION AND DECEPTION EFFECTIVELY
PRECLUDED BY THE APPENDING OF GEOGRAPHIC NAMES TO
CORPORATION LAW CASES
LLB 3
THE WORD "LYCEUM". — The Articles of Incorporation of a
corporation must, among other things, set out the name of
the corporation. Section 18 of the Corporation Code
establishes a restrictive rule insofar as corporate names are
concerned: "Section 18. Corporate name. — No corporate
name may be allowed by the Securities an Exchange
Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law
or is patently deceptive, confusing or contrary to existing
laws. When a change in the corporate name is approved,
the Commission shall issue an amended certificate of
incorporation under the amended name." The policy
underlying the prohibition in Section 18 against the
registration of a corporate name which is "identical or
deceptively or confusingly similar" to that of any existing
corporation or which is "patently deceptive" or "patently
confusing" or "contrary to existing laws," is the avoidance of
fraud upon the public which would have occasion to deal
with the entity concerned, the evasion of legal obligations
and duties, and the reduction of difficulties of
administration and supervision over corporations. We do
not consider that the corporate names of private
respondent institutions are "identical with, or deceptively
or confusingly similar" to that of the petitioner institution.
True enough, the corporate names of private respondent
entities all carry the word "Lyceum" but confusion and
deception are effectively precluded by the appending of
geographic names to the word "Lyceum." Thus, we do not
believe that the "Lyceum of Aparri" can be mistaken by the
general public for the Lyceum of the Philippines, or that
the "Lyceum of Camalaniugan" would be confused with the
Lyceum of the Philippines.
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF
WORD "LYCEUM," NOT ATTENDED WITH EXCLUSIVITY. — It is
claimed, however, by petitioner that the word "Lyceum" has
acquired a secondary meaning in relation to petitioner with
the result that word, although originally a generic, has
become appropriable by petitioner to the exclusion of
other institutions like private respondents herein. The
doctrine of secondary meaning originated in the field of
trademark law. Its application has, however, been extended
to corporate names sine the right to use a corporate name
to the exclusion of others is based upon the same principle
which underlies the right to use a particular trademark or
tradename. In Philippine Nut Industry, Inc. v. Standard
Brands, Inc., the doctrine of secondary meaning was
elaborated in the following terms: " . . . a word or phrase
originally incapable of exclusive appropriation with
reference to an article on the market, because
Page 24 of 160
geographically or otherwise descriptive, might nevertheless
have been used so long and so exclusively by one producer
with reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase has
come to mean that the article was his product." The
question which arises, therefore, is whether or not the use
by petitioner of "Lyceum" in its corporate name has been
for such length of time and with such exclusivity as to have
become associated or identified with the petitioner
institution in the mind of the general public (or at least
that portion of the general public which has to do with
schools). The Court of Appeals recognized this issue and
answered it in the negative: "Under the doctrine of
secondary meaning, a word or phrase originally incapable
of exclusive appropriation with reference to an article in
the market, because geographical or otherwise descriptive
might nevertheless have been used so long and so
exclusively by one producer with reference to this article
that, in that trade and to that group of the purchasing
public, the word or phrase has come to mean that the
article was his produce (Ana Ang vs. Toribio Teodoro, 74
Phil. 56). This circumstance has been referred to as the
distinctiveness into which the name or phrase has evolved
through the substantial and exclusive use of the same for a
considerable period of time. . . . No evidence was ever
presented in the hearing before the Commission which
sufficiently proved that the word 'Lyceum' has indeed
acquired secondary meaning in favor of the appellant. If
there was any of this kind, the same tend to prove only
that the appellant had been using the disputed word for a
long period of time. . . . In other words, while the
appellant may have proved that it had been using the word
'Lyceum' for a long period of time, this fact alone did not
amount to mean that the said word had acquired secondary
meaning in its favor because the appellant failed to prove
that it had been using the same word all by itself to the
exclusion of others. More so, there was no evidence
presented to prove that confusion will surely arise if the
same word were to be used by other educational
institutions. Consequently, the allegations of the appellant
in its first two assigned errors must necessarily fail." We
agree with the Court of Appeals. The number alone of the
private respondents in the case at bar suggests strongly
that petitioner's use of the word "Lyceum" has not been
attended with the exclusivity essential for applicability of
the doctrine of secondary meaning. Petitioner's use of the
word "Lyceum" was not exclusive but was in truth shared
with the Western Pangasinan Lyceum and a little later with
other private respondent institutions which registered with
the SEC using "Lyceum" as part of their corporation names.
There may well be other schools using Lyceum or Liceo in
MAYORDO, M.A
their names, but not registered with the SEC because they
have not adopted the corporate form of organization.
3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO
DETERMINE WHETHER THEY ARE CONFUSINGLY OR
DECEPTIVELY SIMILAR TO ANOTHER CORPORATE ENTITY'S
NAME. — petitioner institution is not entitled to a legally
enforceable exclusive right to use the word "Lyceum" in its
corporate name and that other institutions may use
"Lyceum" as part of their corporate names. To determine
whether a given corporate name is "identical" or
"confusingly or deceptively similar" with another entity's
corporate name, it is not enough to ascertain the presence
of "Lyceum" or "Liceo" in both names. One must evaluate
corporate names in their entirety and when the name of
petitioner is juxtaposed with the names of private
respondents, they are not reasonably regarded as
"identical" or "confusingly or deceptively similar" with each
other.
DECISION
FELICIANO, J p:
Petitioner is an educational institution duly registered with
the Securities and Exchange Commission ("SEC"). When it
first registered with the SEC on 21 September 1950, it used
the corporate name Lyceum of the Philippines, Inc. and has
used that name ever since.
On 24 February 1984, petitioner instituted proceedings
before the SEC to compel the private respondents, which
are also educational institutions, to delete the word
"Lyceum" from their corporate names and permanently to
enjoin them from using "Lyceum" as part of their respective
names.
Some of the private respondents actively participated in
the proceedings before the SEC. These are the following,
the dates of their original SEC registration being set out
below opposite their respective names:
Western Pangasinan Lyceum — 27 October 1950
Lyceum of Cabagan — 31 October 1962
Lyceum of Lallo, Inc. — 26 March 1972
Lyceum of Aparri — 28 March 1972
Lyceum of Tuao, Inc. — 28 March 1972
Lyceum of Camalaniugan — 28 March 1972
The following private respondents were declared in default
for failure to file an answer despite service of summons:
Buhi Lyceum;
CORPORATION LAW CASES
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Central Lyceum of Catanduanes;
Lyceum of Eastern Mindanao, Inc.; and
Lyceum of Southern Philippines
Petitioner's original complaint before the SEC had included
three (3) other entities:
1. The Lyceum of Malacanay;
2. The Lyceum of Marbel; and
3. The Lyceum of Araullo
The complaint was later withdrawn insofar as concerned
the Lyceum of Malacanay and the Lyceum of Marbel, for
failure to serve summons upon these two (2) entities. The
case against the Liceum of Araullo was dismissed when that
school motu proprio change its corporate name to
"Pamantasan ng Araullo."
The background of the case at bar needs some recounting.
Petitioner had sometime before commenced in the SEC a
proceeding (SEC-Case No. 1241) against the Lyceum of
Baguio, Inc. to require it to change its corporate name and
to adopt another name not "similar [to] or identical" with
that of petitioner. In an Order dated 20 April 1977,
Associate Commissioner Julio Sulit held that the corporate
name of petitioner and that of the Lyceum of Baguio, Inc.
were substantially identical because of the presence of a
"dominant" word, i.e., "Lyceum," the name of the
geographical location of the campus being the only word
which distinguished one from the other corporate name.
The SEC also noted that petitioner had registered as a
corporation ahead of the Lyceum of Baguio, Inc. in point of
time, 1 and ordered the latter to change its name to
another name "not similar or identical [with]" the names of
previously registered entities.
The Lyceum of Baguio, Inc. assailed the Order of the SEC
before the Supreme Court in a case docketed as G.R. No.
L-46595. In a Minute Resolution dated 14 September 1977,
the Court denied the Petition for Review for lack of merit.
Entry of judgment in that case was made on 21 October
1977. 2
Armed with the Resolution of this Court in G.R. No.
L-46595, petitioner then wrote all the educational
institutions it could find using the word "Lyceum" as part of
their corporate name, and advised them to discontinue
such use of "Lyceum." When, with the passage of time, it
became clear that this recourse had failed, petitioner
instituted before the SEC SEC-Case No. 2579 to enforce
what petitioner claims as its proprietary right to the word
"Lyceum." The SEC hearing officer rendered a decision
sustaining petitioner's claim to an exclusive right to use the
word "Lyceum." The hearing officer relied upon the SEC
Page 25 of 160
ruling in the Lyceum of Baguio, Inc. case (SEC-Case No.
1241) and held that the word "Lyceum" was capable of
appropriation and that petitioner had acquired an
enforceable exclusive right to the use of that word.
On appeal, however, by private respondents to the SEC En
Banc, the decision of the hearing officer was reversed and
set aside. The SEC En Banc did not consider the word
"Lyceum" to have become so identified with petitioner as to
render use thereof by other institutions as productive of
confusion about the identity of the schools concerned in
the mind of the general public. Unlike its hearing officer,
the SEC En Banc held that the attaching of geographical
names to the word "Lyceum" served sufficiently to
distinguish the schools from one another, especially in view
of the fact that the campuses of petitioner and those of the
private respondents were physically quite remote from
each other. 3
Petitioner then went on appeal to the Court of Appeals. In
its Decision dated 28 June 1991, however, the Court of
Appeals affirmed the questioned Orders of the SEC En Banc.
4 Petitioner filed a motion for reconsideration, without
success.
Before this Court, petitioner asserts that the Court of
Appeals committed the following errors:
1. The Court of Appeals erred in holding that the Resolution
of the Supreme Court in G.R. No. L-46595 did not
constitute stare decisis as to apply to this case and in not
h o l d i n g t h a t s a i d Re s o l u t i o n b o u n d s u b s e q u e n t
determinations on the right to exclusive use of the word
Lyceum.
2. The Court of Appeals erred in holding that respondent
Western Pangasinan Lyceum, Inc. was incorporated earlier
than petitioner.
3. The Court of Appeals erred in holding that the word
Lyceum has not acquired a secondary meaning in favor of
petitioner.
4. The Court of Appeals erred in holding that Lyceum as a
generic word cannot be appropriated by the petitioner to
the exclusion of others. 5
We will consider all the foregoing ascribed errors, though
not necessarily seriatim. We begin by noting that the
Resolution of the Court in G.R. No. L-46595 does not, of
course, constitute res adjudicata in respect of the case at
bar, since there is no identity of parties. Neither is stare
decisis pertinent, if only because the SEC En Banc itself has
MAYORDO, M.A
re-examined Associate Commissioner Sulit's ruling in the
Lyceum of Baguio case. The Minute Resolution of the Court
in G.R. No. L-46595 was not a reasoned adoption of the
Sulit ruling.
The Articles of Incorporation of a corporation must, among
other things, set out the name of the corporation. 6 Section
18 of the Corporation Code establishes a restrictive rule
insofar as corporate names are concerned:
"SECTION 18.Corporate name. — No corporate name may be
allowed by the Securities an Exchange Commission if the
proposed name is identical or deceptively or confusingly
similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive,
confusing or contrary to existing laws. When a change in
the corporate name is approved, the Commission shall issue
an amended certificate of incorporation under the
amended name." (Emphasis supplied)
The policy underlying the prohibition in Section 18 against
the registration of a corporate name which is "identical or
deceptively or confusingly similar" to that of any existing
corporation or which is "patently deceptive" or "patently
confusing" or "contrary to existing laws," is the avoidance of
fraud upon the public which would have occasion to deal
with the entity concerned, the evasion of legal obligations
and duties, and the reduction of difficulties of
administration and supervision over corporations. 7
We do not consider that the corporate names of private
respondent institutions are "identical with, or deceptively
or confusingly similar" to that of the petitioner institution.
True enough, the corporate names of private respondent
entities all carry the word "Lyceum" but confusion and
deception are effectively precluded by the appending of
geographic names to the word "Lyceum." Thus, we do not
believe that the "Lyceum of Aparri" can be mistaken by the
general public for the Lyceum of the Philippines, or that
the "Lyceum of Camalaniugan" would be confused with the
Lyceum of the Philippines.
Etymologically, the word "Lyceum" is the Latin word for the
Greek lykeion which in turn referred to a locality on the
river Ilissius in ancient Athens "comprising an enclosure
dedicated to Apollo and adorned with fountains and
buildings erected by Pisistratus, Pericles and Lycurgus
frequented by the youth for exercise and by the
philosopher Aristotle and his followers for teaching." 8 In
time, the word "Lyceum" became associated with schools
and other institutions providing public lectures and
CORPORATION LAW CASES
LLB 3
concerts and public discussions. Thus today, the word
"Lyceum" generally refers to a school or an institution of
learning. While the Latin word "lyceum" has been
incorporated into the English language, the word is also
found in Spanish (liceo) and in French (lycee). As the Court
of Appeals noted in its Decision, Roman Catholic schools
frequently use the term; e.g., "Liceo de Manila," "Liceo de
Baleno" (in Baleno, Masbate), "Liceo de Masbate," "Liceo de
Albay." 9 "Lyceum" is in fact as generic in character as the
word "university." In the name of the petitioner, "Lyceum"
appears to be a substitute for "university;" in other places,
however, "Lyceum," or "Liceo" or "Lycee" frequently denotes
a secondary school or a college. It may be (though this is a
question of fact which we need not resolve) that the use of
the word "Lyceum" may not yet be as widespread as the use
of "university," but it is clear that a not inconsiderable
number of educational institutions have adopted "Lyceum"
or "Liceo" as part of their corporate names. Since "Lyceum"
or "Liceo" denotes a school or institution of learning, it is
not unnatural to use this word to designate an entity which
is organized and operating as an educational institution.
It is claimed, however, by petitioner that the word
"Lyceum" has acquired a secondary meaning in relation to
petitioner with the result that that word, although
originally a generic, has become appropriable by petitioner
to the exclusion of other institutions like private
respondents herein.
The doctrine of secondary meaning originated in the field
of trademark law. Its application has, however, been
extended to corporate names sine the right to use a
corporate name to the exclusion of others is based upon
the same principle which underlies the right to use a
particular trademark or tradename. 10 In Philippine Nut
Industry, Inc. v. Standard Brands, Inc., 11 the doctrine of
secondary meaning was elaborated in the following terms:
" . . . a word or phrase originally incapable of exclusive
appropriation with reference to an article on the market,
because geographically or otherwise descriptive, might
nevertheless have been used so long and so exclusively by
one producer with reference to his article that, in that
trade and to that branch of the purchasing public, the word
or phrase has come to mean that the article was his
product." 12
The question which arises, therefore, is whether or not the
use by petitioner of "Lyceum" in its corporate name has
been for such length of time and with such exclusivity as to
have become associated or identified with the petitioner
Page 26 of 160
institution in the mind of the general public (or at least
that portion of the general public which has to do with
schools). The Court of Appeals recognized this issue and
answered it in the negative:
"Under the doctrine of secondary meaning, a word or
phrase originally incapable of exclusive appropriation with
reference to an article in the market, because geographical
or otherwise descriptive might nevertheless have been used
so long and so exclusively by one producer with reference
to this article that, in that trade and to that group of the
purchasing public, the word or phrase has come to mean
that the article was his produce (Ana Ang vs. Toribio
Teodoro, 74 Phil. 56). This circumstance has been referred
to as the distinctiveness into which the name or phrase has
evolved through the substantial and exclusive use of the
same for a considerable period of time. Consequently, the
same doctrine or principle cannot be made to apply where
the evidence did not prove that the business (of the
plaintiff) has continued for so long a time that it has
become of consequence and acquired a good will of
considerable value such that its articles and produce have
acquired a well-known reputation, and confusion will result
by the use of the disputed name (by the defendant) (Ang Si
Heng vs. Wellington Department Store, Inc., 92 Phil. 448).
With the foregoing as a yardstick, [we] believe the
appellant failed to satisfy the aforementioned requisites.
No evidence was ever presented in the hearing before the
Commission which sufficiently proved that the word
'Lyceum' has indeed acquired secondary meaning in favor of
the appellant. If there was any of this kind, the same tend
to prove only that the appellant had been using the
disputed word for a long period of time. Nevertheless, its
(appellant) exclusive use of the word (Lyceum) was never
established or proven as in fact the evidence tend to
convey that the cross-claimant was already using the word
'Lyceum' seventeen (17) years prior to the date the
appellant started using the same word in its corporate
name. Furthermore, educational institutions of the Roman
Catholic Church had been using the same or similar word
like 'Liceo de Manila,' 'Liceo de Baleno' (in Baleno,
Masbate), 'Liceo de Masbate,' 'Liceo de Albay' long before
appellant started using the word 'Lyceum'. The appellant
also failed to prove that the word 'Lyceum' has become so
identified with its educational institution that confusion
will surely arise in the minds of the public if the same word
were to be used by other educational institutions.
In other words, while the appellant may have proved that it
had been using the word 'Lyceum' for a long period of time,
MAYORDO, M.A
this fact alone did not amount to mean that the said word
had acquired secondary meaning in its favor because the
appellant failed to prove that it had been using the same
word all by itself to the exclusion of others. More so, there
was no evidence presented to prove that confusion will
surely arise if the same word were to be used by other
educational institutions. Consequently, the allegations of
the appellant in its first two assigned errors must
necessarily fail." 13 (Underscoring partly in the original and
partly supplied)
We agree with the Court of Appeals. The number alone of
the private respondents in the case at bar suggests strongly
that petitioner's use of the word "Lyceum" has not been
attended with the exclusivity essential for applicability of
the doctrine of secondary meaning. It may be noted also
that at least one of the private respondents, i.e., the
Western Pangasinan Lyceum, Inc., used the term "Lyceum"
seventeen (17) years before the petitioner registered its
own corporate name with the SEC and began using the word
"Lyceum." It follows that if any institution had acquired an
exclusive right to the word "Lyceum," that institution would
have been the Western Pangasinan Lyceum, Inc. rather than
the petitioner institution.
In this connection, petitioner argues that because the
Western Pangasinan Lyceum, Inc. failed to reconstruct its
records before the SEC in accordance with the provisions of
R.A. No. 62, which records had been destroyed during
World War II, Western Pangasinan Lyceum should be
deemed to have lost all rights it may have acquired by
virtue of its past registration. It might be noted that the
Western Pangasinan Lyceum, Inc. registered with the SEC
soon after petitioner had filed its own registration on 21
September 1950. Whether or not Western Pangasinan
Lyceum, Inc. must be deemed to have lost its rights under
its original 1933 registration, appears to us to be quite
secondary in importance; we refer to this earlier
registration simply to underscore the fact that petitioner's
use of the word "Lyceum" was neither the first use of that
term in the Philippines nor an exclusive use thereof.
Petitioner's use of the word "Lyceum" was not exclusive but
was in truth shared with the Western Pangasinan Lyceum
and a little later with other private respondent institutions
which registered with the SEC using "Lyceum" as part of
their corporation names. There may well be other schools
using Lyceum or Liceo in their names, but not registered
with the SEC because they have not adopted the corporate
form of organization.
CORPORATION LAW CASES
LLB 3
We conclude and so hold that petitioner institution is not
entitled to a legally enforceable exclusive right to use the
word "Lyceum" in its corporate name and that other
institutions may use "Lyceum" as part of their corporate
names. To determine whether a given corporate name is
"identical" or "confusingly or deceptively similar" with
another entity's corporate name, it is not enough to
ascertain the presence of "Lyceum" or "Liceo" in both
names. One must evaluate corporate names in their
entirety and when the name of petitioner is juxtaposed
with the names of private respondents, they are not
reasonably regarded as "identical" or "confusingly or
deceptively similar" with each other.
WHEREFORE, the petitioner having failed to show any
reversible error on the part of the public respondent Court
of Appeals, the Petition for Review is DENIED for lack of
merit, and the Decision of the Court of Appeals dated 28
June 1991 is hereby AFFIRMED. No pronouncement as to
costs.
SO ORDERED.
G.R. No. 129552               June 29, 2005
P.C. JAVIER & SONS, INC., SPS. PABLO C. JAVIER, SR. and
ROSALINA F. JAVIER, petitioners,  vs. HON. COURT OF
APPEALS, PAIC SAVINGS & MORTGAGE BANK, INC.,
SHERIFFS GRACE BELVIS, SOFRONIO VILLARIN, PIO
MARTINEZ and NICANOR BLANCO, respondents.
DECISION
CHICO-NAZARIO, J.:
Before Us is an appeal by  certiorari  under Rule 45 of the
Rules of Court which seeks to set aside the decision1 of the
Court of Appeals dated 31 January 1997 which affirmed  in
toto  the decision of Branch 62 of the Regional Trial Court
(RTC) of Makati City, dismissing the complaint for
Annulment of Mortgage and Foreclosure with Preliminary
Injunction, Prohibition and Damages filed by petitioners,
and its Resolution2 dated 20 June 1997 denying petitioners’
motion for reconsideration.
A complaint3  for Annulment of Mortgage and Foreclosure
with Preliminary Injunction, Prohibition and Damages was
filed by petitioners P.C. Javier & Sons, Inc. and spouses
Pablo C. Javier, Sr. and Rosalina F. Javier against PAIC
Savings & Mortgage Bank, Inc., Grace S. Belvis, Acting
Ex  Officio  Regional Sheriff of Pasig, Metro Manila and
Sofronio M. Villarin, Deputy Sheriff-in-Charge, before
Branch 62 of the RTC of Makati City, on 07 May 1984. The
case was docketed as Civil Case No. 7184.
Page 27 of 160
On 10 May 1984, a Supplemental Complaint4  was filed to
include additional defendants, namely: Pio Martinez, Acting
Ex  Officio  Regional Sheriff of Antipolo, Rizal, and Nicanor
D. Blanco, Deputy Sheriff-in-Charge.
The facts that gave rise to the aforesaid complaint, as
found by Branch 62 of the RTC of Makati City, and adopted
by the respondent court, are as follows:
In February, 1981, Plaintiff P.C. Javier and Sons Services,
Inc., Plaintiff Corporation, for short, applied with First
Summa Savings and Mortgage Bank, later on renamed as
PAIC Savings and Mortgage Bank, Defendant Bank, for short,
for a loan accommodation under the Industrial Guarantee
Loan Fund (IGLF) for ₱1.5 Million. On March 21, 1981,
Plaintiff Corporation through Plaintiff Pablo C. Javier,
Plaintiff Javier for short, was advised that its loan
application was approved and that the same shall be
forwarded to the Central Bank (CB) for processing and
release (Exhibit A also Exhibit 8).
The CB released the loan to Defendant Bank in two (2)
tranches of ₱750,000 each. The first tranche was released
to the Plaintiff Corporation on May 18, 1981 in the amount
of ₱750,000.00 and the second tranche was released to
Plaintiff Corporation on November 21, 1981 in the amount
of ₱750,000.00. From the second tranche release, the
amount of ₱250,000.00 was deducted and deposited in the
name of Plaintiff Corporation under a time deposit.
Plaintiffs claim that the loan releases were delayed; that
the amount of ₱250,000.00 was deducted from the IGLF
loan of ₱1.5 Million and placed under time deposit; that
Plaintiffs were never allowed to withdraw the proceeds of
the time deposit because Defendant Bank intended this
time deposit as automatic payments on the accrued
principal and interest due on the loan. Defendant Bank,
however, claims that only the final proceeds of the loan in
the amount of ₱750,000.00 was delayed the same having
been released to Plaintiff Corporation only on November
20, 1981, but this was because of the shortfall in the
collateral cover of Plaintiff’s loan; that this second tranche
of the loan was precisely released after a firm commitment
was made by Plaintiff Corporation to cover the collateral
deficiency through the opening of a time deposit using a
portion of the loan proceeds in the amount of ₱250,000.00
for the purpose; that in compliance with their commitment
to submit additional security and open time deposit,
Plaintiff Javier in fact opened a time deposit for
₱250,000.00 and on February 15, 1983, executed a chattel
MAYORDO, M.A
mortgage over some machineries in favor of Defendant
Bank; that thereafter, Plaintiff Corporation defaulted in the
payment of its IGLF loan with Defendant Bank hence
Defendant Bank sent a demand letter dated November 22,
1983, reminding Plaintiff Javier to make payments because
their accounts have been long overdue; that on May 2,
1984, Defendant Bank sent another demand letter to
Plaintiff spouses informing them that since they have
defaulted in paying their obligation, their mortgage will
now be foreclosed; that when Plaintiffs still failed to pay,
Defendant Bank initiated extrajudicial foreclosure of the
real estate mortgage executed by Plaintiff spouses and
accordingly the auction sale of the property covered by TCT
No. 473216 was scheduled by the Ex–Officio Sheriff on May
9, 1984.5
The instant complaint was filed to forestall the
extrajudicial foreclosure sale of a piece of land covered by
Transfer Certificate of Title (TCT) No. 4732166  mortgaged
by petitioner corporation in favor of First Summa Savings
and Mortgage Bank which bank was later renamed as PAIC
Savings and Mortgage Bank, Inc.7  It likewise asked for the
nullification of the Real Estate Mortgages it entered into
with First Summa Savings and Mortgage Bank. The
supplemental complaint added several defendants who
scheduled for public auction other real estate properties
contained in the same real estate mortgages and covered
by TCTs No. N-5510, No. 426872, No. 506346 and Original
Certificate of Title No. 10146.8
Several extrajudicial foreclosures of the mortgaged
properties were scheduled but were temporarily restrained
by the RTC notwithstanding the denial9  of petitioners’
prayer for a writ of preliminary injunction. In an
Order10  dated 10 December 1990, the RTC ordered
respondents-sheriffs to maintain the  status quo  and to
desist from further proceeding with the extrajudicial
foreclosure of the mortgaged properties.
Among the issues raised by petitioners at the RTC are
whether or not First Summa Savings and Mortgage Bank and
PAIC Savings and Mortgage Bank, Inc. are one and the same
entity, and whether or not their obligation is already due
and demandable at the time respondent bank commenced
to extrajudicially foreclose petitioners’ properties in April
1984.
The RTC declared that First Summa Savings and Mortgage
Bank and PAIC Savings and Mortgage Bank, Inc. are one and
the same entity and that petitioner corporation is liable to
respondent bank for the unpaid balance of its Industrial
CORPORATION LAW CASES
LLB 3
Guarantee Loan Fund (IGLF) loans. The RTC further ruled
that respondent bank was justified in extrajudicially
foreclosing the real estate mortgages executed by
petitioner corporation in its favor because the loans were
already due and demandable when it commenced
foreclosure proceedings in April 1984.
In its decision dated 06 July 1993, the RTC disposed of the
case as follows:
Premises considered, judgment is hereby rendered
dismissing the Complaint against Defendant Bank and
ordering Plaintiffs to pay Defendant Bank jointly and
severally, the following:
1. The principal amount of P700,453.45 under
P.N. No. 713 plus all the accrued interests,
liquidated damages and other fees due thereon
from March 18, 1983 until fully paid as provided
in said PN;
2. The principal amount of P749,879.38 under
P.N. No. 841 plus all the accrued interests,
liquidated damages and other fees due thereon
from September 1, 1982 until fully paid as
provided in such PN;
3. The amount of P40,000.00 as actual damages;
4. The amount of P30,000.00 as exemplary
damages;
5. The amount of P50,000.00 as attorney’s fees;
plus
6. Cost of suit.11
Petitioners filed a Motion for Reconsideration12  which was
opposed13  by respondent bank. The motion was denied in
an Order dated 11 May 1994.
Petitioners appealed the decision to the Court of Appeals.
The latter affirmed in toto the decision of the lower court.
It also denied petitioners’ motion for reconsideration.
Hence, this appeal by certiorari.
Petitioners assigned the following as errors:
a. PUBLIC RESPONDENT COURT GRAVELY ERRED WHEN IT
SUSTAINED THE DISMISSAL OF PETITIONERS’ COMPLAINT AND
IN AFFIRMING THE RIGHT OF THE RESPONDENT BANK TO
COLLECT THE IGLF LOANS IN LIEU OF FIRST SUMMA SAVINGS
AND MORTGAGE BANK WHICH ORIGINALLY GRANTED SAID
LOANS.
Page 28 of 160
COROLLARY TO THE ABOVE ARGUMENT, THE PUBLIC
RESPONDENT COURT ALSO GRAVELY ERRED WHEN IT RULED
THAT THE PETITIONERS CANNOT WITHHOLD THEIR PAYMENT
TO THE RESPONDENT BANK NOTWITHSTANDING THE
ADMITTED INABILITY OF THE RESPONDENT BANK TO FURNISH
THE PETITIONERS THE SAID REQUESTED DOCUMENTS.
b. PUBLIC RESPONDENT COURT GRAVELY ERRED WHEN IT
SUSTAINED THE COLLECTION OF THE ENTIRE PROCEEDS OF
THE IGLF LOANS OF P1,500,000.00 DESPITE THE FACT THAT
THE P250,000.00 OF THIS LOAN WAS WITHHELD BY THE
FIRST SUMMA SAVINGS AND MORTGAGE BANK TO BECOME
PART OF THE COLLATERALS TO THE SAID P1,500,000.00
LOAN.
c. PUBLIC RESPONDENT COURT GRAVELY ERRED WHEN IT
SUSTAINED THE DAMAGES AWARDED TO THE RESPONDENT
BANK DESPITE THE ABSENCE OF MALICE OR BAD FAITH ON
THE PART OF THE PETITIONERS IN FILING THIS CASE
AGAINST THE RESPONDENT BANK.
On the first assigned error, petitioners argue that they are
legally justified to withhold their amortized payments to
the respondent bank until such time they would have been
properly notified of the change in the corporate name of
First Summa Savings and Mortgage Bank. They claim that
they have never received any formal notice of the alleged
change of corporate name of First Summa Savings and
Mortgage Bank to PAIC Savings & Mortgage Bank, Inc. They
further claim that the only and first time they received
formal evidence of a change in the corporate name of First
Summa Savings and Mortgage Bank surfaced when
respondent bank presented its witness, Michael Caguioa, on
03 April 1990, where he presented the Securities and
Exchange Commission (SEC) Certificate of Filing of the
Amended Articles of Incorporation of First Summa Savings
and Mortgage Bank,14  the Central Bank (CB) Certificate of
Authority15 to change the name of First Summa Savings and
Mortgage Bank to PAIC Savings and Mortgage Bank, Inc., and
the CB Circular Letter16 dated 27 June 1983.
Their argument does not hold water. Their defense that
they should first be formally notified of the change of
corporate name of First Summa Savings and Mortgage Bank
to PAIC Savings and Mortgage Bank, Inc., before they will
continue paying their loan obligations to respondent bank
presupposes that there exists a requirement under a law or
regulation ordering a bank that changes its corporate name
to formally notify all its debtors. After going over the
Corporation Code and Banking Laws, as well as the
regulations and circulars of both the SEC and the Bangko
Sentral ng Pilipinas (BSP), we find that there is no such
MAYORDO, M.A
requirement. This being the case, this Court cannot impose
on a bank that changes its corporate name to notify a
debtor of such change absent any law, circular or regulation
requiring it. Such act would be judicial legislation. The
formal notification is, therefore, discretionary on the bank.
Unless there is a law, regulation or circular from the SEC or
BSP requiring the formal notification of all debtors of banks
of any change in corporate name, such notification remains
to be a mere internal policy that banks may or may not
adopt.
In the case at bar, though there was no evidence showing
that petitioners were furnished copies of official documents
showing the First Summa Savings and Mortgage Bank’s
change of corporate name to PAIC Savings and Mortgage
Bank, Inc., evidence abound that they had notice or
knowledge thereof. Several documents establish this fact.
First, letter17  dated 16 July 1983 signed by Raymundo V.
Blanco, Accountant of petitioner corporation, addressed to
PAIC Savings and Mortgage Bank, Inc. Part of said letter
reads: "In connection with your inquiry as to the utilization
of funds we obtained from the former First Summa Savings
and Mortgage Bank, . . ." Second, Board Resolution18  of
petitioner corporation signed by Pablo C. Javier, Sr. on 24
August 1983 authorizing him to execute a Chattel Mortgage
over certain machinery in favor of PAIC Savings and
Mortgage Bank, Inc. Third, Secretary’s Certificate19  signed
by Fortunato E. Gabriel, Corporate Secretary of petitioner
corporation, on 01 September 1983, certifying that a board
resolution was passed authorizing Mr. Pablo C. Javier, Sr. to
execute a chattel mortgage on the corporation’s equipment
that will serve as collateral to cover the IGLF loan with
PAIC Savings and Mortgage Bank, Inc. Fourth, undated
letter20 signed by Pablo C. Javier, Sr. and addressed to PAIC
Savings and Mortgage Bank, Inc., authorizing Mr. Victor F.
Javier, General Manager of petitioner corporation, to
secure from PAIC Savings and Mortgage Bank, Inc. certain
documents for his signature.
From the foregoing documents, it cannot be denied that
petitioner corporation was aware of First Summa Savings
and Mortgage Bank’s change of corporate name to PAIC
Savings and Mortgage Bank, Inc. Knowing fully well of such
change, petitioner corporation has no valid reason not to
pay because the IGLF loans were applied with and obtained
from First Summa Savings and Mortgage Bank. First Summa
Savings and Mortgage Bank and PAIC Savings and Mortgage
Bank, Inc., are one and the same bank to which petitioner
corporation is indebted. A change in the corporate name
does not make a new corporation, whether effected by a
special act or under a general law. It has no effect on the
CORPORATION LAW CASES
LLB 3
identity of the corporation, or on its property, rights, or
liabilities.21 The corporation, upon such change in its name,
is in no sense a new corporation, nor the successor of the
original corporation. It is the same corporation with a
different name, and its character is in no respect changed.
22
Anent the second assigned error, this Court rules that
respondent court did not err when it sustained the
collection of the entire proceeds of the IGLF loans
amounting to P1,500,000.00 despite the withholding of
P250,000.00 to become part of the collaterals to the said
P1,500,000.00 IGLF loan.
Petitioners contend that the collaterals they submitted
were more than sufficient to cover the P1,500,000.00 IGLF
loan. Such contention is untenable. Petitioner corporation
was required to place P250,000.00 in a time deposit with
respondent bank for the simple reason that the collateral it
put up was insufficient to cover the IGLF loans it has
received. It admitted the shortfall of its collateral when it
authorized petitioner Pablo C. Javier, Sr.,  via  a board
resolution,23  to execute a chattel mortgage over certain
machinery in favor of PAIC Savings and Mortgage Bank, Inc.
which was certified by its corporate secretary.24  If the
collateral it put up was sufficient, why then did it execute
another chattel mortgage?
In his order dated 07 September 1984, Hon. Rafael T.
Mendoza found that the loanable value of the lands,
buildings, machinery and equipment amounted only to
P934,000.00. The order reads in part:
The terms and conditions of the IGLF loan extended to
plaintiff corporation are governed by the loan and security
documents evidencing said loan. Although the loan
agreement was approved by the defendant bank, the same
has to be processed and be finally approved by the Central
Bank of the Philippines, in pursuance to the IGLF program,
of which the defendant bank is an accredited participant.
The defendant had to await Central Bank’s advise (sic)
regarding the final approval of the loan before the release
of the proceeds thereof. The proceeds of the loan was
released to the plaintiff on 6 April and November 20, 1981,
and the final proceeds was released only on November 20,
1981, on account of short fall in the collateral covered by
the lands and buildings as well as the machineries and
equipment then subject of the existing mortgages in favor
of the defendant bank, having only a loanable value of
P934,000.00, and only after a firm commitment made by
plaintiff corporation to the defendant bank to correct the
collateral deficiency thru the execution of a chattel
Page 29 of 160
mortgage on additional machineries, equipment and tools
and thru the opening of a time deposit with PAIC Bank using
a portion of the loan proceeds in the amount of
P250,000.00 to answer for its obligation to the defendant
bank under the IGLF loan was the final proceeds of the loan
released in favor of the plaintiffs. The delay in the release
of the final proceeds of the IGLF loan was due to the
aforestated collateral deficiency.25
As declared by the respondent court, the finding in said
order was not disputed in the appeal before it. It said that
what was contained in petitioners’ brief was that "their
loans were ‘overcollateralized,’ and fail to specify why or
in what manner it was so."26 Having failed to raise this issue
before the respondent court, petitioners thus cannot raise
this issue before this Court. Moreover, since the issue of
whether or not the collateral put up by petitioners is
sufficient is factual, the same is not proper for this Court’s
consideration. The basic rule is that factual questions are
beyond the province of the Supreme Court in a petition for
review.27
Petitioners maintain that to collect the P250,000.00 from
them would be a clear case of unjust enrichment because
they have not availed or used said amount for the same was
unlawfully withheld from them.
We do not agree. The fundamental doctrine of unjust
enrichment is the transfer of value without just cause or
consideration. The elements of this doctrine are:
enrichment on the part of the defendant; impoverishment
on the part of the plaintiff; and lack of cause. The main
objective is to prevent one to enrich himself at the expense
of another.28  It is commonly accepted that this doctrine
simply means that a person shall not be allowed to profit or
enrich himself inequitably at another's expense.29  In the
instant case, there is no unjust enrichment to speak of. The
amount of P225,905.79 was applied as payment for
petitioner corporation’s loan which was taken from the
P250,000.00, together with its accrued interest, that was
placed in time deposit with First Summa Savings and
Mortgage Bank. The use of said amount as payment was
approved by petitioner Pablo C. Javier, Sr. on 17 March
1983.30  As further found by the RTC in its decision, the
balance of the time deposit was withdrawn by petitioners.31
Petitioner corporation faults respondent bank, then known
as First Summa Savings and Mortgage Bank, for requiring it
to put up as additional collateral the amount of
P250,000.00 inasmuch as the CB never required it to do so.
It added that respondent bank took advantage of its urgent
and immediate need at the time for the proceeds of the
MAYORDO, M.A
IGLF loans that it had no choice but to comply with
respondent bank’s requirement to put in time deposits the
said amount as additional collateral.
We agree with respondent court that the questioning of the
propriety of the placing of the P250,000.00 in time
deposits32 with respondent bank as additional collateral was
belatedly made. As above-discussed, the requirement to
give additional collateral was warranted because the
collateral petitioner corporation put up failed to cover its
IGLF loans. If petitioner corporation was really bent on
questioning the reasonableness of putting up the
aforementioned amount as additional collateral, it should
have done immediately after it made the time deposits on
26 November 1981. This, it did not do. It questioned the
placing of the time deposits only on 08 February 198433 or
long after defendant bank had already demanded full
payment of the loans, then amounting to P2,045,401.79 as
of 22 November 1983. It is too late in the day for petitioner
corporation to question the placing of the P250,000.00 in
time deposits after it failed to pay its loan obligations as
scheduled, making them due and demandable, and after a
demand for full payment has been made. We will not allow
petitioner corporation to have one’s cake and eat it too.
As regards the payments made by petitioner corporation,
respondent court has this to say:
The trial court held, based on plaintiffs’ own exhibits, that
plaintiff[s] made the following payments:
On Promissory Note No. 713:
Date
 Actual Date of
 Amount
(Per P N Payment
Schedule)
July 6, 1981 August 3, 1981 ₱ 28,125.00
October 6, October 28,
28,836.13
1981 1981
January 6, January 22,
29,227.38
1982 1982
March 17, 1983 225,905.79
TOTAL ₱
312,094.30
And on Promissory Note No. 841:
CORPORATION LAW CASES
LLB 3
Date

Actual Date of
 Despite knowledge that First Summa Savings and Mortgage
(Per PN Amount
Payment
Schedule)
F e b r u a r y 2 0 , April 13, 1982 ₱ demands for payment were made, claiming that it never
1982 28,569.30
May 20, 1982 July 7, 1982 29,254.31
August 20, 1982 August 31, 36,795.44
1982
TOTAL ₱
94,619.05
Plaintiff-appellant[s] does not dispute the finding, which is
obvious from the foregoing summary, that plaintiff[s]
stopped payments on March 17, 1983 on Promissory Note
No. 713, and on August 31, 1982 on Promissory Note No.
841.
By simply looking at the amortization schedule attached to
the two promissory notes, it is clear that plaintiff[s]
already defaulted on its loan obligations when the
defendant Bank gave notice of the foreclosure proceedings
on April 28, 1984. On amortization payments alone,
plaintiff[s] should have paid a total of P459,339 as of April
6, 1984 on Promissory [Note] No. 713, and a total of
P328,173.00 as of February 20, 1984 on Promissory Note
[No.] 841. No extended computation is necessary to
demonstrate that, even without imputing the liquidated
damages equivalent to 2% a month on the delayed
payments (see second paragraph of the promissory notes),
the plaintiffs were grossly deficient in amortization
payments, and already in default when the foreclosure
proceedings were commenced. Further, we note that under
the terms of the promissory note, "failure to pay an
installment when due shall entitle the bank or its assign to
declare all the obligations as immediately due and payable"
(second paragraph).34
As to the third assigned error, petitioners argue that there
being no malice or bad faith on their part when they filed
the instant case, no damages should have been awarded to
respondent bank.
We cannot sustain such argument. The presence of malice
or bad faith is very evident in the case before us. By the
documents it executed, petitioner corporation was well
aware that First Summa Savings and Mortgage Bank changed
Page 30 of 160
its corporate name to PAIC Savings and Mortgage Bank, Inc.
Bank and PAIC Savings and Mortgage Bank, Inc., are one and
the same entity, it pretended otherwise. It used this
purported ignorance as an excuse to renege on its
obligation to pay its loans after they became due and after
obtained the loans from respondent bank.
No good faith was shown by petitioner corporation. If it
were in good faith in complying with its loan obligations
since it believed that respondent bank had no right to the
payment, it should have made a valid consignation in court.
This, it did not do. If petitioner corporation were at a loss
as to who should receive the payment, it could have easily
taken steps and inquired from the SEC, CB of the
Philippines or from the bank itself from which it received
the loans and to where it made previous payments. Further,
the fact that it was respondent bank that was demanding
payment for loans already due and demandable and not
First Summa Savings and Mortgage Bank is sufficient to
make petitioner corporation wonder why this is so. It never
took any initiative to clear the matter. Instead, it paid no
attention to the valid demands of respondent bank.
The awarding of actual and compensatory damages, as well
as attorney’s fees, is justified under the circumstances. We
quote with approval the reasons given by the RTC for the
grant of the same:
Considering that Defendant Bank had been prevented at
least four (4) times from foreclosing the mortgages (i.e.,
Temporary Restraining Orders of May 9 and 19 and October
22, 1984 and status quo order of December 10, 1990
enjoining the extrajudicial foreclosure sales of May 9 and
16 and October 23, 1984 and December 20, 1990,
respectively), it is proper that Defendant Bank be
reimbursed its actual expenses. The amount of P40,000.00
is reasonable reimbursement for the publication and other
expenses incurred in the four (4) extrajudicial foreclosures
which were enjoined by the Court. Considering the wanton
and reckless filing of this clearly unfounded and baseless
legal action and the fact that Defendant Bank had to
defend itself against such suit, attorney’s fees in the
amount of P50,000.00 should be paid by the Plaintiffs to
the Defendant Bank. Defendant Bank failed to adduce
indubitable proof on the moral and exemplary damages
that it seeks. Nevertheless, since such proof is not
absolutely necessary and primarily as an example for the
public good to deter others from filing a similar clearly
MAYORDO, M.A
unfounded legal action, Defendant Bank should be entitled
to an award of exemplary damages.35
This Court finds that petitioners failed to comply with what
is incumbent upon them – to pay their loans when they
became due. The lame excuse they belatedly advanced for
their non-payment cannot and should not prevent
respondent bank from exercising its right to foreclose the
real estate mortgages executed in its favor.
WHEREFORE, premises considered, the Court of Appeals
decision dated 31 January 1997 and its resolution dated 20
June 1997 are hereby AFFIRMED  in toto.  Costs against
petitioners.
SO ORDERED.
G.R. No. L-26370 July 31, 1970
PHILIPPINE FIRST INSURANCE COMPANY, INC., plaintiff-
appellant,  vs. MARIA CARMEN HARTIGAN, CGH, and O.
ENGKEE, defendants-appellees.
BARREDO, J.:
Appeal from the decision dated 6 October 1962 of the Court
of First Instance of Manila — dismissing the action in its
Civil Case No. 48925 — brought by the herein plaintiff-
appellant Philippine First Insurance Co., Inc. to the Court of
Appeals which could, upon finding that the said appeal
raises purely questions of law, declared itself without
jurisdiction to entertain the same and, in its resolution
dated 15 July 1966, certified the records thereof to this
Court for proper determination.
The antecedent facts are set forth in the pertinent portions
of the resolution of the Court of Appeals referred to as
follows:
According to the complaint, plaintiff was originally
organized as an insurance corporation under the
name of 'The Yek Tong Lin Fire and Marine Insurance
Co., Ltd.' The articles of incorporation originally
presented before the Security and Exchange
Commissioner and acknowledged before Notary
Public Mr. E. D. Ignacio on June 1, 1953 state that
the name of the corporation was 'The Yek Tong Lin
Fire and Marine Insurance Co., Ltd.' On May 26,
1961 the articles of incorporation were amended
pursuant to a certificate of the Board of Directors
dated March 8, 1961 changing the name of the
corporation to 'Philippine First Insurance Co., Inc.'.
CORPORATION LAW CASES
LLB 3
The complaint alleges that the plaintiff Philippine
First Insurance Co., Inc., doing business under the
name of 'The Yek Tong Lin Fire and Marine Insurance
Co., Lt.' signed as co-maker together with
defendant Maria Carmen Hartigan, CGH, a
promissory note for P5,000.00 in favor of the China
Banking Corporation payable within 30 days after
the date of the promissory note with the usual
banking interest; that the plaintiff agreed to act as
such co-maker of the promissory note upon the
application of the defendant Maria Carmen
Hartigan, CGH, who together with Antonio F. Chua
and Chang Ka Fu, signed an indemnity agreement in
favor of the plaintiff, undertaking jointly and
severally, to pay the plaintiff damages, losses or
expenses of whatever kind or nature, including
attorney's fees and legal costs, which the plaintiff
may sustain as a result of the execution by the
plaintiff and co-maker of Maria Carmen Hartigan,
CGH, of the promissory note above-referred to;
that as a result of the execution of the promissory
note by the plaintiff and Maria Carmen Hartigan,
CGH, the China Banking Corporation delivered to
the defendant Maria Carmen Hartigan, CGH, the
sum of P5,000.00 which said defendant failed to
pay in full, such that on August 31, 1961 the same
was. renewed and as of November 27, 1961 there
was due on account of the promissory note the sum
of P4,559.50 including interest. The complaint ends
with a prayer for judgment against the defendants,
jointly and severally, for the sum of P4,559.50 with
interest at the rate of 12% per annum from
November 23, 1961 plus P911.90 by way of
attorney's fees and costs.
Although O. Engkee was made as party defendant in
the caption of the complaint, his name is not
mentioned in the body of said complaint. However,
his name Appears in the Annex A attached to the
complaint which is the counter indemnity
agreement supposed to have been signed according
to the complaint by Maria Carmen Hartigan, CGH,
Antonio F. Chua and Chang Ka Fu.
In their answer the defendants deny the allegation
that the plaintiff formerly conducted business
under the name and style of 'The Yek Tong Lin Fire
and Marine Insurance Co., Ltd.' They admit the
execution of the indemnity agreement but they
claim that they signed said agreement in favor of
the Yek Tong Lin Fire and Marine Insurance Co.,
Page 31 of 160
Ltd.' and not in favor of the plaintiff. They likewise
admit that they failed to pay the promissory note
when it fell due but they allege that since their
obligation with the China Banking Corporation
based on the promissory note still subsists, the
surety who co-signed the promissory note is not
entitled to collect the value thereof from the
defendants otherwise they will be liable for double
amount of their obligation, there being no
allegation that the surety has paid the obligation to
the creditor.
By way of special defense, defendants claim that
there is no privity of contract between the plaintiff
and the defendants and consequently, the plaintiff
has no cause of action against them, considering
that the complaint does not allege that the plaintiff
and the 'Yek Tong Lin Fire and Marine Insurance Co.,
Ltd.' are one and the same or that the plaintiff has
acquired the rights of the latter. The parties after
the admission of Exhibit A which is the amended
articles of incorporation and Exhibit 1 which is a
demand letter dated August 16, 1962 signed by the
manager of the loans and discount department of
the China Banking Corporation showing that the
promissory note up to said date in the sum of
P4,500.00 was still unpaid, submitted the case for
decision based on the pleadings.
Under date of 6 October 1962, the Court of First Instance of
Manila rendered the decision appealed. It dismissed the
action with costs against the plaintiff Philippine First
Insurance Co., Inc., reasoning as follows:
... With these undisputed facts in mind, the parties
correctly concluded that the issues for resolution by
this Court are as follows:
(a) Whether or not the plaintiff is the real party in
interest that may validly sue on the indemnity
agreement signed by the defendants and the Yek
Tong Lin Fire & Marine Insurance Co., Ltd. (Annex A
to plaintiff's complaint ); and
(b) Whether or not a suit for indemnity or
reimbursement may under said indemnity
agreement prosper without plaintiff having yet paid
the amount due under said promissory note.
In the first place, the change of name of the Yek
Tong Lin Fire & Marine Insurance Co., Ltd. to the
MAYORDO, M.A
Philippines First Insurance Co., Inc. is of dubious
validity. Such change of name in effect dissolved
the original corporation by a process of dissolution
not authorized by our corporation law (see Secs. 62
and 67, inclusive, of our Corporation Law).
Moreover, said change of name, amounting to a
dissolution of the Yek Tong Lin Fire & Marine
Insurance Co., Ltd., does not appear to have been
effected with the written note or assent of
stockholders representing at least two-thirds of the
subscribed capital stock of the corporation, a voting
proportion required not only for the dissolution of a
corporation but also for any amendment of its
articles of incorporation (Secs. 18 and 62,
Corporation Law). Furthermore, such change of
corporate name appears to be against public policy
and may be effected only by express authority of
law (Red Line Transportation Co. v. Rural Transit
Co., Ltd., 60 Phil. 549, 555; Cincinnati Cooperage
Co., Ltd. vs. Vate, 26 SW 538, 539; Pilsen Brewing
Co. vs. Wallace, 125 NE 714), but there is nothing in
our corporation law authorizing the change of
corporate name in this jurisdiction.
In the second place, assuming that the change of
name of the Yek Tong Lin Fire & Marine Insurance
Co. Ltd., to Philippines pine First Insurance Co.,
Inc., as accomplished on March 8, 1961, is valid,
that would mean that the original corporation, the
Yek Tong Lin Fire & Marine Insurance Co., Ltd.,
became dissolved and of no further existence since
March 8, 1961, so that on May 15, 1961, the date
the indemnity agreement, Annex A, was executed,
said original corporation bad no more power to
enter into any agreement with the defendants, and
the agreement entered into by it was ineffective
for lack of capacity of said dissolved corporation to
enter into said agreement. At any rate, even if we
hold that said change of name is valid, the fact
remains that there is no evidence showing that the
new entity, the Philippine First Insurance Co., Inc.
has with the consent of the original parties,
assumed the obligations or was assigned the rights
of action in the original corporation, the Yek Tong
Lin Fire & Marine Insurance Co., Ltd. In other
words, there is no evidence of conventional
subrogation of the Plaintiffs in the rights of the Yek
Tong Lin Fire & Marine Insurance Co., Ltd. under
said indemnity agreement (Arts. 1300, 1301, New
Civil Code). without such subrogation assignment of
rights, the herein plaintiff has no cause of action
CORPORATION LAW CASES
LLB 3
against the defendants, and is, therefore, not the
right party in interest as plaintiff.
Last, but not least, assuming that the said change
of name was legal and operated to dissolve the
original corporation, the dissolved corporation,
must pursuant to Sec. 77 of our corporation law, be
deemed as continuing as a body corporate for three
(3) years from March 8, 1961 for the purpose of
prosecuting and defending suits. It is, therefore,
the Yek Tong Lin Fire & Marine Insurance Co., Ltd.
that is the proper party to sue the defendants
under said indemnity agreement up to March 8,
1964.
Having arrived at the foregoing conclusions, this
Court need not squarely pass upon issue (b)
formulated above.
WHEREFORE, plaintiff's action is hereby dismissed,
with costs against the plaintiff.
In due time, the Philippine First Insurance Company, Inc.
moved for reconsideration of the decision aforesaid, but
said motion was denied on December 3, 1962 in an order
worded thus:
The motion for reconsideration, dated November 8,
1962, raises no new issue that we failed to consider
in rendering our decision of October 6, 1962.
However, it gives us an opportunity to amplify our
decision as regards the question of change of name
of a corporation in this jurisdiction.
We find nothing in our Corporation Law authorizing
a change of name of a corporation organized
pursuant to its provisions. Sec. 18 of the
Corporation Law authorizes, in our opinion,
amendment to the Articles of Incorporation of a
corporation only as to matters other than its
corporate name. Once a corporation is organized in
this jurisdiction by the execution and registration
of its Articles of Incorporation, it shall continue to
exist under its corporate name for the lifetime of
its corporate existence fixed in its Articles of
Incorporation, unless sooner legally dissolved (Sec.
11, Corp. Law). Significantly, change of name is not
one of the methods of dissolution of corporations
expressly authorized by our Corporation Law. Also
significant is the fact that the power to change its
corporate name is not one of the general powers
conferred on corporations in this jurisdiction (Sec.
Page 32 of 160
13, Corp. Law). The enumeration of corporate
powers made in our Corporation Law implies the
exclusion of all others (Thomas v. West Jersey R.
Co., 101 U.S. 71, 25 L. ed. 950). It is obvious, in
this connection, that change of name is not one of
the powers necessary to the exercise of the powers
conferred on corporations by said Sec. 13 (see Sec.
14, Corp. Law).
To rule that Sec. 18 of our Corporation Law
authorizes the change of name of a corporation by
amendment of its Articles of Incorporation is to
indulge in judicial legislation. We have examined
the cases cited in Volume 13 of American
Jurisprudence in support of the proposition that the
general power to alter or amend the charter of a
corporation necessarily includes the power to alter
the name of a corporation, and find no justification
for said conclusion arrived at by the editors of
American Jurisprudence. On the contrary, the
annotations in favor of plaintiff's view appear to
have been based on decisions in cases where the
statute itself expressly authorizes change of
corporate name by amendment of its Articles of
Incorporation. The correct rule in harmony with the
provisions of our Corporation Law is well expressed
in an English case as follows:
After a company has been completely register
without defect or omission, so as to be
incorporated by the name set forth in the deed
of settlement, such incorporated company has
not the power to change its name ... Although
the King by his prerogative might incorporate
by a new name, and the newly named
corporation might retain former rights, and
sometimes its former name also, ... it never
appears to be such an act as the corporation
could do by itself, but required the same power
as created the corporation. (Reg. v. Registrar of
Joint Stock Cos 10 Q.B. 839, 59 E.C.L. 839).
The contrary view appears to represent the
minority doctrine, judging from the annotations on
decided cases on the matter.
The movant invokes as persuasive precedent the
action of the Securities Commissioner in tacitly
approving the Amended, Articles of Incorporation
on May 26, 1961. We regret that we cannot in good
conscience lend approval to this action of the
MAYORDO, M.A
Securities and Exchange Commissioner. We find no
justification, legal, moral, or practical, for
adhering to the view taken by the Securities and
Exchange Commissioner that the name of a
corporation in the Philippines may be changed by
mere amendment of its Articles of Incorporation as
to its corporate name. A change of corporate name
would serve no useful purpose, but on the contrary
would most probably cause confusion. Only a
dubious purpose could inspire a change of a
corporate. name which, unlike a natural person's
name, was chosen by the incorporators themselves;
and our Courts should not lend their assistance to
the accomplishment of dubious purposes.
WHEREFORE, we hereby deny plaintiff's motion for
reconsideration, dated November 8, 1962, for lack
of merit.
In this appeal appellant contends that —
I
THE TRIAL COURT ERRED IN HOLDING THAT IN THIS
JURISDICTION, THERE IS NOTHING IN OUR
CORPORATION LAW AUTHORIZING THE CHANGE OF
CORPORATE NAME;
II
THE TRIAL COURT ERRED IN DECLARING THAT A
CHANGE OF CORPORATE NAME APPEARS TO BE
AGAINST PUBLIC POLICY;
III
THE TRIAL COURT ERRED IN HOLDING THAT A
CHANGE OF CORPORATE NAME HAS THE LEGAL
E F F E C T O F D I S S O LV I N G T H E O R I G I N A L
CORPORATION:
IV
THE TRIAL COURT ERRED IN HOLDING THAT THE
CHANGE OF NAME OF THE YEK TONG LIN FIRE &
MARINE INSURANCE CO., LTD. IS OF DUBIOUS
VALIDITY;
V
THE TRIAL COURT ERRED IN HOLDING THAT THE
APPELLANT HEREIN IS NOT THE RIGHT PARTY
INTEREST TO SUE DEFENDANTS-APPELLEES;
IV
THE TRIAL COURT FINALLY ERRED IN DISMISSING THE
COMPLAINT.
Appellant's Position is correct; all the above assignments of
error are well taken. The whole case, however, revolves
around only one question. May a Philippine corporation
change its name and still retain its original personality and
individuality as such?
CORPORATION LAW CASES
LLB 3
The answer is not difficult to find. True, under Section 6 of
the Corporation Law, the first thing required to be stated in
the Articles of Incorporation of any corn corporation is its
name, but it is only one among many matters equally if not
more important, that must be stated therein. Thus, it is
also required, for example, to state the number and names
of and residences of the incorporators and the residence or
location of the principal office of the corporation, its term
of existence, the amount of its capital stock and the
number of shares into which it is divided, etc., etc.
On the other hand, Section 18 explicitly permits the
articles of incorporation to be amended thus:
Sec. 18. — Any corporation may for legitimate
corporate purpose or purposes, amend its articles
of incorporation by a majority vote of its board of
directors or trustees and the vote or written assent
of two-thirds of its members, if it be a nonstock
corporation or, if it be a stock corporation, by the
vote or written assent of the stockholders
representing at least two-thirds of the subscribed
capital stock of the corporation Provided, however,
That if such amendment to the articles of
incorporation should consist in extending the
corporate existence or in any change in the rights
of holders of shares of any class, or would authorize
shares with preferences in any respect superior to
those of outstanding shares of any class, or would
restrict the rights of any stockholder, then any
stockholder who did not vote for such corporate
action may, within forty days after the date upon
which such action was authorized, object thereto in
writing and demand Payment for his shares. If,
after such a demand by a stockholder, the
corporation and the stockholder cannot agree upon
the value of his share or shares at the time such
corporate action was authorized, such values all be
ascertained by three disinterested persons, one of
whom shall be named by the stockholder, another
by the corporation, and the third by the two thus
chosen. The findings of the appraisers shall be
final, and if their award is not paid by the
corporation within thirty days after it is made, it
may be recovered in an action by the stockholder
against the corporation. Upon payment by the
corporation to the stockholder of the agreed or
awarded price of his share or shares, the
stockholder shall forthwith transfer and assign the
share or shares held by him as directed by the
Page 33 of 160
corporation:  Provided,  however, That their own
shares of stock purchased or otherwise acquired by
banks, trust companies, and insurance companies,
should be disposed of within six months after
acquiring title thereto.
Unless and until such amendment to the articles of
incorporation shall have been abandoned or the
action rescinded, the stockholder making such
demand in writing shall cease to be a stockholder
and shall have no rights with respect to such
shares, except the right to receive payment
therefor as aforesaid.
A stockholder shall not be entitled to payment for
his shares under the provisions of this section unless
the value of the corporate assets which would
remain after such payment would be at least equal
to the aggregate amount of its debts and liabilities
and the aggregate par value and/or issued value of
the remaining subscribed capital stock.
A copy of the articles of incorporation as amended,
duly certified to be correct by the president and
the secretary of the corporation and a majority of
the board of directors or trustees, shall be filed
with the Securities and Exchange Commissioner,
who shall attach the same to the original articles of
incorporation, on file in his office. From the time of
filing such copy of the amended articles of
incorporation, the corporation shall have the same
powers and it and the members and stockholders
thereof shall thereafter be subject to the same
liabilities as if such amendment had been embraced
in the original articles of incorporation:  Provided,
however, That should the amendment consist in
extending the corporate life, the extension shall
not exceed 50 years in any one instance. Provided,
further, That the original articles and amended
articles together shall contain all provisions
required by law to be set out in the articles of
incorporation:  And provided, further, That nothing
in this section shall be construed to authorize any
corporation to increase or diminish its capital stock
or so as to effect any rights or actions which
accrued to others between the time of filing the
original articles of incorporation and the filing of
the amended articles.
The Securities and, Exchange Commissioner shall be
entitled to collect and receive the sum of ten pesos for
MAYORDO, M.A
filing said copy of the amended articles of
incorporation.  Provided, however, That when the
amendment consists in extending the term of corporate
existence, the Securities and Exchange Commissioner shall
be entitled to collect and receive for the filing of its
amended articles of incorporation the same fees collectible
under existing law for the filing of articles of incorporation.
The Securities & Exchange Commissioner shall not hereafter
file any amendment to the articles of incorporation of any
bank, banking institution, or building and loan association
unless accompanied by a certificate of the Monetary Board
(of the Central Bank) to the effect that such amendment is
in accordance with law. (As further amended by Act No.
3610, Sec. 2 and Sec. 9.R.A. No. 337 and R.A. No. 3531.)
It can be gleaned at once that this section does not only
authorize corporations to amend their charter; it also lays
down the procedure for such amendment; and, what is
more relevant to the present discussion, it contains
provisos restricting the power to amend when it comes to
the term of their existence and the increase or decrease of
the capital stock. There is no prohibition therein against
the change of name. The inference is clear that such a
change is allowed, for if the legislature had intended to
enjoin corporations from changing names, it would have
expressly stated so in this section or in any other provision
of the law.
No doubt, "(the) name (of a corporation) is peculiarly
important as necessary to the very existence of a
corporation. The general rule as to corporations is that
each corporation shall have a name by which it is to sue
and be sued and do all legal acts. The name of a
corporation in this respect designates the corporation in
the same manner as the name of an individual designates
the person."1 Since an individual has the right to change his
name under certain conditions, there is no compelling
reason why a corporation may not enjoy the same right.
There is nothing sacrosanct in a name when it comes to
artificial beings. The sentimental considerations which
individuals attach to their names are not present in
corporations and partnerships. Of course, as in the case of
an individual, such change may not be made exclusively. by
the corporation's own act. It has to follow the procedure
prescribed by law for the purpose; and this is what is
important and indispensably prescribed — strict adherence
to such procedure.
Local well known corporation law commentators are
unanimous in the view that a corporation may change its
name by merely amending its charter in the manner
prescribed by law.2  American authorities which have
CORPORATION LAW CASES
LLB 3
persuasive force here in this regard because our
corporation law is of American origin, the same being a sort
of codification of American corporate law,3 are of the same
opinion.
A general power to alter or amend the charter of a
corporation necessarily includes the power to alter
the name of the corporation.  Ft. Pitt Bldg., etc.,
Assoc. v. Model Plan Bldg., etc., Assoc., 159 Pa. St.
308, 28 Atl. 215;  In re  Fidelity Mut. Aid Assoc., 12
W.N.C. (Pa.) 271; Excelsior Oil Co., 3 Pa. Co. Ct.
184; Wetherill Steel Casting Co., 5 Pa. Co. Ct. 337.
xxx xxx xxx
Under the General Laws of Rhode Island, c 176, sec.
7, relating to an increase of the capital stock of a
corporation, it is provided that 'such agreement
may be amended in any other particular, excepting
as provided in the following section', which relates
to a decrease of the capital stock This section has
been held to authorize a change in the name of a
corporation.  Armington v. Palmer, 21 R.I. 109, 42
Atl. 308, 43, L.R.A. 95, 79 Am. St. Rep. 786.(Vol.
19, American and English Annotated Cases, p.
1239.)
Fletcher, a standard authority on American an corporation
law also says:
Statutes are to be found in the various jurisdictions
dealing with the matter of change in corporate
names. Such statutes have been subjected to
judicial construction and have, in the main, been
upheld as constitutional.  In direct terms or by
necessary implication, they authorize corporations
new names  and prescribe the mode of procedure
for that purpose. The same steps must be taken
under some statutes to effect a change in a
corporate name, as when any other amendment of
the corporate charter is sought .... When the
general law thus deals with the subject, a
corporation can change its name only in the manner
provided. (6 Fletcher, Cyclopedia of the Law of
Private Corporations, 1968 Revised Volume, pp.
212-213.) (Emphasis supplied)
The learned trial judge held that the above-quoted
proposition are not supported by the weight of authority
because they are based on decisions in cases where the
statutes expressly authorize change of corporate name by
amendment of the articles of incorporation. We have
Page 34 of 160
carefully examined these authorities and We are satisfied
of their relevance. Even Lord Denman who has been quoted
by His Honor from  In Reg. v. Registrar of Joint Stock Cos.
10, Q.B., 59 E.C.L. maintains merely that the change of its
name never appears to be such an act as the corporation
could do for itself, but required ;the same Power as
created a corporation." What seems to have been
overlooked, therefore, is that the procedure prescribes by
Section 18 of our Corporation Law for the amendment of
corporate charters is practically identical with that for the
incorporation itself of a corporation.
In the appealed order of dismissal, the trial court, made
the observation that, according to this Court in  Red Line
Transportation Co. v. Rural Transit Co., Ltd., 60 Phil, 549,
555, change of name of a corporation is against public
policy. We must clarify that such is not the import of Our
said decision. What this Court held in that case is simply
that:
We know of no law that empowers the Public
Service Commission or any court in this jurisdiction
to authorize one corporation to assume the name of
another corporation as a trade name. Both the
Rural Transit Company, Ltd., and the Bachrach
Motor Co., Inc., are Philippine corporations and the
very law of their creation and continued existence
requires each to adopt and certify a distinctive
name. The incorporators 'constitute a body politic
and corporate  under the name stated in the
certificate.' (Section 11, Act No. 1459, as
amended.) A corporation has the power  'of
succession by its corporate name.'(Section
13,  ibid.) The name of a corporation is therefore
essential to its existence. It cannot change its name
except in the manner provided by the statute. By
that name alone is it authorized to transact
business. The law gives a corporation no express or
implied authority to assume another name that is
unappropriated; still less that of another
corporation, which is expressly set apart for it and
protected by the law. If any corporation could
assume at pleasure as an unregistered trade name
the name of another corporation, this practice
would result in confusion and open the door to
frauds and evasions and difficulties of
administration and supervision. The policy of the
law as expressed our corporation statute and the
Code of Commerce is clearly against such a
practice. (Cf. Scarsdale Pub.Co. — Colonial Press vs.
Carter, 116 New York Supplement, 731; Svenska
MAYORDO, M.A
Nat. F. i. C. vs. Swedish Nat. Assn., 205 Illinois
[Appellate Courts], 428, 434.)
In other words, what We have held to be contrary to public
policy is the use by one corporation of the name of another
corporation as its trade name. We are certain no one will
disagree that such an act can only "result in confusion and
open the door to frauds and evasions and difficulties of
administration and supervision." Surely, the Red Line case
was not one of change of name.
Neither can We share the posture of His Honor that the
change of name of a corporation results in its dissolution.
There is unanimity of authorities to the contrary.
An authorized change in the name of a corporation
has no more effect upon its identity as a
corporation than a change of name of a natural
person has upon his identity. It does not affect the
rights of the corporation or lessen or add to its
obligations. After a corporation has effected a
change in its name it should sue and be sued in its
new name ....(13 Am. Jur. 276-277, citing cases.)
A mere change in the name of a corporation, either
by the legislature or by the corporators or
stockholders under legislative authority, does not,
generally speaking, affect the identity of the
corporation, nor in any way affect the rights,
privileges, or obligations previously acquired or
incurred by it. Indeed, it has been said that a
change of name by a corporation has no more
effect upon the identity of the corporation than a
change of name by a natural person has upon the
identity of such person. The corporation, upon such
change in its name, is in no sense a new
corporation, nor the successor of the original one,
but remains and continues to be the original
corporation. It is the same corporation with a
different name, and its character is in no respect
changed. ... (6 Fletcher, Cyclopedia of the Law of
Private Corporations, 224-225, citing cases.)
The change in the name of a corporation has no
more effect upon its identity as a corporation than
a change of name of a natural person has upon his
identity. It does not affect the rights of the
corporation, or lessen or add to its obligations.
England.  —  Doe v. Norton,  11 M. & W. 913, 7 Jur.
751, 12 L. J. Exch. 418.
CORPORATION LAW CASES
LLB 3
United States. —  Metropolitan Nat. Bank v.
Claggett,  141 U.S. 520, 12 S. Ct. 60, 35 U.S. (L.
ed.) 841.
Alabama. —  Lomb v. Pioneer Sav., etc., Co.,  106
Ala. 591, 17 So. 670; North Birmingham Lumber Co.
v. Sims, 157 Ala. 595, 48 So. 84.
Connecticut. — Trinity Church v. Hall, 22 Com. 125.
Illinois. —  Mt. Palatine Academy v. Kleinschnitz  28
III, 133;  St. Louis etc. R. Co. v. Miller, 43 Ill.
199; Reading v. Wedder, 66 III. 80.
Indiana. —  Rosenthal v. Madison etc., Plank Road
Co., 10 Ind. 358.
Kentucky. — Cahill v. Bigger, 8 B. Mon. 211; Wilhite
v. Convent of Good Shepherd, 177 Ky. 251, 78 S. W.
138.
Maryland. —  Phinney v. Sheppard & Enoch Pratt
Hospital, 88 Md. 633, 42 Atl. 58, writ of error
dismissed, 177 U.S. 170, 20 S. Ct. 573, 44 U.S. (L.
ed.) 720.
Missouri. — Dean v. La Motte Lead Co., 59 Mo. 523.
Nebraska. — Carlon v. City Sav. Bank, 82 Neb. 582,
188 N. W. 334. New York First Soc of M.E. Church v.
Brownell, 5 Hun 464.
Pennsylvania. — Com. v. Pittsburgh, 41 Pa. St. 278.
South Carolina. —  South Carolina Mut Ins. Co. v.
Price 67 S.C. 207, 45 S.E. 173.
Virginia. —  Wilson v. Chesapeake etc., R. Co., 21
Gratt 654; Wright-Caesar Tobacco Co. v. Hoen, 105
Va. 327, 54 S.E. 309.
Washington. — King v. Ilwaco R. etc., Co., 1 Wash.
127. 23 Pac. 924.
Wisconsin. — Racine Country Bank v. Ayers, 12 Wis.
512.
The fact that the corporation by its old name makes
a format transfer of its property to the corporation
by its new name does not of itself show that the
change in name has affected a change in the
i d e n t i t y o f t h e c o r p o r a t i o n .  P a l f r e y v.
Association for Relief, etc., 110 La. 452, 34 So. 600.
Page 35 of 160
The fact that a corporation organized as a state
bank afterwards becomes a national bank by
complying with the provisions of the National
Banking Act, and changes its name accordingly, has
no effect on its right to sue upon obligations or
liabilities incurred to it by its former name.
Michigan Ins. Bank v. Eldred 143 U.S. 293, 12 S. Ct.
450, 36 U.S. (L. ed.) 162.
A deed of land to a church by a particular name has
been held not to be affected by the fact that the
church afterwards took a different name. Cahill v.
Bigger, 8 B. Mon (ky) 211.
A change in the name of a corporation is not a
divestiture of title or such a change as requires a
regular transfer of title to property, whether real or
personal, from the corporation under one name to
the same corporation under another
name.  McCloskey v. Doherty,  97 Ky. 300, 30 S. W.
649. (19 American and English Annotated Cases
1242-1243.)
As was very aptly said in  Pacific Bank v. De Ro  37
Cal. 538, "The changing of the name of a
corporation is no more the creation of a
corporation than the changing of the name of a
natural person is the begetting of a natural person.
The act, in both cases, would seem to be what the
language which we use to designate it imports — a
change of name, and not a change of being.
Having arrived at the above conclusion, We have agree with
appellant's pose that the lower court also erred in holding
that it is not the right party in interest to sue defendants-
appellees.4  As correctly pointed out by appellant, the
approval by the stockholders of the amendment of its
articles of incorporation changing the name "The Yek Tong
Lin Fire & Marine Insurance Co., Ltd." to "Philippine First
Insurance Co., Inc." on March 8, 1961, did not automatically
change the name of said corporation on that date. To be
effective, Section 18 of the Corporation Law, earlier
quoted, requires that "a copy of the articles of
incorporation as amended, duly certified to be correct by
the president and the secretary of the corporation and a
majority of the board of directors or trustees, shall be filed
with the Securities & Exchange Commissioner", and it
is  only from the time of such filing, that "the corporation
shall have the same powers and it and the members and
stockholders thereof shall thereafter be subject to the
same liabilities as if such amendment had been embraced
MAYORDO, M.A
in the original articles of incorporation." It goes without
saying then that appellant rightly acted in its old name
when on May 15, 1961, it entered into the indemnity
agreement, Annex A, with the defendant-appellees; for
only after the filing of the amended articles of
incorporation with the Securities & Exchange Commission
on May 26, 1961, did appellant legally acquire its new
name; and it was perfectly right for it to file the present
case In that new name on December 6, 1961. Such is, but
the logical effect of the change of name of the corporation
upon its actions.
Actions brought by a corporation after it has
changed its name should be brought under the new
name although for the enforcement of rights
existing at the time the change was made. Lomb v.
Pioneer Sav., etc., Co.,  106 Ala. 591, 17 So.
670:  Newlan v. Lombard University, 62 III.
195;  Thomas v. Visitor of Frederick County School,
7 Gill & J (Md.) 388; Delaware, etc., R. Co. v. Trick,
23 N. J. L. 321;  Northumberland Country Bank v.
Eyer, 60 Pa. St. 436; Wilson v. Chesapeake etc., R.
Co., 21 Gratt (Va.) 654.
The change in the name of the corporation does not
affect its right to bring an action on a note given to
the corporation under its former name. Cumberland
College v. Ish, 22.Cal. 641; Northwestern College v.
Schwagler,  37 Ia. 577.(19 American and English
Annotated Cases 1243.)
In consequence, We hold that the lower court erred in
dismissing appellant's complaint. We take this opportunity,
however, to express the Court's feeling that it is apparent
that appellee's position is more technical than otherwise.
Nowhere in the record is it seriously pretended that the
indebtedness sued upon has already been paid. If appellees
entertained any fear that they might again be made liable
to Yek Tong Lin Fire & Marine Insurance Co. Ltd., or to
someone else in its behalf, a cursory examination of the
records of the Securities & Exchange Commission would
have sufficed to clear up the fact that Yek Tong Lin had just
changed its name but it had not ceased to be their creditor.
Everyone should realize that when the time of the courts is
utilized for cases which do not involve substantial questions
and the claim of one of the parties, therein is based on
pure technicality that can at most delay only the ultimate
outcome necessarily adverse to such party because it has
no real cause on the merits, grave injustice is committed to
numberless litigants whose meritorious cases cannot be
given all the needed time by the courts. We address this
appeal once more to all members of the bar, in particular,
CORPORATION LAW CASES
LLB 3
since it is their bounden duty to the profession and to our
country and people at large to help ease as fast as possible
the clogged dockets of the courts. Let us not wait until the
people resort to other means to secure speedy, just and
inexpensive determination of their cases.
WHEREFORE, judgment of the lower court is reversed, and
this case is remanded to the trial court for further
proceedings consistent herewith With costs against
appellees.
G.R. No. 157900               July 22, 2013
ZUELLIG FREIGHT AND CARGO SYSTEMS, Petitioner, 
 business operations; that it had no obligation to employ San
vs. NATIONAL LABOR RELATIONS COMMISSION AND
RONALDO V. SAN MIGUEL, Respondents.
DECISION
BERSAMIN, J.:
The mere change in the corporate name is not considered
under the law as the creation of a new corporation; hence,
the renamed corporation remains liable for the illegal
dismissal of its employee separated under that guise.
The Case
Petitioner employer appeals the decision promulgated on
November 6, 2001,1  whereby the Court of Appeals (CA)
dismissed its petition for certiorari and upheld the adverse
decision of the National Labor Relations Commission (NLRC)
finding respondent Ronaldo V. San Miguel to have been
illegally dismissed.
Antecedents
San Miguel brought a complaint for unfair labor practice,
illegal dismissal, non-payment of salaries and moral
damages against petitioner, formerly known as Zeta
Brokerage Corporation (Zeta).2 He alleged that he had been
a checker/customs representative of Zeta since December
16, 1985; that in January 1994, he and other employees of
Zeta were informed that Zeta would cease operations, and
that all affected employees, including him, would be
separated; that by letter dated February 28, 1994, Zeta
informed him of his termination effective March 31, 1994;
that he reluctantly accepted his separation pay subject to
the standing offer to be hired to his former position by
petitioner; and that on April 15, 1994, he was summarily
terminated, without any valid cause and due process.
Page 36 of 160
San Miguel contended that the amendments of the articles
of incorporation of Zeta were for the purpose of changing
the corporate name, broadening the primary functions, and
increasing the capital stock; and that such amendments
could not mean that Zeta had been thereby dissolved.3
On its part, petitioner countered that San Miguel’s
termination from Zeta had been for a cause authorized by
the Labor Code; that its non-acceptance of him had not
been by any means irregular or discriminatory; that its
predecessor-in-interest had complied with the
requirements for termination due to the cessation of
Miguel in the exercise of its valid management prerogative;
that all employees had been given sufficient time to make
their decision whether to accept its offer of employment or
not, but he had not responded to its offer within the time
set; that because of his failure to meet the deadline, the
offer had expired; that he had nonetheless been hired on a
temporary basis; and that when it decided to hire another
employee instead of San Miguel, such decision was not
arbitrary because of seniority considerations.4
Decision of the Labor Arbiter
On November 15, 1999, Labor Arbiter Francisco A. Robles
rendered a decision holding that San Miguel had been
illegally dismissed,5 to wit:
Contrary to respondents’ claim that Zeta ceased operations
and closed its business, we believe that there was merely a
change of business name and primary purpose and
upgrading of stocks of the corporation. Zuellig and Zeta are
therefore legally the same person and entity and this was
admitted by Zuellig’s counsel in its letter to the VAT
Department of the Bureau of Internal Revenue on 08 June
1994 (Reply, Annex "A"). As such, the termination of
complainant’s services allegedly due to cessation of
business operations of Zeta is deemed illegal.
Notwithstanding his receipt of separation benefits from
respondents, complainant is not estopped from questioning
the legality of his dismissal.6
xxxx
WHEREFORE, in view of the foregoing, complainant is found
to have been illegally dismissed. Respondent Zuellig Freight
and Cargo Systems, Inc. is hereby ordered to pay
complainant his backwages from April 1, 1994 up to
November 15, 1999, in the amount of THREE HUNDRED
TWENTY FOUR THOUSAND SIX HUNDRED FIFTEEN PESOS
(₱324,615.00).
MAYORDO, M.A
The same respondent is ordered to pay the complainant
Ronaldo San Miguel attorney’s fees equivalent to ten
percent (10%) of the total award.
All other claims are dismissed.
SO ORDERED.7
Decision of the NLRC
Petitioner appealed, but the NLRC issued a resolution on
April 4, 2001,8 affirming the decision of the Labor Arbiter.
The NLRC later on denied petitioner’s motion for
reconsideration via its resolution dated June 15, 2001.9
Decision of the CA
Petitioner then filed a petition for certiorari in the CA,
imputing to the NLRC grave abuse of discretion amounting
to lack or excess of jurisdiction, as follows:
1. In failing to consider the circumstances
attendant to the cessation of business of Zeta;
2. In failing to consider that San Miguel failed to
meet the deadline Zeta fixed for its employees to
accept the offer of petitioner for re-employment;
3. In failing to consider that San Miguel’s
employment with petitioner from April 1 to 15,
1994 could in no way be interpreted as a
continuation of employment with Zeta;
4. In admitting in evidence the letter dated
January 21, 1994 of petitioner’s counsel to the
Bureau of Internal Revenue; and
5. In awarding attorney’s fees to San Miguel
based on Article 2208 of the Civil Code and
Article 111 of the Labor Code.
On November 6, 2002, the CA promulgated its assailed
decision dismissing the petition for certiorari,10 viz:
A careful perusal of the records shows that the closure of
business operation was not validly made. Consider the
Certificate of Filing of the Amended Articles of
Incorporation which clearly shows that petitioner Zuellig is
actually the former Zeta as per amendment dated January
21, 1994. The same observation can be deduced with
respect to the Certificate of Filing of Amended By-Laws
dated May 10, 1994. As aptly pointed out by private
respondent San Miguel, the amendment of the articles of
incorporation merely changed its corporate name,
CORPORATION LAW CASES
LLB 3
broadened its primary purpose and increased its authorized
capital stocks. The requirements contemplated in Article
283 were not satisfied in this case. Good faith was not
established by mere registration with the Securities and
Exchange Commission (SEC) of the Amended Articles of
Incorporation and ByLaws. The factual milleu of the case,
considered in its totality, shows that there was no closure
to speak of. The termination of services allegedly due to
cessation of business operations of Zeta was illegal.
Notwithstanding private respondent San Miguel’s receipt of
separation benefits from petitioner Zuellig, the former is
not estopped from questioning the legality of his dismissal.
Petitioner Zuellig’s allegation that the five employees who
refused to receive the termination letters were verbally
informed that they had until 6:00 p.m. of March 1, 1994 to
receive the termination letters and sign the employment
contracts, otherwise the former would be constrained to
withdraw its offer of employment and seek for
replacements in order to ensure the smooth operations of
the new company from its opening date, is of no moment in
view of the foregoing circumstances. There being no valid
closure of business operations, the dismissal of private
respondent San Miguel on alleged authorized cause of
cessation of business pursuant to Article 283 of the Labor
Code, was utterly illegal. Despite verbal notice that the
employees had until 6:00 p.m. of March 1, 1994 to receive
the termination letters and sign the employment contracts,
the dismissal was still illegal for the said condition is null
and void. In point of facts and law, private respondent San
Miguel remained an employee of petitioner Zuellig. If at
all, the alleged closure of business operations merely
operates to suspend employment relation since it is not
permanent in character.
Where there is no showing of a clear, valid, and legal cause
for the termination of employment, the law considers the
matter a case of illegal dismissal and the burden is on the
employer to prove that the termination was for a valid or
authorized cause.
Findings of facts of the NLRC, particularly when both the
NLRC and Labor Arbiter are in agreement, are deemed
binding and conclusive upon the Supreme Court.
As regards the second and last argument advanced by
petitioner Zuellig that private respondent San Miguel is not
entitled to attorney’s fees, this Court finds no reason to
disturb the ruling of the public respondent NLRC. Petitioner
Zuellig maintains that the factual backdraft (sic) of this
petition does not call for the application of Article 2208 of
Page 37 of 160
the Civil Code and Article 111 of the Labor Code as private
respondent’s wages were not withheld. On the other hand,
public respondent NLRC argues that paragraphs 2 and 3,
Article 2208 of the Civil Code and paragraph (a), Article 111
of the Labor Code justify the award of attorney’s fees.
NLRC was saying to the effect that by petitioner Zuellig’s
act of illegally dismissing private respondent San Miguel,
the latter was compelled to litigate and thus incurred
expenses to protect his interest. In the same passion,
private respondent San Miguel contends that petitioner
Zuellig acted in gross and evident bad faith in refusing to
satisfy his plainly valid, just and demandable claim.
After careful and judicious evaluation of the arguments
advanced to support the propriety or impropriety of the
award of attorney’s fees to private respondent San Miguel,
this Court finds the resolutions of public respondent NLRC
supported by laws and jurisprudence. It does not need
much imagination to see that by reason of petitioner
Zuellig’s feigned closure of business operations, private
respondent San Miguel incurred expenses to protect his
rights and interests. Therefore, the award of attorney’s
fees is in order.
WHEREFORE, in view of the foregoing, the resolutions
dated April 4, 2001 and June 15, 2001 of the National Labor
Relations Commission affirming the November 15, 1999
decision of the Labor Arbiter in NLRC NCR 05-03639-94 (CA
No. 022861-00) are hereby AFFIRMED and the instant
petition for certiorari is hereby DENIED and ordered
DISMISSED.
SO ORDERED.
Hence, petitioner appeals.
Issues
Petitioner asserts that the CA erred in holding that the
NLRC did not act with grave abuse of discretion in ruling
that the closure of the business operation of Zeta had not
been bona fide, thereby resulting in the illegal dismissal of
San Miguel; and in holding that the NLRC did not act with
grave abuse of discretion in ordering it to pay San Miguel
attorney’s fees.11
In his comment,12 San Miguel counters that the CA correctly
found no grave abuse of discretion on the part of the NLRC
because the ample evidence on record showed that he had
been illegally terminated; that such finding accorded with
applicable laws and jurisprudence; and that he was entitled
to back wages and attorney’s fees.
MAYORDO, M.A
In its reply,13  petitioner reiterates that the cessation of
Zeta’s business, which resulted in the severance of San
Miguel from his employment, was valid; that the CA erred
in upholding the NLRC’s finding that San Miguel had been
illegally terminated; that his acknowledgment of the
validity of his separation from Zeta by signing a quitclaim
and waiver estopped him from claiming that it had
subsequently employed him; and that the award of
attorney’s fees had no basis in fact and in law.
Ruling
The petition for review on certiorari is denied for its lack of
merit.
First of all, the outcome reached by the CA that the NLRC
did not commit any grave abuse of discretion was borne out
by the records of the case. We cannot undo such finding
without petitioner making a clear demonstration to the
Court now that the CA gravely erred in passing upon the
petition for certiorari of petitioner.
Indeed, in a special civil action for certiorari brought
against a court or quasi-judicial body with jurisdiction over
a case, petitioner carries the burden of proving that the
court or quasi-judicial body committed not a merely
reversible error but a grave abuse of discretion amounting
to lack or excess of jurisdiction in issuing the impugned
order.14Showing mere abuse of discretion is not enough, for
it is necessary to demonstrate that the abuse of discretion
was grave. Grave abuse of discretion means either that the
judicial or quasi-judicial power was exercised in an
arbitrary or despotic manner by reason of passion or
personal hostility, or that the respondent judge, tribunal or
board evaded a positive duty, or virtually refused to
perform the duty enjoined or to act in contemplation of
law, such as when such judge, tribunal or board exercising
judicial or quasi-judicial powers acted in a capricious or
whimsical manner as to be equivalent to lack of
jurisdiction.15  Under the circumstances, the CA committed
no abuse of discretion, least of all grave, because its
justifications were supported by the records and by the
applicable laws and jurisprudence.
Secondly, it is worthy to point out that the Labor Arbiter,
the NLRC, and the CA were united in concluding that the
cessation of business by Zeta was not a bona fide closure to
be regarded as a valid ground for the termination of
employment of San Miguel within the ambit of Article 283
of the Labor Code. The provision pertinently reads:
CORPORATION LAW CASES
LLB 3
Article 283.Closure of establishment and reduction of
personnel. — The employer may also terminate the
employment of any employee due to the installation of
labor-saving devices, redundancy, retrenchment to prevent
losses or the closing or cessation of operation of the
establishment or undertaking unless the closing is for the
purpose of circumventing the provisions of this Title, by
serving a written notice on the workers and the
Department of Labor and Employment at least one (1)
month before the intended date thereof. x x x.
The unanimous conclusions of the CA, the NLRC and the
Labor Arbiter, being in accord with law, were not tainted
with any abuse of discretion, least of all grave, on the part
of the NLRC. Verily, the amendments of the articles of
incorporation of Zeta to change the corporate name to
Zuellig Freight and Cargo Systems, Inc. did not produce the
dissolution of the former as a corporation. For sure, the
Corporation Code defined and delineated the different
modes of dissolving a corporation, and amendment of the
articles of incorporation was not one of such modes. The
effect of the change of name was not a change of the
corporate being, for, as well stated in Philippine First
Insurance Co., Inc. v. Hartigan:16 "The changing of the name
of a corporation is no more the creation of a corporation
than the changing of the name of a natural person is
begetting of a natural person. The act, in both cases, would
seem to be what the language which we use to designate it
imports – a change of name, and not a change of being."
The consequences, legal and otherwise, of the change of
name were similarly dealt with in P.C. Javier & Sons, Inc. v.
Court of Appeals,17 with the Court holding thusly:
From the foregoing documents, it cannot be denied that
petitioner corporation was aware of First Summa Savings
and Mortgage Bank’s change of corporate name to PAIC
Savings and Mortgage Bank, Inc. Knowing fully well of such
change, petitioner corporation has no valid reason not to
pay because the IGLF loans were applied with and obtained
from First Summa Savings and Mortgage Bank. First Summa
Savings and Mortgage Bank and PAIC Savings and Mortgage
Bank, Inc., are one and the same bank to which petitioner
corporation is indebted. A change in the corporate name
does not make a new corporation, whether effected by a
special act or under a general law. It has no effect on the
identity of the corporation, or on its property, rights, or
liabilities. The corporation, upon to change in its name, is
in no sense a new corporation, nor the successor of the
original corporation. It is the same corporation with a
Page 38 of 160
different name, and its character is in no respect changed.
(Bold underscoring supplied for emphasis)
In short, Zeta and petitioner remained one and the same
corporation. The change of name did not give petitioner
the license to terminate employees of Zeta like San Miguel
without just or authorized cause. The situation was not
similar to that of an enterprise buying the business of
another company where the purchasing company had no
obligation to rehire terminated employees of the latter.
18  Petitioner, despite its new name, was the mere
continuation of Zeta's corporate being, and still held the
obligation to honor all of Zeta's obligations, one of which
was to respect San Miguel's security of tenure. The
dismissal of San Miguel from employment on the pretext
that petitioner, being a different corporation, had no
obligation to accept him as its employee, was illegal and
ineffectual.
And, lastly, the CA rightfully upheld the NLRC's affirmance
of the grant of attorney's fees to San Miguel. Thereby, the
NLRC did not commit any grave abuse of its discretion,
considering that San Miguel had been compelled to litigate
and to incur expenses to protect his rights and interest. In
Producers Bank of the Philippines v. Court of Appeals,19the
Court ruled that attorney's fees could be awarded to a
party whom an unjustified act of the other party compelled
to litigate or to incur expenses to protect his interest. It
was plain that petitioner's refusal to reinstate San Miguel
with backwages and other benefits to which he had been
legally entitled was unjustified, thereby entitling him to
recover attorney's fees.
WHEREFORE, the Court AFFIRMS the decision of the Court
of Appeals promulgated on November 6, 2002; and ORDERS
petitioner to pay the costs of suit.
SO ORDERED.
G.R. No. L-28113               March 28, 1969
THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and
AMER MACAORAO BALINDONG, petitioners, 
 statute before this was declared unconstitutional, its
vs. PANGANDAPUN BENITO, HADJI NOPODIN
MACAPUNUNG, HADJI HASAN MACARAMPAD, FREDERICK
V. DUJERTE MONDACO ONTAL, MARONSONG ANDOY,
MACALABA INDAR LAO. respondents.
CASTRO, J.:
The petitioner Amer Macaorao Balindong is the mayor of
Malabang, Lanao del Sur, while the respondent
Pangandapun Bonito is the mayor, and the rest of the
respondents are the councilors, of the municipality of
MAYORDO, M.A
Balabagan of the same province. Balabagan was formerly a
part of the municipality of Malabang, having been created
on March 15, 1960, by Executive Order 386 of the then
President Carlos P. Garcia, out of barrios and sitios1  of the
latter municipality.
The petitioners brought this action for prohibition to nullify
Executive Order 386 and to restrain the respondent
municipal officials from performing the functions of their
respective office relying on the ruling of this Court
in  Pelaez v. Auditor General  2  and  Municipality of San
Joaquin v. Siva. 3
In Pelaez this Court, through Mr. Justice (now Chief Justice)
Concepcion, ruled: (1) that section 23 of Republic Act 2370
[Barrio Charter Act, approved January 1, 1960], by vesting
the power to create  barrios  in the provincial board, is a
"statutory denial of the presidential authority to create a
new barrio [and] implies a negation of the bigger power to
create municipalities," and (2) that section 68 of the
Administrative Code, insofar as it gives the President the
power to create municipalities, is unconstitutional (a)
because it constitutes an undue delegation of legislative
power and (b) because it offends against section 10 (1) of
article VII of the Constitution, which limits the President's
power over local governments to mere supervision. As this
Court summed up its discussion: "In short, even if it did not
entail an undue delegation of legislative powers, as it
certainly does, said section 68, as part of the Revised
Administrative Code, approved on March 10, 1917, must be
deemed repealed by the subsequent adoption of the
Constitution, in 1935, which is utterly incompatible and
inconsistent with said statutory enactment."
On the other hand, the respondents, while admitting the
facts alleged in the petition, nevertheless argue that the
rule announced in  Pelaez  can have no application in this
case because unlike the municipalities involved in  Pelaez,
the municipality of Balabagan is at least a  de
facto  corporation, having been organized under color of a
officers having been either elected or appointed, and the
municipality itself having discharged its corporate functions
for the past five years preceding the institution of this
action. It is contended that as a  de facto  corporation, its
existence cannot be collaterally attacked, although it may
be inquired into directly in an action for  quo warranto  at
the instance of the State and not of an individual like the
petitioner Balindong.
CORPORATION LAW CASES
LLB 3
It is indeed true that, generally, an inquiry into the legal
existence of a municipality is reserved to the State in a
proceeding for  quo warranto  or other direct proceeding,
and that only in a few exceptions may a private person
exercise this function of government.  4  But the rule
disallowing collateral attacks applies only where the
m u n i c i p a l c o r p o r a t i o n i s a t l e a s t a  d e
facto  corporations.  5  For where it is neither a
corporation  de jure  nor  de facto, but a nullity, the rule is
that its existence may be, questioned collaterally or
directly in any action or proceeding by any one whose
rights or interests ate affected thereby, including the
citizens of the territory incorporated unless they are
estopped by their conduct from doing so. 6
And so the threshold question is whether the municipality
of Balabagan is a  de facto  corporation. As earlier stated,
the claim that it is rests on the fact that it was organized
before the promulgation of this Court's decision in Pelaez. 7
Accordingly, we address ourselves to the question whether
a statute can lend color of validity to an attempted
organization of a municipality despite the fact that such
statute is subsequently declared unconstitutional.
This has been a litigiously prolific question, sharply dividing
courts in the United States. Thus, some hold that a  de
facto corporation cannot exist where the statute or charter
creating it is unconstitutional because there can be no  de
f a c t o  c o r p o r a t i o n w h e r e t h e r e c a n b e n o  d e
jure one, 8 while others hold otherwise on the theory that a
statute is binding until it is condemned as
unconstitutional. 9
An early article in the Yale Law Journal offers the following
analysis:
It appears that the true basis for denying to the
corporation a de facto status lay in the absence of
any legislative act to give vitality to its creation. An
examination of the cases holding, some of them
unreservedly, that a  de facto  office or municipal
corporation can exist under color of an
unconstitutional statute will reveal that in no
instance did the invalid act give life to the
corporation, but that either in other valid acts or in
the constitution itself the office or the corporation
was potentially created....
The principle that color of title under an
unconstitutional statute can exist only where there
Page 39 of 160
is some other valid law under which the
organization may be effected, or at least an
authority in potentia by the state constitution, has
its counterpart in the negative propositions that
there can be no color of authority in an
unconstitutional statute that plainly so appears on
its face or that attempts to authorize the ousting of
a  de jure  or  de facto  municipal corporation upon
the same territory; in the one case the fact would
imply the imputation of bad faith, in the other the
new organization must be regarded as a mere
usurper....
As a result of this analysis of the cases the following
principles may be deduced which seem to reconcile
the apparently conflicting decisions:
I. The color of authority requisite to the
o r g a n i z a t i o n o f a  d e f a c t o  m u n i c i p a l
corporation may be:
1. A valid law enacted by the legislature.
2. An unconstitutional law, valid on its face,
which has either (a) been upheld for a time by
the courts or (b) not yet been declared
void;  provided  that a warrant for its creation
can be found in some other valid law or in the
recognition of its potential existence by the
general laws or constitution of the state.
II. There can be no  de facto  municipal
corporation unless either directly or potentially,
such a de jurecorporation is authorized by some
legislative fiat.
III. There can be no color of authority in an
unconstitutional statute alone, the invalidity of
which is apparent on its face.
 
IV. There can be no  de facto  corporation
created to take the place of an existing  de
jure  corporation, as such organization would
clearly be a usurper.10
In the cases where a  de facto  municipal corporation was
recognized as such despite the fact that the statute
creating it was later invalidated, the decisions could fairly
be made to rest on the consideration that there was some
other valid law giving corporate vitality to the organization.
Hence, in the case at bar, the mere fact that Balabagan
was organized at a time when the statute had not been
i n v a l i d a t e d c a n n o t c o n c e i v a b l y m a k e i t a  d e
MAYORDO, M.A
factocorporation, as, independently of the Administrative
Code provision in question, there is no other valid statute
to give color of authority to its creation. Indeed,
in Municipality of San Joaquin v. Siva,  11  this Court granted
a similar petition for prohibition and nullified an executive
order creating the municipality of Lawigan in Iloilo on the
basis of thePelaez  ruling, despite the fact that the
municipality was created in 1961, before section 68 of the
Administrative Code, under which the President had acted,
was invalidated. 'Of course the issue of de facto municipal
corporation did not arise in that case.
In  Norton v. Shelby Count,  12  Mr. Justice Field said: "An
unconstitutional act is not a law; it confers no rights; it
imposes no duties; it affords no protection;  it creates no
office; it is, in legal contemplation, as inoperative as
though it had never been passed." Accordingly, he held that
bonds issued by a board of commissioners created under an
invalid statute were unenforceable.
Executive Order 386 "created no office." This is not to say,
however, that the acts done by the municipality of
Balabagan in the exercise of its corporate powers are a
nullity because the executive order "is, in legal
contemplation, as inoperative as though it had never been
passed." For the existence of Executive, Order 386 is "an
operative fact which cannot justly be ignored." As Chief
Justice Hughes explained in Chicot County Drainage District
v. Baxter State Bank: 13
The courts below have proceeded on the theory
that the Act of Congress, having been found to be
unconstitutional, was not a law; that it was
inoperative, conferring no rights and imposing no
duties, and hence affording no basis for the
challenged decree. Norton v. Shelby County, 118
U.S. 425, 442; Chicago, I. & L. Ry. Co. v. Hackett,
228 U.S. 559, 566. It is quite clear, however, that
such broad statements as to the effect of a
determination of unconstitutionality must be taken
with qualifications. The actual existence of a
statute, prior to such a determination, is an
operative fact and may have consequences which
cannot justly be ignored. The past cannot always be
erased by a new judicial declaration. The effect of
the subsequent ruling as to invalidity may have to
be considered in various aspects — with respect to
particular relations, individual and corporate, and
particular conduct, private and official. Questions
of rights claimed to have become vested, of status
of prior determinations deemed to have finality and
acted upon accordingly, of public policy in the light
CORPORATION LAW CASES
LLB 3
of the nature both of the statute and of its previous
application, demand examination. These questions
are among the most difficult of those which have
engaged the attention of courts, state and federal,
and it is manifest from numerous decisions that an
all-inclusive statement of a principle of absolute
retroactive invalidity cannot be justified.
There is then no basis for the respondents' apprehension
that the invalidation of the executive order creating
Balabagan would have the effect of unsettling many an act
done in reliance upon the validity of the creation of that
municipality. 14
ACCORDINGLY, the petition is granted, Executive Order 386
is declared void, and the respondents are hereby
permanently restrained from performing the duties and
functions of their respective offices. No pronouncement as
to costs.
G.R. No. L-2598             June 29, 1950
C. ARNOLD HALL and BRADLEY P. HALL, petitioners, 
 such inquiry may be had at the suit of the Insular
vs. EDMUNDO S. PICCIO, Judge of the Court of First
Instance of Leyte, FRED BROWN, EMMA BROWN, HIPOLITA
CAPUCIONG, in his capacity as receiver of the Far Eastern
Lumber and Commercial Co., Inc.,respondents.
BENGZON, J.:
This is petition to set aside all the proceedings had in civil
case No. 381 of the Court of First Instance of Leyte and to
enjoin the respondent judge from further acting upon the
same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall
and Bradley P. Hall, and the respondents Fred Brown, Emma
Brown, Hipolita D. Chapman and Ceferino S. Abella, signed
and acknowledged in Leyte, the article of incorporation of
the Far Eastern Lumber and Commercial Co., Inc.,
organized to engage in a general lumber business to carry
on as general contractors, operators and managers, etc.
Attached to the article was an affidavit of the treasurer
stating that 23,428 shares of stock had been subscribed and
fully paid with certain properties transferred to the
corporation described in a list appended thereto.
(2) Immediately after the execution of said articles of
incorporation, the corporation proceeded to do business
with the adoption of by-laws and the election of its
officers.
Page 40 of 160
(3) On December 2, 1947, the said articles of incorporation
were filed in the office of the Securities and Exchange
Commissioner, for the issuance of the corresponding
certificate of incorporation.
(4) On March 22, 1948, pending action on the articles of
incorporation by the aforesaid governmental office, the
respondents Fred Brown, Emma Brown, Hipolita D.
Chapman and Ceferino S. Abella filed before the Court of
First Instance of Leyte the civil case numbered 381,
entitled "Fred Brown et al.  vs. Arnold C. Hall et al.",
alleging among other things that the Far Eastern Lumber
and Commercial Co. was an unregistered partnership; that
they wished to have it dissolved because of bitter
dissension among the members, mismanagement and fraud
by the managers and heavy financial losses.
(5) The defendants in the suit, namely, C. Arnold Hall and
Bradley P. Hall, filed a motion to dismiss, contesting the
court's jurisdiction and the sufficiently of the cause of
action.
(6) After hearing the parties, the Hon. Edmund S. Piccio
ordered the dissolution of the company; and at the request
of plaintiffs, appointed of the properties thereof, upon the
filing of a P20,000 bond.
(7) The defendants therein (petitioners herein) offered to
file a counter-bond for the discharge of the receiver, but
the respondent judge refused to accept the offer and to
discharge the receiver. Whereupon, the present special civil
action was instituted in this court. It is based upon two
main propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381 to
decree the dissolution of the company, because it being
a  de facto  corporation, dissolution thereof may only be
ordered in a  quo warranto  proceeding instituted in
accordance with section 19 of the Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown
had signed the article of incorporation but only a
partnership.
Discussion: The second proposition may at once be
dismissed. All the parties are informed that the Securities
and Exchange Commission has not, so far, issued the
corresponding certificate of incorporation. All of them
know, or sought to know, that the personality of a
corporation begins to exist only from the moment such
certificate is issued — not before (sec. 11, Corporation
MAYORDO, M.A
Law). The complaining associates have not represented to
the others that they were incorporated any more than the
latter had made similar representations to them. And as
nobody was led to believe anything to his prejudice and
damage, the principle of estoppel does not apply. Obviously
this is not an instance requiring the enforcement of
contracts  with the corporation  through the rule of
estoppel.
The first proposition above stated is premised on the theory
that, inasmuch as the Far Eastern Lumber and Commercial
Co., is a de facto corporation, section 19 of the Corporation
Law applies, and therefore the court had not jurisdiction to
take cognizance of said civil case number 381. Section 19
reads as follows:
. . . The due incorporation of any corporations
claiming in good faith to be a corporation under
this Act and its right to exercise corporate powers
shall not be inquired into collaterally in any private
suit to which the corporation may be a party, but
Government on information of the Attorney-
General.
There are least two reasons why this section does not
govern the situation. Not having obtained the certificate of
incorporation, the Far Eastern Lumber and Commercial Co.
— even its stockholders — may not probably claim "in good
faith" to be a corporation.
Under our statue it is to be noted (Corporation Law,
sec. 11) that it is the issuance of a certificate of
incorporation by the Director of the Bureau of
Commerce and Industry which calls a corporation
into being. The immunity if collateral attack is
granted to corporations "claiming in good faith to
be a corporation under this act." Such a claim is
compatible with the existence of errors and
irregularities; but not with a total or substantial
disregard of the law. Unless there has been an
evident attempt to comply with the law the claim
to be a corporation "under this act" could not be
made "in good faith." (Fisher on the Philippine Law
o f S t o c k C o r p o r a t i o n s , p . 7 5 .  S e e
also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)
Second, this is not a suit in which  the corporation  is a
party. This is a litigation between stockholders of the
alleged corporation, for the purpose of obtaining its
dissolution. Even the existence of a  de jure  corporation
CORPORATION LAW CASES
LLB 3
may be terminated in a private suit for its dissolution
between stockholders, without the intervention of the
state.
There might be room for argument on the right of minority
stockholders to sue for dissolution;1 but that question does
not affect the court's jurisdiction, and is a matter for
decision by the judge, subject to review on appeal. Whkch
brings us to one principal reason why this petition may not
prosper, namely: the petitioners have their remedy by
appealing the order of dissolution at the proper time.
There is a secondary issue in connection with the
appointment of a receiver. But it must be admitted that
receivership is proper in proceedings for dissolution of a
company or corporation, and it was no error to reject the
counter-bond, the court having declared the dissolution. As
to the amount of the bond to be demanded of the receiver,
much depends upon the discretion of the trial court, which
in this instance we do not believe has been clearly abused.
Judgment: The petition will, therefore, be dismissed, with
costs. The preliminary injunction heretofore issued will be
dissolved.
Ozaeta, Pablo, Tuason, Montemayor, and Reyes,
JJ., concur.
G.R. No. 22106           September 11, 1924
ASIA BANKING CORPORATION, plaintiff-appellee, 
 also estopped from denying its own corporate existence.
vs. STANDARD PRODUCTS, CO., INC., defendant-appellant.
OSTRAND, J.:
This action is brought to recover the sum of P24,736.47,
the balance due on the following promissory note:
P37,757.22
MANILA, P. I.,     Nov. 28, 1921.
MANILA, P. I., Nov. 28, 1921.
On demand, after date we promise to pay to the
Asia Banking Corporation, or order, the sum of
thirty-seven thousand seven hundred fifty-seven
and 22/100 pesos at their office in Manila, for
value received, together with interest at the rate
of ten per cent per annum.
No. ________ Due __________
THE STANDARD PRODUCTS CO., INC.
 think the motion was appropriate. Since there was no
        By     (Sgd.) GEORGE H. SEAVER
                By     President
Page 41 of 160
The court below rendered judgment in favor of the plaintiff
for the sum demanded in the complaint, with interest on
the sum of P24,147.34 from November 1, 1923, at the rate
of 10 per cent per annum, and the costs. From this
judgment the defendant appeals to this court.
At the trial of the case the plaintiff failed to prove
affirmatively the corporate existence of the parties and the
appellant insists that under these circumstances the court
erred in finding that the parties were corporations with
juridical personality and assigns same as reversible error.
There is no merit whatever in the appellant's contention.
The general rule is that in the absence of fraud a person
who has contracted or otherwise dealt with an association
in such a way as to recognize and in effect admit its legal
existence as a corporate body is thereby estopped to deny
its corporate existence in any action leading out of or
involving such contract or dealing, unless its existence is
attacked for cause which have arisen since making the
contract or other dealing relied on as an estoppel and this
applies to foreign as well as to domestic corporations. (14
C. J., 227; Chinese Chamber of Commerce vs. Pua Te Ching,
14 Phil., 222.)
The defendant having recognized the corporate existence
of the plaintiff by making a promissory note in its favor and
making partial payments on the same is therefore estopped
to deny said plaintiff's corporate existence. It is, of course,
Under these circumstances it was unnecessary for the
plaintiff to present other evidence of the corporate
existence of either of the parties. It may be noted that
there is no evidence showing circumstances taking the case
out of the rules stated.
The judgment appealed from is affirmed, with the costs
against the appellant. So ordered.
CRANSON v. INTERNATIONAL BUSINESS MACHINES
CORPORATION
[No. 245, September Term, 1963.]
Court of Appeals of Maryland.
Decided April 30, 1964.
*479 The cause was argued before HENDERSON, HAMMOND,
HORNEY, MARBURY and SYBERT, JJ.
William J. Brannan, Jr., with whom were Kardy, Brannan &
Neumann on the brief, for the appellant.
Henry J. Noyes for the appellee.
MAYORDO, M.A
HORNEY, J., delivered the opinion of the Court.
On the theory that the Real Estate Service Bureau was
neither a de jure nor a de facto corporation and that Albion
C. Cranson, Jr., was a partner in the business conducted by
the Bureau and as such was personally liable for its debts,
the International Business Machines Corporation brought
this action against Cranson for the balance due on electric
typewriters purchased by the Bureau. At the same time it
moved for summary judgment and supported the motion by
affidavit. In due course, Cranson filed a general issue plea
and an affidavit in opposition to summary judgment in
which he asserted in effect that the Bureau was a  de
facto corporation and that he was not personally liable for
its debts.
The agreed statement of facts shows that in April 1961,
Cranson was asked to invest in a new business corporation
which was about to be created. Towards this purpose he
met with other interested individuals and an attorney and
agreed to purchase stock and become an officer and
director. Thereafter, upon being advised by the attorney
that the corporation had been formed under the laws of
Maryland, he paid for and received a stock certificate
evidencing ownership of shares in the corporation, and was
shown the corporate seal and minute book. The business of
the new venture was conducted as if it were a corporation,
through corporate bank accounts, with auditors maintaining
corporate books and records, and under a
lease  *480  entered into by the corporation for the office
from which it operated its business. Cranson was elected
president and all transactions conducted by him for the
corporation, including the dealings with I.B.M., were made
as an officer of the corporation. At no time did he assume
any personal obligation or pledge his individual credit to
I.B.M. Due to an oversight on the part of the attorney, of
which Cranson was not aware, the certificate of
incorporation, which had been signed and acknowledged
prior to May 1, 1961, was not filed until November 24,
1961. Between May 17 and November 8, the Bureau
purchased eight typewriters from I.B.M., on account of
which partial payments were made, leaving a balance due
of $4,333.40, for which this suit was brought.
Although a question is raised as to the propriety of making
use of a motion for summary judgment as the means of
determining the issues presented by the pleadings, we
genuine dispute as to the material facts, the only question
was whether I.B.M. was entitled to judgment as a matter of
law. The trial court found that it was, but we disagree.
CORPORATION LAW CASES
LLB 3
The fundamental question presented by the appeal is
whether an officer [1]  of a defectively incorporated
association may be subjected to personal liability under the
circumstances of this case. We think not.
Traditionally, two doctrines have been used by the courts to
clothe an officer of a defectively incorporated association
with the corporate attribute of limited liability. The first,
often referred to as the doctrine of de facto corporations,
has been applied in those cases where there are elements
showing: (1) the existence of law authorizing incorporation:
(2) an effort in good faith to incorporate under the existing
law; and (3) actual user or exercise of corporate powers.
B a l l a n t i n e ,  P r i v a t e C o r p o r a t i o n s ,  § 2 3 ; 8
F l e t c h e r ,  C y c l o p e d i a o f t h e L a w o f
P r i v a t e  * 4 8 1  C o r p o r a t i o n s ,  § 3 7 7 7 ; 1 3 A m .
Jur., Corporations, §§ 49-56; 18 C.J.S., Corporations, § 99.
The second, the doctrine of estoppel to deny the corporate
existence, is generally employed where the person seeking
to hold the officer personally liable has contracted or
otherwise dealt with the association in such a manner as to
recognize and in effect admit its existence as a corporate
body. Ballantine,  op.cit.,  § 29; Machen,  Modern Law of
Corporations, §§ 278-282; 18 C.J.S., op.cit., § 109.
It is not at all clear what Maryland has done with respect to
the two doctrines. There have been no recent cases in this
State on the subject and some of the seemingly
irreconcilable earlier cases offer little to clarify the
problem.[2]
In one line of cases, the Court, in determining the rights
and liabilities of a defectively organized corporation, or a
member or stockholder thereof, seems to have drawn a
distinction between those acts or requirements which are a
condition precedent to corporate existence and those acts
prescribed by law to be done after incorporation. In so
doing, it has been generally held that where there had
been a failure to comply with a requirement which the law
declared to be a condition precedent to the existence of
the corporation, the corporation was not a legal entity and
was therefore precluded from suing or being sued as
such. Boyce v. M.E. Church, 46 Md. 359 (1877); Regester v.
Medcalf,  71 Md. 528,  18 A. 966  (1889);  Bonaparte v. Lake
Roland R.R. Co.,  75 Md. 340,  23 A. 784  (1892);  Jones v.
Linden Building Asso., 79 Md. 73, 29 A. 76 (1894); Maryland
Tube Works v. West End Imp. Co.,  87 Md. 207,  39 A.
620(1898);  Cleaveland v. Mullin,  96 Md.  *482  598,  54 A.
665  (1903);  National Shutter Bar Co. v. Zimmerman,  110
Md. 313,  73 A. 19  (1909). These cases appear to stand for
Page 42 of 160
the proposition that substantial compliance with those
formalities of the corporation law, which are made a
condition precedent to corporate existence, was not only
necessary for the creation of a corporation de jure, but was
a l s o a p r e r e q u i s i t e t o t h e e x i s t e n c e o f a  d e
facto corporation or a corporation by estoppel.
In the  Boyce  case, an action in assumpsit against a
defectively incorporated religious society, the Court (at p.
373 and p. 374), in holding that the society was not
estopped to deny its corporate existence, said:
"We think it would be extending the doctrine of estoppel to
an extent, not justified by the principles of public policy, to
allow it to operate through the conduct of the parties
concerned, to create substantially a  de facto  corporation,
with just such powers as the parties may by their acts give
to it.
***
"The statute law of the State, expressly requiring certain
prescribed acts to be done to constitute a corporation, to
permit parties indirectly, or upon the principle of estoppel,
virtually to create a corporation for any purpose, or to have
acts so construed, would be in manifest opposition to the
statute law, and clearly against its policy, and justified
upon no sound principle in the administration of justice."
In the  Maryland Tube  case, an action by a corporation for
specific performance of a contract to convey land which it
had entered into prior to its becoming a legal entity, the
Court, having cited (at p. 217) the statements in  Jones v.
Aspen Hardware Co.,  40 P. 457  (Colo. 1895),[3]  with
approval for the  *483proposition that "`the doctrine of
estoppel cannot be successfully invoked, unless the
corporation has at least a de facto existence,'" that "`a de
factocorporation can never be recognized in violation of a
positive law'" and that "`there is a broad distinction
between those acts made necessary by the statute  as a
prerequisite to the exercise of corporate powers,  and
those acts required of individuals seeking incorporation but
not made prerequisite to the exercise of such powers,'"
went on to say (at p. 218) that "these principles were
clearly recognized and applied" in the Boyce case.
In the National Shutter Bar case, an action by a corporation
for an alleged libel which had occurred before the
performance of a condition precedent necessary for legal
incorporation, it was held — citing the Maryland Tube case
for the proposition that statutory conditions precedent
must have been complied with to give existence to
corporations formed under general laws — that the
MAYORDO, M.A
corporation had no legal existence at the time of the
alleged libel. In referring to the Boycecase, it was said (at
p. 320) that "it has been held by our predecessors that a
corporation cannot be actually or virtually created by
estoppel in Maryland." And, on the basis of the statements
in  Jones v. Aspen Hardware Co., supra  (also relied on in
the  Maryland Tube  case), it was concluded that the
corporation could not maintain the action.
On the other hand, where the corporation has obtained
legal existence but has failed to comply with a condition
subsequent to corporate existence, this Court has held that
such nonperformance afforded the State the right to
institute proceedings for the forfeiture of the charter, but
that such neglect or omission could never be set up by the
corporation itself, or by its members and stockholders, as a
defense to an action to enforce their liabilities.  C. & O.
Canal Co. v. B. & O. Railroad Co.,  4 G. & J. 1
(1832);  Hammond v. Straus,  53 Md. 1  (1880);  Murphy v.
Wheatley, 102 Md. 501, 63 A. 62 (1906).
*484 In the Hammond case, an action by a creditor against
a stockholder of a state bank on his statutory liability, the
Court, after stating that a corporation or a stockholder
could not defeat an action by showing noncompliance with
the requirements of the corporation law unless the acts
required are conditions precedent to corporate existence,
said (at p. 15):
"By holding otherwise, parties might avail themselves of the
powers and privileges of a corporation, without in any
manner subjecting themselves to its duties and obligations,
and might set up their own neglect of duty, of wilful
omission to comply with the requirements of the statute, as
means of discharge from all their just obligations under the
law. This is forbidden by every principle of law and justice,
and hence such a defense could never be tolerated."
It seems clear therefore that when a defect in the
incorporation process resulted from a failure to comply
with a condition subsequent, the doctrine of estoppel may
be applied for the benefit of a creditor to estop the
corporation, or the members or stockholders thereof, from
denying its corporate existence. See Brune (Herbert M.,
Jr.),  Maryland Corporation Law and Practice  (rev. ed.), §
339.
In another line of Maryland cases which determined the
rights and liabilities of a defectively organized corporation,
or a member or stockholder thereof, the Court, apparently
disregarding the distinction made between those
CORPORATION LAW CASES
LLB 3
requirements which are conditions precedent and those
which are conditions subsequent to corporate existence,
has generally precluded, on the grounds of estoppel or
collateral attack, inquiry into the question of corporate
existence.  Maltby v. Northwestern Va. R.R. Co.,  16 Md.
422  (1860);  Franz v. Teutonia Building Asso.,  24 Md.
259 (1866); Grape Sugar & Vinegar Mfg. Co. v. Small,40 Md.
395 (1874); Laflin & Rand Powder Co. v. Sinsheimer, 46 Md.
315 (1877); Keene v. Van Reuth, 48 Md. 184 (1878); Bartlett
v. Wilbur,53 Md. 485  (1880);  Pott & Co. v. Schmucker,  84
Md. 535,  36 A. 592  (1897). In the  Grape Sugar  case, an
action against a defectively organized corporation
to  *485  recover the balance due for work done and
materials furnished, the Court said (at p. 400):
"The second prayer proceeds upon the assumption that the
[corporation] is not liable, provided the work was done
prior to the recording of the certificate of incorporation. It
is true, that under the general incorporation law of this
State, the recording of the certificate was necessary to
constitute the [corporation] a body politic. If, however, the
contract was made with the [creditor] through * * * [the]
President of the [corporation], after the certificate had
been signed by the members of the proposed corporation,
but before it was recorded, and the company, after its
incorporation was complete, accepted the work done under
the contract, it will be estopped, both in law and equity,
from denying its liability, on account of the same."
Cf.  Hammond v. Straus, supra.  And see to the
contrary  Boyce v. M.E. Church, supra,  which might be
distinguishable in that it involved an effort to impose
liability on a religious society and not a business
corporation.
In the Laflin & Rand case, decided in the same year (1877)
as the  Boyce  case, the Court, in an action against certain
members of a corporation to make them individually liable
for goods sold and delivered to the corporation, said (at p.
321):
"[The company] has been clothed with all the forms of a
corporation by the laws of a neighboring State, and was in
the exercise and use of the franchises conferred upon it. It
was a corporation de facto at the time the goods were sold
and delivered to it * * * and its existence as a corporation
cannot be collaterally drawn into question.
"To permit a recovery against the defendants, and thereby
to say that they are to be regarded in law as a voluntary
unincorporated association, would be a departure from all
Page 43 of 160
the cases. The debt was not created with them individually,
but with a company acting  *486  under a formal
incorporation, and in the exercise of its corporate powers.
This [creditor] dealt with it and gave it credit as a
corporation. If its assets are not ample to pay, it is the
misfortune of the creditor."[4]
See also the  Franz  case at p. 270 (of 24 Md.) and
the  Bartlett  case at p. 498 (of 53 Md.) for similar
statements of the law. From these cases it appears that
where the parties have assumed corporate existence and
dealt with each other on that basis, the Court will apply
the estoppel doctrine on the theory that the parties by
recognizing the organization as a corporation were
thereafter prevented from raising a question as to its
corporate existence.
When summarized, the law in Maryland pertaining to the de
facto and estoppel doctrines reveals that the cases seem to
fall into one or the other of two categories. In one line of
cases, the Court, choosing to disregard the nature of the
dealings between the parties, refused to recognize both
doctrines where there had been a failure to comply with a
condition precedent to corporate existence, but, whenever
such noncompliance concerned a condition subsequent to
incorporation, the Court often applied the estoppel
doctrine. In the other line of cases, the Court, choosing to
make no distinction between defects which  *487were
conditions precedent and those which were conditions
subsequent, emphasized the course of conduct between
the parties and applied the estoppel doctrine when there
had been substantial dealings between them on a corporate
basis.
Whether or not the decisions in the  Boyce  and  Maryland
Tube  cases had the effect of repudiating the  de
facto  doctrine in this state, as some of the text writers
seem to think, is a question we do not reach in this case
and therefore need not consider at this time. On the other
hand, since it is clear that the Maryland Tube and National
Shutter Bar  cases are inconsistent with other Maryland
cases insofar as they held (in relying on the statements
in Jones v. Aspen Hardware Co., supra) that the doctrine of
estoppel cannot be invoked unless a corporation has at
least a  de facto  existence, both cases —  Maryland
Tube and National Shutter Bar — should be, and are hereby,
overruled to the extent of the inconsistency. There is, as
we see it, a wide difference between creating a
corporation by means of the  de facto  doctrine and
estopping a party, due to his conduct in a particular case,
from setting up the claim of no incorporation. Although
MAYORDO, M.A
some cases tend to assimilate the doctrines of
incorporation  de facto  and by estoppel, each is a distinct
theory and they are not dependent on one another in their
application. See 8 Fletcher,  op.cit.,  § 3763;  France on
Corporations  (2nd ed.), § 29; 18 C.J.S.,  op.cit.,  § 111h.
Where there is a concurrence of the three elements
necessary for the application of the  de facto  corporation
doctrine, there exists an entity which is a corporation  de
jure  against all persons but the state. On the other hand,
the estoppel theory is applied only to the facts of each
particular case and may be invoked even where there is no
corporation de facto.Accordingly, even though one or more
of the requisites of a  de facto  corporation are absent, we
think that this factor does not preclude the application of
the estoppel doctrine[5] in a proper case, such as the one at
bar.
*488  I.B.M. contends that the failure of the Bureau to file
its certificate of incorporation debarred  all  corporate
existence. But, in spite of the fact that the omission might
have prevented the Bureau from being either a
corporation  de jure  or  de facto,[6]Jones v. Linden Building
Asso., supra,  we think that I.B.M. having dealt with the
Bureau as if it were a corporation and relied on its credit
rather than that of Cranson, is estopped to assert that the
Bureau was not incorporated at the time the typewriters
were purchased.  Laflin & Rand Powder Co. v. Sinsheimer,
supra. See also Tulane Improvement Co. v. S.A. Chapman &
Co., 56 So. 509 (La. 1911). In 1 Clark and Marshall, Private
Corporations, § 89, it is stated:
"The doctrine in relation to estoppel is based upon the
ground that it would generally be inequitable
to *489 permit the corporate existence of an association to
be denied by persons who have represented it to be a
corporation, or held it out as a corporation, or by any
persons who have recognized it as a corporation by dealing
with it as such; and by the overwhelming weight of
authority, therefore, a person may be estopped to deny the
legal incorporation of an association which is not even a
corporation de facto."
In cases similar to the one at bar, involving a failure to file
articles of incorporation, the courts of other jurisdictions
have held that where one has recognized the corporate
existence of an association, he is estopped to assert the
contrary with respect to a claim arising out of such
dealings. See, for example,  Tarbell v. Page,  24 Ill.
46 (1860); Magnolia Shingle Co. v. J. Zimmern's Co., 58 So.
90 (Ala. 1912); Lockwood v. Wynkoop, 144 N.W. 846 (Mich.
CORPORATION LAW CASES
LLB 3
1914); John Lucas Co. v. Bernhardt's Estate, 100 So.399 (La.
1924).
Since I.B.M. is estopped to deny the corporate existence of
the Bureau, we hold that Cranson was not liable for the
balance due on account of the typewriters.
Judgment reversed; the appellee to pay the costs.
G.R. No. L-11442             May 23, 1958
MANUELA T. VDA. DE SALVATIERRA, petitioner, 
 SEC. 3.WHEN PETITION FILED; CONTENTS AND
vs. HON. LORENZO C. GARLITOS, in his capacity as Judge
of the Court of First Instance of Leyte, Branch II, and
SEGUNDINO REFUERZO, respondents.
FELIX, J.:
This is a petition for certiorari filed by Manuela T. Vda. de
Salvatierra seeking to nullify the order of the Court of First
Instance of Leyte in Civil Case No. 1912, dated March 21,
1956, relieving Segundino Refuerzo of liability for the
contract entered into between the former and the
Philippine Fibers Producers Co., Inc., of which Refuerzo is
the president. The facts of the case are as follows:
Manuela T. Vda. de Salvatierra appeared to be the owner of
a parcel of land located at Maghobas, Poblacion, Burauen,
Teyte. On March 7, 1954, said landholder entered into a
contract of lease with the Philippine Fibers Producers Co.,
Inc., allegedly a corporation "duly organized and existing
under the laws of the Philippines, domiciled at Burauen,
Leyte, Philippines, and with business address therein,
represented in this instance by Mr. Segundino Q. Refuerzo,
the President". It was provided in said contract, among
other things, that the lifetime of the lease would be for a
period of 10 years; that the land would be planted to
kenaf, ramie or other crops suitable to the soil; that the
lessor would be entitled to 30 per cent of the net income
accruing from the harvest of any, crop without being
responsible for the cost of production thereof; and that
after every harvest, the lessee was bound to declare at the
earliest possible time the income derived therefrom and to
deliver the corresponding share due the lessor.
Apparently, the aforementioned obligations imposed on the
alleged corporation were not complied with because on
April 5, 1955, Alanuela T. Vda, de Salvatierra filed with the
Court of First Instance of Leyte a complaint against the
Philippine Fibers Producers Co., Inc., and Segundino Q.
Refuerzo, for accounting, rescission and damages (Civil
Case No. 1912). She averred that sometime in April, 1954,
defendants planted kenaf on 3 hectares of the leased
Page 44 of 160
property which crop was, at the time of the
commencement of the action, already harvested, processed
and sold by defendants; that notwithstanding that fact,
defendants refused to render an accounting of the income
derived therefrom and to deliver the lessor's share; that
the estimated gross income was P4,500, and the deductible
expenses amounted to P1,000; that as defendants' refusal
to undertake such task was in violation of the terms of the
covenant entered into between the plaintiff and defendant
corporation, a rescission was but proper.
As defendants apparently failed to file their answer to the
complaint, of which they were allegedly notified, the Court
declared them in default and proceeded to receive
plaintiff's evidence. On  June 8, 1955, the lower Court
rendered judgment granting plaintiff's prayer, and required
defendants to render a complete accounting of the harvest
of the land subject of the proceeding within 15 days from
receipt of the decision and to deliver 30 per cent of the net
income realized from the last harvest to plaintiff, with
legal interest from the date defendants received payment
for said crop. It was further provide that upon defendants'
failure to abide by the said requirement, the gross income
would be fixed at P4,200 or a net income of P3,200 after
deducting the expenses for production, 30 per cent of
which or P960 was held to be due the plaintiff pursuant to
the aforementioned contract of lease, which was declared
rescinded.
No appeal therefrom having been perfected within the
reglementary period, the Court, upon motion of plaintiff,
issued a writ of execution, in virtue of which the Provincial
Sheriff of Leyte caused the attachment of 3 parcels of land
registered in the name of Segundino Refuerzo. No property
of the Philippine Fibers Producers Co., Inc., was found
available for attachment. On January 31, 1956, defendant
Segundino Refuerzo filed a motion claiming that the
decision rendered in said Civil Case No. 1912 was null and
void with respect to him, there being no allegation in the
complaint pointing to his personal liability and thus prayed
that an order be issued limiting such liability to defendant
corporation. Over plaintiff's opposition, the Court  a
quo granted the same and ordered the Provincial Sheriff of
Leyte to release all properties belonging to the movant that
might have already been attached, after finding that the
evidence on record made no mention or referred to any
fact which might hold movant personally liable therein. As
plaintiff's petition for relief from said order was denied,
Manuela T. Vda.de Salvatierra instituted the instant action
asserting that the trial Judge in issuing the order
MAYORDO, M.A
complained of, acted with grave abuse of discretion and
prayed that same be declared a nullity.
From the foregoing narration of facts, it is clear that the
order sought to be nullified was issued by tile respondent
Judge upon motion of defendant Refuerzo, obviously
pursuant to Rule 38 of the Rules of Court. Section 3 of said
Rule, however, in providing for the period within which
such a motion may be filed, prescribes that:
VERIFICATION. — A petition provided for in either of
the preceding sections of this rule must be verified,
filed  within sixty days after the petitioner learns
of the judgment, order, or other proceeding to be
set aside, and not more than six months after such
judgment or order was entered, or such proceeding
was taken; and must be must be accompanied with
affidavit showing the fraud, accident, mistake, or
excusable negligence relied upon, and the facts
constituting the petitioner is good and substantial
cause of action or defense, as the case may be,
which he may prove if his petition be granted".
(Rule 38)
The aforequoted provision treats of 2 periods, i.e., 60 days
after petitioner learns of the judgment, and not more than
6 months after the judgment or order was rendered, both
of which must be satisfied. As the decision in the case at
bar was under date of June 8, 1955, whereas the motion
filed by respondent Refuerzo was dated January 31, 1956,
or after the lapse of 7 months and 23 days, the filing of the
aforementioned motion was clearly made beyond the
prescriptive period provided for by the rules. The remedy
allowed by Rule 38 to a party adversely affected by a
decision or order is certainly an alert of grace or
benevolence intended to afford said litigant a penultimate
opportunity to protect his interest. Considering the nature
of such relief and the purpose behind it, the periods fixed
by said rule are non-extendible and never interrupted; nor
could it be subjected to any condition or contingency
because it is of itself devised to meet a condition or
contingency (Palomares vs. Jimenez,*  G.R. No. L-4513,
January 31, 1952). On this score alone, therefore, the
petition for a writ of  certiorari  filed herein may be
granted. However, taking note of the question presented by
the motion for relief involved herein, We deem it wise to
delve in and pass upon the merit of the same.
Refuerzo, in praying for his exoneration from any liability
resulting from the non-fulfillment of the obligation imposed
on defendant Philippine Fibers Producers Co., Inc.,
CORPORATION LAW CASES
LLB 3
interposed the defense that the complaint filed with the
lower court contained no allegation which would hold him
liable personally, for while it was stated therein that he
was a signatory to the lease contract, he did so in his
capacity as president of the corporation. And this allegation
was found by the Court a quo to be supported by the
records. Plaintiff on the other hand tried to refute this
averment by contending that her failure to specify
defendant's personal liability was due to the fact that all
the time she was under the impression that the Philippine
Fibers Producers Co., Inc., represented by Refuerzo was a
duly registered corporation as appearing in the contract,
but a subsequent inquiry from the Securities and Exchange
Commission yielded otherwise. While as a general rule a
person who has contracted or dealt with an association in
such a way as to recognize its existence as a corporate
body is estopped from denying the same in an action arising
out of such transaction or dealing, (Asia Banking
Corporation vs. Standard Products Co., 46 Phil., 114;
Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta
Development Co.; vs. Steamship Pompey, 49 Phil., 117), yet
this doctrine may not be held to be applicable where fraud
takes a part in the said transaction. In the instant case, on
plaintiff's charge that she was unaware of the fact that the
Philippine Fibers Producers Co., Inc., had no juridical
personality, defendant Refuerzo gave no confirmation or
denial and the circumstances surrounding the execution of
the contract lead to the inescapable conclusion that
plaintiff Manuela T. Vda. de Salvatierra was really made to
believe that such corporation was duly organized in
accordance with law.
There can be no question that a corporation with registered
has a juridical personality separate and distinct from its
component members or stockholders and officers such that
a corporation cannot be held liable for the personal
indebtedness of a stockholder even if he should be its
president (Walter A. Smith Co. vs. Ford, SC-G.R. No. 42420)
and conversely, a stockholder or member cannot be held
personally liable for any financial obligation be, the
corporation in excess of his unpaid subscription. But this
rule is understood to refer merely to registered
corporations and cannot be made applicable to the liability
of members of an unincorporated association. The reason
behind this doctrine is obvious-since an organization which
before the law is non-existent has no personality and would
be incompetent to act and appropriate for itself the powers
and attribute of a corporation as provided by law; it cannot
create agents or confer authority on another to act in its
behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at
Page 45 of 160
their own risk. And as it is an elementary principle of law
that a person who acts as an agent without authority or
without a principal is himself regarded as the principal,
possessed of all the rights and subject to all the liabilities
of a principal, a person acting or purporting to act on
behalf of a corporation which has no valid existence
assumes such privileges and obligations and comes
personally liable for contracts entered into or for other acts
performed as such, agent (Fay vs. Noble, 7 Cushing [Mass.]
188. Cited in II Tolentino's Commercial Laws of the
Philippines, Fifth Ed., P. 689-690). Considering that
defendant Refuerzo, as president of the unregistered
corporation Philippine Fibers Producers Co., Inc., was the
moving spirit behind the consummation of the lease
agreement by acting as its representative, his liability
cannot be limited or restricted that imposed upon
corporate shareholders. In acting on behalf of a corporation
which he knew to be unregistered, he assumed the risk of
reaping the consequential damages or resultant rights, if
any, arising out of such transaction.
Wherefore, the order of the lower Court of March 21, 1956,
amending its previous decision on this matter and ordering
the Provincial Sheriff of Leyte to release any and all
properties of movant therein which might have been
attached in the execution of such judgment, is hereby set
aside and nullified as if it had never been issued. With costs
against respondent Segundino Refuerzo. It is so ordered.
G.R. No. L-58028 April 18, 1989
CHIANG KAI SHEK SCHOOL, petitioner, 
 provides that "only natural or juridical persons may be
vs. COURT OF APPEALS and FAUSTINA FRANCO
OH, respondents.
CRUZ, J.:
An unpleasant surprise awaited Fausta F. Oh when she
reported for work at the Chiang Kai Shek School in Sorsogon
on the first week of July, 1968. She was told she had no
assignment for the next semester. Oh was shocked. She had
been teaching in the school since 1932 for a continuous
period of almost 33 years. And now, out of the blue, and for
no apparent or given reason, this abrupt dismissal.
Oh sued. She demanded separation pay, social security
benefits, salary differentials, maternity benefits and moral
and exemplary damages. 1 The original defendant was the
Chiang Kai Shek School but when it filed a motion to dismiss
on the ground that it could not be sued, the complaint was
amended.  2  Certain officials of the school were also
impleaded to make them solidarily liable with the school.
MAYORDO, M.A
The Court of First Instance of Sorsogon dismissed the
complaint.  3  On appeal, its decision was set aside by the
respondent court, which held the school suable and liable
while absolving the other defendants.  4  The motion for
reconsideration having been denied,  5  the school then
came to this Court in this petition for review on certiorari.
The issues raised in the petition are:
1. Whether or not a school that has not been incorporated
may be sued by reason alone of its long continued
existence and recognition by the government,
2. Whether or not a complaint filed against persons
associated under a common name will justify a judgment
against the association itself and not its individual
members.
3. Whether or not the collection of tuition fees and book
rentals will make a school profit-making and not charitable.
4. Whether or not the Termination Pay Law then in force
was available to the private respondent who was employed
on a year-to-year basis.
5. Whether or not the awards made by the respondent
court were warranted.
We hold against the petitioner on the first question. It is
true that Rule 3, Section 1, of the Rules of Court clearly
parties in a civil action." It is also not denied that the
school has not been incorporated. However, this omission
should not prejudice the private respondent in the
assertion of her claims against the school.
As a school, the petitioner was governed by Act No. 2706 as
amended by C.A. No. 180, which provided as follows:
Unless exempted for special reasons by the
Secretary of Public Instruction, any private school
or college recognized by the government shall be
incorporated under the provisions of Act No. 1459
known as the Corporation Law, within 90 days after
the date of recognition, and shall file with the
Secretary of Public Instruction a copy of its
incorporation papers and by-laws.
Having been recognized by the government, it was under
obligation to incorporate under the Corporation Law within
90 days from such recognition. It appears that it had not
CORPORATION LAW CASES
LLB 3
done so at the time the complaint was filed
notwithstanding that it had been in existence even earlier
than 1932. The petitioner cannot now invoke its own non-
compliance with the law to immunize it from the private
respondent's complaint.
There should also be no question that having contracted
with the private respondent every year for thirty two years
and thus represented itself as possessed of juridical
personality to do so, the petitioner is now estopped from
denying such personality to defeat her claim against it.
According to Article 1431 of the Civil Code, "through
estoppel an admission or representation is rendered
conclusive upon the person making it and cannot be denied
or disproved as against the person relying on it."
As the school itself may be sued in its own name, there is
no need to apply Rule 3, Section 15, under which the
persons joined in an association without any juridical
personality may be sued with such association. Besides, it
has been shown that the individual members of the board
of trustees are not liable, having been appointed only after
the private respondent's dismissal. 6
It is clear now that a charitable institution is covered by
the labor laws  7  although the question was still unsettled
when this case arose in 1968. At any rate, there was no law
even then  exempting  such institutions from the operation
of the labor laws (although they were exempted by the
Constitution from ad valorem taxes). Hence, even assuming
that the petitioner was a charitable institution as it claims,
the private respondent was nonetheless still entitled to the
protection of the Termination Pay Law, which was then in
force.
While it may be that the petitioner was engaged in
charitable works, it would not necessarily follow that those
in its employ were as generously motivated. Obviously,
most of them would not have the means for such charity.
The private respondent herself was only a humble school
teacher receiving a meager salary of Pl80. 00 per month.
At that, it has not been established that the petitioner is a
charitable institution, considering especially that it charges
tuition fees and collects book rentals from its
students.  8  While this alone may not indicate that it is
profit-making, it does weaken its claim that it is a non-
profit entity.
The petitioner says the private respondent had not been
illegally dismissed because her teaching contract was on a
Page 46 of 160
yearly basis and the school was not required to rehire her
in 1968. The argument is that her services were terminable
at the end of each year at the discretion of the school.
Significantly, no explanation was given by the petitioner,
and no advance notice either, of her relief after teaching
year in and year out for all of thirty-two years, the private
respondent was simply told she could not teach any more.
The Court holds, after considering the particular
circumstance of Oh's employment, that she had become a
permanent employee of the school and entitled to security
of tenure at the time of her dismissal. Since no cause was
shown and established at an appropriate hearing, and the
notice then required by law had not been given, such
dismissal was invalid.
The private respondent's position is no different from that
of the rank-and-file employees involved in  Gregorio
Araneta University Foundation v. NLRC,  9  of whom the
Court had the following to say:
Undoubtedly, the private respondents' positions as
deans and department heads of the petitioner
university are necessary in its usual business.
Moreover, all the private respondents have been
serving the university from 18 to 28 years. All of
them rose from the ranks starting as instructors
until they became deans and department heads of
the university. A person who has served the
University for 28 years and who occupies a high
administrative position in addition to teaching
duties could not possibly be a temporary employee
or a casual.
The applicable law is the Termination Pay Law, which
provided:
SECTION 1. In cases of employment, without a
definite period, in a commercial, industrial, or
agricultural establishment or enterprise, the
employer or the employee may terminate at any
time the employment with just cause; or without
just cause in the case of an employee by serving
written notice on the employer at least one month
in advance, or in the case of an employer, by
serving such notice to the employee at least one
month in advance or one-half month for every year
of service of the employee, whichever, is longer, a
fraction of at least six months being considered as
one whole year.
MAYORDO, M.A
The employer, upon whom no such notice was
served in case of termination of employment
without just cause may hold the employee liable
for damages.
The employee, upon whom no such notice was
served in case of termination of employment
without just cause shall be entitled to
compensation from the date of termination of his
employment in an I amount equivalent to his
salaries or wages correspond to the required period
of notice. ... .
The respondent court erred, however, in awarding her one
month pay instead of only one-half month salary for every
year of service. The law is quite clear on this matter.
Accordingly, the separation pay should be computed at
P90.00 times 32 months, for a total of P2,880.00.
Parenthetically, R.A. No. 4670, otherwise known as the
Magna Carta for Public School Teachers, confers security of
tenure on the teacher upon appointment as long as he
possesses the required qualification.  10  And under the
present policy of the Department of Education, Culture and
Sports, a teacher becomes permanent and automatically
acquires security of tenure upon completion of three years
in the service. 11
While admittedly not applicable to the case at bar, these I
rules nevertheless reflect the attitude of the government
on the protection of the worker's security of tenure, which
is now guaranteed by no less than the Constitution
itself. 12
We find that the private respondent was arbitrarily treated
by the petitioner, which has shown no cause for her
removal nor had it given her the notice required by the
Termination Pay Law. As the respondent court said, the
contention that she could not report one week before the
start of classes is a flimsy justification for replacing
her.  13  She had been in its employ for all of thirty-two
years. Her record was apparently unblemished. There is no
showing of any previous strained relations between her and
the petitioner. Oh had every reason to assume, as she had
done in previous years, that she would continue teaching as
usual.
It is easy to imagine the astonishment and hurt she felt
when she was flatly and without warning told she was
dismissed. There was not even the amenity of a formal
notice of her replacement, with perhaps a graceful
CORPORATION LAW CASES
LLB 3
expression of thanks for her past services. She was simply
informed she was no longer in the teaching staff. To put it
bluntly, she was fired.
For the wrongful act of the petitioner, the private
respondent is entitled to moral damages. 14 As a proximate
result of her illegal dismissal, she suffered mental anguish,
serious anxiety, wounded feelings and even besmirched
reputation as an experienced teacher for more than three
decades. We also find that the respondent court did not err
in awarding her exemplary damages because the petitioner
acted in a wanton and oppressive manner when it dismissed
her. 15
The Court takes this opportunity to pay a sincere tribute to
the grade school teachers, who are always at the forefront
in the battle against illiteracy and ignorance. If only
because it is they who open the minds of their pupils to an
unexplored world awash with the magic of letters and
numbers, which is an extraordinary feat indeed, these
humble mentors deserve all our respect and appreciation.
WHEREFORE, the petition is DENIED. The appealed decision
is AFFIRMED except for the award of separation pay, which
is reduced to P2,880.00. All the other awards are approved.
Costs against the petitioner.
This decision is immediately executory.
SO ORDERED.
[G.R. No. 125221. June 19, 1997]
REYNALDO M. LOZANO, petitioner, vs. HON. ELIEZER R.
DE LOS SANTOS, Presiding Judge, RTC, Br. 58,
Angeles City; and ANTONIO ANDA, respondents.
DECISION
PUNO, J.:
This petition for certiorari seeks to annul and set aside the
decision of the Regional Trial Court, Branch 58, Angeles City
which ordered the Municipal Circuit Trial Court, Mabalacat
and Magalang, Pampanga to dismiss Civil Case No. 1214 for
lack of jurisdiction.
The facts are undisputed.  On December 19, 1995,
petitioner Reynaldo M. Lozano filed Civil Case No. 1214 for
damages against respondent Antonio Anda before
the  Municipal Circuit Trial Court (MCTC), Mabalacat
and  Magalang, Pampanga.  Petitioner alleged that he was
the president of the Kapatirang Mabalacat-Angeles Jeepney
Drivers' Association, Inc. (KAMAJDA) while respondent Anda
Page 47 of 160
was the president of the Samahang Angeles-Mabalacat
Jeepney Operators' and Drivers' Association, Inc.
(SAMAJODA);  in August 1995, upon the request of the
Sangguniang Bayan of Mabalacat, Pampanga, petitioner and
private respondent  agreed to consolidate their respective
associations and form the Unified Mabalacat-Angeles
Jeepney Operators' and Drivers' Association, Inc.
(UMAJODA); petitioner and private respondent also agreed
to elect one set of officers who shall be given the sole
authority to collect the daily dues from the members of the
consolidated association; elections were held on October
29, 1995 and both petitioner and private respondent ran for
president;  petitioner won;  private respondent protested
and, alleging fraud, refused to recognize the results of the
election; private respondent also refused to abide by their
agreement and continued collecting the dues from the
members of his association despite several demands to
desist. Petitioner was thus constrained to file the complaint
to restrain private respondent from collecting the dues and
to order him to pay damages in the amount of  P25,000.00
and attorney's fees of P500.00.[1]
Private respondent moved to dismiss the complaint for lack
of jurisdiction, claiming that jurisdiction was lodged with
the Securities and Exchange Commission (SEC).  The MCTC
denied the motion on February 9, 1996.[2]  It denied
reconsideration on March 8, 1996.[3]
Private respondent filed a petition for certiorari before the
Regional Trial Court, Branch 58, Angeles City.[4]  The trial
court found the dispute to be intracorporate, hence,
subject to the jurisdiction of the SEC, and ordered the
MCTC to dismiss Civil Case No. 1214 accordingly.[5] It denied
reconsideration on May 31, 1996.[6]
Hence this petition. Petitioner claims that:
"THE RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION AND SERIOUS ERROR OF LAW IN CONCLUDING
THAT THE SECURITIES AND EXCHANGE COMMISSION HAS
JURISDICTION OVER A CASE OF DAMAGES BETWEEN HEADS/
PRESIDENTS OF TWO (2) ASSOCIATIONS WHO INTENDED TO
CONSOLIDATE/MERGE THEIR ASSOCIATIONS BUT NOT YET
[SIC] APPROVED AND REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION."[7]
The jurisdiction of the Securities and Exchange Commission
(SEC) is set forth in Section 5 of Presidential Decree No.
902-A. Section 5 reads as follows:
MAYORDO, M.A
"Section 5. x x x [T]he Securities and Exchange Commission
[has] original and exclusive jurisdiction to hear and decide
cases involving:
(a)  Devices or schemes employed by or any acts of the
board of directors, business associates, its officers or
partners, amounting to fraud and misrepresentation which
may be detrimental to the interest of the public and/or of
the stockholders, partners, members of associations or
organizations registered with the Commission.
(b) Controversies arising out of intracorporate or
partnership relations, between and among stockholders,
members or associates; between any or all of them and the
corporation, partnership or association of which they are
stockholders, members, or associates, respectively;  and
between such corporation, partnership or association and
the state insofar as it concerns their individual franchise or
right to exist as such entity.
(c) Controversies in the election or appointment of
directors, trustees, officers or managers of such
corporations, partnerships or associations.
(d) Petitions of corporations, partnerships or associations to
be declared in the state of suspension of payments in cases
where the corporation, partnership or association possesses
sufficient property to cover all its debts but foresees the
impossibility of meeting them when they respect very fall
due or in cases where the corporation, partnership or
association has no sufficient assets to cover its liabilities,
but is under the management of a Rehabilitation Receiver
or Management Committee created pursuant to this
Decree."
The grant of jurisdiction to the SEC must be viewed in the
light of its nature and function under the law.[8]  This
jurisdiction is determined by a concurrence of two
elements: (1) the status or relationship of the parties; and
(2) the nature of the question that is the subject of their
controversy.[9]
The first element requires that the controversy must arise
out of intracorporate or partnership relations between and
among stockholders, members, or associates; between any
or all of them and the corporation, partnership or
association of which they are stockholders, members or
associates, respectively; and between such corporation,
partnership or association and the State in so far as it
concerns their individual franchises.[10] The second element
requires that the dispute among the parties be intrinsically
connected with the regulation of the corporation,
CORPORATION LAW CASES
LLB 3
partnership or association or deal with the internal affairs
of the corporation, partnership or association.[11] After all,
the principal function of the SEC is the supervision and
control of corporations, partnerships and associations with
the end in view that investments in these entities may be
encouraged and protected, and their activities pursued for
the promotion of economic development.[12]
There is no intracorporate nor partnership relation between
petitioner and private respondent.  The controversy
between them arose out of their plan to consolidate their
respective jeepney drivers' and operators' associations into
a single common association.  This unified association was,
however, still a proposal. It had not been approved by the
SEC, neither had its officers and members submitted their
articles of consolidation in accordance with Sections 78 and
79 of the Corporation Code.  Consolidation becomes
effective not upon mere agreement of the members but
only upon issuance of the certificate of consolidation by the
SEC.[13]  When the SEC, upon processing and examining the
articles of consolidation, is satisfied that the consolidation
of the corporations is not inconsistent with the provisions
of the Corporation Code and existing laws, it issues a
certificate of consolidation which makes the reorganization
official.[14]  The new consolidated corporation comes into
existence and the constituent corporations dissolve and
cease to exist.[15]
The  KAMAJDA and SAMAJODA to which petitioner and
private respondent belong are duly registered with the SEC,
but these associations are two separate entities.  The
dispute between petitioner and private respondent is not
within the KAMAJDA nor the SAMAJODA.  It is between
members of separate and distinct associations.  Petitioner
and private respondent have no intracorporate relation
much less do they have an intracorporate dispute. The SEC
therefore has no jurisdiction over the complaint.
The doctrine of corporation by estoppel[16]  advanced by
private respondent cannot override jurisdictional
requirements. Jurisdiction is fixed by law and is not subject
to the agreement of the parties.[17]  It cannot be acquired
through or waived, enlarged or diminished by, any act or
omission of the parties, neither can it be conferred by the
acquiescence of the court.[18]
Corporation by estoppel is founded on principles of equity
and is designed to prevent injustice and unfairness.[19]  It
applies when persons assume to form a corporation and
exercise corporate functions and enter into business
relations with third persons. Where there is no third person
Page 48 of 160
involved and the conflict arises only among those assuming
the form of a corporation, who therefore know that it has
not been registered, there is no corporation by estoppel.[20]
IN VIEW WHEREOF, the petition is granted and the decision
dated April 18, 1996 and the order dated May 31, 1996 of
the Regional Trial Court, Branch 58, Angeles City are set
aside.The Municipal Circuit Trial Court of Mabalacat and
Magalang, Pampanga is ordered to proceed with dispatch in
resolving Civil Case No. 1214. No costs.
SO ORDERED.
[G.R. No. 136448. November 3, 1999]
LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR
INDUSTRIES, INC., respondent.
DECISION
PANGANIBAN, J.:
A partnership may be deemed to exist among parties who
agree to borrow money to pursue a business and to divide
the profits or losses that may arise therefrom, even if it is
shown that they have not contributed any capital of their
own to a "common fund." Their contribution may be in the
form of credit or industry, not necessarily cash or fixed
assets. Being partners, they are all liable for debts incurred
by or on behalf of the partnership.  The liability for a
contract entered into on behalf of an unincorporated
association or ostensible corporation may lie in a person
who may not have directly transacted on its behalf, but
reaped benefits from that contract.
The Case
In the Petition for Review on Certiorari before us, Lim Tong
Lim assails the November 26, 1998 Decision of the Court of
Appeals in CA-GR CV 41477,[1] which disposed as follows:
WHEREFORE, [there being] no reversible error in the
appealed decision, the same is hereby affirmed.[2]
The decretal portion of the Quezon City Regional Trial
Court (RTC) ruling, which was affirmed by the CA, reads as
follows:
WHEREFORE, the Court rules:
1.  That plaintiff is entitled to the writ of preliminary
attachment issued by this Court on September 20, 1990;
2.  That defendants are jointly liable to plaintiff for the
following amounts, subject to the modifications as
hereinafter made by reason of the special and unique facts
MAYORDO, M.A
and circumstances and the proceedings that transpired
during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of
the fishing nets covered by the Agreement plus P68,000.00
representing the unpaid price of the floats not covered by
said Agreement;
b.  12% interest per annum counted from date of plaintiffs
invoices and computed on their respective amounts as
follows:
i. Accrued interest of  P73,221.00 on Invoice No. 14407
for P385,377.80 dated February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No. 14413
for P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426
for P68,000.00 dated February 19, 1990;
c.  P50,000.00 as and for attorneys fees, plus  P8,500.00
representing P500.00 per appearance in court;
d.  P65,000.00 representing  P5,000.00 monthly rental for
storage charges on the nets counted from September 20,
1990 (date of attachment) to September 12, 1991 (date of
auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the
principal obligation or for the unpaid price of nets and
floats in the amount of  P532,045.00 and  P68,000.00,
respectively, or for the total amount of  P600,045.00, this
Court noted that these items were attached to guarantee
any judgment that may be rendered in favor of the plaintiff
but, upon agreement of the parties, and, to avoid further
deterioration of the nets during the pendency of this case,
it was ordered sold at public auction for not less
than  P900,000.00 for which the plaintiff was the sole and
winning bidder.  The proceeds of the sale paid for by
plaintiff was deposited in court.  In effect, the amount
of  P900,000.00 replaced the attached property as a
guaranty for any judgment that plaintiff may be able to
secure in this case with the ownership and possession of the
nets and floats awarded and delivered by the sheriff to
plaintiff as the highest bidder in the public auction sale. It
has also been noted that ownership of the nets [was]
retained by the plaintiff until full payment [was] made as
stipulated in the invoices; hence, in effect, the plaintiff
attached its own properties.  It [was] for this reason also
that this Court earlier ordered the attachment bond filed
by plaintiff to guaranty damages to defendants to be
CORPORATION LAW CASES
LLB 3
cancelled and for the P900,000.00 cash bidded and paid for
by plaintiff to serve as its bond in favor of defendants.
From the foregoing, it would appear therefore that
whatever judgment the plaintiff may be entitled to in this
case will have to be satisfied from the amount
of  P900,000.00 as this amount replaced the attached nets
and floats.  Considering, however, that the total judgment
obligation as computed above would amount to
only  P840,216.92, it would be inequitable, unfair and
unjust to award the excess to the defendants who are not
entitled to damages and who did not put up a single
centavo to raise the amount of P900,000.00 aside from the
fact that they are not the owners of the nets and
floats. For this reason, the defendants are hereby relieved
from any and all liabilities arising from the monetary
judgment obligation enumerated above and for plaintiff to
retain possession and ownership of the nets and floats and
for the reimbursement of the  P900,000.00 deposited by it
with the Clerk of Court.
SO ORDERED. [3]
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio
Chua and Peter Yao entered into a Contract dated February
7, 1990, for the purchase of fishing nets of various sizes
from the Philippine Fishing Gear Industries, Inc. (herein
respondent).  They claimed that they were engaged in a
business venture with Petitioner Lim Tong Lim, who
however was not a signatory to the agreement.  The total
price of the nets amounted to  P532,045.  Four hundred
pieces of floats worth  P68,000 were also sold to the
Corporation.[4]
The buyers, however, failed to pay for the fishing nets and
the floats; hence, private respondent filed a collection suit
against Chua, Yao and Petitioner Lim Tong Lim with a prayer
for a writ of preliminary attachment. The suit was brought
against the three in their capacities as general partners, on
the allegation that Ocean Quest Fishing Corporation was a
nonexistent corporation as shown by a Certification from
the Securities and Exchange Commission.[5]  On September
20, 1990, the lower court issued a Writ of Preliminary
Attachment, which the sheriff enforced by attaching the
fishing nets on board  F/B Lourdes  which was then docked
at the Fisheries Port, Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a
Manifestation admitting his liability and requesting a
reasonable time within which to pay. He also turned over to
Page 49 of 160
respondent some of the nets which were in his
possession.  Peter Yao filed an Answer, after which he was
deemed to have waived his right to cross-examine
witnesses and to present evidence on his behalf, because of
his failure to appear in subsequent hearings. Lim Tong Lim,
on the other hand, filed an Answer with Counterclaim and
Crossclaim and moved for the lifting of the Writ of
Attachment.[6]  The trial court maintained the Writ, and
upon motion of private respondent, ordered the sale of the
fishing nets at a public auction.  Philippine Fishing Gear
Industries won the bidding and deposited with the said
court the sales proceeds of P900,000.[7]
On November 18, 1992, the trial court rendered its
Decision, ruling that Philippine Fishing Gear Industries was
entitled to the Writ of Attachment and that Chua, Yao and
Lim, as general partners, were jointly liable to pay
respondent.[8]
The trial court ruled that a partnership among Lim, Chua
and Yao existed based (1) on the testimonies of the
witnesses presented and (2) on a Compromise Agreement
executed by the three[9]  in Civil Case No. 1492-MN which
Chua and Yao had brought against Lim in the RTC of
Malabon, Branch 72, for (a) a declaration of nullity of
commercial documents; (b) a reformation of contracts; (c)
a declaration of ownership of fishing boats; (d) an
injunction and (e) damages.[10] The Compromise Agreement
provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have
the four (4) vessels sold in the amount of  P5,750,000.00
including the fishing net.  This  P5,750,000.00 shall be
applied as full payment for  P3,250,000.00 in favor of JL
Holdings Corporation and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at
a higher price than  P5,750,000.00 whatever will be the
excess will be divided into 3: 1/3 Lim Tong Lim; 1/3 Antonio
Chua; 1/3 Peter Yao;
c)  If the proceeds of the sale the vessels will be less
than  P5,750,000.00 whatever the deficiency shall be
shouldered and paid to JL Holding Corporation by 1/3 Lim
Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao.[11]
The trial court noted that the Compromise Agreement was
silent as to the nature of their obligations, but that joint
liability could be presumed from the equal distribution of
the profit and loss.[12]
MAYORDO, M.A
Lim appealed to the Court of Appeals (CA) which, as
already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was
a partner of Chua and Yao in a fishing business and may
thus be held liable as a such for the fishing nets and floats
purchased by and for the use of the partnership.  The
appellate court ruled:
The evidence establishes that all the defendants including
herein appellant Lim Tong Lim undertook a partnership for
a specific undertaking, that is for commercial fishing x x
x.  Obviously, the ultimate undertaking of the defendants
was to divide the profits among themselves which is what a
partnership essentially is x x x.  By a contract of
partnership, two or more persons bind themselves to
contribute money, property or industry to a common fund
with the intention of dividing the profits among themselves
(Article 1767, New Civil Code).[13]
Hence, petitioner brought this recourse before this Court.
[14]
The Issues
In his Petition and Memorandum, Lim asks this Court to
reverse the assailed Decision on the following grounds:
I  THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A
COMPROMISE AGREEMENT THAT CHUA, YAO AND PETITIONER
LIM ENTERED INTO IN A SEPARATE CASE, THAT A
PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
II  SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE
WAS ACTING FOR OCEAN QUEST FISHING CORPORATION
WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING, THE
COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING
LIABILITY TO PETITIONER LIM AS WELL.
III  THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE
AND ATTACHMENT OF PETITIONER LIMS GOODS.
In determining whether petitioner may be held liable for
the fishing nets and floats purchased from respondent, the
Court must resolve this key issue:  whether by their acts,
Lim, Chua and Yao could be deemed to have entered into a
partnership.
This Courts Ruling
CORPORATION LAW CASES
LLB 3
The Petition is devoid of merit.
First and Second Issues:  Existence of a Partnership and
Petitioner's Liability
In arguing that he should not be held liable for the
equipment purchased from respondent, petitioner
controverts the CA finding that a partnership existed
between him, Peter Yao and Antonio Chua. He asserts that
the CA based its finding on the Compromise Agreement
alone. Furthermore, he disclaims any direct participation in
the purchase of the nets, alleging that the negotiations
were conducted by Chua and Yao only, and that he has not
even met the representatives of the respondent
company. Petitioner further argues that he was a lessor, not
a partner, of Chua and Yao, for the "Contract of Lease"
dated February 1, 1990, showed that he had merely leased
to the two the main asset of the purported partnership --
the fishing boat F/B Lourdes. The lease was for six months,
with a monthly rental of  P37,500 plus 25 percent of the
gross catch of the boat.
We are not persuaded by the arguments of petitioner.  The
facts as found by the two lower courts clearly showed that
there existed a partnership among Chua, Yao and him,
pursuant to Article 1767 of the Civil Code which provides:
Article 1767 - By the contract of partnership, two or more
persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing
the profits among themselves.
Specifically, both lower courts ruled that a partnership
among the three existed based on the following factual
findings:[15]
(1)  That Petitioner Lim Tong Lim requested Peter Yao who
was
engaged in commercial fishing to join him, while Antonio
Chua was already Yaos partner;
(2) That after convening for a few times, Lim Chua, and Yao
verbally agreed to acquire two fishing boats, the  FB
Lourdes and the FB Nelson for the sum of P3.35 million;
(3)  That they borrowed P3.25 million from Jesus Lim,
brother of Petitioner Lim Tong Lim, to finance the venture.
(4)  That they bought the boats from CMF Fishing
Corporation, which executed a Deed of Sale over these two
(2) boats in favor of Petitioner Lim Tong Lim only to serve
as security for the loan extended by Jesus Lim;
Page 50 of 160
(5)  That Lim, Chua and Yao agreed that the refurbishing ,
re-equipping, repairing, dry docking and other expenses for
the boats would be shouldered by Chua and Yao;
(6)  That because of the unavailability of funds, Jesus Lim
again extended a loan to the partnership in the amount of
P1 million secured by a check, because of which, Yao and
Chua entrusted the ownership papers of two other boats,
Chuas FB Lady Anne Mel and Yaos FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao
and Antonio Chua bought nets from Respondent Philippine
Fishing Gear, in behalf of "Ocean Quest Fishing
Corporation," their purported business name.
(8)  That subsequently, Civil Case No. 1492-MN was filed in
the Malabon RTC, Branch 72 by Antonio Chua and Peter Yao
against Lim Tong Lim for (a) declaration of nullity of
commercial documents; (b) reformation of contracts; (c)
declaration of ownership of fishing boats; (4) injunction;
and (e) damages.
(9)  That the case was amicably settled through a
Compromise Agreement executed between the parties-
litigants the terms of which are already enumerated above.
From the factual findings of both lower courts, it is clear
that Chua, Yao and Lim had decided to engage in a fishing
business, which they started by buying boats worth  P3.35
million, financed by a loan secured from Jesus Lim who was
petitioners brother.  In their Compromise Agreement, they
subsequently revealed their intention to pay the loan with
the proceeds of the sale of the boats, and to divide equally
among them the excess or loss. These boats, the purchase
and the repair of which were financed with borrowed
money, fell under the term common fund under Article
1767.  The contribution to such fund need not be cash or
fixed assets; it could be an intangible like credit or
industry.  That the parties agreed that any loss or profit
from the sale and operation of the boats would be divided
equally among them also shows that they had indeed
formed a partnership.
Moreover, it is clear that the partnership extended not only
to the purchase of the boat, but also to that of the nets
and the floats.  The fishing nets and the floats, both
essential to fishing, were obviously acquired in furtherance
of their business. It would have been inconceivable for Lim
to involve himself so much in buying the boat but not in the
MAYORDO, M.A
acquisition of the aforesaid equipment, without which the
business could not have proceeded.
Given the preceding facts, it is clear that there was, among
petitioner, Chua and Yao, a partnership engaged in the
fishing business.  They purchased the boats, which
constituted the main assets of the partnership, and they
agreed that the proceeds from the sales and operations
thereof would be divided among them.
We stress that under Rule 45, a petition for review like the
present case should involve only questions of law. Thus, the
foregoing factual findings of the RTC and the CA are binding
on this Court, absent any cogent proof that the present
action is embraced by one of the exceptions to the rule.
[16] In assailing the factual findings of the two lower courts,
petitioner effectively goes beyond the bounds of a petition
for review under Rule 45.
Compromise Agreement Not the Sole Basis of
Partnership
Petitioner argues that the appellate courts sole basis for
assuming the existence of a partnership was the
Compromise Agreement. He also claims that the settlement
was entered into only to end the dispute among them, but
not to adjudicate their preexisting rights and
obligations.  His arguments are baseless.  The Agreement
was but an embodiment of the relationship extant among
the parties prior to its execution.
A proper adjudication of claimants rights mandates that
courts must review and thoroughly appraise all relevant
facts.  Both lower courts have done so and have found,
correctly, a preexisting partnership among the parties.  In
implying that the lower courts have decided on the basis of
one piece of document alone, petitioner fails to appreciate
that the CA and the RTC delved into the history of the
document and explored all the possible consequential
c o m b i n a t i o n s i n h a r m o n y w i t h l a w, l o g i c a n d
fairness.  Verily, the two lower courts factual findings
mentioned above nullified petitioners argument that the
existence of a partnership was based only on the
Compromise Agreement.
Petitioner Was a Partner, Not a Lessor
We are not convinced by petitioners argument that he was
merely the lessor of the boats to Chua and Yao, not a
partner in the fishing venture. His argument allegedly finds
support in the Contract of Lease and the registration papers
CORPORATION LAW CASES
LLB 3
showing that he was the owner of the boats, including F/B
Lourdes where the nets were found.
His allegation defies logic.  In effect, he would like this
Court to believe that he consented to the sale of  his
own boats to pay a debt of Chua and Yao, with the excess
of the proceeds to be divided among the three of them. No
lessor would do what petitioner did. Indeed, his consent to
the sale proved that there was a preexisting partnership
among all three.
Verily, as found by the lower courts, petitioner entered into
a business agreement with Chua and Yao, in which debts
were undertaken in order to finance the acquisition and the
upgrading of the vessels which would be used in their
fishing business.  The sale of the boats, as well as the
division among the three of the balance remaining after the
payment of their loans, proves beyond cavil that  F/B
Lourdes, though registered in his name, was not his own
property but an asset of the partnership.  It is not
uncommon to register the properties acquired from a loan
in the name of the person the lender trusts, who in this
case is the petitioner himself. After all, he is the brother of
the creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd -- for
petitioner to sell his property to pay a debt he did not
incur, if the relationship among the three of them was
merely that of lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by
estoppel, liability can be imputed only to Chua and Yao,
and not to him. Again, we disagree.
Section 21 of the Corporation Code of the Philippines
provides:
Sec. 21. Corporation by estoppel. - All persons who assume
to act as a corporation knowing it to be without authority
to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result
thereof:  Provided however,  That when any such ostensible
corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall
not be allowed to use as a defense its lack of corporate
personality.
Page 51 of 160
One who assumes an obligation to an ostensible corporation
as such, cannot resist performance thereof on the ground
that there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to
be legally nonexistent, a party may be estopped from
denying its corporate existence. The reason behind this
doctrine is obvious - an unincorporated association has no
personality and would be incompetent to act and
appropriate for itself the power and attributes of a
corporation as provided by law; it cannot create agents or
confer authority on another to act in its behalf; thus, those
who act or purport to act as its representatives or agents
do so without authority and at their own risk.  And as it is
an elementary principle of law that a person who acts as an
agent without authority or without a principal is himself
regarded as the principal, possessed of all the right and
subject to all the liabilities of a principal, a person acting
or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and obligations and
becomes personally liable for contracts entered into or for
other acts performed as such agent.[17]
The doctrine of corporation by estoppel may apply to the
alleged corporation and to a third party.  In the first
instance, an unincorporated association, which represented
itself to be a corporation, will be estopped from denying its
corporate capacity in a suit against it by a third person who
relied in good faith on such representation. It cannot allege
lack of personality to be sued to evade its responsibility for
a contract it entered into and by virtue of which it received
advantages and benefits.
On the other hand,  a third party who, knowing an
association to be unincorporated, nonetheless treated it as
a corporation and received benefits from it, may be barred
from denying its corporate existence in a suit brought
against the alleged corporation. In such case, all those who
benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be
held liable for contracts they impliedly assented to or took
advantage of.
There is no dispute that the respondent, Philippine Fishing
Gear Industries, is entitled to be paid for the nets it
sold.  The only question here is whether petitioner should
be held jointly[18]  liable with Chua and Yao.  Petitioner
contests such liability, insisting that only those who dealt in
the name of the ostensible corporation should be held
liable.  Since his name does not appear on any of the
MAYORDO, M.A
contracts and since he never directly transacted with the
respondent corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the
nets found inside  F/B Lourdes,  the boat which has earlier
been proven to be an asset of the partnership.  He in fact
questions the attachment of the nets, because the Writ has
effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim,
Chua and Yao decided to form a corporation.  Although it
was never legally formed for unknown reasons, this fact
alone does not preclude the liabilities of the three as
contracting parties in representation of it.  Clearly, under
the law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to be
without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on
behalf of the corporation.  However, having reaped the
benefits of the contract entered into by persons with
whom he previously had an existing relationship, he is
deemed to be part of said association and is covered by the
scope of the doctrine of corporation by estoppel.  We
reiterate the ruling of the Court in Alonso v. Villamor:[19]
A litigation is not a game of technicalities in which one,
more deeply schooled and skilled in the subtle art of
movement and position , entraps and destroys the other. It
is, rather, a contest in which each contending party fully
and fairly lays before the court the facts in issue and then,
brushing aside as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks
that justice be done upon the merits.  Lawsuits, unlike
duels, are not to be won by a rapiers thrust.  Technicality,
when it deserts its proper office as an aid to justice and
becomes its great hindrance and chief enemy, deserves
scant consideration from courts. There should be no vested
rights in technicalities.
Third Issue: Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was
improperly issued against the nets.  We agree with the
Court of Appeals that this issue is now moot and
academic.  As previously discussed,  F/B Lourdes  was an
asset of the partnership and that it was placed in the name
of petitioner, only to assure payment of the debt he and his
partners owed.  The nets and the floats were specifically
manufactured and tailor-made according to their own
design, and were bought and used in the fishing venture
CORPORATION LAW CASES
LLB 3
they agreed upon. Hence, the issuance of the Writ to assure
the payment of the price stipulated in the invoices is
proper.  Besides, by specific agreement, ownership of the
nets remained with Respondent Philippine Fishing Gear,
until full payment thereof.
WHEREFORE, the Petition is  DENIED  and the assailed
Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. 119002               October 19, 2000
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES,
INC., petitioner, 
 rendered a decision reversing the trial court, the decretal
vs. HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE
FOOTBALL FEDERATION, respondents.
DECISION
KAPUNAN, J.:
On June 30 1989, petitioner International Express Travel
and Tour Services, Inc., through its managing director,
wrote a letter to the Philippine Football Federation
(Federation), through its president private respondent
Henri Kahn, wherein the former offered its services as a
travel agency to the latter.1 The offer was accepted.
Petitioner secured the airline tickets for the trips of the
athletes and officials of the Federation to the South East
Asian Games in Kuala Lumpur as well as various other trips
to the People's Republic of China and Brisbane. The total
cost of the tickets amounted to P449,654.83. For the
tickets received, the Federation made two partial
payments, both in September of 1989, in the total amount
of P176,467.50.2
On 4 October 1989, petitioner wrote the Federation,
through the private respondent a demand letter requesting
for the amount of P265,894.33.3  On 30 October 1989, the
Federation, through the Project Gintong Alay, paid the
amount of P31,603.00.4
On 27 December 1989, Henri Kahn issued a personal check
in the amount of P50,000 as partial payment for the
outstanding balance of the Federation.5  Thereafter, no
further payments were made despite repeated demands.
This prompted petitioner to file a civil case before the
Regional Trial Court of Manila. Petitioner sued Henri Kahn in
his personal capacity and as President of the Federation
and impleaded the Federation as an alternative defendant.
Petitioner sought to hold Henri Kahn liable for the unpaid
balance for the tickets purchased by the Federation on the
Page 52 of 160
ground that Henri Kahn allegedly guaranteed the said
obligation.6
Henri Kahn filed his answer with counterclaim. While not
denying the allegation that the Federation owed the
amount P207,524.20, representing the unpaid balance for
the plane tickets, he averred that the petitioner has no
cause of action against him either in his personal capacity
or in his official capacity as president of the Federation. He
maintained that he did not guarantee payment but merely
acted as an agent of the Federation which has a separate
and distinct juridical personality.7
On the other hand, the Federation failed to file its answer,
hence, was declared in default by the trial court.8
In due course, the trial court rendered judgment and ruled
in favor of the petitioner and declared Henri Kahn
personally liable for the unpaid obligation of the
Federation. In arriving at the said ruling, the trial court
rationalized:
Defendant Henri Kahn would have been correct in his
contentions had it been duly established that defendant
Federation is a corporation. The trouble, however, is that
neither the plaintiff nor the defendant Henri Kahn has
adduced any evidence proving the corporate existence of
the defendant Federation. In paragraph 2 of its complaint,
plaintiff asserted that "Defendant Philippine Football
Federation is a sports association xxx." This has not been
denied by defendant Henri Kahn in his Answer. Being the
President of defendant Federation, its corporate existence
is within the personal knowledge of defendant Henri Kahn.
He could have easily denied specifically the assertion of the
plaintiff that it is a mere sports association, if it were a
domestic corporation. But he did not.
xxx
A voluntary unincorporated association, like defendant
Federation has no power to enter into, or to ratify, a
contract. The contract entered into by its officers or agents
on behalf of such association is not binding on, or
enforceable against it. The officers or agents are
themselves personally liable.
x x x9
The dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is rendered ordering defendant
Henri Kahn to pay the plaintiff the principal sum of
P207,524.20, plus the interest thereon at the legal rate
MAYORDO, M.A
computed from July 5, 1990, the date the complaint was
filed, until the principal obligation is fully liquidated; and
another sum of P15,000.00 for attorney's fees.
The complaint of the plaintiff against the Philippine
Football Federation and the counterclaims of the defendant
Henri Kahn are hereby dismissed.
With the costs against defendant Henri Kahn.10
Only Henri Kahn elevated the above decision to the Court
of Appeals. On 21 December 1994, the respondent court
portion of said decision reads:
WHEREFORE, premises considered, the judgment appealed
from is hereby REVERSED and SET ASIDE and another one is
rendered dismissing the complaint against defendant Henri
S. Kahn.11
In finding for Henri Kahn, the Court of Appeals recognized
the juridical existence of the Federation. It rationalized
that since petitioner failed to prove that Henri Kahn
guaranteed the obligation of the Federation, he should not
be held liable for the same as said entity has a separate
and distinct personality from its officers.
Petitioner filed a motion for reconsideration and as an
alternative prayer pleaded that the Federation be held
liable for the unpaid obligation. The same was denied by
the appellate court in its resolution of 8 February 1995,
where it stated that:
As to the alternative prayer for the Modification of the
Decision by expressly declaring in the dispositive portion
thereof the Philippine Football Federation (PFF) as liable
for the unpaid obligation, it should be remembered that
the trial court dismissed the complaint against the
Philippine Football Federation, and the plaintiff did not
appeal from this decision. Hence, the Philippine Football
Federation is not a party to this appeal and consequently,
no judgment may be pronounced by this Court against the
PFF without violating the due process clause, let alone the
fact that the judgment dismissing the complaint against it,
had already become final by virtue of the plaintiff's failure
to appeal therefrom. The alternative prayer is therefore
similarly DENIED.12
Petitioner now seeks recourse to this Court and alleges that
the respondent court committed the following assigned
errors:13
CORPORATION LAW CASES
LLB 3
A. THE HONORABLE COURT OF APPEALS ERRED IN
HOLDING THAT PETITIONER HAD DEALT WITH THE
PHILIPPINE FOOTBALL FEDERATION (PFF) AS A
CORPORATE ENTITY AND IN NOT HOLDING THAT PRIVATE
RESPONDENT HENRI KAHN WAS THE ONE WHO
REPRESENTED THE PFF AS HAVING A CORPORATE
PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT
H O L D I N G P R I VAT E R E S P O N D E N T H E N R I K A H N
PERSONALLY LIABLE FOR THE OBLIGATION OF THE
UNINCORPORATED PFF, HAVING NEGOTIATED WITH
PETITIONER AND CONTRACTED THE OBLIGATION IN
BEHALF OF THE PFF, MADE A PARTIAL PAYMENT AND
ASSURED PETITIONER OF FULLY SETTLING THE
OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT
KAHN IS NOT PERSONALLY LIABLE, THE HONORABLE
COURT OF APPEALS ERRED IN NOT EXPRESSLY
DECLARING IN ITS DECISION THAT THE PFF IS SOLELY
LIABLE FOR THE OBLIGATION.
The resolution of the case at bar hinges on the
determination of the existence of the Philippine Football
Federation as a juridical person. In the assailed decision,
the appellate court recognized the existence of the
Federation. In support of this, the CA cited Republic Act
3135, otherwise known as the Revised Charter of the
Philippine Amateur Athletic Federation, and Presidential
Decree No. 604 as the laws from which said Federation
derives its existence.
As correctly observed by the appellate court, both R.A.
3135 and P.D. No. 604 recognized the juridical existence of
national sports associations. This may be gleaned from the
powers and functions granted to these associations. Section
14 of R.A. 3135 provides:
SEC. 14.Functions, powers and duties of Associations. - The
National Sports' Association shall have the following
functions, powers and duties:
1. To adopt a constitution and by-laws for their internal
organization and government;
2. To raise funds by donations, benefits, and other
means for their purposes.
Page 53 of 160
3. To purchase, sell, lease or otherwise encumber
property both real and personal, for the
accomplishment of their purpose;
4. To affiliate with international or regional sports'
Associations after due consultation with the executive
committee;
xxx
13. To perform such other acts as may be necessary for
the proper accomplishment of their purposes and not
inconsistent with this Act.
Section 8 of P.D. 604, grants similar functions to these
sports associations:
SEC. 8.Functions, Powers, and Duties of National Sports
Association. - The National sports associations shall have
the following functions, powers, and duties:
1. Adopt a Constitution and By-Laws for their internal
organization and government which shall be submitted
to the Department and any amendment thereto shall
take effect upon approval by the Department:
Provided, however, That no team, school, club,
organization, or entity shall be admitted as a voting
member of an association unless 60 per cent of the
athletes composing said team, school, club,
organization, or entity are Filipino citizens;
2. Raise funds by donations, benefits, and other means
for their purpose subject to the approval of the
Department;
3. Purchase, sell, lease, or otherwise encumber
p r o p e r t y, b o t h r e a l a n d p e r s o n a l , f o r t h e
accomplishment of their purpose;
4. Conduct local, interport, and international
competitions, other than the Olympic and Asian Games,
for the promotion of their sport;
5. Affiliate with international or regional sports
associations after due consultation with the
Department;
xxx
13. Perform such other functions as may be provided by
law.
The above powers and functions granted to national sports
associations clearly indicate that these entities may acquire
MAYORDO, M.A
a juridical personality. The power to purchase, sell, lease
and encumber property are acts which may only be done by
persons, whether natural or artificial, with juridical
capacity. However, while we agree with the appellate court
that national sports associations may be accorded
corporate status, such does not automatically take place by
the mere passage of these laws.
It is a basic postulate that before a corporation may
acquire juridical personality, the State must give its
consent either in the form of a special law or a general
enabling act. We cannot agree with the view of the
appellate court and the private respondent that the
Philippine Football Federation came into existence upon
the passage of these laws. Nowhere can it be found in R.A.
3135 or P.D. 604 any provision creating the Philippine
Football Federation. These laws merely recognized the
existence of national sports associations and provided the
manner by which these entities may acquire juridical
personality. Section 11 of R.A. 3135 provides:
SEC. 11.National Sports' Association; organization and
recognition. - A National Association shall be organized for
each individual sports in the Philippines in the manner
hereinafter provided to constitute the Philippine Amateur
Athletic Federation. Applications for recognition as a
National Sports' Association shall be filed with the
executive committee together with, among others, a copy
of the constitution and by-laws and a list of the members of
the proposed association, and a filing fee of ten pesos.
The Executive Committee shall give the recognition applied
for if it is satisfied that said association will promote the
purposes of this Act and particularly section three thereof.
No application shall be held pending for more than three
months after the filing thereof without any action having
been taken thereon by the executive committee. Should
the application be rejected, the reasons for such rejection
shall be clearly stated in a written communication to the
applicant. Failure to specify the reasons for the rejection
shall not affect the application which shall be considered as
unacted upon: Provided, however, That until the executive
committee herein provided shall have been formed,
applications for recognition shall be passed upon by the
duly elected members of the present executive committee
of the Philippine Amateur Athletic Federation. The said
executive committee shall be dissolved upon the
organization of the executive committee herein provided:
Provided, further, That the functioning executive
committee is charged with the responsibility of seeing to it
that the National Sports' Associations are formed and
CORPORATION LAW CASES
LLB 3
organized within six months from and after the passage of
this Act.
Section 7 of P.D. 604, similarly provides:
SEC. 7.National Sports Associations. - Application for
accreditation or recognition as a national sports association
for each individual sport in the Philippines shall be filed
with the Department together with, among others, a copy
of the Constitution and By-Laws and a list of the members
of the proposed association.
The Department shall give the recognition applied for if it
is satisfied that the national sports association to be
organized will promote the objectives of this Decree and
has substantially complied with the rules and regulations of
the Department: Provided, That the Department may
withdraw accreditation or recognition for violation of this
Decree and such rules and regulations formulated by it.
The Department shall supervise the national sports
association: Provided, That the latter shall have exclusive
technical control over the development and promotion of
the particular sport for which they are organized.
Clearly the above cited provisions require that before an
entity may be considered as a national sports association,
such entity must be recognized by the accrediting
organization, the Philippine Amateur Athletic Federation
under R.A. 3135, and the Department of Youth and Sports
Development under P.D. 604. This fact of recognition,
however, Henri Kahn failed to substantiate. In attempting
to prove the juridical existence of the Federation, Henri
Kahn attached to his motion for reconsideration before the
trial court a copy of the constitution and by-laws of the
Philippine Football Federation. Unfortunately, the same
does not prove that said Federation has indeed been
recognized and accredited by either the Philippine Amateur
Athletic Federation or the Department of Youth and Sports
Development. Accordingly, we rule that the Philippine
Football Federation is not a national sports association
within the purview of the aforementioned laws and does
not have corporate existence of its own.
Thus being said, it follows that private respondent Henry
Kahn should be held liable for the unpaid obligations of the
unincorporated Philippine Football Federation. It is a
settled principal in corporation law that any person acting
or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and becomes
personally liable for contract entered into or for other acts
Page 54 of 160
performed as such agent.14  As president of the Federation,
Henri Kahn is presumed to have known about the corporate
existence or non-existence of the Federation. We cannot
subscribe to the position taken by the appellate court that
even assuming that the Federation was defectively
incorporated, the petitioner cannot deny the corporate
existence of the Federation because it had contracted and
dealt with the Federation in such a manner as to recognize
and in effect admit its existence.15  The doctrine of
corporation by estoppel is mistakenly applied by the
respondent court to the petitioner. The application of the
doctrine applies to a third party only when he tries to
escape liability on a contract from which he has benefited
on the irrelevant ground of defective incorporation.16 In the
case at bar, the petitioner is not trying to escape liability
from the contract but rather is the one claiming from the
contract.
WHEREFORE, the decision appealed from is REVERSED and
SET ASIDE. The decision of the Regional Trial Court of
Manila, Branch 35, in Civil Case No. 90-53595 is hereby
REINSTATED.
SO ORDERED.
G.R. No. 117188 August 7, 1997
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH)
ASSOCIATION, INC., petitioner, 
 West II, East III, West III and East IV. It submitted its by-laws
vs. HON. COURT OF APPEALS, HOME INSURANCE AND
GUARANTY CORPORATION, EMDEN ENCARNACION and
HORATIO AYCARDO, respondents.
ROMERO, J.:
May the failure of a corporation to file its by-laws within
one month from the date of its incorporation, as mandated
by Section 46 of the Corporation Code, result in its
automatic dissolution?
This is the issue raised in this petition for review
on  certiorari  of the Decision1  of the Court of Appeals
affirming the decision of the Home Insurance and Guaranty
Corporation (HIGC). This quasi-judicial body recognized
Loyola Grand Villas Homeowners Association (LGVHA) as the
sole homeowners' association in Loyola Grand Villas, a duly
registered subdivision in Quezon City and Marikina City that
was owned and developed by Solid Homes, Inc. It revoked
the certificates of registration issued to Loyola Grand Villas
homeowners (North) Association Incorporated (the North
Association for brevity) and Loyola Grand Villas
Homeowners (South) Association Incorporated (the South
Association).
MAYORDO, M.A
LGVHAI was organized on February 8, 1983 as the
association of homeowners and residents of the Loyola
Grand Villas. It was registered with the Home Financing
Corporation, the predecessor of herein respondent HIGC, as
the sole homeowners' organization in the said subdivision
under Certificate of Registration No. 04-197. It was
organized by the developer of the subdivision and its first
president was Victorio V. Soliven, himself the owner of the
developer. For unknown reasons, however, LGVHAI did not
file its corporate by-laws.
Sometime in 1988, the officers of the LGVHAI tried to
register its by-laws. They failed to do so.  2 To the officers'
consternation, they discovered that there were two other
organizations within the subdivision — the North Association
and the South Association. According to private
respondents, a non-resident and Soliven himself,
respectively headed these associations. They also
discovered that these associations had five (5) registered
homeowners each who were also the incorporators,
directors and officers thereof. None of the members of the
LGVHAI was listed as member of the North Association
while three (3) members of LGVHAI were listed as members
of the South Association.3  The North Association was
registered with the HIGC on February 13, 1989 under
Certificate of Registration No. 04-1160 covering Phases
on December 20, 1988.
In July, 1989, when Soliven inquired about the status of
LGVHAI, Atty. Joaquin A. Bautista, the head of the legal
department of the HIGC, informed him that LGVHAI had
been automatically dissolved for two reasons. First, it did
not submit its by-laws within the period required by the
Corporation Code and, second, there was non-user of
corporate charter because HIGC had not received any
report on the association's activities. Apparently, this
information resulted in the registration of the South
Association with the HIGC on July 27, 1989 covering Phases
West I, East I and East II. It filed its by-laws on July 26,
1989.
These developments prompted the officers of the LGVHAI
to lodge a complaint with the HIGC. They questioned the
revocation of LGVHAI's certificate of registration without
due notice and hearing and concomitantly prayed for the
cancellation of the certificates of registration of the North
and South Associations by reason of the earlier issuance of
a certificate of registration in favor of LGVHAI.
CORPORATION LAW CASES
LLB 3
On January 26, 1993, after due notice and hearing, private
respondents obtained a favorable ruling from HIGC Hearing
Officer Danilo C. Javier who disposed of HIGC Case No.
RRM-5-89 as follows:
WHEREFORE, judgment is hereby rendered recognizing
the Loyola Grand Villas Homeowners Association, Inc.,
under Certificate of Registration No. 04-197 as the duly
registered and existing homeowners association for
Loyola Grand Villas homeowners, and declaring the
Certificates of Registration of Loyola Grand Villas
Homeowners (North) Association, Inc. and Loyola Grand
Villas Homeowners (South) Association, Inc. as hereby
revoked or cancelled; that the receivership be
terminated and the Receiver is hereby ordered to
render an accounting and turn-over to Loyola Grand
Villas Homeowners Association, Inc., all assets and
records of the Association now under his custody and
possession.
The South Association appealed to the Appeals Board of the
HIGC. In its Resolution of September 8, 1993, the
Board 4 dismissed the appeal for lack of merit.
Rebuffed, the South Association in turn appealed to the
Court of Appeals, raising two issues.  First, whether or not
LGVHAI's failure to file its by-laws within the period
prescribed by Section 46 of the Corporation Code resulted
in the automatic dissolution of LGVHAI. Second, whether or
not two homeowners' associations may be authorized by the
HIGC in one "sprawling subdivision." However, in the
Decision of August 23, 1994 being assailed here, the Court
of Appeals affirmed the Resolution of the HIGC Appeals
Board.
In resolving the first issue, the Court of Appeals held that
under the Corporation Code, a private corporation
commences to have corporate existence and juridical
personality from the date the Securities and Exchange
Commission (SEC) issues a certificate of incorporation
under its official seal. The requirement for the filing of by-
laws under Section 46 of the Corporation Code within one
month from official notice of the issuance of the certificate
of incorporation presupposes that it is already
incorporated, although it may file its by-laws with its
articles of incorporation. Elucidating on the effect of a
delayed filing of by-laws, the Court of Appeals said:
We also find nothing in the provisions cited by the
petitioner, i.e., Section 46 and 22, Corporation Code, or
in any other provision of the Code and other laws which
Page 55 of 160
provide or at least imply that failure to file the by-laws
results in an automatic dissolution of the corporation.
While Section 46, in prescribing that by-laws must be
adopted within the period prescribed therein, may be
interpreted as a mandatory provision, particularly
because of the use of the word "must," its meaning
cannot be stretched to support the argument that
automatic dissolution results from non-compliance.
We realize that Section 46 or other provisions of the
Corporation Code are silent on the result of the failure
to adopt and file the by-laws within the required
period. Thus, Section 46 and other related provisions of
the Corporation Code are to be construed with Section
6 (1) of P.D. 902-A. This section empowers the SEC to
suspend or revoke certificates of registration on the
grounds listed therein. Among the grounds stated is the
failure to file by-laws (see also II Campos: The
Corporation Code, 1990 ed., pp. 124-125). Such
suspension or revocation, the same section provides,
should be made upon proper notice and hearing.
Although P.D. 902-A refers to the SEC, the same
principles and procedures apply to the public
respondent HIGC as it exercises its power to revoke or
suspend the certificates of registration or homeowners
association. (Section 2 [a], E.O. 535, series 1979,
transferred the powers and authorities of the SEC over
homeowners associations to the HIGC.)
We also do not agree with the petitioner's
interpretation that Section 46, Corporation Code
prevails over Section 6, P.D. 902-A and that the latter is
invalid because it contravenes the former. There is no
basis for such interpretation considering that these two
provisions are not inconsistent with each other. They
are, in fact, complementary to each other so that one
cannot be considered as invalidating the other.
The Court of Appeals added that, as there was no showing
that the registration of LGVHAI had been validly revoked, it
continued to be the duly registered homeowners'
association in the Loyola Grand Villas. More importantly,
the South Association did not dispute the fact that LGVHAI
had been organized and that, thereafter, it transacted
business within the period prescribed by law.
On the second issue, the Court of Appeals reiterated its
previous ruling  5  that the HIGC has the authority to order
the holding of a referendum to determine which of two
contending associations should represent the entire
community, village or subdivision.
MAYORDO, M.A
Undaunted, the South Association filed the instant petition
for review on  certiorari. It elevates as sole issue for
resolution the first issue it had raised before the Court of
Appeals, i.e., whether or not the LGVHAI's failure to file its
by-laws within the period prescribed by Section 46 of the
Corporation Code had the effect of automatically dissolving
the said corporation.
Petitioner contends that, since Section 46 uses the word
"must" with respect to the filing of by-laws, noncompliance
therewith would result in "self-extinction" either due to
non-occurrence of a suspensive condition or the occurrence
of a resolutory condition "under the hypothesis that (by)
the issuance of the certificate of registration alone the
corporate personality is deemed already formed." It asserts
that the Corporation Code provides for a "gradation of
violations of requirements." Hence, Section 22 mandates
that the corporation must be formally organized and should
commence transaction within two years from date of
incorporation. Otherwise, the corporation would be
deemed dissolved. On the other hand, if the corporation
commences operations but becomes continuously
inoperative for five years, then it may be suspended or its
corporate franchise revoked.
Petitioner concedes that Section 46 and the other
provisions of the Corporation Code do not provide for
sanctions for non-filing of the by-laws. However, it insists
that no sanction need be provided "because the mandatory
nature of the provision is so clear that there can be no
doubt about its being an essential attribute of corporate
birth." To petitioner, its submission is buttressed by the
facts that the period for compliance is "spelled out
distinctly;" that the certification of the SEC/HIGC must
show that the by-laws are not inconsistent with the Code,
and that a copy of the by-laws "has to be attached to the
articles of incorporation." Moreover, no sanction is provided
for because "in the first place, no corporate identity has
been completed." Petitioner asserts that "non-provision for
remedy or sanction is itself the tacit proclamation that
non-compliance is fatal and no corporate existence had yet
evolved," and therefore, there was "no need to proclaim its
demise."  6 In a bid to convince the Court of its arguments,
petitioner stresses that:
. . . the word  MUST  is used in Sec. 46 in its universal
literal meaning and corollary human implication — its
compulsion is integrated in its very essence —  MUST  is
always enforceable by the inevitable consequence —
that is, "OR ELSE". The use of the word MUST in Sec. 46
CORPORATION LAW CASES
LLB 3
is no exception — it means file the by-laws within one
month after notice of issuance of certificate of
registration  OR ELSE. The  OR ELSE, though not
specified, is inextricably a part of MUST . Do this or if
you do not you are "Kaput". The importance of the by-
laws to corporate existence compels such meaning for
as decreed the by-laws is "the government" of the
corporation. Indeed, how can the corporation do any
lawful act as such without by-laws. Surely, no law is
indeed to create chaos. 7
Petitioner asserts that P.D. No. 902-A cannot exceed the
scope and power of the Corporation Code which itself does
not provide sanctions for non-filing of by-laws. For the
petitioner, it is "not proper to assess the true meaning of
Sec. 46 . . . on an unauthorized provision on such matter
contained in the said decree."
In their comment on the petition, private respondents
counter that the requirement of adoption of by-laws is not
mandatory. They point to P.D. No. 902-A as having resolved
the issue of whether said requirement is mandatory or
merely directory. Citing  Chung Ka Bio v.  Intermediate
Appellate Court,  8  private respondents contend that
Section 6(I) of that decree provides that non-filing of by-
laws is only a ground for suspension or revocation of the
certificate of registration of corporations and, therefore, it
may not result in automatic dissolution of the corporation.
Moreover, the adoption and filing of by-laws is a condition
subsequent which does not affect the corporate personality
of a corporation like the LGVHAI. This is so because Section
9 of the Corporation Code provides that the corporate
existence and juridical personality of a corporation begins
from the date the SEC issues a certificate of incorporation
under its official seal. Consequently, even if the by-laws
have not yet been filed, a corporation may be considered
a  de facto  corporation. To emphasize the fact the LGVHAI
was registered as the sole homeowners' association in the
Loyola Grand Villas, private respondents point out that
membership in the LGVHAI was an "unconditional restriction
in the deeds of sale signed by lot buyers."
In its reply to private respondents' comment on the
petition, petitioner reiterates its argument that the word "
must" in Section 46 of the Corporation Code is mandatory. It
a d d s t h a t , b e f o r e t h e r u l i n g i n  C h u n g K a B i o
v.  Intermediate Appellate Court  could be applied to this
case, this Court must first resolve the issue of whether or
not the provisions of P.D. No. 902-A prescribing the rules
and regulations to implement the Corporation Code can
Page 56 of 160
"rise above and change" the substantive provisions of the
Code.
The pertinent provision of the Corporation Code that is the
focal point of controversy in this case states:
Sec. 46.Adoption of by-laws. — Every corporation
formed under this Code, must within one (1) month
after receipt of official notice of the issuance of its
certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its
government not inconsistent with this Code. For the
adoption of by-laws by the corporation, the affirmative
vote of the stockholders representing at least a
majority of the outstanding capital stock, or of at least
a majority of the members, in the case of non-stock
corporations, shall be necessary. The by-laws shall be
signed by the stockholders or members voting for them
and shall be kept in the principal office of the
corporation, subject to the stockholders or members
voting for them and shall be kept in the principal office
of the corporation, subject to inspection of the
stockholders or members during office hours; and a
copy thereof, shall be filed with the Securities and
Exchange Commission which shall be attached to the
original articles of incorporation.
Notwithstanding the provisions of the preceding
paragraph, by-laws may be adopted and filed prior to
incorporation; in such case, such by-laws shall be
approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission,
together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the
issuance by the Securities and Exchange Commission of
a certification that the by-laws are not inconsistent
with this Code.
The Securities and Exchange Commission shall not
accept for filing the by-laws or any amendment thereto
of any bank, banking institution, building and loan
association, trust company, insurance company, public
utility, educational institution or other special
corporations governed by special laws, unless
accompanied by a certificate of the appropriate
government agency to the effect that such by-laws or
amendments are in accordance with law.
As correctly postulated by the petitioner, interpretation of
this provision of law begins with the determination of the
meaning and import of the word "must" in this section
MAYORDO, M.A
Ordinarily, the word "must" connotes an imperative act or
operates to impose a duty which may be enforced.  9  It is
synonymous with "ought" which connotes compulsion or
mandatoriness.  10  However, the word "must" in a statute,
like "shall," is not always imperative. It may be consistent
with an exercise of discretion. In this jurisdiction, the
tendency has been to interpret "shall" as the context or a
reasonable construction of the statute in which it is used
demands or requires.  11  This is equally true as regards the
word "must." Thus, if the languages of a statute considered
as a whole and with due regard to its nature and object
reveals that the legislature intended to use the words
"shall" and "must" to be directory, they should be given that
meaning.12
In this respect, the following portions of the deliberations
of the Batasang Pambansa No. 68 are illuminating:
MR. FUENTEBELLA. Thank you, Mr. Speaker.
On page 34, referring to the adoption of by-laws, are
we made to understand here, Mr. Speaker, that by-laws
must immediately be filed within one month after the
issuance? In other words, would this be mandatory or
directory in character?
MR. MENDOZA. This is mandatory.
MR. FUENTEBELLA. It being mandatory, Mr. Speaker,
what would be the effect of the failure of the
corporation to file these by-laws within one month?
MR. MENDOZA. There is a provision in the latter part of
the Code which identifies and describes the
consequences of violations of any provision of this
Code. One such consequences is the dissolution of the
corporation for its inability, or perhaps, incurring
certain penalties.
MR. FUENTEBELLA. But it will not automatically amount
to a dissolution of the corporation by merely failing to
file the by-laws within one month. Supposing the
corporation was late, say, five days, what would be the
mandatory penalty?
MR. MENDOZA. I do not think it will necessarily result in
the automatic or  ipso facto  dissolution of the
corporation. Perhaps, as in the case, as you suggested,
in the case of El Hogar Filipino where a  quo
warrantoaction is brought, one takes into account the
gravity of the violation committed. If the by-laws were
late — the filing of the by-laws were late by, perhaps, a
CORPORATION LAW CASES
LLB 3
day or two, I would suppose that might be a tolerable
delay, but if they are delayed over a period of months
— as is happening now — because of the absence of a
clear requirement that by-laws must be completed
within a specified period of time, the corporation must
suffer certain consequences. 13
This exchange of views demonstrates clearly that automatic
corporate dissolution for failure to file the by-laws on time
was never the intention of the legislature. Moreover, even
without resorting to the records of deliberations of the
Batasang Pambansa, the law itself provides the answer to
the issue propounded by petitioner.
Taken as a whole and under the principle that the best
interpreter of a statute is the statute itself (optima statuli
interpretatix est ipsum statutum),  14  Section 46
aforequoted reveals the legislative intent to attach a
directory, and not mandatory, meaning for the word "must"
in the first sentence thereof. Note should be taken of the
second paragraph of the law which allows the filing of the
by-laws even  prior  to incorporation. This provision in the
same section of the Code rules out mandatory compliance
with the requirement of filing the by-laws "within one (1)
month after receipt of official notice of the issuance of its
certificate of incorporation by the Securities and Exchange
Commission." It necessarily follows that failure to file the
by-laws within that period does not imply the "demise" of
the corporation. By-laws may be necessary for the
"government" of the corporation but these are subordinate
to the articles of incorporation as well as to the
Corporation Code and related statutes.15  There are in fact
cases where by-laws are unnecessary to corporate
existence or to the valid exercise of corporate powers,
thus:
In the absence of charter or statutory provisions to the
contrary, by-laws are not necessary either to the
existence of a corporation or to the valid exercise of
the powers conferred upon it, certainly in all cases
where the charter sufficiently provides for the
government of the body; and even where the governing
statute in express terms confers upon the corporation
the power to adopt by-laws, the failure to exercise the
power will be ascribed to mere nonaction which will
not render void any acts of the corporation which
would otherwise be valid. 16 (Emphasis supplied.)
As Fletcher aptly puts it:
Page 57 of 160
It has been said that the by-laws of a corporation are
the rule of its life, and that until by-laws have been
adopted the corporation may not be able to act for the
purposes of its creation, and that the first and most
important duty of the members is to adopt them. This
would seem to follow as a matter of principle from the
office and functions of by-laws. Viewed in this light,
the adoption of by-laws is a matter of practical, if not
one of legal, necessity. Moreover, the peculiar
circumstances attending the formation of a corporation
may impose the obligation to adopt certain by-laws, as
in the case of a close corporation organized for specific
purposes. And the statute or general laws from which
the corporation derives its corporate existence may
expressly require it to make and adopt by-laws and
specify to some extent what they shall contain and the
manner of their adoption.  The mere fact, however, of
the existence of power in the corporation to adopt by-
laws does not ordinarily and of necessity make the
exercise of such power essential to its corporate life,
or to the validity of any of its acts. 17
Although the Corporation Code requires the filing of by-
laws, it does not expressly provide for the consequences of
the non-filing of the same within the period provided for in
Section 46. However, such omission has been rectified by
Presidential Decree No. 902-A, the pertinent provisions on
the jurisdiction of the SEC of which state:
Sec. 6. In order to effectively exercise such
jurisdiction, the Commission shall possess the following
powers:
xxx xxx xxx
(1) To  suspend, or revoke, after proper notice and
hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of
the grounds provided by law, including the following:
xxx xxx xxx
5. Failure to file by-laws within the required period;
xxx xxx xxx
In the exercise of the foregoing authority and
jurisdiction of the Commission or by a Commissioner or
by such other bodies, boards, committees and/or any
officer as may be created or designated by the
Commission for the purpose. The decision, ruling or
order of any such Commissioner, bodies, boards,
committees and/or officer may be appealed to the
Commission sitting en banc within thirty (30) days after
receipt by the appellant of notice of such decision,
ruling or order. The Commission shall promulgate rules
MAYORDO, M.A
of procedures to govern the proceedings, hearings and
appeals of cases falling with its jurisdiction.
The aggrieved party may appeal the order, decision or
ruling of the Commission sitting en banc to the Supreme
Court by petition for review in accordance with the
pertinent provisions of the Rules of Court.
Even under the foregoing express grant of power and
authority, there can be no  automatic corporate
dissolutionsimply because the incorporators failed to abide
by the required filing of by-laws embodied in Section 46 of
the Corporation Code. There is no outright "demise" of
corporate existence. Proper notice and hearing are cardinal
components of due process in any democratic institution,
agency or society. In other words, the incorporators must
be given the chance to explain their neglect or omission
and remedy the same.
That the failure to file by-laws is not provided for by the
Corporation Code but in another law is of no moment. P.D.
No. 902-A, which took effect immediately after its
promulgation on March 11, 1976, is very much apposite to
the Code. Accordingly, the provisions abovequoted supply
the law governing the situation in the case at bar, inasmuch
as the Corporation Code and P.D. No. 902-A are statutes
in  pari materia.  Interpretare et concordare legibus est
optimus interpretandi. Every statute must be so construed
and harmonized with other statutes as to form a uniform
system of jurisprudence. 18
As the "rules and regulations or private laws enacted by the
corporation to regulate, govern and control its own actions,
affairs and concerns and its stockholders or members and
directors and officers with relation thereto and among
themselves in their relation to it,"  19  by-laws are
indispensable to corporations in this jurisdiction. These
may not be essential to corporate birth but certainly, these
are required by law for an orderly governance and
management of corporations. Nonetheless, failure to file
them within the period required by law by no means tolls
the automatic dissolution of a corporation.
In this regard, private respondents are correct in relying on
the pronouncements of this Court in  Chung Ka Bio
v.Intermediate Appellate Court, 20 as follows:
. . . . Moreover, failure to file the by-laws does not
automatically operate to dissolve a corporation but is
now considered only a ground for such dissolution.
CORPORATION LAW CASES
LLB 3
Section 19 of the Corporation Law, part of which is now
Section 22 of the Corporation Code, provided that the
powers of the corporation would cease if it did not
formally organize and commence the transaction of its
business or the continuation of its works within two
years from date of its incorporation. Section 20, which
has been reproduced with some modifications in
Section 46 of the Corporation Code, expressly declared
that "every corporation formed under this Act, must
within one month after the filing of the articles of
incorporation with the Securities and Exchange
Commission, adopt a code of by-laws." Whether this
provision should be given mandatory or only directory
effect remained a controversial question until it
became academic with the adoption of PD 902-A. Under
this decree, it is now clear that the failure to file by-
laws within the required period is only a ground for
suspension or revocation of the certificate of
registration of corporations.
Non-filing of the by-laws will not result in automatic
dissolution of the corporation. Under Section 6(I) of PD
902-A, the SEC is empowered to "suspend or revoke,
after proper notice and hearing, the franchise or
certificate of registration of a corporation" on the
ground  inter alia  of "failure to file by-laws within the
required period." It is clear from this provision that
there must first of all be a hearing to determine the
existence of the ground, and secondly, assuming such
finding, the penalty is not necessarily revocation but
may be only suspension of the charter. In fact, under
the rules and regulations of the SEC, failure to file the
by-laws on time may be penalized merely with the
imposition of an administrative fine without affecting
the corporate existence of the erring firm.
It should be stressed in this connection that substantial
compliance with conditions subsequent will suffice to
perfect corporate personality. Organization and
commencement of transaction of corporate business
are but conditions subsequent and not prerequisites for
acquisition of corporate personality. The adoption and
filing of by-laws is also a condition subsequent. Under
Section 19 of the Corporation Code, a Corporation
commences its corporate existence and juridical
personality and is deemed incorporated from the date
the Securities and Exchange Commission issues
certificate of incorporation under its official seal. This
may be done even before the filing of the by-laws,
which under Section 46 of the Corporation Code, must
be adopted "within one month after receipt of official
Page 58 of 160
notice of the issuance of its certificate of
incorporation." 21
That the corporation involved herein is under the
supervision of the HIGC does not alter the result of this
case. The HIGC has taken over the specialized functions of
the former Home Financing Corporation by virtue of
Executive Order No. 90 dated December 17, 1989.  22  With
respect to homeowners associations, the HIGC shall
"exercise all the powers, authorities and responsibilities
that are vested on the Securities and Exchange
Commission . . . , the provision of Act 1459, as amended by
P.D. 902-A, to the contrary notwithstanding." 23
WHEREFORE, the instant petition for review on certiorari is
hereby DENIED and the questioned Decision of the Court of
Appeals AFFIRMED. This Decision is immediately executory.
Costs against petitioner.
SO ORDERED.
G.R. No. L-23241             March 14, 1925
HENRY FLEISCHER, plaintiff-appellee,  vs. BOTICA
NOLASCO CO., INC., defendant-appellant.
JOHNSON, J.:
This action was commenced in the Court of First Instance of
the Province of Oriental Negros on the 14th day of August,
1923, against the board of directors of the Botica Nolasco,
Inc., a corporation duly organized and existing under the
laws of the Philippine Islands. The plaintiff prayed that said
board of directors be ordered to register in the books of the
corporation five shares of its stock in the name of Henry
Fleischer, the plaintiff, and to pay him the sum of P500 for
damages sustained by him resulting from the refusal of said
body to register the shares of stock in question. The
defendant filed a demurrer on the ground that the facts
alleged in the complaint did not constitute sufficient cause
of action, and that the action was not brought against the
proper party, which was the Botica Nolasco, Inc. The
demurrer was sustained, and the plaintiff was granted five
days to amend his complaint.
On November 15, 1923, the plaintiff filed an amended
complaint against the Botica Nolasco, Inc., alleging that he
became the owner of five shares of stock of said
corporation, by purchase from their original owner, one
Manuel Gonzalez; that the said shares were fully paid; and
that the defendant refused to register said shares in his
name in the books of the corporation in spite of repeated
demands to that effect made by him upon said corporation,
which refusal caused him damages amounting to P500.
MAYORDO, M.A
Plaintiff prayed for a judgment ordering the Botica
Nolasco, Inc. to register in his name in the books of the
corporation the five shares of stock recorded in said books
in the name of Manuel Gonzalez, and to indemnify him in
the sum of P500 as damages, and to pay the costs. The
defendant again filed a demurrer on the ground that the
amended complaint did not state facts sufficient to
constitute a cause of action, and that said amended
complaint was ambiguous, unintelligible, uncertain, which
demurrer was overruled by the court.
The defendant answered the amended complaint denying
generally and specifically each and every one of the
material allegations thereof, and, as a special defense,
alleged that the defendant, pursuant to article 12 of its by-
laws, had preferential right to buy from the plaintiff said
shares at the par value of P100 a share, plus P90 as
dividends corresponding to the year 1922, and that said
offer was refused by the plaintiff. The defendant prayed
for a judgment absolving it from all liability under the
complaint and directing the plaintiff to deliver to the
defendant the five shares of stock in question, and to pay
damages in the sum of P500, and the costs.
Upon the issue presented by the pleadings above stated,
the cause was brought on for trial, at the conclusion of
which, and on August 21, 1924, the Honorable N.
Capistrano, judge, held that, in his opinion, article 12 of
the by-laws of the corporation which gives it preferential
right to buy its shares from retiring stockholders, is in
conflict with Act No. 1459 (Corporation Law), especially
with section 35 thereof; and rendered a judgment ordering
the defendant corporation, through its board of directors,
to register in the books of said corporation the said five
shares of stock in the name of the plaintiff, Henry
Fleischer, as the shareholder or owner thereof, instead of
the original owner, Manuel Gonzalez, with costs against the
defendant.
The defendant appealed from said judgment, and now
makes several assignment of error, all of which, in
substance, raise the question whether or not article 12 of
the by-laws of the corporation is in conflict with the
provisions of the Corporation Law (Act No. 1459).
There is no controversy as to the facts of the present case.
They are simple and may be stated as follows:
That Manuel Gonzalez was the original owner of the five
shares of stock in question, Nos. 16, 17, 18, 19 and 20 of
the Botica Nolasco, Inc.; that on March 11, 1923, he
CORPORATION LAW CASES
LLB 3
assigned and delivered said five shares to the plaintiff,
Henry Fleischer, by accomplishing the form of endorsement
provided on the back thereof, together with other credits,
in consideration of a large sum of money owed by Gonzalez
to Fleischer (Exhibits A, B, B-1, B-2, B-3, B-4); that on
March 13, 1923, Dr. Eduardo Miciano, who was the
secretary-treasurer of said corporation, offered to buy from
Henry Fleischer, on behalf of the corporation, said shares of
stock, at their par value of P100 a share, for P500; that by
virtue of article 12 of the by-laws of Botica Nolasco, Inc.,
said corporation had the preferential right to buy from
Manuel Gonzalez said shares (Exhibit 2); that the plaintiff
refused to sell them to the defendant; that the plaintiff
requested Doctor Miciano to register said shares in his
name; that Doctor Miciano refused to do so, saying that it
would be in contravention of the by-laws of the
corporation.
It also appears from the record that on the 13th day of
March, 1923, two days after the assignment of the shares to
the plaintiff, Manuel Gonzales made a written statement to
the Botica Nolasco, Inc., requesting that the five shares of
stock sold by him to Henry Fleischer be noted transferred
to Fleischer's name. He also acknowledged in said written
statement the preferential right of the corporation to buy
said five shares (Exhibit 3). On June 14, 1923, Gonzalez
wrote a letter to the Botica Nolasco, withdrawing and
cancelling his written statement of March 13, 1923 (Exhibit
C), to which letter the Botica Nolasco on June 15, 1923,
replied, declaring that his written statement was in
conformity with the by-laws of the corporation; that his
letter of June 14th was of no effect, and that the shares in
question had been registered in the name of the Botica
Nolasco, Inc., (Exhibit X).
As indicated above, the important question raised in this
appeal is whether or not article 12 of the by-laws of the
Botica Nolasco, Inc., is in conflict with the provisions of the
Corporation Law (Act No. 1459). Appellant invoked said
article as its ground for denying the request of the plaintiff
that the shares in question be registered in his (plaintiff's)
name, and for claiming that it (Botica Nolasco, Inc.) had
the preferential right to buy said shares from Gonzalez.
Appellant now contends that article 12 of the said by-laws
is in conformity with the provisions of Act No. 1459. Said
article is as follows:
ART. 12. Las acciones de la Corporacion pueden ser
transferidas a otra persona, pero para que estas
transferencias tengan validez legal, deben constar en
los registros de la Corporacion con el debido endoso del
Page 59 of 160
accionista a cuyo nombre se ha expedido la accion o
acciones que se transfieran, o un documento de
transferencia.  Entendiendose que, ningun accionista
transferira accion alguna a otra persona sin participar
antes por escrito al Secretario-Tesorero. En igualdad de
condiciones, la sociedad tendra el derecho de adquirir
para si la accion o acciones que se traten de transferir.
(Exhibit 2.)
The above-quoted article constitutes a by-law or regulation
adopted by the Botica Nolasco, Inc., governing the transfer
of shares of stock of said corporation. The latter part of
said article creates in favor of the Botica Nolasco, Inc., a
preferential right to buy, under the same conditions, the
share or shares of stock of a retiring shareholder. Has said
corporation any power, under the Corporation Law (Act.No.
1459), to adopt such by-law?
The particular provisions of the Corporation Law referring
to transfer of shares of stock are as follows:
SEC. 13. Every corporation has the power:
xxx     xxx     xxx
(7) To make by-laws, not inconsistent with any existing
law, for the fixing or changing of the number of its
officers and directors within the limits prescribed by
law, and for the  transferring of its stock, the
administration of its corporate affairs, etc.
xxx     xxx     xxx
SEC. 35. The capital stock of stock corporations shall de
divided into shares for which certificates signed by the
president or the vice-president, countersigned by the
secretary or clerk and sealed with the seal of the
corporation, shall be issued in accordance with the by-
laws.  Shares of stock so issued are personal property
and may be transferred by delivery of the certificate
indorsed by the owner  or his attorney in fact or other
person legally authorized to make the transfer.  No
transfer, however, shall be valid, except as between
the parties, until the transfer is entered and noted
upon the books of the corporation so as to show the
names of the parties to the transaction, that date of
the transfer, the number of the certificate, and the
number of shares transferred.
No share of stock against which the corporation holds
any unpaid claim shall be transferable on the books of
the corporation.
MAYORDO, M.A
Section 13, paragraph 7, above-quoted, empowers a
corporation to make  by-laws, not inconsistent with any
existing law, for the transferring of its stock. It follows
from said provision, that a by-law adopted by a corporation
relating to transfer of stock should be in harmony with the
law on the subject of transfer of stock. The law on this
subject is found in section 35 of Act No. 1459 above
quoted. Said section specifically provides that the shares of
stock  "are personal property and may be transferred by
delivery of the certificate indorsed by the owner, etc." Said
section 35 defines the nature, character and transferability
of shares of stock. Under said section they are personal
property and may be transferred as therein provided. Said
section contemplates no restriction as to whom they may
be transferred or sold. It does not suggest that any
discrimination may be created by the corporation in favor
or against a certain purchaser. The holder of shares, as
owner of personal property, is at liberty, under said section,
to dispose of them in favor of whomsoever he pleases,
without any other limitation in this respect, than the
general provisions of law. Therefore, a stock corporation in
adopting a by-law governing transfer of shares of stock
should take into consideration the specific provisions of
section 35 of Act No. 1459, and said by-law should be made
to harmonize with said provisions. It should not be
inconsistent therewith.
The by-law now in question was adopted under the power
conferred upon the corporation by section 13, paragraph 7,
above quoted; but in adopting said by-law the corporation
has transcended the limits fixed by law in the same
section, and has not taken into consideration the provisions
of section 35 of Act No. 1459.
As a general rule, the by-laws of a corporation are valid if
they are reasonable and calculated to carry into effect the
objects of the corporation, and are not contradictory to the
general policy of the laws of the land. (Supreme
Commandery of the Knights of the Golden Rule  vs.
Ainsworth, 71 Ala., 436; 46 Am. Rep., 332.)
On the other hand, it is equally well settled that by-laws of
a corporation must be reasonable and for a corporate
purpose, and always within the charter limits. They must
always be strictly subordinate to the constitution and the
general laws of the land. They must not infringe the policy
of the state, nor be hostile to public welfare. (46 Am. Rep.,
332.) They must not disturb vested rights or impair the
obligation of a contract, take away or abridge the
substantial rights of stockholder or member, affect rights of
property or create obligations unknown to the law.
(People's Home Savings Bank  vs. Superior Court, 104 Cal.,
CORPORATION LAW CASES
LLB 3
649; 43 Am. St. Rep., 147; Ireland vs. Globe Milling Co., 79
Am. St. Rep., 769.)
The validity of the by-law of a corporation is purely a
question of law. (South Florida Railroad Co. vs. Rhodes, 25
Fla., 40.)
The power to enact by-laws restraining the sale and
transfer of stock must be found in the governing
statute or the charter.  Restrictions upon the traffic in
stock must have their source in legislative enactment,
as the corporation itself cannot create such
impediments. By-law are intended merely for the
protection of the corporation, and prescribe regulation
and not restriction; they are always subject to the
charter of the corporation. The corporation, in the
absence of such a power, cannot ordinarily inquire into
or pass upon the legality of the transaction by which its
stock passes from one person to another, nor can it
question the consideration upon which a sale is based.
A by-law cannot take away or abridge the substantial
rights of stockholder.  Under a statute authorizing by-
laws for the transfer of stock, a corporation can do no
more than prescribe a general mode of transfer on the
corporate books and cannot justify an unreasonable
restriction upon the right of sale. (4 Thompson on
Corporations, sec. 4137, p. 674.
The right of unrestrained transfer of shares inheres in
the very nature of a corporation, and courts will
carefully scrutinize any attempt to impose restrictions
or limitations upon the right of stockholders to sell and
assign their stock. The right to impose any restraint in
this respect must be conferred upon the corporation
either by the governing statute or by the articles of
the corporation. It cannot be done by a by-law without
statutory or charter authority. (4 Thompson on
Corporations, sec. 4334, pp. 818, 819.)
The jus disponendi, being an incident of the ownership
of property, the general rule (subject to exceptions
hereafter pointed out and discussed) is that  every
owner of corporate shares has the same uncontrollable
right to alien them which attaches to the ownership of
any other species of property. A shareholder is under
no obligation to refrain from selling his shares at the
sacrifice of his personal interest, in order to secure the
welfare of the corporation, or to enable another
shareholder to make gains and profits. (10 Cyc., p.
577.)
Page 60 of 160
It follows from the foregoing that a corporation has no
power to prevent or to restrain transfers of its shares,
unless such power is expressly conferred in its charter
or governing statute. This conclusion follows from the
further consideration that by-laws or other regulations
restraining such transfers, unless derived from
authority expressly granted by the legislature, would
be regarded as impositions in restraint of trade. (10
Cyc., p. 578.)
The foregoing authorities go farther than the stand we are
taking on this question. They hold that the power of a
corporation to enact by-laws restraining the sale and
transfer of shares, should not only be in harmony with the
law or charter of the corporation, but such power should be
expressly granted in said law or charter.
The only restraint imposed by the Corporation Law upon
transfer of shares is found in section 35 of Act No. 1459,
quoted above, as follows: "No transfer, however, shall be
valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation so as
to show the names of the parties to the transaction, the
date of the transfer, the number of the certificate, and the
number of shares transferred." This restriction is necessary
in order that the officers of the corporation may know who
are the stockholders, which is essential in conducting
elections of officers, in calling meeting of stockholders,
and for other purposes. but any restriction of the nature of
that imposed in the by-law now in question, is ultra vires,
violative of the property rights of shareholders, and in
restraint of trade.
And moreover, the by-laws now in question cannot have any
effect on the appellee. He had no knowledge of such by-
law when the shares were assigned to him. He obtained
them in good faith and for a valuable consideration. He was
not a privy to the contract created by said by-law between
the shareholder Manuel Gonzalez and the Botica Nolasco,
Inc. Said by-law cannot operate to defeat his rights as a
purchaser.
An unauthorized by-law forbidding a shareholder to sell
his shares without first offering them to the corporation
for a period of thirty days is not binding upon an
assignee of the stock as a personal contract, although
his assignor knew of the by-law and took part in its
adoption. (10 Cyc., 579; Ireland  vs. Globe Milling Co.,
21 R.I., 9.)
When no restriction is placed by public law on the
transfer of corporate stock, a purchaser is not affected
MAYORDO, M.A
by any contractual restriction of which he had no
notice. (Brinkerhoff-Farris Trust and Savings Co.  vs.
Home Lumber Co., 118 Mo., 447.)
The assignment of shares of stock in a corporation by
one who has assented to an unauthorized by-law has
only the effect of a contract by, and enforceable
against, the assignor; the assignee is not bound by such
by-law by virtue of the assignment alone. (Ireland  vs.
Globe Milling Co., 21 R.I., 9.)
A by-law of a corporation which provides that transfers
of stock shall not be valid unless approved by the board
of directors, while it may be enforced as a reasonable
regulation for the protection of the corporation against
worthless stockholders, cannot be made available to
defeat the rights of third persons. (Farmers' and
Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.)
Counsel for defendant incidentally argues in his brief, that
the plaintiff does not have any right of action against the
defendant corporation, but against the president and
secretary thereof, inasmuch as the signing and registration
of shares is incumbent upon said officers pursuant to
section 35 of the Corporation Law. This contention cannot
be sustained now. The question should have been raised in
the lower court. It is too late to raise it now in this appeal.
Besides, as stated above, the corporation was made
defendant in this action upon the demurrer of the attorney
of the original defendant in the lower court, who
contended that the Botica Nolasco, Inc., should be made
the party defendant in this action. Accordingly, upon order
of the court, the complaint was amended and the said
corporation was made the party defendant.
Whenever a corporation refuses to transfer and register
stock in cases like the present, mandamus will lie to
compel the officers of the corporation to transfer said stock
upon the books of the corporation. (26 Cyc. 347; Hager vs.
Bryan, 19 Phil., 138.)
In view of all the foregoing, we are of the opinion, and so
hold, that the decision of the lower court is in accordance
with law and should be and is hereby affirmed, with costs.
So ordered.
G.R. No. L-26649             July 13, 1927
THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on
relation of the Attorney-General), plaintiff,  vs. EL HOGAR
FILIPINO, defendant.
STREET, J.:
CORPORATION LAW CASES
LLB 3
This is a  quo warranto  proceeding instituted originally in
this court by the Government of the Philippine Islands on
the relation of the Attorney-General against the building
and loan association known as El Hogar Filipino, for the
purpose of depriving it of its corporate franchise, excluding
it from all corporate rights and privileges, and effecting a
final dissolution of said corporation. The complaint
enumerates seventeen distinct causes of action, to all of
which the defendant has answered upon the merits, first
admitting the averments of the first paragraph in the
statement of the first cause of action, wherein it is alleged
that the defendant was organized in the year 1911 as a
building and loan association under the laws of the
Philippine Islands, and that, since its organization, the
corporation has been doing business in the Philippine
Islands, with its principal office in the City of Manila. Other
facts alleged in the various causes of action in the
complaint are either denied in the answer or controverted
in legal effect by other facts.
After issue had been thus joined upon the merits, the
attorneys entered into an elaborate agreement as to the
fact, thereby removing from the field of dispute such
matters of fact as are necessary to the solution of the
controversy. It follows that we are here confronted only
with the legal questions arising upon the agreed statement.
On March 1, 1906, the Philippine Commission enacted what
is known as the Corporation Law (Act No. 1459) effective
upon April 1 of the same year. Section 171 to 190, inclusive,
of this Act are devoted to the subject of building and loan
associations, defining their objects making various
provisions governing their organization and administration,
and providing for the supervision to be exercised over
them. These provisions appear to be adopted from
American statutes governing building and loan associations
and they of course reflect the ideals and principles found in
American law relative to such associations. The respondent,
El Hogar Filipino, was apparently the first corporation
organized in the Philippine Islands under the provisions
cited, and the association has been favored with
extraordinary success. The articles of incorporation bear
the date of December 28, 1910, at which time capital stock
in the association had been subscribed to the amount of
P150,000 of which the sum of P10,620 had been paid in.
Under the law as it then stood, the capital of the
Association was not permitted to exceed P3,000,000, but
by Act No. 2092, passed December 23, 1911, the statute
was so amended as to permit the capitalization of building
and loan associations to the amount of ten millions. Soon
thereafter the association took advantage of this
Page 61 of 160
enactment by amending its articles so as to provide that
the capital should be in an amount not exceeding the then
lawful limit. From the time of its first organization the
number of shareholders has constantly increased, with the
result that on December 31, 1925, the association had
5,826 shareholders holding 125,750 shares, with a total
paid-up value of P8,703,602.25. During the period of its
existence prior to the date last above-mentioned the
association paid to withdrawing stockholders the amount of
P7,618,257,.72; and in the same period it distributed in the
form of dividends among its stockholders the sum of
P7,621,565.81.
First cause of action. — The first cause of action is based
upon the alleged illegal holding by the respondent of the
title to real property for a period in excess of five years
after the property had been bought in by the respondent at
one of its own foreclosure sales. The provision of law
relevant to the matter is found in section 75 of Act of
Congress of July 1, 1902 (repeated in subsection 5 of
section 13 of the Corporation Law.) In both of these
provisions it is in substance declared that while
corporations may loan funds upon real estate security and
purchase real estate when necessary for the collection of
loans, they shall dispose of real estate so obtained within
five years after receiving the title.
In this connection it appears that in the year 1920 El Hogar
Filipino was the holder of a recorded mortgage upon a tract
of land in the municipality of San Clemente, Province of
Tarlac, as security for a loan of P24,000 to the shareholders
of El Hogar Filipino who were the owners of said property.
The borrowers having defaulted in their payments, El Hogar
Filipino foreclosed the mortgage and purchased the land at
the foreclosure sale for the net amount of the
indebtedness, namely, the sum of P23,744.18. The auction
sale of the mortgaged property took place November 18,
1920, and the deed conveying the property to El Hogar
Filipino was executed and delivered December 22, 1920. On
December 27, 1920, the deed conveying the property to El
Hogar Filipino was sent to the register of deeds of the
Province of Tarlac, with the request that the certificate of
title then standing in the name of the former owners be
cancelled and that a new certificate of title be issued in
the name of El Hogar Filipino. Said deed was received in
the office of the register of deeds of Tarlac on December
28, 1920, together with the old certificate of title, and
thereupon the register made upon the said deed the
following annotation:
MAYORDO, M.A
The foregoing document was received in this office at
4.10 p. m., December 28, 1920, according to entry
1898, page 50 of Book One of the Day Book and
registered on the back of certificate of title No. 2211
and its duplicate, folio 193 of Book A-10 of the register
of original certificate. Tarlac, Tarlac, January 12, 1921.
(Sgd.) SILVINO LOPEZ DE JESUS, Register of Deeds.
For months no reply was received by El Hogar Filipino from
the register of deeds of Tarlac, and letters were written to
him by El Hogar Filipino on the subject in March and April,
1921, requesting action. No answer having been received to
these letters, a complaint was made by El Hogar Filipino to
the Chief of the General Land Registration Office; and on
May 7, 1921, the certificate of title to the San Clemente
land was received by El Hogar Filipino from the register of
deeds of Tarlac.
On March 10, 1921, the board of directors of El Hogar
Filipino adopted a resolution authorizing Vicente Bengzon,
an agent of the corporation, to endeavor to find a buyer for
the San Clemente land. On July 27, 1921, El Hogar Filipino
authorized one Jose Laguardia to endeavor to find a
purchaser for the San Clemente land for the sum of P23,000
undertaking to pay the said Laguardia a commission of 5
per centum of the selling price for his services, but no
offers to purchase were obtained through this agent or
through the agent Bengzon. In July, 1923, plans of the San
Clemente land were sent to Mr. Luis Gomez, Mr. J. Gonzalez
and Mr. Alfonso de Castelvi, as prospective purchasers, but
no offers were received from them. In January, 1926, the
agent not having succeeded in finding a buyer, the San
Clemente land was advertised for sale by El Hogar Filipino
in  El Debate, La Vanguardia  and  Taliba, three newspapers
of general circulation in the Philippine Islands published in
the City of Manila. On March 16, 1926, the first offer for
the purchase of the San Clemente land was received by El
Hogar Filipino. This offer was made to it in writing by one
Alcantara, who offered to buy it for the sum of P4,000,
Philippine currency, payable P500 in cash, and the
remainder within thirty days. Alcantara's offer having been
reported by the manager of El Hogar Filipino to its board of
directors, it was decided, by a resolution adopted at a
meeting of the board held on March 25, 1926, to accept the
offer, and this acceptance was communicated to the
prospective buyer. Alcantara was given successive
extensions of the time, the last of which expired April 30,
1926, within which to make the payment agreed upon; and
upon his failure to do so El Hogar Filipino treated the
contract with him as rescinded, and efforts were made at
once to find another buyer. Finally the land was sold to
CORPORATION LAW CASES
LLB 3
Doña Felipa Alberto for P6,000 by a public instrument
executed before a notary public at Manila, P. I., on July 30,
1926.
Upon consideration of the facts above set forth it is evident
that the strict letter of the law was violated by the
respondent; but it is equally obvious that its conduct has
not been characterized by obduracy or pertinacity in
contempt of the law. Moreover, several facts connected
with the incident tend to mitigate the offense. The
Attorney-General points out that the respondent acquired
title on December 22, 1920, when the deed was executed
and delivered, by which the property was conveyed to it as
purchaser at its foreclosure sale, and this title remained in
it until July 30, 1926, when the property was finally sold to
Felipa Alberto. The interval between these two
conveyances is thus more than five years; and it is
contended that the five year period did not begin to run
against the respondent until May 7, 1921, when the register
of deeds of Tarlac delivered the new certificate of title to
the respondent pursuant to the deed by which the property
was acquired. As an equitable consideration affecting the
case this contention, though not decisive, is in our opinion
more than respectable. It has been held by this court that a
purchaser of land registered under the Torrens system
cannot acquire the status of an innocent purchaser for
value unless his vendor is able to place in his hands an
owner's duplicate showing the title of such land to be in the
vendor (Director of Lands  vs.  Addison, 49, Phil., 19;
Rodriguez  vs.  Llorente, G. R. No. 266151). It results that
prior to May 7, 1921, El Hogar Filipino was not really in a
position to pass an indefeasible title to any purchaser. In
this connection it will be noted that section 75 of the Act of
Congress of July 1, 1902, and the similar provision in
section 13 of the Corporation Law, allow the corporation
"five years after receiving the title," within which to
dispose of the property. A fair interpretation of these
provisions would seem to indicate that the date of the
receiving of the title in this case was the date when the
respondent received the owner's certificate, or May 7,
1921, for it was only after that date that the respondent
had an unequivocal and unquestionable power to pass a
complete title. The failure of the respondent to receive the
certificate sooner was not due in any wise to its fault, but
to unexplained delay on the part of the register of deeds.
For this delay the respondent cannot be held accountable.
Again, it is urged for the respondent that the period
between March 25, 1926, and April 30, 1926, should not be
counted as part of the five-year period. This was the period
during which the respondent was under obligation to sell
Page 62 of 160
the property to Alcantara, prior to the rescission of the
contract by reason of Alcantara's failure to make the
stipulated first payment. Upon this point the contention of
the respondent is, in our opinion, well founded. The
acceptance by it of Alcantara's offer obligated the
respondent to Alcantara; and if it had not been for the
default of Alcantara, the effective sale of the property
would have resulted. The respondent was not at all
chargeable with the collapse of these negotiations; and
hence in any equitable application of the law this period
should be deducted from the five-year period within which
the respondent ought to have made the sale. Another
circumstance explanatory of the respondent's delay in
selling the property is found in the fact that it purchased
the property for the full amount of the indebtedness due to
it from the former owner, which was nearly P24,000. It was
subsequently found that the property was not salable for
anything like that amount and in the end it had to be sold
for P6,000, notwithstanding energetic efforts on the part of
the respondent to find a purchaser upon better terms.
The question then arises whether the failure of the
respondent to get rid of the San Clemente property within
five years after it first acquired the deed thereto, even
supposing the five-year period to be properly counted from
that date, is such a violation of law as should work a
forfeiture of its franchise and require a judgment to be
entered for its dissolution in this action of  quo warranto.
Upon this point we do not hesitate to say that in our
opinion the corporation has not been shown to have
offended against the law in a manner that should entail a
forfeiture of its charter. Certainly no court with any
discretion to use in the matter would visit upon the
respondent and its thousands of shareholders the extreme
penalty of the law as a consequence of the delinquency
here shown to have been committed.
The law applicable to the case is in our opinion found in
section 212 of the Code of Civil Procedure, as applied by
this court in  Government of the Philippine Islands vs.
Philippine Sugar Estates Development Co.  (38 Phil., 15).
This section (212), in prescribing the judgment to be
rendered against a corporation in an action of  quo
warranto, among other things says:
. . . When it is found and adjudged that a corporation
has offended in any matter or manner which does not
by law work as a surrender or forfeiture, or has misused
a franchise or exercised a power not conferred by law,
but not of such a character as to work a surrender or
forfeiture of its franchise, judgment shall be rendered
MAYORDO, M.A
that it be outset from the continuance of such offense
or the exercise of such power.
This provision clearly shows that the court has a discretion
with respect to the infliction of capital punishment upon
corporation and that there are certain misdemeanors and
misuses of franchises which should not be recognized as
requiring their dissolution. In Government of the Philippine
Islands vs. Philippine Sugar Estates Development Co.(38
Phil., 15), it was found that the offending corporation had
been largely (though indirectly) engaged in the buying and
holding or real property for speculative purposes in
contravention of its charter and contrary to the express
provisions of law. Moreover, in that case the offending
corporation was found to be still interested in the
properties so purchased for speculative at the time the
action was brought. Nevertheless, instead of making an
absolute and unconditional order for the dissolution of the
corporation, the judgment of ouster was made conditional
upon the failure of the corporation to discontinue its
unlawful conduct within six months after final decision. In
the case before us the respondent appears to have rid itself
of the San Clemente property many months prior to the
institution of this action. It is evident from this that the
dissolution of the respondent would not be an appropriate
remedy in this case. We do not of course undertake to say
that a corporation might not be dissolved for offenses of
this nature perpetrated in the past, especially if its conduct
had exhibited a willful obduracy and contempt of law. We
content ourselves with holding that upon the facts here
before us the penalty of dissolution would be excessively
severe and fraught with consequences altogether
disproportionate to the offense committed.
The evident purpose behind the law restricting the rights of
corporations with respect to the tenure of land was to
prevent the revival of the entail (mayorazgo) or other
similar institution by which land could be fettered and its
alienation hampered over long periods of time. In the case
before us the respondent corporation has in good faith
disposed of the piece of property which appears to have
been in its hands at the expiration of the period fixed by
law, and a fair explanation is given of its failure to dispose
of it sooner. Under these circumstances the destruction of
the corporation would bring irreparable loss upon the
thousand of innocent shareholders of the corporation
without any corresponding benefit to the public. The
discretion permitted to this court in the application of the
remedy of  quo warranto  forbids so radical a use of the
remedy.
CORPORATION LAW CASES
LLB 3
But the case for the plaintiff supposes that the discretion
of this court in matters like that now before us has been
expressly taken away by the third section of Act No. 2792,
and that the dissolution of the corporation is obligatory
upon the court a mere finding that the respondent has
violated the provision of the Corporation Law in any
respect. This makes necessary to examine the Act last
above-mentioned with some care. Upon referring thereto,
we find that it consists of three sections under the
following style:
No. 2792. — An Act to amend certain sections of the
Corporation Law, Act Numbered Fourteen hundred and
fifty-nine, providing for the publication of the assets
and liabilities of corporations registering in the Bureau
of Commerce and Industry, determining the liability of
the officers of corporations with regard to the issuance
of stock or bonus, establishing penalties for certain
things, and for other purposes.
The first two section contain amendments to the
Corporation Law with respect to matters with which we are
not here concurred. The third section contains anew
enactment to be inserted as section 190 (A) in the
corporation Law immediately following section 190. This
new section reads as follows:
SEC. 190. (A). Penalties. — The violation of any of the
provisions of this Act and its amendments not otherwise
penalized therein, shall be punished by a fine of not
more than one thousand pesos, or by imprisonment for
not more than five years, or both, in the discretion of
the court. If the violation being proved, be dissolved
by  quo warranto  proceedings instituted by the
Attorney-General or by any provincial fiscal, by order of
said Attorney-General: Provided, That nothing in this
section provided shall be construed to repeal the other
causes for the dissolution of corporation prescribed by
existing law, and the remedy provided for in this
section shall be considered as additional to the
remedies already existing.
The contention for the plaintiff is to the effect that the
second sentence in this enactment has entirely abrogated
the discretion of this court with respect to the application
of the remedy of qou warranto, as expressed in section 212
of the Code of Civil Procedure, and that it is now
mandatory upon us to dissolved any corporation whenever
we find that it has committed any violation of the
Corporation Law, however trivial. In our opinion in this
radical view of the meaning of the enactment is untenable.
Page 63 of 160
When the statute says, "If the violation is committed by a
corporation, the same shall, upon such violation being
proved, be dissolved by  quo warranto  proceedings . . .,"
the intention was to indicate that the remedy against the
corporation shall be by action of quo warranto. There was
no intention to define the principles governing said remedy,
and it must be understood that in applying the remedy the
court is still controlled by the principles established in
immemorial jurisprudence. The interpretation placed upon
this language in the brief of the Attorney-General would be
dangerous in the extreme, since it would actually place the
life of all corporate investments in the official. No
corporate enterprise of any moment can be conducted
perpetually without some trivial misdemeanor against
corporate law being committed by some one or other of its
numerous employees. As illustrations of the preposterous
effects of the provision, in the sense contended for by the
Attorney-General, the attorneys for the respondent have
called attention to the fact that under section 52 of the
Corporation Law, a business corporation is required to keep
a stock book and a transfer book in which the names of
stockholders shall kept in alphabetical order. Again, under
section 94, railroad corporations are required to cause all
employees working on passenger trains or at a station for
passengers to wear a badge on his cap or hat which will
indicate his office. Can it be supposed that the Legislature
intended to penalize the violation of such provisions as
these by dissolution of the corporation involved? Evidently
such could not have been the intention; and the only way
to avoid the consequence suggested is to hold, as we now
hold, that the provision now under consideration has not
impaired the discretion of this court in applying the writ
of quo warranto.
Another way to put the same conclusion is to say that the
expression "shall be dissolved by quo warrantoproceedings"
m e a n s i n e f f e c t , " m a y b e d i s s o l v e d b y  q u o
warranto  proceedings in the discretion of the court." The
proposition that the word "shall" may be construed as
"may", when addressed by the Legislature to the courts, is
well supported in jurisprudence. In the case of  Becker vs.
Lebanon and M. St. Ry. Co.,  (188 Pa., 484), the Supreme
Court of Pennsylvania had under consideration a statute
providing as follows:
It shall be the duty of the court . . . to examine,
inquire and ascertain whether such corporation does in
fact posses the right or franchise to do the act from
which such alleged injury to private rights or to the
rights and franchises of other corporations results; and
if such rights or franchises have not been conferred
MAYORDO, M.A
upon such corporations, such courts, it exercising
equitable power,  shall, by injunction, at suit of the
private parties or other corporations, restrain such
injurious acts.
In an action based on this statute the plaintiff claimed
injunctive relief as a matter of right. But this was denied
the court saying:
Notwithstanding, therefore, the use of the imperative
"shall" the injunction is not to be granted unless a
proper case for injunction be made out, in accordance
with the principles and practice of equity. The word
"shall" when used by the legislature to a court, is
usually a grant of authority and means "may", and even
if it be intended to be mandatory it must be subject to
the necessary limitation that a proper case has been
made out for the exercise of the power.
Other authorities amply sustain this view
(People  vs.  Nusebaum, 66 N. Y. Supp., 129, 133; West
Wisconsin R. Co. vs. Foley, 94 U. S., 100, 103; 24 Law. Ed.,
71; Clancy  vs.  McElroy, 30 Wash., 567; 70 Pac., 1095;
State vs. West, 3 Ohio State, 509, 511; In re Lent, 40 N. Y.
Supp., 570, 572; 16 Misc. Rep., 606; Ludlow  vs.  Ludlow's
Executors, 4 N. J. Law [1 Sothard], 387, 394;
Whipple  vs.  Eddy, 161 Ill., 114;43 N. E., 789, 790;
Borkheim  vs.  Fireman's Fund Ins. Co., 38 Cal., 505, 506;
Beasley  vs.  People, 89 Ill., 571, 575; Donnelly  vs.  Smith,
128 Iowa, 257; 103 N. W., 776).
But section 3 of Act No. 2792 is challenged by the
respondent on the ground that the subject-matter of this
section is not expressed in the title of the Act, with the
result that the section is invalid. This criticism is in our
opinion well founded. Section 3 of our organic law (Jones
Bill) declares, among other things, that "No bill which may
be enacted into law shall embrace more than one subject,
and that subject shall be expressed in the title of the bill."
Any law or part of a law passed by the Philippine
Legislature since this provision went into effect and
offending against its requirement is necessarily void.
Upon examining the entire Act (No. 2792), we find that it is
directed to three ends which are successively dealt with in
the first three sections of the Act. But it will be noted that
these three matters all relate to the Corporation Law; and
it is at once apparent that they might properly have been
embodied in a single Act if a title of sufficient unity and
generality had been prefixed thereto. Furthermore, it is
obvious, even upon casual inspection, that the subject-
CORPORATION LAW CASES
LLB 3
matter of each of the first two sections is expressed and
defined with sufficient precision in the title. With respect
to the subject-matter of section 3 the only words in the
title which can be taken to refer to the subject-matter of
said section are these, "An Act . . . establishing penalties
for certain things, and for other purposes." These words
undoubtedly have sufficient generality to cover the
subject-matter of section 3 of the Act. But this is not
enough. The Jones Law requires that the subject-matter of
the bill "shall be expressed in the title of the bill."
When reference is had to the expression "establishing
penalties for certain things," it is obvious that these words
express nothing. The constitutional provision was
undoubtedly adopted in order that the public might be
informed as to what the Legislature is about while bills are
in process of passage. The expression "establishing
penalties for certain things" would give no definite
information to anybody as to the project of legislation
intended under this expression. An examination of the
decided cases shows that courts have always been
indulgent of the practices of the Legislature with respect to
the form and generality of title, for if extreme refinements
were indulged by the courts, the work of legislation would
be unnecessarily hampered. But, as has been observed by
the California court, there must be some reasonable limit
to the generality of titles that will be allowed. The
measure of legality is whether the title is sufficient to give
notice of the general subject of the proposed legislation to
the persons and interests likely to be affected.
In Lewis vs. Dunne (134 Cal., 291), the court had before it a
statute entitled "An Act to revise the Code of Civil
Procedure of the State of California, by amending certain
sections, repealing others, and adding certain new
sections." This title was held to embrace more than one
subject, which were not sufficiently expressed in the title.
In discussing the question the court said:
* * * It is apparent that the language of the title of the
act in question, in and of itself, express no subject
whatever. No one could tell from the title alone what
subject of legislation was dealt with in the body of the
act; such subject so far as the title of the act informs
us, might have been entirely different from anything to
be found in the act itself.
We cannot agree with the contention of some of
respondent's counsel — apparently to some extent
countenanced by a few authorities — that the provision
of the constitution in question can be entirely avoided
Page 64 of 160
by the simple device of putting into the title of an act
words which denote a subject "broad" enough to cover
everything. Under that view, the title, "An act
concerning the laws of the state," would be good, and
the convention and people who framed and adopted
the constitution would be convicted of the folly of
elaborately constructing a grave constitutional
limitation of legislative power upon a most important
subject, which the legislature could at once circumvent
by a mere verbal trick. The word "subject" is used in
the constitution embrace but "one subject" it
necessarily implies — what everybody knows — that
there are numerous subjects of the legislation, and
declares that only one of these subjects shall embraced
in any one act. All subjects cannot be conjured into one
subject by the mere magic of a word in a title.
In Rader vs. Township of Union (39 N. J. L., 509, 515), the
Supreme Court of New Jersey made the following
observation:
* * * It is true, that it may be difficult to indicate, by a
formula, how specialized the title of a statute must be;
but it is not difficult to conclude that it must mean
something in the way of being a notice of what is doing.
Unless it does not enough that it embraces the
legislative purpose — it must express it; and where the
language is too general, it will accomplish the former,
but not the latter. Thus, a law entitled "An act for a
certain purpose," would embrace any subject, but
would express none, and, consequently, it would not
stand the constitutional test.
The doctrine properly applicable in matters of this kind is,
we think, fairly summed up in a current repository of
jurisprudence in the following language:
* * * While it may be difficult to formulate a rule by
which to determine the extent to which the title of a
bill must specialize its object, it may be safely assumed
that the title must not only embrace the subject of
proposed legislation, but also express it clearly and
fully enough to give notice of the legislative purpose.
(25 R. C. L., p. 853.)
In dealing with the problem now before us the words "and
for other purposes "found at the end of the caption of Act
No. 2792, must be laid completely out of consideration.
They express nothing, and amount to nothing as a
compliance with the constitutional requirement to which
attention has been directed. This expression "(for other
MAYORDO, M.A
purposes") is frequently found in the title of acts adopted
by the Philippine Legislature; and its presence in our laws is
due to the adoption by our Legislature of the style used in
Congression allegation. But it must be remembered that
the legislation of Congress is subject to no constitutional
restriction with respect to the title of bills. Consequently,
in Congressional legislation the words "and for other
purposes" at least serve the purpose of admonishing the
public that the bill whose heading contains these words
contains legislation upon other subjects than that
expressed in the title. Now, so long as the Philippine
Legislature was subject to no restriction with respect to
the title of bills intended for enactment into general laws,
the expression "for other purposes" could be appropriately
used in titles, not precisely for the purpose of conveying
information as to the matter legislated upon, but for the
purpose ad admonishing the public that any bill containing
such words in the title might contain other subjects than
that expressed in the definitive part of the title. But, when
congress adopted the Jones Law, the restriction with which
we are now dealing became effective here and the words
"for other purposes" could no longer be appropriately used
in the title of legislative bills. Nevertheless, the custom of
using these words has still been followed, although they
can no longer serve to cover matter not germane to the bill
in the title of which they are used. But the futility of
adding these words to the style of any act is now obvious
(Cooley, Const. Lims., 8th ed., p. 302)
In the brief for the plaintiff it is intimated that the
constitutional restriction which we have been discussing is
more or less of a dead letter in this jurisdiction; and it
seems to be taken for granted that no court would ever
presume to hold a legislative act or part of a legislative act
invalid for non-compliance with the requirement. This is a
mistake; and no utterance of this court can be cited as
giving currency to any such notion. On the contrary the
discussion contained in Central Capiz vs. Ramirez (40 Phil.,
883), shows that when a case arises where a violation of
the restriction is apparent, the court has no alternative but
to declare the legislation affected thereby to be invalid.
Second cause of action. — The second cause of action is
based upon a charge that the respondent is owning and
holding a business lot, with the structure thereon, in the
financial district of the City of Manila is excess of its
reasonable requirements and in contravention of subsection
5 of section 13 of the corporation Law. The facts on which
this charge is based appear to be these:
CORPORATION LAW CASES
LLB 3
On August 28, 1913, the respondent purchased 1,413 square
meters of land at the corner of Juan Luna Street and the
Muelle de la Industria, in the City of Manila, immediately
adjacent to the building then occupied by the Hongkong
and Shanghai Banking Corporation. At the time the
respondent acquired this lot there stood upon it a building,
then nearly fifty years old, which was occupied in part by
the offices of an importing firm and in part by warehouses
of the same firm. The material used in the construction was
Guadalupe stone and hewn timber, and the building
contained none of the facilities usually found in a modern
office building.
In purchase of a design which had been formed prior to the
purchase of the property, the directors of the El Hogar
Filipino caused the old building to be demolished; and they
erected thereon a modern reinforced concrete office
building. As at first constructed the new building was three
stories high in the main, but in 1920, in order to obtain
greater advantage from the use of the land, an additional
story was added to the building, making a structure of four
stories except in one corner where an additional story was
place, making it five stories high over an area of 117.52
square meters. It is admitted in the plaintiffs brief that this
"noble and imposing structure" — to use the words of the
Attorney-General — "has greatly improved the aspect of the
banking and commercial district of Manila and has greatly
contributed to the movement and campaign for the Manila
Beautiful." It is also admitted that the competed building is
reasonably proportionate in value and revenue producing
capacity to the value of the land upon which it stands. The
total outlay of the respondent for the land and the
improvements thereon was P690,000 and at this valuation
the property is carried on the books of the company, while
the assessed valuation of the land and improvements is at
P786,478.
Since the new building was completed the respondent has
used about 324 square meters of floor space for its own
offices and has rented the remainder of the office space in
said building, consisting of about 3,175 square meters, to
other persons and entities. In the second cause of action of
the complaint it is supposed that the acquisition of this lot,
the construction of the new office building thereon, and
the subsequent renting of the same in great part to third
persons, are ultra vires acts on the part of the corporation,
and that the proper penalty to be enforced against it in this
action is that if dissolution.
With this contention we are unable to agree. Under
subsection 5 of section 13 of the Corporation Law, every
Page 65 of 160
corporation has the power to purchase, hold and lease such
real property as the transaction of the lawful business of
the corporation may reasonably and necessarily require.
When this property was acquired in 1916, the business of El
Hogar Filipino had developed to such an extent, and its
prospects for the future were such as to justify its directors
in acquiring a lot in the financial district of the City of
Manila and in constructing thereon a suitable building as
the site of its offices; and it cannot be fairly said that the
area of the lot — 1,413 square meters — was in excess of its
reasonable requirements. The law expressly declares that
corporations may acquire such real estate as is reasonably
necessary to enable them to carry out the purposes for
which they were created; and we are of the opinion that
the owning of a business lot upon which to construct and
maintain its offices is reasonably necessary to a building
and loan association such as the respondent was at the
time this property was acquired. A different ruling on this
point would compel important enterprises to conduct their
business exclusively in leased offices — a result which could
serve no useful end but would retard industrial growth and
be inimical to the best interests of society.
We are furthermore of the opinion that, inasmuch as the
lot referred to was lawfully acquired by the respondent, it
is entitled to the full beneficial use thereof. No legitimate
principle can discovered which would deny to one owner
the right to enjoy his (or its) property to the same extent
that is conceded to any other owner; and an intention to
discriminate between owners in this respect is not lightly to
be imputed to the Legislature. The point here involved has
been the subject of consideration in many decisions of
American courts under statutes even more restrictive than
that which prevails in this jurisdiction; and the conclusion
has uniformly been that a corporations whose business may
properly be conducted in a populous center may acquire an
appropriate lot and construct thereon an edifice with
facilities in excess of its own immediate requirements.
Thus in  People vs. Pullman's Palace-Car Co.  (175 Ill., 125;
64 L. R. A., 366), it appeared that the respondent
corporation owned and controlled a large ten-story business
block in the City of Chicago, worth $2,000,000, and that it
occupied only about one-fourth thereof for its own
purposes, leasing the remainder to others at heavy rentals.
The corporate charter merely permitted the holding of such
real estate by the respondent as might be necessary for the
successful prosecution of its business. An attempt was
made to obtain the dissolution of the corporation in a  quo
warranto proceeding similar to that now before us, but the
remedy was denied.
MAYORDO, M.A
In Rector vs. Hartford Deposit Co., a question was raised as
to the power of the Deposit Company to erect and own a
fourteen-story building — containing eight storerooms, one
hundred suites of offices, and one safety deposit vault,
under a statute authorizing the corporation to possess so
much real estate "as shall be necessary for the transaction
of their business." The court said:
That the appellee company possessed ample power to
acquire real property and construct a building thereon
for the purpose of transacting therein the legitimate
business of the corporation is beyond the range of
debate. Nor is the contrary contended, but the
insistence is that, under the guise of erecting a building
for corporate purposes, the appellee company
purposely constructed a much larger building than its
business required, containing many rooms intended to
be rented to others for offices and business purposes, —
among them, the basement rooms contracted to be
leased to the appellant, — and that in so doing it
designedly exceeded its corporate powers. The position
off appellant therefore is that the appellee corporation
has flagrantly abused its general power to acquire real
estate and construct a building thereon . . . It was
within the general scope of the express powers of the
appellee corporation to own and possess a building
necessary for its proper corporate purposes. In planning
and constructing such a building, as was said in People
vs. Pullman's Palace Car Co., supra, the corporation
should not necessarily be restricted to a building
containing the precise number of rooms its then
business might require, and no more, but that the
future probable growth and volume of its business
might be considered and anticipated, and a larger
building, and one containing more rooms than the
present volume of business required be erected, and
the rooms not needed might be rented by the
corporation, — provided, of course, such course should
be taken in good faith, and not as a mere evasion of
the public law and the policy of the state relative to
the ownership of real estate by corporations. In such
state of case the question is whether the corporation
has abused or excessively and unjustifiably used the
power and authority granted it by the state to
construct buildings and own real estate necessary for
its corporate purposes.
In Home savings building  Association vs. Driver  (129 Ky.,
754), one of the questions before the court was precisely
CORPORATION LAW CASES
LLB 3
the same as that now before us. Upon this the Supreme
Court of Kentucky said:
The third question is, has the association the right to
erect, remodel, or own a building of more than
sufficient capacity to accommodate its own business
and to rent out the excess? There is nothing in the
Constitution, charter of the association, or statutes
placing any limitation upon the character of a building
which a corporation may erect as a home in which to
conduct its business. A corporation conducting a
business of the character of that in which appellant is
engaged naturally expects its business to grow and
expand from time to time, and, in building a home it
would be exercising but a short-sighted judgment if it
did not make provision for the future by building a
home large enough to take care of its expanding
business, and hence, even if it should build a house
larger and roomier than its present needs or interests
require, it would be acting clearly with the exercise of
its corporate right and power. The limitation which the
statute imposes is that proper conduct of its business,
but it does not attempt to place any restriction or
limitation upon the right of the corporation or
association as to the character of building it shall erect
on said real estate; and, while the Constitution and the
statutes provide that no corporation shall engage in any
business other than that expressly authorized by its
charter, we are of opinion that, in renting out the
unoccupied and unused portions of the building so
erected, the association could not be said to engaged in
any other business than that authorized by its charter.
The renting of the unused portions of the building is a
mere incident in the conduct of its real business. We
would not say that a building association might embark
in the business of building houses and renting or leasing
them, but there is quite a difference in building or
renting a house in which to conduct its own business
and leasing the unused portion thereof for the time
being, or until such time as they may be needed by the
association, and in building houses for the purpose of
renting or leasing them. The one might properly be said
to be the proper exercise of a power incident to the
conduct of its legitimate business, whereas the other
would be a clear violation of that provision of the
statute which denies to any corporation the right to
conduct any business other than that authorized by its
charter. To hold otherwise would be to charge most of
the banking institutions, trust companies and other
corporations, such as title guaranty companies, etc.,
doing with violating the law; for it is known that there
Page 66 of 160
are few of such institutions that do not, at times, rent
out or lease the unneeded portions of the building
occupied by them as homes. We do not think that in so
doing they are violating any provisions of the law, but
that the renting out of the unused or unoccupied
portions of their buildings is but an incident in the
conduct of their business.
In Wingert vs. First National Bank of Hagerstown, Md. (175
Fed., 739, 741), a stockholder sought to enjoin the bank
from building a six-story building owned by the bank in the
commercial district of Hagerstown of which only the first
story was to be used by the bank, the remaining stories to
be rented out for offices and places of business, on the
theory that such action was  ultra vires  and in violation of
the provisions of the national banking act confining such
corporations to the holding, only, of such real estate "as
shall be necessary for its immediate accommodation in the
transaction of its business."
The injunction was denied, the court adopting the opinion
of the lower court in which the following was said:
'The other ground urged by the complainant is that the
proposed action is violative of the restriction which
permits a national bank to hold only such real estate as
shall be necessary for its immediate accommodation in
the transaction of its business, and that, therefore, the
erection of a building which will contain offices not
necessary for the business of the bank is not permitted
by the law, although that method of improving the lot
may be the most beneficial use that can be made of it.
It is matter of common knowledge that the actual
practice of national banks is to the contrary. Where
ground is valuable, it may probably be truly said that
the majority of national bank buildings are built with
accommodations in excess of the needs of the bank for
the purpose of lessening the bank's expense by renting
out the unused portion. If that were not allowable,
many smaller banks in cities would be driven to become
tenants as the great cost of the lot would be prohibitive
of using it exclusively for the banking accommodation
of a single bank. As indicative of the interpretation of
the law commonly received and acted upon, reference
may be made to the reply of the Comptroller of the
Currency to the injury by the bank in this case asking
whether the law forbids the bank constructing such a
building as was contemplated.
'The reply was follows: "Your letter of the 9th instant
received, stating that the directors contemplate
MAYORDO, M.A
making improvements in the bank building and inquiring
if there is anything in the national banking laws
prohibiting the construction of a building which will
contain floors for offices to be rented out by the bank
as well as the banking room. Your attention is called to
the case of Brown vs. Schleier, 118 Fed., 981 [55 C. C.
A, 475], in which the court held that: 'If the land which
a national bank purchases or leases for the
accommodation of its business is very valuable it may
exercise the same rights that belong to other
landowners of improving it in a way that will yield the
largest income, lessen its own rent, and render that
part of its funds which are invested in realty most
productive.'" This seems to be the common sense
interpretation of the act of Congress and is the one
which prevails.'
It would seem to be unnecessary to extend the opinion by
lengthy citations upon the point under consideration,
butBrown vs. Schleier  (118 Fed., 981), may be cited as
being in harmony with the foregoing authorities. In dealing
with the powers of a national bank the court, in this case,
said:
When an occasion arises for an investment in real
property for either of the purposes specified in the
statute the national bank act permits banking
associations to act as any prudent person would act in
making an investment in real estate, and to exercise
the same measure of judgment and discretion. The act
ought not to be construed in such as way as to compel a
national bank, when it acquires real property for a
legitimate purpose, to deal with it otherwise than a
prudent land owner would ordinarily deal with such
property.
In the brief of the Attorney-General reliance is place almost
entirely upon two Illinois cases, namely  Africani Home
Purchase and Loan Association vs. Carroll  (267 Ill., 380),
and  First Methodist Episcopal Church of Chicago vs.
Dixon  (178 Ill., 260). In our opinion these cases are either
distinguishable from that now before us, or they reflect a
view of the law which is incorrect. At any rate the weight
of judicial opinion is so overwhelmingly in favor of
sustaining the validity of the acts alleged in the second
cause of action to have been done by the respondent in
excess of its powers that we refrain from commenting at
any length upon said cases. The ground stated in the
second cause of action is in our opinion without merit.
CORPORATION LAW CASES
LLB 3
Third cause of action. — Under the third cause of action
the respondent is charged with engaging in activities
foreign to the purposes for which the corporation was
created and not reasonable necessary to its legitimate
ends. The specifications under this cause of action relate to
three different sorts of activities. The first consist of the
administration of the offices in the El Hogar building not
used by the respondent itself and the renting of such
offices to the public. As stated in the discussion connected
with the second cause of action, the respondent uses only
about ten per cent of the office space in the El Hogar
building for its own purposes, and it leases the remainder
to strangers. In the years 1924 and 1925 the respondent
received as rent for the leased portions of the building the
sums of P75,395.06 and P58,259.27, respectively. The
activities here criticized clearly fall within the legitimate
powers of the respondent, as shown in what we have said
above relative to the second cause of action. This matter
will therefore no longer detain us. If the respondent had
the power to acquire the lot, construct the edifice and hold
it beneficially, as there decided, the beneficial
administration by it of such parts of the building as are let
to others must necessarily be lawful.
The second specification under the third cause of action
has reference to the administration and management of
properties belonging to delinquent shareholders of the
association. In this connection it appears that in case of
delinquency on the part of its shareholders in the payment
of interest, premium, and dues, the association has been
accustomed (pursuant to clause 8 of its standard mortgage)
to take over and manage the mortgaged property for the
purpose of applying the income to the obligations of the
debtor party. For these services the respondent charges a
commission at the rate of 2½ per centum on sums
collected. The case for the government supposes that the
only remedy which the respondent has in case of default on
the part of its shareholders is to proceed to enforce
collection of the whole loan in the manner contemplated in
section 185 of the Corporation Law. It will be noted,
however, that, according to said section, the association
may treat the whole indebtedness as due, "at the option of
the board of directors," and this remedy is not made
exclusive. We see no reason to doubt the validity of the
clause giving the association the right to take over the
property which constitutes the security for the delinquent
debt and to manage it with a view to the satisfaction of the
obligations due to the debtor than the immediate
enforcement of the entire obligation, and the validity of
the clause allowing this course to be taken appears to us to
be not open to doubt. The second specification under this
Page 67 of 160
cause of action is therefore without merit, as was true of
the first.
The third specification under this cause of action relates to
certain activities which are described in the following
paragraphs contained in the agreed statements of facts:.
El Hogar Filipino has undertaken the management of
some parcels of improved real estate situated in Manila
not under mortgage to it, but owned by shareholders,
and has held itself out by advertisement as prepared to
do so. The number of properties so managed during the
years 1921 to 1925, inclusive, was as follows:
1921 eight properties
1922 six properties
1923 ten properties
1924 fourteen properties
1925 fourteen properties.
This service is limited to shareholders; but some of the
persons whose properties are so managed for them
became shareholders only to enable them to take
advantage thereof.
The services rendered in the management of such
improved real estate by El Hogar Filipino consist in the
renting of the same, the payment of real estate taxes
and insurance for the account of the owner, causing the
necessary repairs for upkeep to be made, and
collecting rents due from tenants. For the services so
rendered in the management of such properties El
Hogar Filipino receives compensation in the form of
commissions upon the gross receipts from such
properties at rates varying from two and one-half per
centum to five per centum of the sums so collected,
according to the location of the property and the effort
involved in its management.
The work of managing real estate belonging to non-
borrowing shareholders administered by El Hogar
Filipino is carried on by the same members of the staff
who attend to the details of the management of
properties administered by the manager of El Hogar
Filipino under the provisions of paragraph 8 of the
standard mortgage form, and of properties bought in on
foreclosure of mortgage.
The practice described in the passage above quoted from
the agreed facts is in our opinion unauthorized by law. Such
was the view taken by the bank examiner of the Treasury
Bureau in his report to the Insular Treasurer on December
MAYORDO, M.A
21, 1925, wherein the practice in question was criticized.
The administration of property in the manner described is
more befitting to the business of a real estate agent or
trust company than to the business of a building and loan
association. The practice to which this criticism is directed
relates of course solely to the management and
administration of properties which are not mortgaged to
the association. The circumstance that the owner of the
property may have been required to subscribe to one or
more shares of the association with a view to qualifying him
to receive this service is of no significance. It is a general
rule of law that corporations possess only such express
powers. The management and administration of the
property of the shareholders of the corporation is not
expressly authorized by law, and we are unable to see that,
upon any fair construction of the law, these activities are
necessary to the exercise of any of the granted powers. The
corporation, upon the point now under the criticism, has
clearly extended itself beyond the legitimate range of its
powers. But it does not result that the dissolution of the
corporation is in order, and it will merely be enjoined from
further activities of this sort.
Fourth cause of action. — It appears that among the by
laws of the association there is an article (No. 10) which
reads as follows:
The board of directors of the association, by the vote of
an absolute majority of its members, is empowered to
cancel shares and to return to the owner thereof the
balance resulting from the liquidation thereof
whenever, by reason of their conduct, or for any other
motive, the continuation as members of the owners of
such shares is not desirable.
This by-law is of course a patent nullity, since it is in direct
conflict with the latter part of section 187 of the
Corporation Law, which expressly declares that the board
of directors shall not have the power to force the surrender
and withdrawal of unmatured stock except in case of
liquidation of the corporation or of forfeiture of the stock
for delinquency. It is agreed that this provision of the by-
laws has never been enforced, and in fact no attempt has
ever been made by the board of directors to make use of
the power therein conferred. In November, 1923, the Acting
Insular Treasurer addressed a letter to El Hogar Filipino,
calling attention to article 10 of its by-laws and expressing
the view that said article was invalid. It was therefore
suggested that the article in question should be eliminated
from the by-laws. At the next meeting of the board of
directors the matter was called to their attention and it
CORPORATION LAW CASES
LLB 3
was resolved to recommend to the shareholders that in
their next annual meeting the article in question be
abrogated. It appears, however, that no annual meeting of
the shareholders called since that date has been attended
by a sufficient number of shareholders to constitute a
quorum, with the result that the provision referred to has
no been eliminated from the by-laws, and it still stands
among the by-laws of the association, notwithstanding its
patent conflict with the law.
It is supposed, in the fourth cause of action, that the
existence of this article among the by-laws of the
association is a misdemeanor on the part of the respondent
which justifies its dissolution. In this view we are unable to
concur. The obnoxious by-law, as it stands, is a mere nullity,
and could not be enforced even if the directors were to
attempt to do so. There is no provision of law making it a
misdemeanor to incorporate an invalid provision in the by-
laws of a corporation; and if there were such, the hazards
incident to corporate effort would certainly be largely
increased. There is no merit in this cause of action.
Fifth cause of action. — In section 31 of the Corporation
Law it is declared that, "at all elections of directors there
must be present, either in person or by representative
authorized to act by written proxy, the owners of the
majority of the subscribed capital stock entitled to vote. . .
." Conformably with this requirement it is declared in
article 61 of the by-laws of El Hogar Filipino that, "the
attendance in person or by proxy of shareholders owning
one-half plus one of the shareholders shall be necessary to
constitute a quorum for the election of directors. At the
general annual meetings of the El Hogar Filipino held in the
years 1911 and 1912, there was a quorum of shares present
or represented at the meetings and directors were duly
elected accordingly. As the corporation has grown,
however, it has been fond increasingly difficult to get
together a quorum of the shareholders, or their proxies, at
the annual meetings; and with the exception of the annual
meeting held in 1917, when a new directorate was elected,
the meetings have failed for lack of quorum. It has been
foreseen by the officials in charge of the respondent that
this condition of affairs would lead to embarrassment, and
a special effort was made by the management to induce a
sufficient number of shareholders to attend the annual
meeting for February, 1923. In addition to the publication
of notices in the newspapers, as required by the by-laws, a
letter of notification was sent to every shareholder at his
last known address, together with a blank form of proxy to
be used in the event the shareholder could not personally
attend the meeting. Notwithstanding these special efforts
Page 68 of 160
the meeting was attended only by shareholders, in person
and by proxy, representing 3,889 shares, out of a total of
106,491 then outstanding and entitled to vote.
Owing to the failure of a quorum at most of the general
meetings since the respondent has been in existence, it has
been the practice of the directors to fill vacancies in the
directorate by choosing suitable persons from among the
stockholders. This custom finds its sanction in article 71 of
the by-laws, which reads as follows:
ART. 71. The directors shall elect from among the
shareholders members to fill the vacancies that
may occur in the board of directors until the
election at the general meeting.
The person thus chosen to fill vacancies in the directorate
have, it is admitted, uniformly been experienced and
successful business and professional men of means,
enjoying earned incomes of from P12,000 to P50,000 per
annum, with an annual average of P30,000 in addition to
such income as they derive from their properties. Moreover,
it appears that several of the individuals constituting the
original directorate and persons chosen to supply vacancies
therein belong to prominent Filipino families, and that they
are more or less related to each other by blood or
marriage. In addition to this it appears that it has been the
policy of the directorate to keep thereon some member or
another of a single prominent American law firm in the city.
It is supposed in the statement of the fifth cause of action
in the complaint that the failure of the corporation to hold
annual meetings and the filling of vacancies in the
directorate in the manner described constitute
misdemeanors on the part of the respondent which justify
the resumption of the franchise by the Government and
dissolution of the corporation; and in this connection it is
charge that the board of directors of the respondent has
become a permanent and self perpetuating body composed
of wealthy men instead of wage earners and persons of
moderate means. We are unable to see the slightest merit
in the charge. No fault can be imputed to the corporation
on account of the failure of the shareholders to attend the
annual meetings; and their non-attendance at such
meetings is doubtless to be interpreted in part as
expressing their satisfaction of the way in which things
have been conducted. Upon failure of a quorum at any
annual meeting the directorate naturally holds over and
continues to function until another directorate is chosen
and qualified. Unless the law or the charter of a
corporation expressly provides that an office shall become
MAYORDO, M.A
vacant at the expiration of the term of office for which the
officer was elected, the general rule is to allow the officer
to holdover until his successor is duly qualified. Mere
failure of a corporation to elect officers does not terminate
the terms of existing officers nor dissolve the corporation
(Quitman Oil Company  vs. Peacock, 14 Ga. App., 550;
Jenkins vs. Baxter, 160 Pa. State, 199; New York B. & E. Ry.
Co.  vs.  Motil, 81 Conn., 466; Hatch  vs.  Lucky Bill Mining
Company, 71 Pac., 865; Youree  vs.  Home Town Matual Ins.
Company, 180 Missouri, 153; Cassell vs. Lexington, H. and P.
Turnpike Road Co., 10 Ky. L. R., 486). The doctrine above
stated finds expressions in article 66 of the by-laws of the
respondent which declares in so many words that directors
shall hold office "for the term of one year on until their
successors shall have been elected and taken possession of
their offices."
It result that the practice of the directorate of filling
vacancies by the action of the directors themselves is valid.
Nor can any exception be taken to then personality of the
individuals chosen by the directors to fill vacancies in the
body. Certainly it is no fair criticism to say that they have
chosen competent businessmen of financial responsibility
instead of electing poor persons to so responsible a
position. The possession of means does not disqualify a man
for filling positions of responsibility in corporate affairs.
Sixth cause of action. — Under the sixth cause of action it
is alleged that the directors of El Hogar Filipino, instead of
serving without pay, or receiving nominal pay or a fixed
salary, — as the complaint supposes would be proper, —
have been receiving large compensation, varying in amount
from time to time, out of the profits of the respondent.
The facts relating to this cause of action are in substance
these:
Under section 92 of the by-laws of El Hogar Filipino 5 per
centum of the net profit shown by the annual balance sheet
is distributed to the directors in proportion to their
attendance at meetings of the board. The compensation
paid to the directors from time to time since the
organization was organized in 1910 to the end of the year
1925, together with the number of meetings of the board
held each year, is exhibited in the following table:
Compensatio
Number Rate per 

n 

of 
 meeting 

Year p a i d
meetings 
 as a
directors 

held whole
as a whole
CORPORATION LAW CASES MAYORDO, M.A
LLB 3

1925, inclusive, when the board was composed of nine the by-laws meeting to change the rule. The remedy, if any,
191
P 4,167.96 25 P 166.71 members, the attendance has regularly been eight meeting seems to lie rather in publicity and competition, rather
1
with the exception of two years when the average than in a court proceeding. The sixth cause of action is in
attendance was seven. It is insisted in the brief for the our opinion without merit.
191
10,511.87 29 362.47 Attorney-General that the payment of the compensation
2
indicated is excessive and prejudicial to he interests of the Seventh cause of action. — It appears that the promoter
191 shareholders at large. For the respondent, attention is and organizer of El Hogar Filipino was Mr. Antonio Melian,
15,479.29 27 573.30 directed to the fact that the liberal policy adopted by the and in the early stages of the organization of the
3
association with respect to the compensation of the association the board of directors authorized the
191 directors has had highly beneficial results, not only in association to make a contract with him with regard to the
19,164.72 27 709.80
4 securing a constant attendance on the part of the services him therefor. Pursuant to this authority the
membership, but in obtaining their intelligent attention to president of the corporation, on January 11, 1911, entered
191 the affairs of the association. Certainly, in this connection, into a written agreement with Mr. Melian, which is
24,032.85 25 961.31
5 the following words from the report of the government reproduced in the agreed statement of facts and of which
examiners for 1918 to the Insular Treasurer contain matter the important clauses are these:
191 worthy of consideration:
27,539.50 28 983.55
6 1. The corporation "El Hogar Filipino Sociedad Mutua de
The management of the association is entrusted to men of Construccion y Prestamos," and on its behalf its
191 recognized ability in financial affairs and it is believed that president, Don Antonio R. Roxas, hereby confers on Don
31,327.00 26 1,204.88
7 they have long foreseen all possible future contingencies Antonio Melian the office of manager of said association
and that under such men the interests of the stockholders for the period of one year from the date of this
191
32,858.35 20 1,642.91 are duly protected. The steps taken by the directorate to contract.
8 curtail the influx of unnecessary capital into the
association's coffers, as mentioned above, reveals how the 2. Don Antonio Melian accepts said office and
191
36,318.78 21 1,729.46 men at grasp the situation and to apply the necessary undertakes to render the services thereto
9
remedy as the circumstances were found in the same corresponding for the period of one year, as prescribed
excellent condition as in the previous examination. by the by-laws of the corporation, without salary.
192
63,517.01 28 2,268.46
0
In so far as this court is concerned the question here before 3. Don Antonio Melian furthermore undertakes to pay
192 us is not one concerning the propriety and wisdom of the for his own account, all the expenses incurred in the
36,815.33 25 1,472.61 measure of compensation adopted by the respondent but organization of the corporation.
1
rather the question of the validity of the measure. Upon
192 this point there can, it seems to us, be no difference of 4. Don Antonio Melian further undertakes to lend to the
43,133.73 25 1,725.34
2 intelligent opinion. The Corporation Law does not corporation, without interest the sum of six thousand
undertake to prescribe the rate of compensation for the pesos (P6,000), Philippine Currency, for the purpose of
192 directors of corporations. The power to fixed the meeting the expense of rent, office supplies, etcetera,
39,773.61 27 1,473.09
3 compensation they shall receive, if any, is left to the until such time as the association has sufficient funds of
corporation, to be determined in its by-laws(Act No. 1459, its own with which to return this loan:  Provided,
192 sec. 21). Pursuant to this authority the compensation for nevertheless, That the maximum period thereof shall
38,651.92 26 1,486.61
4 the directors of El Hogar Filipino has been fixed in section not exceed three (3) years.
92 of its by-laws, as already stated. The justice and
192 property of this provision was a proper matter for the 5. Don Antonio Melian undertakes that the capital of
35,719.27 26 1,373.81
5 shareholders when the by-laws were framed; and the the association shall amount to the sum of four hundred
circumstance that, with the growth of the corporation, the thousand pesos (P400,000), Philippine currency, par
It will be note that the compensation above indicated as amount paid as compensation to the directors has increased value, during the first year of its duration.
accruing to the directorate as a whole has been divided beyond what would probably be necessary to secure
among the members actually present at the different adequate service from them is matter that cannot be 6. In compensation of the studies made and services
meetings. As a result of this practice, and the liberal corrected in this action; nor can it properly be made a basis rendered by Don Antonio Melian for its organization,
measure of compensation adopted, we find that the for depriving the respondent of its franchise, or even for the expenses incurred by him to that end, and in
attendance of the membership at the board meetings has enjoining it from compliance with the provisions of its own further consideration of the said loan of six thousand
been extraordinarily good. Thus, during the years 1920 to by-laws. If a mistake has been made, or the rule adopted in pesos (P6,000), and of the services to be rendered by

Page 69 of 160
CORPORATION LAW CASES
LLB 3
him as manager, and of the obligation assumed by him
that the nominal value of the capital of the association
shall reach the sum of four hundred thousand pesos
(P400,000) during the first year of its duration, the
corporation 'El Hogar Filipino Sociedad Mutua de
Construccion y Prestamos' hereby grants him five per
centum (5%) of the net profits to be earned by it in
each year during the period fixed for the duration of
the association by its articles of
incorporation;  Provided, that this participation in the
profits shall be transmitted to the heirs of Señor Melian
in the event of his death;  And provided further, that
the performance of all the obligations assumed by
Señor Melian in favor of the association, in accordance
with this contract, shall and does constitute a condition
precedent to the acquisition by Señor Melian of the
right to the said participation in the profits of the
association, unless the non-performance of such
obligations shall be due to a fortuitous event or  force
majeure.
In conformity with this agreement there was inserted in
section 92 of the by-laws of the association a provision
recognizing the rights of Melian, as founder, to 5 per
centum of the net profits shown by the annual balance
sheet, payment of the same to be made to him or his heirs
during the life of the association. It is declared in said
article that this portion of the earnings of the association is
conceded to him in compensation for the studies, work and
contributions made by him for the organization of El Hogar
Filipino and the performance on his part of the contract of
January 11, 1911, above quoted. During the whole life of
the association, thus far, it has complied with the
obligations assumed by it in the contract above-
mentioned; and during the years 1911 to 1925, inclusive, it
paid to him as founder's royalty the sum of P459,011.19, in
addition to compensation received from the association by
him in to remuneration of services to the association in
various official capacities.
As a seventh cause of action it is alleged in the complaint
that this royalty of the founder is "unconscionable,
excessive and out of all proportion to the services
rendered, besides being contrary to and incompatible with
the spirit and purpose of building and loan associations." It
is not alleged that the making of this contract was beyond
the powers of the association (ultra vires); nor it alleged
that it is vitiated by fraud of any kind in its procurement.
Nevertheless, it is pretended that in making and observing
said contract the respondent committed an offense
requiring its dissolution, or, as is otherwise suggested, that
Page 70 of 160
the association should be enjoined from performing the
agreement.
It is our opinion that this contention is entirely without
merit. Stated in its true simplicity, the primary question
here is whether the making of a (possibly) indiscreet
contract is a capital offense in a corporation, — a question
which answers itself. No possible doubt exists as to the
power of a corporation to contract for services rendered
and to be rendered by a promoter in connection with
organizing and maintaining the corporation. It is true that
contracts with promoters must be characterized by good
faith; but could it be said with certainty, in the light of
facts existing at the time this contract was made, that the
compensation therein provided was excessive? If the
amount of the compensation now appears to be a subject
of legitimate criticism, this must be due to the
extraordinary development of the association in recent
years.
If the Melian contract had been clearly ultra vires — which
is not charged and is certainly untrue — its continued
performance might conceivably be enjoined in such a
proceeding as this; but if the defect from which it suffers is
mere matter for an action because Melian is not a party. It
is rudimentary in law that an action to annul a contract
cannot be maintained without joining both the contracting
parties as defendants. Moreover, the proper party to bring
such an action is either the corporation itself, or some
shareholder who has an interest to protect.
The mere fact that the compensation paid under this
contract is in excess of what, in the full light of history,
may be considered appropriate is not a proper
consideration for this court, and supplies no ground for
interfering with its performance. In the case of  El Hogar
Filipino vs. Rafferty  (37 Phil., 995), which was before this
court nearly ten years ago, this court held that the El Hogar
Filipino is contract with Mr. Melian did not affect the
association's legal character. The inference is that the
contract under consideration was then considered binding,
and it occurred to no one that it was invalid. It would be a
radical step indeed for a court to attempt to substitute its
judgment for the judgment of the contracting parties and
to hold, as we are invited to hold under this cause of
action, that the making of such a contract as this removes
the respondent association from the pale of the law. The
majority of the court is of the opinion that our traditional
respect for the sanctity of the contract obligation should
prevail over the radical and innovating tendencies which
find acceptance with some and which, if given full rein,
would go far to sink legitimate enterprise in the Islands into
MAYORDO, M.A
the pit of populism and bolshevism. The seventh count is
not sustainable.
Eight cause of action. — Under the fourth cause of action
we had case where the alleged ground for the revocation of
the respondent's charter was based upon the presence in
the by-laws of article 10 that was found to be inconsistent
with the express provisions of law. Under the eight cause of
action the alleged ground for putting an end to the
corporate life of the respondent is found in the presence of
other articles in the by-laws, namely, articles 70 and 76,
which are alleged to be unlawful but which, as will
presently be seen, are entirely valid. Article 70 of the by-
laws in effect requires that persons elected to the board of
directors must be holders of shares of the paid up value of
P5,000 which shall be held as security may be put up in the
behalf of any director by some other holder of shares in the
amount stated. Article 76 of the by-laws declares that the
directors waive their right as shareholders to receive loans
from the association.
It is asserted, under the eight cause of action, that article
70 is objectionable in that, under the requirement for
security, a poor member, or wage-earner, cannot serve as
director, irrespective of other qualifications and that as a
matter of fact only men of means actually sit on the board.
Article 76 is criticized on the ground that the provision
requiring directors to renounce their right to loans
unreasonably limits their rights and privileges as members.
There is nothing of value in either of theses suggestions.
Section 21 of the Corporation Law expressly gives the
power to the corporation to provide in its by-laws for the
qualifications of directors; and the requirement of security
from them for the proper discharge of the duties of their
office, in the manner prescribed in article 70, is highly
prudent and in conformity with good practice. Article 76,
prohibiting directors from making loans to themselves, is of
course designed to prevent the possibility of the looting of
the corporation by unscrupulous directors. A more discreet
provision to insert in the by-laws of a building and loan
association would be hard to imagine. Clearly, the eighth
cause of action cannot be sustained.
Ninth cause of action. — The specification under this head
is in effect that the respondent has abused its franchise in
issuing "special" shares. The issuance of these shares is
allege to be illegal and inconsistent with the plan and
purposes of building and loan associations; and in
particular, it is alleged and inconsistent with the plan and
purposes of building and loan associations; and in
particular, it is alleged that they are, in the main, held by
CORPORATION LAW CASES
LLB 3
well-to-wage-earners for accumulating their modest savings
for the building of homes.
In the articles of incorporation we find the special shares
described as follows:
"Special" shares shall be issued upon the payment of 80
per cent of their par value in cash, or in monthly dues
of P10. The 20 per cent remaining of the par value of
such shares shall be completed by the accumulation
thereto of their proportionate part of the profits of the
corporation. At the end of each quarter the holders of
special shares shall be entitled to receive in cash such
part of the net profits of the corporation corresponding
to the amount on such date paid in by the holders of
special shares, on account thereof, as shall be
determined by the directors, and at the end of each
year the full amount of the net profits available for
distribution corresponding to the special shares. The
directors shall apply such part as they deem advisable
to the amortization of the subscription to capital with
respect to shares not fully paid up, and the remainder
of the profits, if any, corresponding to such shares,
shall be delivered to the holders thereof in accordance
with the provision of the by-laws.
The ground for supposing the issuance of the "special"
shares to be unlawful is that special shares are not
mentioned in the Corporation Law as one of the forms of
security which may be issued by the association. In the
agreed statement of facts it is said that special shares are
issued upon two plans. By the second, the shareholder,
upon subscribing, pays in cash P10 for each share taken,
and undertakes to pay P10 a month, as dues, until the total
so paid in amounts to P160 per share. On December 31,
1925, there were outstanding 20,844 special shares of a
total paid value (including accumulations ) of
P3,680,162.51. The practice of El Hogar Filipino, since
1915, has been to accumulate to each special share, at the
end of the year, one-tenth of the divident declared and to
pay the remainder of the divident in cash to the holders of
shares. Since the same year dividend have been declared
on the special and common shares at the rate of 10 per
centum per annum. When the amount paid in upon any
special share plus the accumulated dividends accruing to it,
amounts to the par value of the share (P200), such share
matures and ceases to participate further in the earning.
The amount of the par value of the share (P200) is then
returned to the shareholder and the share cancelled.
Holders of special and ordinary shares participate ratably in
the dividends declared and distributed, the part pertaining
Page 71 of 160
MAYORDO, M.A
to each share being computed on the basis of the capital payment shares; in if close attention be paid to the
paid in, plus the accumulated dividends pertaining to each language used in the last sentence of section 178 of the
share at the end of the year. The total number of shares of Corporation Law, it will be found that special shares where
El Hogar Filipino outstanding on December 31, 1925, was evidently created for the purpose of meeting the condition
125,750, owned by 5,826 shareholders, and dividend into cause by the prepayment of dues that is there permitted.
classes as follows: The language of this provision is as follow "payment of dues
or interest may be made in advance, but the corporation
P r e f e r r e d
1,503 shall not allow interest on such advance payment at a
shares ..................................
greater rate than six per centum per annum nor for a
S p e c i a l longer period than one year." In one sort of special shares
shares .................................. 20,884 the dues are prepaid to the extent of P160 per share; in the
... other sort prepayment is made in the amount of P10 per
share, and the subscribers assume the obligation to pay P10
O r d i n a r y 103,36 monthly until P160 shall have been paid.
shares .................................. 3
It will escape notice that the provision quoted say that
The matter of the propriety of the issuance of special
interest shall not be allowed on the advance payments at a
shares by El Hogar Filipino has been before this court in
greater rate than six per centum per annum nor for a
two earlier cases, in both of which the question has
longer period than one year. The word "interest " as there
received the fullest consideration from this court. In  El
used must be taken in its true sense of compensation for
Hogar Filipino vs. Rafferty  (37 Phil., 995), it was insisted
the used of money loaned, and it not must not be confused
that the issuance of such shares constituted a departure on
with the dues upon which it is contemplated that the
the part of the association from the principle of mutuality;
interest may be paid. Now, in the absence of any showing
and it was claimed by the Collector of Internal Revenue
to the contrary, we infer that no interest is ever paid by
that this rendered the association liable for the income tax
the association in any amount for the advance payments
to which other corporate entities are subject. It was held made on these shares; and the reason is to be found in the
that this contention was untenable and that El Hogar
fact that the participation of the special shares in the
Filipino was a legitimate building and loan association
earnings of the corporation, in accordance with section 188
notwithstanding the issuance of said shares. In Sevireno vs.
of the Corporation Law, sufficiently compensates the
El Hogar Filipino (G. R. No. 24926),2 and the related cases
shareholder for the advance payments made by him; and no
of Gervasio Miraflores and Gil Lopes against the same
other incentive is necessary to induce inventors to purchase
entity, it was asserted by the plaintiffs that the emission of
the stock.
special shares deprived the herein responded of the
privileges and immunities of a building and loan association
It will be observed that the final 20 per centum of the par
and that as a consequence the loans that had been made to
value of each special share is not paid for by the
the plaintiffs in those cases were usurious. Upon an
shareholder with funds out of the pocket. The amount is
elaborate review of the authorities, the court, though
satisfied by applying a portion of the shareholder's
divided, adhered to the principle announced in the earlier
participation in the annual earnings. But as the right of
case and held that the issuance of the special shares did
every shareholder to such participation in the earnings is
not affect the respondent's character as a building and loan
undeniable, the portion thus annually applied is as much
association nor make its loans usurious. In view of the
the property of the shareholder as if it were in fact taken
lengthy discussion contained in the decisions above-
out of his pocket. It follows that the mission of the special
mentioned, it would appear to be an act of supererogation
shares does not involve any violation of the principle that
on our part to go over the same ground again. The
the shares must be sold at par.
discussion will therefore not be repeated, and what is now
From what has been said it will be seen that there is
to be said should be considered supplemental thereto.
express authority, even in the very letter of the law, for the
emission of advance-payment or "special" shares, and the
Upon examination of the nature of the special shares in the
argument that these shares are invalid is seen to be
light of American usage, it will be found that said shares
baseless. In addition to this it is satisfactorily demonstrated
are precisely the same kind of shares that, in some
in Severino vs. El Hogar Filipino, supra, that even assuming
American jurisdictions, are generally known as advance
that the statute has not expressly authorized such shares,
CORPORATION LAW CASES
LLB 3
yet the association has implied authority to issue them. The
complaint consequently fails also as regards the stated in
the ninth cause of action.
Tenth cause of action. — Under this head of the complaint
it is alleged that the defendant is pursuing a policy of
depreciating, at the rate of 10 per centum per annum, the
value of the real properties acquired by it at its sales; and
it is alleged that this rate is excessive. From the agreed
statement it appears that since its organization in 1910 El
Hogar Filipino, prior to the end of the year 1925, had made
1,373 loans to its shareholders secured by first mortgages
on real estate as well as by the pledge of the shares of the
borrowers. In the same period the association has
purchased at foreclosure sales the real estate constituting
the security for 54 of the aforesaid loans. In making these
purchases the association has always bid the full amount
due to it from the debtor, after deducting the withdrawal
value of the shares pledged as collateral, with the result
that in no case has the shareholder been called upon to pay
a deficiency judgement on foreclosure.
El Hogar Filipino places real estate so purchased in its
inventory at actual cost, as determined by the amount bid
on foreclosure sale; and thereafter until sold the book
value of such real estate is depreciated at the rate fixed by
the directors in accordance with their judgment as to each
parcel, the annual average depreciation having varied from
nothing to a maximum of 14.138 per cent. The sales
thereof, but sales are made for the best prices obtainable,
whether greater or less than the book value.
It is alleged in the complaint that depreciation is charged
by the association at the rate of 10 per centum per annum.
The agreed statement of facts on this point shows that the
annual average varies from nothing to a maximum of
something over 14 per centum. We are thus left in the dark
as to the precise depreciation allowed from year to year. It
is not claimed for the Government that the association is
without power to allow some depreciation; and it is quite
clear that the board of directors possesses a discretion in
this matter. There is no positive provision of law prohibiting
the association from writing off a reasonable amount for
depreciation on its assets for the purpose of determining its
real profits; and article 74 of its by-laws expressly
authorizes the board of directors to determine each year
the amount to be written down upon the expenses of
installation and the property of the corporation. There can
be no question that the power to adopt such a by-law is
embraced within the power to make by-laws for the
administration of the corporate affairs of the association
Page 72 of 160
and for the management of its business, as well as the
care, control and disposition of its property (Act No. 1459,
sec. 13 [7]). But the Attorney-General questions the
exercise of the direction confided to the board; and it is
insisted that the excessive depreciation of the property of
the association is objectionable in several respects, but
mainly because it tends to increase unduly the reserves of
the association, thereby frustrating the right of the
shareholders to participate annually and equally in the
earnings of the association.
This count for the complaint proceeds, in our opinion, upon
an erroneous notion as to what a court may do in
determining the internal policy of a business corporation. If
the criticism contained in the brief of the Attorney-General
upon the practice of the respondent association with
respect to depreciation be well founded, the Legislature
should supply the remedy by defining the extent to which
depreciation may be allowed by building and loan
associations. Certainly this court cannot undertake to
control the discretion of the board of directors of the
association about an administrative matter as to which they
have legitimate power of action. The tenth cause of action
is therefore not well founded.
Eleventh and twelfth causes of action. — The same
comment is appropriate with respect to the eleventh and
twelfth causes of action, which are treated together in the
briefs, and will be here combined. The specification in the
eleventh cause of action is that the respondent maintains
excessive reserve funds, and in the twelfth cause of action
that the board of directors has settled upon the unlawful
policy of paying a straight annual dividend of 10 per
centum, regardless of losses suffered and profits made by
the corporation and in contravention of the requirements
of section 188 of the Corporation Law. The facts relating to
these two counts in the complaint, as set forth in the
stipulation, are these:
In article 92 of the by-laws of El Hogar Filipino it is
provided that 5 per centum of the net profits earned each
year, as shown by the annual balance sheet shall be carried
to a reserve fund. The fund so created is called the General
Reserve. Article 93 of the by-laws authorizes the directors
to carry funds to a special reserve, whenever in their
judgment it is advisable to do so, provided that the annual
dividend in the year in which funds are carried to special
reserve exceeds 8 per centum. It appears to have been the
policy of the board of directors for several years past to
place in the special reserve any balance in the profit and
loss account after the satisfaction of preferential charges
MAYORDO, M.A
and the payment of a dividend of 10 per centum to all
special and ordinary shares (with accumulated dividends).
As things stood in 1926 the general reserve contained an
amount equivalent to about 5 per centum of the paid-in
value of shared. This fund has never been drawn upon for
the purpose of maintaining the regular annual dividend; but
recourse has been had to the special reserve on three
different occasions to make good the amount necessary to
pay dividends. It appears that in the last five years the
reserves have declined from something over 9 per cent to
something over 7.
It is insisted in the brief of the Attorney-General that the
maintenance of reserve funds is unnecessary in the case of
building and loan associations, and at any rate the keeping
of reserves is inconsistent with section 188 of the
Corporation Law. Moreover, it is said that the practice of
the association in declaring regularly a 10 per cent dividend
is in effect a guaranty by the association of a fixed dividend
which is contrary to the intention of the statute.
Upon careful consideration of the questions involved we
find no reason to doubt the right of the respondent to
maintain these reserves. It is true that the corporation law
does not expressly grant this power, but we think it is to be
implied. It is a fact of common observation that all
commercial enterprises encounter periods when earnings
fall below the average, and the prudent manager makes
provision for such contingencies. To regard all surplus as
profit is to neglect one of the primary canons of good
business practice. Building and loan associations, though
among the most solid of financial institutions, are
nevertheless subject to vicissitudes. Fluctuations in the
dividend rate are highly detrimental to any fiscal
institutions, while uniformity in the payments of dividends,
continued over long periods, supplies the surest
foundations of public confidence.
The question now under consideration is not new in
jurisprudence, for the American courts have been called
upon more than once to consider the legality of the
maintenance of reserves by institutions of this or similar
character.
In  Greeff vs. Equitable Life Assurance Society, the court
had under consideration a charter provision of a life
insurance company, organized on the mutual plan, in its
relation to the power of the company to provide reserves.
There the statute provided that "the officers of the
company, within sixty days from the expiration of the first
five years, from December 31, 1859, and within the first
CORPORATION LAW CASES
LLB 3
sixty days of every subsequent period of five years, shall
cause a balance to be struck of the affairs of the company,
which shall exhibit its assets and liabilities, both present
and contingent, and also the net surplus, after deducting a
sufficient amount to cover all outstanding risks and other
obligations. Each policy holder shall be credited with an
equitable share of the said surplus."
The court said:
No prudent person would be inclined to take a policy in
a company which had so improvidently conducted its
affairs that it only retained a fund barely sufficient to
pay its present liabilities, and, therefore, was in a
condition where any change by the reduction of
interest upon, or depreciation in, the value of its
securities, or any increase of mortality, would render it
insolvent and subject to be placed in the hands of a
receiver. The evident purpose of the provisions of the
defendant's charter and policy relating to this subject
was to vest in the directors of the corporation a
discretion to determine the proportion of its surplus
which should be dividend each year.
In a friendly suit tried in a circuit court of Wisconsin in
1916, entitled  Boheman Bldg. and Loan Association vs.
Knolt, the court, in commenting on the nature of these
reserves, said:
The apparent function of this fund is to insure the
stockholders against losses. Its purpose is not unlike
that of the various forms of insurance now in such
common use. This contribution is as legitimate an item
of expense as are the premiums paid on any insurance
policy. (See  Clarks and Chase, Building and Loan
Association, footnote, page 344.)
In commenting on the necessity of such funds, Sundheim
says:
It is optional with the association whether to maintain
such a fund or not, but justice and good business policy
seem to require it. The retiring stockholder must be
paid the value of his stock in cash and leave for those
remaining a large number of securities and perhaps
some real estate purchased to protect the associations
interest. How much will be realized on these securities,
or real estate, no human foresight can tell. Further, the
realizing on these securities may entail considerable
litigation and expense. There are many other
contingencies which might cause a shrinkage in the
Page 73 of 160
association's assets, such as defective titles,
undisclosed defalcations on the part of an officer, a
miscalculation of assets and liabilities, and many other
errors and omissions which must always be reckoned
within the conduct of human affairs.
The contingent fund is merely insurance against
possible loss. That losses may occur from time to time
seems almost inevitable and it is, therefore,
inequitable that the remaining stockholders should be
compelled to accept all securities at par, so, to say the
least, the maintenance of this fund is justified. The
association teaches the duty of providing for the
proverbial rainy day. Why should it not provide for the
hour of adversity? The reserve fund has protected the
maturing or withdrawing member during the period of
his membership. In case of loss it has or would have
reimbursed him and, at all times, it has protected him
and given strength and standing to the association.
Losses may occur, after his membership ceases, that
arose from some mistake or mismanagement committed
during the period of his membership, and in fairness
and equity the remaining members should have some
protection against this. (Sundheim, Law of Building and
Loan Association, sec. 53.)
The government insists, we thing, upon an interpretation of
section 188 of the Corporation Law that is altogether too
strict and literal. From the fact that the statute provides
that profits and losses shall be annually apportioned among
the shareholders it is argued that all earnings should be
distributed without carrying anything to the reserve. But it
will be noted that it is provided in the same section that
the profits and losses shall be determined by the board of
directors: and this means that they shall exercise the usual
discretion of good businessmen in allocating a portion of
the annual profits to purposes needful to the welfare of the
association. The law contemplates the distribution of
earnings and losses after other legitimate obligations have
been met.
Our conclusion is that the respondent has the power to
maintain the reserves criticized in the eleventh and twelfth
counts of the complaint; and at any rate, if it be supposed
that the reserves referred to have become excessive, the
remedy is in the hands of the Legislature. It is no proper
function of the court to arrogate to itself the control of
administrative matters which have been confided to the
discretion of the board of directors. The causes of action
under discussion must be pronounced to be without merit.
MAYORDO, M.A
Thirteenth cause of action. — The specification under this
head is, in effect, that the respondent association has
made loans which, to the knowledge of the associations
officers were intended to be used by the borrowers for
other purposes than the building of homes. In this
connection it appears that, though loans have been made
by the association exclusively to its shareholders, no
attempt has been made by it to control the borrowers with
respect to the use made of the borrowed funds, the
association being content to see that the security given for
the loan in each case is sufficient. On December 31, 1925,
the respondent had five hundred forty-four loans
outstanding secured by mortgages upon real estate and by
the pledge of the borrowers' shares in an amount sufficient
at maturity to amortize the loans. With respect to the
nature of the real estate upon which these loans were
made it appears that three hundred fifty-one loans were
secured by mortgages upon city residences, seven by
mortgages upon commercial building in cities, and three
mortgages upon unimproved city lots. At the same time one
hundred eighty-three of the loans were secured by
mortgages upon groves, sugar land, and rice land, with a
total area of about 7,558 hectares. From information
gathered by the association from voluntary statements of
borrowers given at the time of application with respect to
the use intended to be made of the borrowed funds, it
appears that the amount of P693,200 was borrowed to
redeem real property from existing mortgages or pactos de
retro, P280,800 to buy real estate, P449,100 to erect
buildings, P24,000 to improve and repair buildings,
P1,480,900 for agricultural purposes, while the amount of
P5,763,700 was borrowed for purposes not disclosed.
Upon these facts an elaborate argument has been
constructed in behalf of the plaintiff to the effect that in
making loans for other purposes than the building of
residential houses the association has illegally departed
from its character and made itself amenable to the penalty
of dissolution. Aside from being directly opposed to the
decision of this court in  Lopez and Javelona vs. El Hogar
Filipino and Registrar of Deeds of Occidental Negros  (47
Phil., 249), this contention finds no substantial support in
the prevailing decisions made in American courts; and our
attention has not been directed to a single case wherein
the dissolution of a building and loan association has been
decreed in a  quo warranto  proceeding because the
association allowed its borrowers to use the loans for other
purposes than the acquisition of homes.
The case principally relied upon for the Government
appears to be Pfeister vs. Wheeling Building Association (19
CORPORATION LAW CASES
LLB 3
W. Va., 676, 716),which involved the question whether a
building and loan association could recover the full amount
of a note given to it by a member and secured by a
mortgage from a stranger. At the time the case arose there
was a statute in force in the State of West Virginia
expressly forbidding building and loan associations to use or
direct their funds for or to any other object or purpose
than the buying of lots or houses or in building and
repairing houses, and it was declared that in case the funds
should be improperly directed to other objects, the
offending association should forfeit all rights and privileges
as a corporation. Under the statute so worded the court
held that the plaintiff could only recover the amount
actually advanced by it with lawful interest and fines,
without premium; and judgment was given accordingly. The
suggestion in that case that the result would have been the
same even in the absence of statute was mere dictum and
is not supported by respectable authority.
Reliance is also placed in the plaintiff's brief upon McCauley
vs. Building & Saving Association. The statute in force in
the State of Tennessee at the time this action arose
provided that all loans should be made to the members of
the association at open stated meetings and that the
money should be lent to the highest bidder. Inconsistently
with this provision, there was inserted in the by-laws of the
association a provision to the effect that no loan should be
made at a greater premium than 30 per cent, nor at a less
premium than 29 7/8 per cent. It was held that this by-law
made free and open competition impossible and that it in
effect established a fixed premium. It was accordingly
held, in the case cited, that an association could not
recover such part of the loan as had been applied by it to
the satisfaction of a premium of 30 per centum.
We have no criticism to make upon the result reached in
either of the two decisions cited, but it is apparent that
much of the discussion contained in the opinions in those
cases does not reflect the doctrine now prevailing in the
United States; and much less are those decisions applicable
in this jurisdiction. There is no statute here expressly
declaring that loans may be made by these
associations  solely  for the purpose of building homes. On
the contrary, the building of homes is mentioned in section
171 of the Corporation Law as only one among several ends
which building and loan associations are designed to
promote. Furthermore, section 181 of the Corporation Law
expressly authorities the Board of directors of the
association from time to time to fix the premium to be
charged.
Page 74 of 160
In the brief of the plaintiff a number of excerpts from
textbooks and decisions have been collated in which the
idea is developed that the primary design of building and
loan associations should be to help poor people to procure
homes of their own. This beneficent end is undoubtedly
served by these associations, and it is not to be denied that
they have been generally fostered with this end in view.
But in this jurisdiction at least the lawmaker has taken care
not to limit the activities of building and loan associations
in an exclusive manner, and the exercise of the broader
powers must in the end approve itself to the business
community. Judging from the past history of these
institutions it can be truly said that they have done more to
encourage thrift, economy and saving among the people at
large than any other institution of modern times, not
excepting even the saving banks. In this connection Mr.
Sundheim, in a late treatise upon the subject of the law of
building and loan associations, makes the following
comment:
They have grown to such an extent in recent years that
they no longer restrict their money to the home buyer,
but loan their money to the mere investor or dealer in
real estate. They are the holder of large mortgages
secured upon farms, factories and other business
properties and rows of stores and dwellings. This is not
an abuse of their powers or departure from their main
purposes, but only a natural and proper expansion
along healthy and legitimate lines. (Sundheim, Building
and Loan Associations, sec. 7.)
Speaking of the purpose for which loans may be made, the
same author adds:
Loans are made for the purpose of purchasing a
homestead, or other real estate, or for any lawful
purpose or business, but there is no duty or obligation
of the association to inquire for what purpose the loan
is obtained, or to require any stipulation from the
borrower as to what use he will make of the money, or
in any manner to supervise or control its disbursement.
(Sundheim, Building and Loan Association, sec. 111.)
In Lopez and Javelona vs. El Hogar Filipino and Registrar of
Deeds of Occidental Negros, this court had before it the
question whether a loan made by the respondent
association upon the security of a mortgage upon
agricultural land, — where the loan was doubtless used for
agricultural purposes, — was usurious or not; and the case
turned upon the point whether, in making such loans, the
association had violated the law and departed from its
MAYORDO, M.A
fundamental purposes. The conclusion of the court was that
the loan was valid and could be lawfully enforced by a
nonjudicial foreclosure in conformity with the terms of the
contract between the association and the borrowing
member. We now find no reason to depart from the
conclusion reached in that case, and it is unnecessary to
repeat what was then said. The thirteenth cause of action
must therefore be pronounced unfounded.
Fourteenth cause of action. — The specification under this
head is that the loans made by the defendant for purposes
other than building or acquiring homes have been extended
in extremely large amounts and to wealthy persons and
large companies. In this connection attention is directed to
eight loans made at different times in the last several years
to different persons or entities, ranging in amounts from
P120,000 to P390,000 and to two large loans made to the
Roxas Estate and to the Pacific Warehouse Company in the
amounts of P1,122,000 and P2,320,000, respectively. In
connection with the larger of the two after this loan was
made the available funds of El Hogar Filipino were reduced
to the point that the association was compelled to take
advantage of certain provisions of its by-laws authorizing
the postponement of the payment of claims resulting from
withdrawals, whereas previously the association had always
settled these claims promptly from current funds. At no
time was there apparently any delay in the payment of
matured shares; but in four or five cases there was as much
as ten months delay in the payment of withdrawal
applications.
There is little that can be said upon the legal aspects of
this cause of action. In so far, as it relates to the purposes
for which these loans were made, the matter is covered by
what was said above with reference to the thirteenth cause
of action; and in so far as it relates to the personality of
the borrowers, the question belongs more directly to the
discussion under the sixteenth cause of action, which will
be found below. The point, then, which remains for
consideration here is whether it is a suicidal act on the part
of a building and loan association to make loans in large
amount. If the loans which are here the subject of criticism
had been made upon inadequate security, especially in case
of the largest two, the consequences certainly would have
been disastrous to the association in the extreme; but no
such fact is alleged; and it is to be assumed that none of
the ten borrowers have defaulted in their contracts.
Now, it must be admitted that two of these loans at least
are of a very large size, considering the average range of
financial transaction in this country; and the making of the
CORPORATION LAW CASES
LLB 3
largest loan was followed, as we have already see, with
unpleasant consequences to the association in dealing with
current claims. Nevertheless the agreed statement of facts
shoes that all of the loan referred to are only ten out of a
total of five hundred forty-four outstanding on December
31, 1925; and the average of all the loans taken together is
modest enough. It appears that the chief examiner of banks
and corporations of the Philippine Treasury, after his
examination of El Hogar Filipino at the end of the year
1925, made a report concerning this association as of
January 31, 1926, in which he criticized the Pacific
Warehouse Company loan as being so large that it
temporarily crippled the lending power of the association
for some time. This criticism was apparently justified as
proper comment on the activities of the association; but
the question for use here to decide is whether the making
of this and the other large loans constitutes such a misuser
of the franchise as would justify us in depriving the
association of its corporate life. This question appears to us
to be so simple as almost to answer itself. The law states
no limit with respect to the size of the loans to be made by
the association. That matter is confided to the discretion of
the board of directors; and this court cannot arrogate to
itself a control over the discretion of the chosen officials of
the company. If it should be thought wise in the future to
put a limit upon the amount of loans to be made to a single
person or entity, resort should be had to the Legislature; it
is not a matter amenable to judicial control. The
fourteenth cause of action is therefore obviously withoutt
merit.
Fifteenth cause of action. — The criticism here comes back
to the supposed misdemeanor of the respondent in
maintaining its reserve funds, — a matter already discussed
under the eleventh and twelfth causes of action. Under the
fifteenth cause of action it is claimed that upon the
expiration of the franchise of the association through the
effluxion of time, or earlier liquidation of its business, the
accumulated reserves and other properties will accrue to
the founder, or his heirs, and the then directors of the
corporation and to those persons who may at that time to
be holders of the ordinary and special shares of the
corporation. In this connection we note that article 95 of
the by-laws reads as follows:
ART. 95. The funds obtained by the liquidation of the
association shall be applied in the first place to the
repayment of shares and the balance, if any, shall be
distribute in accordance with the system established
for the distribution of annual profits.
Page 75 of 160
It will be noted that the cause of action with which we are
now concerned is not directed to any positive misdemeanor
supposed to have been committed by the association. It has
exclusive relation to what may happen some thirty-five
years hence when the franchise expires, supposing of
course that the corporation should not be reorganized and
continued after that date. There is nothing in article 95 of
the by-laws which is, in our opinion, subject to criticism.
The real point of criticism is that upon the final liquidation
of the corporation years hence there may be in existence a
reserve fund out of all proportion to the requirements that
may then fall upon it in the liquidation of the company. It
seems to us that this is matter that may be left to the
prevision of the directors or to legislative action if it should
be deemed expedient to require the gradual suppression of
the reserve funds as the time for dissolution approaches. It
is no matter for judicial interference, and much less could
the resumption of the franchise on this ground be justified.
There is no merit in the fifteenth cause of action.
Sixteenth cause of action. — This part of the complaint
assigns as cause of action that various loans now
outstanding have been made by the respondent to
corporations and partnerships, and that these entities have
in some instances subscribed to shares in the respondent
for the sole purpose of obtaining such loans. In this
connection it appears from the stipulation of facts that of
the 5,826 shareholders of El Hogar Filipino, which
composed its membership on December 31, 1925, twenty-
eight are juridical entities, comprising sixteen corporations
and fourteen partnerships; while of the five hundred forty-
four loans of the association outstanding on the same date,
nine had been made to corporations an five to
partnerships. It is also admitted that some of these
juridical entities became shareholders merely for the
purpose of qualifying themselves to take loans from the
association, and the same is said with respect to many
natural persons who have taken shares in the association.
Nothing is said in the agreed statement of facts on the
point whether the corporations and partnerships that have
taken loans from the respondent are qualified by law
governing their own organization to enter into these
contracts with the respondent.
In section 173 of the Corporation Law it is declared that
"any person" may become a stockholder in building and loan
associations. The word "person" appears to be here used in
its general sense, and there is nothing in the context to
indicate that the expression is used in the restricted sense
of both natural and artificial persons, as indicated in
section 2 of the Administrative Code. We would not say that
MAYORDO, M.A
the word "person" or persons," is to be taken in this broad
sense in every part of the Corporation Law. For instance, it
would seem reasonable to say that the incorporators of a
corporation ought to be natural persons, although in
section 6 it is said that five or more "persons", although in
section 6 it is said that five or more "persons," not
exceeding fifteen, may form a private corporation. But the
context there, as well as the common sense of the
situation, suggests that natural persons are meant. When it
is said, however, in section 173, that "any person" may
become a stockholder in a building and loan association, no
reason is seen why the phrase may not be taken in its
proper broad sense of either a natural or artificial person.
At any rate the question whether these loans and the
attendant subscriptions were properly made involves a
consideration of the power of the subscribing corporations
and partnerships to own the stock and take the loans; and
it is not alleged in the complaint that they were without
power in the premises. Of course the mere motive with
which loan or for some other reason, is of no moment in
determining subscriptions are made, whether to qualify the
stockholders to take a whether the subscribers were
competent to make the contracts. The result is that we
find nothing in the allegations of the sixteenth cause of
action, or in the facts developed in connection therewith,
that would justify us in granting the relief.
Seventeenth cause of action. — Under the seventeenth
cause of action, it is charged that in disposing of real
estates purchased by it in the collection of its loans, the
defendant has no various occasions sold some of the said
real estate on credit, transferring the title thereto to the
purchaser; that the properties sold are then mortgaged to
the defendant to secure the payment of the purchase
price, said amount being considered as a loan, and carried
as such in the books of the defendant, and that several
such obligations are still outstanding. It is further charged
that the persons and entities to which said properties are
sold under the condition charged are not members or
shareholders nor are they made members or shareholders
of the defendant.
This part of the complaint is based upon a mere
technicality of bookkeeping. The central idea involved in
the discussion is the provision of the Corporation Law
requiring loans to be stockholders only and on the security
of real estate and shares in the corporation, or of shares
alone. It seems to be supposed that, when the respondent
sells property acquired at its own foreclosure sales and
takes a mortgage to secure the deferred payments, the
obligation of the purchaser is a true loan, and hence
CORPORATION LAW CASES
LLB 3
prohibited. But in requiring the respondent to sell real
estate which it acquires in connection with the collection
of its loans within five years after receiving title to the
same, the law does not prescribe that the property must be
sold for cash or that the purchaser shall be a shareholder in
the corporation. Such sales can of course be made upon
terms and conditions approved by the parties; and when
the association takes a mortgage to secure the deferred
payments, the obligation of the purchaser cannot be fairly
described as arising out of a loan. Nor does the fact that it
is carried as a loan on the books of the respondent make it
a loan on the books of the respondent make it a loan in law.
The contention of the Government under this head is
untenable.
In conclusion, the respondent is enjoined in the future from
administering real property not owned by itself, except as
may be permitted to it by contract when a borrowing
shareholder defaults in his obligation. In all other respects
the complaint is dismissed, without costs. So ordered.
HARRILL v. DAVIS et al.
Doctrine:
Parties who actively engage in business for profit under
thename and pretense of a corporation which they know
neither exists nor has any color of existence may not
escape individualliability because strangers are led by their
pretense to con- tractwith their pretended entity as a
corporation.
Color of legal organization as a corporation, such as a
charter or thefiling of articles of incorporation under some
law, and user of thesupposed corporate franchise in good
faith, are indispensable to theexistence of a de facto
corporation which will exempt from individualliability those
who actively conduct it.Neither the execution of articles
which are not filed, nor statementsnor beliefs of the
promoters that they are a corporation, nor thetreatment of
themselves by themselves and by those who deal withthem
as a corporation, nor all these together, will exempt those
whoactively conduct the business under the assumed name
of such anonexistent corporation from individual liability
for the debts theyincur.
Facts:
The four defendants(Walter B. Mann, Frank Davis, Robert S.
Davis,and James G. Knight) agreed in April or June, 1902,
to take specifiedshares in a $10,000 enterprise for the
purpose of building a cotton ginand carrying on the business
Page 76 of 160
of buying, ginning, and selling cotton,and to organize a
corporation for this purpose. They transacted abusiness
with the plaintiff consisting of the purchase of
lumber,materials, and labor for their buildings and of
dealing in cotton with itwhich amounted to several tens of
thousands of dollars, and theyremained indebted to it over
$5,000, of which $4,700.On September 3, 1902, three of
the defendants met and signedarticles of incorporation as
the "Coweta Cotton & Milling Company"and a declaration of
the purpose of the incorporation, which thestatutes
required to be verified by the signers and to be filed with
theclerk of the Court of Appeals and with the clerk of the
judicial district in which the contemplated corporation was
to do business. Thisdeclaration was verified by Mann on
November 10, 1902, and byFrank M. Davis on December 10,
1902, and it was filed with the clerkof the Court of Appeals
on December 22, 1902, and was never filedelsewhere.
Frank M. Davis, as general manager of the
investmentcompany, treated the milling company as a
corporation all the timeduring which this indebtedness was
contracted, and never chargedany of it to himself or his
associates.The Western Investment Company brought this
action for a balancedue It upon an account for lumber and
materials sold, cotton handled,and services rendered to
Walter B. Mann, Frank Davis, Robert S.Davis, and James G.
Knight, as partners doing business under thefirm name the
"Coweta Cotton & Milling Company. The defendantsdenied
the partnership and their liability, and averred that
theindebtedness in question was that of the milling
company and thatthat company was a corporation.
Issue/s:
Was there ‘colorable’ compliance enough to give the
supposed corporation at least the status of a ‘de facto’
corporation?
Held:
There was none.The defendants cannot escape individual
liability on the ground thatthe Coweta Cotton & Milling
Company was a corporation de factowhen that portion of
the plaintiff's claim was incurred, because it thenhad no
color of incorporation, and they knew it and yet, actively
usedits name to incur the obligation.The general rule is
that parties who associate themselves together and actively
engage in business for profit under any name are liableas
partners for the debts they incur under that name. It is
anexception to this rule that such associates may escape
individualliability for such debts by a compliance with
incorporation laws or by areal attempt to comply with them
which gives the color of a legalcorporation, and by the user
of the franchise of such a corporation inthe honest belief
MAYORDO, M.A
that it is duly incorporated. When the fact appears,as it
does in the case at bar, by indisputable evidence that
partiesassociated and knowingly incurred liabilities under a
given name, thelegal presumption is that they are governed
by the general rule, andthe burdens is upon them to prove
that they fall under some exceptionto it.For the exception
to apply, under the general law of Arkansas in forcein the
Indian Territory, the filing of articles of incorporation with
theclerk of the Court of Appeals was a sine qua non of any
color of alegal corporation. Without that there was not,
and there could not be,an apparent corporation or the
color of a corporation, Agreements toform one, statements
that there was one, signed articles of association to make
one, acts as one, created no color of incorporation,
because there could be no incorporation or color of itunder
the law until the articles were filed.The defendants never
became a corporation de facto prior toDecember 22, 1902,
that they never became a corporation de jure,that the
indebtedness here in question was not incurred under
anypromise or assurance of the defendants as promoters
that it shouldbecome the obligation of a corporation to be
formed, that a large partof it was incurred in the conduct
of a general commercial business,and not to prepare for
the commencement of such a business or for the
organization of a corporation
THE CORPORATE ENTITY
G.R. No. L-18216            October 30, 1962
STOCKHOLDERS OF F. GUANZON AND SONS,
INC., petitioners-appellants,  vs. REGISTER OF DEEDS OF
MANILA, respondent-appellee.
BAUTISTA ANGELO, J.:
On September 19, 1960, the five stockholders of the F.
Guanzon and Sons, Inc. executed a certificate of liquidation
of the assets of the corporation reciting, among other
things, that by virtue of a resolution of the stockholders
adopted on September 17, 1960, dissolving the corporation,
they have distributed among themselves in proportion to
their shareholdings, as liquidating dividends, the assets of
said corporation, including real properties located in
Manila.
The certificate of liquidation, when presented to the
Register of Deeds of Manila, was denied registration on
seven grounds, of which the following were disputed by the
stockholders:
CORPORATION LAW CASES
LLB 3
3. The number of parcels not certified to in the
acknowledgment;
5. P430.50 Reg. fees need be paid;
6. P940.45 documentary stamps need be attached to the
document;
7. The judgment of the Court approving the dissolution and
directing the disposition of the assets of the corporation
need be presented (Rules of Court, Rule 104, Sec. 3).
Deciding the  consulta  elevated by the stockholders, the
Commissioner of Land Registration overruled ground No. 7
and sustained requirements Nos. 3, 5 and 6.
The stockholders interposed the present appeal.
As correctly stated by the Commissioner of Land
Registration, the propriety or impropriety of the three
grounds on which the denial of the registration of the
certificate of liquidation was predicated hinges on whether
or not that certificate merely involves a distribution of the
corporation's assets or should be considered a transfer or
conveyance.
Appellants contend that the certificate of liquidation is not
a conveyance or transfer but merely a distribution of the
assets of the corporation which has ceased to exist for
having been dissolved. This is apparent in the minutes for
dissolution attached to the document. Not being a
conveyance the certificate need not contain a statement of
the number of parcel of land involved in the distribution in
the acknowledgment appearing therein. Hence the amount
of documentary stamps to be affixed thereon should only
be P0.30 and not P940.45, as required by the register of
deeds. Neither is it correct to require appellants to pay the
amount of P430.50 as registration fee.
The Commissioner of Land Registration, however,
entertained a different opinion. He concurred in the view
expressed by the register of deed to the effect that the
certificate of liquidation in question, though it involves a
distribution of the corporation's assets, in the last analysis
represents a transfer of said assets from the corporation to
the stockholders. Hence, in substance it is a transfer or
conveyance.
We agree with the opinion of these two officials. A
corporation is a juridical person distinct from the members
composing it. Properties registered in the name of the
corporation are owned by it as an entity separate and
distinct from its members. While shares of stock constitute
Page 77 of 160
personal property they do not represent property of the
corporation. The corporation has property of its own which
consists chiefly of real estate (Nelson v. Owen, 113 Ala.,
372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W. 743).
A share of stock only typifies an aliquot part of the
corporation's property, or the right to share in its proceeds
to that extent when distributed according to law and equity
(Hall & Faley v. Alabama Terminal, 173 Ala 398, 56 So.,
235), but its holder is not the owner of any part of the
capital of the corporation (Bradley v. Bauder 36 Ohio St.,
28). Nor is he entitled to the possession of any definite
portion of its property or assets (Gottfried v. Miller, 104
U.S., 521; Jones v. Davis, 35 Ohio St., 474). The stockholder
is not a co-owner or tenant in common of the corporate
property (Halton v. Hohnston, 166 Ala 317, 51 So 992).
On the basis of the foregoing authorities, it is clear that the
act of liquidation made by the stockholders of the F.
Guanzon and Sons, Inc. of the latter's assets is not and
cannot be considered a partition of community property,
but rather a transfer or conveyance of the title of its assets
to the individual stockholders. Indeed, since the purpose of
the liquidation, as well as the distribution of the assets of
the corporation, is to transfer their title from the
corporation to the stockholders in proportion to their
shareholdings, — and this is in effect the purpose which
they seek to obtain from the Register of Deeds of Manila, —
that transfer cannot be effected without the corresponding
deed of conveyance from the corporation to the
stockholders. It is, therefore, fair and logical to consider
the certificate of liquidation as one in the nature of a
transfer or conveyance.
WHEREFORE, we affirm the resolution appealed from, with
costs against appellants.
G.R. No. L-48627
FERMIN Z. CARAM, JR. and ROSA O. DE CARAM,
petitioners 
 of the project study which project study was presented to
vs. THE HONORABLE COURT OF APPEALS and ALBERTO V.
ARELLANO, respondents.
CRUZ, J.:
We gave limited due course to this petition on the question
of the solidary liability of the petitioners with their co-
defendants in the lower court 1 because of the challenge to
the following paragraph in the dispositive portion of the
decision of the respondent court: *
1. Defendants are hereby ordered to jointly and severally
pay the plaintiff the amount of P50,000.00 for the
preparation of the project study and his technical services
MAYORDO, M.A
that led to the organization of the defendant corporation,
plus P10,000.00 attorney's fees; 2
The petitioners claim that this order has no support in fact
and law because they had no contract whatsoever with the
private respondent regarding the above-mentioned
services. Their position is that as mere subsequent
investors in the corporation that was later created, they
should not be held solidarily liable with the Filipinas Orient
Airways, a separate juridical entity, and with Barretto and
Garcia, their co-defendants in the lower court, ** who were
the ones who requested the said services from the private
respondent. 3
We are not concerned here with the petitioners' co-
defendants, who have not appealed the decision of the
respondent court and may, for this reason, be presumed to
have accepted the same. For purposes of resolving this case
before us, it is not necessary to determine whether it is the
promoters of the proposed corporation, or the corporation
itself after its organization, that shall be responsible for
the expenses incurred in connection with such organization.
The only question we have to decide now is whether or not
the petitioners themselves are also and personally liable for
such expenses and, if so, to what extent.
The reasons for the said order are given by the respondent
court in its decision in this wise:
As to the 4th assigned error we hold that as to the
remuneration due the plaintiff for the preparation of the
project study and the pre-organizational services in the
amount of P50,000.00, not only the defendant corporation
but the other defendants including defendants Caram
should be jointly and severally liable for this amount. As we
above related it was upon the request of defendants
Barretto and Garcia that plaintiff handled the preparation
defendant Caram so the latter was convinced to invest in
the proposed airlines. The project study was revised for
purposes of presentation to financiers and the banks. It was
on the basis of this study that defendant corporation was
actually organized and rendered operational. Defendants
Garcia and Caram, and Barretto became members of the
Board and/or officers of defendant corporation. Thus, not
only the defendant corporation but all the other
defendants who were involved in the preparatory stages of
the incorporation, who caused the preparation and/or
benefited from the project study and the technical services
of plaintiff must be liable. 4
CORPORATION LAW CASES
LLB 3
It would appear from the above justification that the
petitioners were not really involved in the initial steps that
finally led to the incorporation of the Filipinas Orient
Airways. Elsewhere in the decision, Barretto was described
as "the moving spirit." The finding of the respondent court
is that the project study was undertaken by the private
respondent at the request of Barretto and Garcia who,
upon its completion, presented it to the petitioners to
induce them to invest in the proposed airline. The study
could have been presented to other prospective investors.
At any rate, the airline was eventually organized on the
basis of the project study with the petitioners as major
stockholders and, together with Barretto and Garcia, as
principal officers.
The following portion of the decision in question is also
worth considering:
... Since defendant Barretto was the moving spirit in the
pre-organization work of defendant corporation based on
his experience and expertise, hence he was logically
compensated in the amount of P200,000.00 shares of stock
not as industrial partner but more for his technical services
that brought to fruition the defendant corporation. By the
same token, We find no reason why the plaintiff should not
be similarly compensated not only for having actively
participated in the preparation of the project study for
several months and its subsequent revision but also in his
having been involved in the pre-organization of the
defendant corporation, in the preparation of the franchise,
in inviting the interest of the financiers and in the training
and screening of personnel. We agree that for these special
services of the plaintiff the amount of P50,000.00 as
compensation is reasonable. 5
The above finding bolsters the conclusion that the
petitioners were not involved in the initial stages of the
organization of the airline, which were being directed by
Barretto as the main promoter. It was he who was putting
all the pieces together, so to speak. The petitioners were
merely among the financiers whose interest was to be
invited and who were in fact persuaded, on the strength of
the project study, to invest in the proposed airline.
Significantly, there was no showing that the Filipinas Orient
Airways was a fictitious corporation and did not have a
separate juridical personality, to justify making the
petitioners, as principal stockholders thereof, responsible
for its obligations. As a bona fide corporation, the Filipinas
Orient Airways should alone be liable for its corporate acts
as duly authorized by its officers and directors.
Page 78 of 160
In the light of these circumstances, we hold that the
petitioners cannot be held personally liable for the
compensation claimed by the private respondent for the
services performed by him in the organization of the
corporation. To repeat, the petitioners did not contract
such services. It was only the results of such services that
Barretto and Garcia presented to them and which
persuaded them to invest in the proposed airline. The most
that can be said is that they benefited from such services,
but that surely is no justification to hold them personally
liable therefor. Otherwise, all the other stockholders of the
corporation, including those who came in later, and
regardless of the amount of their share holdings, would be
equally and personally liable also with the petitioners for
the claims of the private respondent.
The petition is rather hazy and seems to be flawed by an
ambiguous ambivalence. Our impression is that it is
opposed to the imposition of solidary responsibility upon
the Carams but seems to be willing, in a vague,
unexpressed offer of compromise, to accept joint liability.
While it is true that it does here and there disclaim total
liability, the thrust of the petition seems to be against the
imposition of solidary liability only rather than against any
liability at all, which is what it should have categorically
argued.
Categorically, the Court holds that the petitioners are not
liable at all, jointly or jointly and severally, under the first
paragraph of the dispositive portion of the challenged
decision. So holding, we find it unnecessary to examine at
this time the rules on solidary obligations, which the
parties-needlessly, as it turns out have belabored unto
death.
WHEREFORE, the petition is granted. The petitioners are
declared not liable under the challenged decision, which is
hereby modified accordingly. It is so ordered.
[G.R. No. 124293. January 31, 2005]
J.G. SUMMIT HOLDINGS, INC., petitioner, vs. COURT OF
APPEALS; COMMITTEE ON PRIVATIZATION, its Chairman
and Members; ASSET PRIVATIZATION TRUST; and
PHILYARDS HOLDINGS, INC., respondents.
RESOLUTION
PUNO, J.:
For resolution before this Court are two motions filed by
t h e p e t i t i o n e r, J . G . S u m m i t H o l d i n g s , I n c . f o r
MAYORDO, M.A
reconsideration of our Resolution dated September 24, 2003
and to elevate this case to the Court En Banc. The
petitioner questions the Resolution which reversed our
Decision of November 20, 2000, which in turn reversed and
set aside a Decision of the Court of Appeals promulgated on
July 18, 1995.
I. Facts
The undisputed facts of the case, as set forth in our
Resolution of September 24, 2003, are as follows:
On January 27, 1997, the National Investment and
Development Corporation (NIDC), a government
corporation, entered into a Joint Venture Agreement (JVA)
with Kawasaki Heavy Industries, Ltd. of Kobe, Japan
(KAWASAKI) for the construction, operation and
management of the Subic National Shipyard, Inc. (SNS)
which subsequently became the Philippine Shipyard and
Engineering Corporation (PHILSECO). Under the JVA, the
NIDC and KAWASAKI will contribute P330 million for the
capitalization of PHILSECO in the proportion of 60%-40%
respectively. One of its salient features is the grant to the
parties of the right of first refusal should either of them
decide to sell, assign or transfer its interest in the joint
venture, viz:
1.4 Neither party shall sell, transfer or assign all or any part
of its interest in SNS [PHILSECO] to any third party without
giving the other under the same terms the right of first
refusal. This provision shall not apply if the transferee is a
corporation owned or controlled by the GOVERNMENT or by
a KAWASAKI affiliate.
On November 25, 1986, NIDC transferred all its rights, title
and interest in PHILSECO to the Philippine National Bank
(PNB). Such interests were subsequently transferred to the
National Government pursuant to Administrative Order No.
14. On December 8, 1986, President Corazon C. Aquino
issued Proclamation No. 50 establishing the Committee on
Privatization (COP) and the Asset Privatization Trust (APT)
to take title to, and possession of, conserve, manage and
dispose of non-performing assets of the National
Government. Thereafter, on February 27, 1987, a trust
agreement was entered into between the National
Government and the APT wherein the latter was named the
trustee of the National Government's share in PHILSECO. In
1989, as a result of a quasi-reorganization of PHILSECO to
settle its huge obligations to PNB, the National
Government's shareholdings in PHILSECO increased to
CORPORATION LAW CASES
LLB 3
97.41% thereby reducing KAWASAKI's shareholdings to
2.59%.
In the interest of the national economy and the
government, the COP and the APT deemed it best to sell
the National Government's share in PHILSECO to private
entities. After a series of negotiations between the APT and
KAWASAKI, they agreed that the latter's right of first refusal
under the JVA be "exchanged" for the right to top by five
percent (5%) the highest bid for the said shares. They
further agreed that KAWASAKI would be entitled to name a
company in which it was a stockholder, which could
exercise the right to top. On September 7, 1990, KAWASAKI
informed APT that Philyards Holdings, Inc. (PHI)[1] would
exercise its right to top.
At the pre-bidding conference held on September 18, 1993,
interested bidders were given copies of the JVA between
NIDC and KAWASAKI, and of the Asset Specific Bidding Rules
(ASBR) drafted for the National Government's 87.6% equity
share in PHILSECO. The provisions of the ASBR were
explained to the interested bidders who were notified that
the bidding would be held on December 2, 1993. A portion
of the ASBR reads:
1.0 The subject of this Asset Privatization Trust (APT) sale
through public bidding is the National Government's equity
in PHILSECO consisting of 896,869,942 shares of stock
(representing 87.67% of PHILSECO's outstanding capital
stock), which will be sold as a whole block in accordance
with the rules herein enumerated.
xxx xxxxxx
2.0 The highest bid, as well as the buyer, shall be subject
to the final approval of both the APT Board of Trustees and
the Committee on Privatization (COP).
2.1 APT reserves the right in its sole discretion, to reject
any or all bids.
3.0 This public bidding shall be on an Indicative Price
Bidding basis. The Indicative price set for the National
Government's 87.67% equity in PHILSECO is PESOS: ONE
BILLION THREE HUNDRED MILLION (P1,300,000,000.00).
xxx xxxxxx
6.0 The highest qualified bid will be submitted to the APT
Board of Trustees at its regular meeting following the
bidding, for the purpose of determining whether or not it
Page 79 of 160
should be endorsed by the APT Board of Trustees to the
COP, and the latter approves the same. The APT shall advise
Kawasaki Heavy Industries, Inc. and/or its nominee,
[PHILYARDS] Holdings, Inc., that the highest bid is
acceptable to the National Government. Kawasaki Heavy
Industries, Inc. and/or [PHILYARDS] Holdings, Inc. shall then
have a period of thirty (30) calendar days from the date of
receipt of such advice from APT within which to exercise
their "Option to Top the Highest Bid" by offering a bid
equivalent to the highest bid plus five (5%) percent thereof.
6.1 Should Kawasaki Heavy Industries, Inc. and/or
[PHILYARDS] Holdings, Inc. exercise their "Option to Top the
Highest Bid," they shall so notify the APT about such
exercise of their option and deposit with APT the amount
equivalent to ten percent (10%) of the highest bid plus five
percent (5%) thereof within the thirty (30)-day period
mentioned in paragraph 6.0 above. APT will then serve
notice upon Kawasaki Heavy Industries, Inc. and/or
[PHILYARDS] Holdings, Inc. declaring them as the preferred
bidder and they shall have a period of ninety (90) days from
the receipt of the APT's notice within which to pay the
balance of their bid price.
6.2 Should Kawasaki Heavy Industries, Inc. and/or
[PHILYARDS] Holdings, Inc. fail to exercise their "Option to
Top the Highest Bid" within the thirty (30)-day period, APT
will declare the highest bidder as the winning bidder.
xxx xxxxxx
12.0 The bidder shall be solely responsible for examining
with appropriate care these rules, the official bid forms,
including any addenda or amendments thereto issued
during the bidding period. The bidder shall likewise be
responsible for informing itself with respect to any and all
conditions concerning the PHILSECO Shares which may, in
any manner, affect the bidder's proposal. Failure on the
part of the bidder to so examine and inform itself shall be
its sole risk and no relief for error or omission will be given
by APT or COP. . . .
At the public bidding on the said date, petitioner J.G.
Summit Holdings, Inc.[2] submitted a bid of Two Billion and
Thirty Million Pesos (P2,030,000,000.00) with an
acknowledgment of KAWASAKI/[PHILYARDS'] right to top,
viz:
4. I/We understand that the Committee on Privatization
(COP) has up to thirty (30) days to act on APT's
recommendation based on the result of this bidding. Should
MAYORDO, M.A
the COP approve the highest bid, APT shall advise Kawasaki
Heavy Industries, Inc. and/or its nominee, [PHILYARDS]
Holdings, Inc. that the highest bid is acceptable to the
National Government. Kawasaki Heavy Industries, Inc. and/
or [PHILYARDS] Holdings, Inc. shall then have a period of
thirty (30) calendar days from the date of receipt of such
advice from APT within which to exercise their "Option to
Top the Highest Bid" by offering a bid equivalent to the
highest bid plus five (5%) percent thereof.
As petitioner was declared the highest bidder, the COP
approved the sale on December 3, 1993 "subject to the
right of Kawasaki Heavy Industries, Inc./[PHILYARDS]
Holdings, Inc. to top JGSMI's bid by 5% as specified in the
bidding rules."
On December 29, 1993, petitioner informed APT that it was
protesting the offer of PHI to top its bid on the grounds
that: (a) the KAWASAKI/PHI consortium composed of
KAWASAKI, [PHILYARDS], Mitsui, Keppel, SM Group, ICTSI and
Insular Life violated the ASBR because the last four (4)
companies were the losing bidders thereby circumventing
the law and prejudicing the weak winning bidder; (b) only
KAWASAKI could exercise the right to top; (c) giving the
same option to top to PHI constituted unwarranted benefit
to a third party; (d) no right of first refusal can be
exercised in a public bidding or auction sale; and (e) the JG
Summit consortium was not estopped from questioning the
proceedings.
On February 2, 1994, petitioner was notified that PHI had
fully paid the balance of the purchase price of the subject
bidding. On February 7, 1994, the APT notified petitioner
that PHI had exercised its option to top the highest bid and
that the COP had approved the same on January 6, 1994.
On February 24, 1994, the APT and PHI executed a Stock
Purchase Agreement. Consequently, petitioner filed with
this Court a Petition for Mandamus under G.R. No. 114057.
On May 11, 1994, said petition was referred to the Court of
Appeals. On July 18, 1995, the Court of Appeals denied the
same for lack of merit. It ruled that the petition for
mandamus was not the proper remedy to question the
constitutionality or legality of the right of first refusal and
the right to top that was exercised by KAWASAKI/PHI, and
that the matter must be brought "by the proper party in the
proper forum at the proper time and threshed out in a full
blown trial." The Court of Appeals further ruled that the
right of first refusal and the right to top are prima facie
legal and that the petitioner, "by participating in the public
bidding, with full knowledge of the right to top granted to
KAWASAKI/[PHILYARDS] isestopped from questioning the
CORPORATION LAW CASES
LLB 3
validity of the award given to [PHILYARDS] after the latter
exercised the right to top and had paid in full the purchase
price of the subject shares, pursuant to the ASBR."
Petitioner filed a Motion for Reconsideration of said
Decision which was denied on March 15, 1996. Petitioner
thus filed a Petition for Certiorari with this Court alleging
grave abuse of discretion on the part of the appellate
court.
On November 20, 2000, this Court rendered x xx [a]
Decision ruling among others that the Court of Appeals
erred when it dismissed the petition on the sole ground of
the impropriety of the special civil action of mandamus
because the petition was also one of certiorari. It further
ruled that a shipyard like PHILSECO is a public utility whose
capitalization must be sixty percent (60%) Filipino-owned.
Consequently, the right to top granted to KAWASAKI under
the Asset Specific Bidding Rules (ASBR) drafted for the sale
of the 87.67% equity of the National Government in
PHILSECO is illegal not only because it violates the rules on
competitive bidding but more so, because it allows foreign
corporations to own more than 40% equity in the shipyard.
It also held that "although the petitioner had the
opportunity to examine the ASBR before it participated in
the bidding, it cannot be estopped from questioning the
unconstitutional, illegal and inequitable provisions
thereof." Thus, this Court voided the transfer of the
national government's 87.67% share in PHILSECO to
Philyard[s] Holdings, Inc., and upheld the right of JG
Summit, as the highest bidder, to take title to the said
shares, viz:
WHEREFORE, the instant petition for review on certiorari is
GRANTED. The assailed Decision and Resolution of the Court
of Appeals are REVERSED and SET ASIDE. Petitioner is
ordered to pay to APT its bid price of Two Billion Thirty
Million Pesos (P2,030,000,000.00), less its bid deposit plus
interests upon the finality of this Decision. In turn, APT is
ordered to:
(a) accept the said amount of P2,030,000,000.00 less bid
deposit and interests from petitioner;
(b) execute a Stock Purchase Agreement with petitioner;
(c) cause the issuance in favor of petitioner of the
certificates of stocks representing 87.6% of PHILSECO's total
capitalization;
Page 80 of 160
(d) return to private respondent PHGI the amount of Two
Billion One Hundred Thirty-One Million Five Hundred
Thousand Pesos (P2,131,500,000.00); and
(e) cause the cancellation of the stock certificates issued to
PHI.
SO ORDERED.
In separate Motions for Reconsideration, respondents
submit[ted] three basic issues for x xx resolution: (1)
Whether PHILSECO is a public utility; (2) Whether under the
1977 JVA, KAWASAKI can exercise its right of first refusal
only up to 40% of the total capitalization of PHILSECO; and
(3) Whether the right to top granted to KAWASAKI violates
the principles of competitive bidding.[3] (citations omitted)
In a Resolution dated September 24, 2003, this Court ruled
in favor of the respondents. On the first issue, we held that
Philippine Shipyard and Engineering Corporation (PHILSECO)
is not a public utility, as by nature, a shipyard is not a
public utility[4] and that no law declares a shipyard to be a
public utility.[5] On the second issue, we found nothing in
the 1977 Joint Venture Agreement (JVA) which prevents
Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI)
from acquiring more than 40% of PHILSECOs total
capitalization.[6] On the final issue, we held that the right
to top granted to KAWASAKI in exchange for its right of first
refusal did not violate the principles of competitive
bidding.[7]
On October 20, 2003, the petitioner filed a Motion for
Reconsideration[8] and a Motion to Elevate This Case to the
Court En Banc.[9] Public respondents Committee on
Privatization (COP) and Asset Privatization Trust (APT), and
private respondent Philyards Holdings, Inc. (PHILYARDS)
filed their Comments on J.G. Summit Holdings, Inc.s (JG
Summits) Motion for Reconsideration and Motion to Elevate
This Case to the Court En Banc on January 29, 2004 and
February 3, 2004, respectively.
II. Issues
Based on the foregoing, the relevant issues to resolve to
end this litigation are the following:
1. Whether there are sufficient bases to elevate the case at
bar to the Court en banc.
MAYORDO, M.A
2. Whether the motion for reconsideration raises any new
matter or cogent reason to warrant a reconsideration of
this Courts Resolution of September 24, 2003.
Motion to Elevate this Case to the
Court En Banc
The petitioner prays for the elevation of the case to the
Court en banc on the following grounds:
1. The main issue of the propriety of the bidding process
involved in the present case has been confused with the
policy issue of the supposed fate of the shipping industry
which has never been an issue that is determinative of this
case.[10]
2. The present case may be considered under the Supreme
Court Resolution dated February 23, 1984 which included
among en banc cases those involving a novel question of
law and those where a doctrine or principle laid down by
the Court en banc or in division may be modified or
reversed.[11]
3. There was clear executive interference in the judicial
functions of the Court when the Honorable Jose Isidro
Camacho, Secretary of Finance, forwarded to Chief Justice
Davide, a memorandum dated November 5, 2001, attaching
a copy of the Foreign Chambers Report dated October 17,
2001, which matter was placed in the agenda of the Court
and noted by it in a formal resolution dated November 28,
2001.[12]
Opposing J.G. Summits motion to elevate the case en banc,
PHILYARDS points out the petitioners inconsistency in
previously opposing PHILYARDS Motion to Refer the Case to
the Court En Banc. PHILYARDS contends that J.G. Summit
should now be estopped from asking that the case be
referred to the Court en banc. PHILYARDS further contends
that the Supreme Court en banc is not an appellate court to
which decisions or resolutions of its divisions may be
appealed citing Supreme Court Circular No. 2-89 dated
February 7, 1989.[13] PHILYARDS also alleges that there is
no novel question of law involved in the present case as the
a s s a i l e d Re s o l u t i o n w a s b a s e d o n w e l l - s e t t l e d
jurisprudence. Likewise, PHILYARDS stresses that the
Resolution was merely an outcome of the motions for
reconsideration filed by it and the COP and APT and is
consistent with the inherent power of courts to amend and
control its process and orders so as to make them
conformable to law and justice. (Rule 135, sec. 5)[14]
CORPORATION LAW CASES
LLB 3
Private respondent belittles the petitioners allegations
regarding the change in ponente and the alleged executive
interference as shown by former Secretary of Finance Jose
Isidro Camachos memorandum dated November 5, 2001
arguing that these do not justify a referral of the present
case to the Court en banc.
In insisting that its Motion to Elevate This Case to the Court
En Banc should be granted, J.G. Summit further argued
that: its Opposition to the Office of the Solicitor Generals
Motion to Refer is different from its own Motion to Elevate;
different grounds are invoked by the two motions; there
was unwarranted executive interference; and the change in
ponente is merely noted in asserting that this case should
be decided by the Court en banc.[15]
We find no merit in petitioners contention that the
propriety of the bidding process involved in the present
case has been confused with the policy issue of the fate of
the shipping industry which, petitioner maintains, has
never been an issue that is determinative of this case. The
Courts Resolution of September 24, 2003 reveals a clear
and definitive ruling on the propriety of the bidding
process. In discussing whether the right to top granted to
KAWASAKI in exchange for its right of first refusal violates
the principles of competitive bidding, we made an
exhaustive discourse on the rules and principles of public
bidding and whether they were complied with in the case
at bar.[16] This Court categorically ruled on the petitioners
argument that PHILSECO, as a shipyard, is a public utility
which should maintain a 60%-40% Filipino-foreign equity
ratio, as it was a pivotal issue. In doing so, we recognized
the impact of our ruling on the shipbuilding industry which
was beyond avoidance.[17]
We reject petitioners argument that the present case may
be considered under the Supreme Court Resolution dated
February 23, 1984 which included among en banc cases
those involving a novel question of law and those where a
doctrine or principle laid down by the court en banc or in
division may be modified or reversed. The case was
resolved based on basic principles of the right of first
refusal in commercial law and estoppel in civil law.
Contractual obligations arising from rights of first refusal
are not new in this jurisdiction and have been recognized in
numerous cases.[18] Estoppel is too known a civil law
concept to require an elongated discussion. Fundamental
principles on public bidding were likewise used to resolve
the issues raised by the petitioner. To be sure, petitioner
leans on the right to top in a public bidding in arguing that
the case at bar involves a novel issue. We are not swayed.
Page 81 of 160
The right to top was merely a condition or a reservation
made in the bidding rules which was fully disclosed to all
bidding parties. In Bureau Veritas, represented by Theodor
H. Hunermann v. Office of the President, et al., [19]we
dealt with this conditionality, viz:
x xx It must be stressed, as held in the case of A.C.
Esguerra & Sons v. Aytona, et al., (L-18751, 28 April 1962, 4
SCRA 1245), that in an "invitation to bid, there is a
condition imposed upon the bidders to the effect that the
bidding shall be subject to the right of the government to
reject any and all bids subject to its discretion. In the case
at bar, the government has made its choice and unless an
unfairness or injustice is shown, the losing bidders have no
cause to complain nor right to dispute that choice. This is a
well-settled doctrine in this jurisdiction and elsewhere."
The discretion to accept or reject a bid and award
contracts is vested in the Government agencies entrusted
with that function. The discretion given to the authorities
on this matter is of such wide latitude that the Courts will
not interfere therewith, unless it is apparent that it is used
as a shield to a fraudulent award (Jalandoni v. NARRA, 108
Phil. 486 [1960]). x xxThe exercise of this discretion is a
policy decision that necessitates prior inquiry,
investigation, comparison, evaluation, and deliberation.
This task can best be discharged by the Government
agencies concerned, not by the Courts. The role of the
Courts is to ascertain whether a branch or instrumentality
of the Government has transgressed its constitutional
boundaries. But the Courts will not interfere with executive
or legislative discretion exercised within those boundaries.
Otherwise, it strays into the realm of policy decision-
making.
It is only upon a clear showing of grave abuse of discretion
that the Courts will set aside the award of a contract made
by a government entity. Grave abuse of discretion implies a
capricious, arbitrary and whimsical exercise of power
(Filinvest Credit Corp. v. Intermediate Appellate Court, No.
65935, 30 September 1988, 166 SCRA 155). The abuse of
discretion must be so patent and gross as to amount to an
evasion of positive duty or to a virtual refusal to perform a
duty enjoined by law, as to act at all in contemplation of
law, where the power is exercised in an arbitrary and
despotic manner by reason of passion or hostility (Litton
Mills, Inc. v. Galleon Trader, Inc., et al[.], L-40867, 26 July
1988, 163 SCRA 489).
The facts in this case do not indicate any such grave abuse
of discretion on the part of public respondents when they
MAYORDO, M.A
awarded the CISS contract to Respondent SGS. In the
"Invitation to Prequalify and Bid" (Annex "C," supra), the
CISS Committee made an express reservation of the right of
the Government to "reject any or all bids or any part
thereof or waive any defects contained thereon and accept
an offer most advantageous to the Government." It is a
well-settled rule that where such reservation is made in an
Invitation to Bid, the highest or lowest bidder, as the case
may be, is not entitled to an award as a matter of right (C
& C Commercial Corp. v. Menor, L-28360, 27 January 1983,
120 SCRA 112). Even the lowest Bid or any Bid may be
rejected or, in the exercise of sound discretion, the award
may be made to another than the lowest bidder (A.C.
Esguerra & Sons v. Aytona, supra, citing 43 Am. Jur., 788).
(emphases supplied)
Like the condition in the Bureau Veritas case, the right to
top was a condition imposed by the government in the
bidding rules which was made known to all parties. It was a
condition imposed on all bidders equally, based on the APTs
exercise of its discretion in deciding on how best to
privatize the governments shares in PHILSECO. It was not a
whimsical or arbitrary condition plucked from the ether and
inserted in the bidding rules but a condition which the APT
approved as the best way the government could comply
with its contractual obligations to KAWASAKI under the JVA
and its mandate of getting the most advantageous deal for
the government. The right to top had its history in the
mutual right of first refusal in the JVA and was reached by
agreement of the government and KAWASAKI.
Further, there is no executive interference in the functions
of this Court by the mere filing of a memorandum by
Secretary of Finance Jose Isidro Camacho. The
memorandum was merely noted to acknowledge its filing. It
had no further legal significance. Notably too, the assailed
Resolution dated September 24, 2003 was decided
unanimously by the Special First Division in favor of the
respondents.
Again, we emphasize that a decision or resolution of a
Division is that of the Supreme Court[20] and the Court en
banc is not an appellate court to which decisions or
resolutions of a Division may be appealed.[21]
For all the foregoing reasons, we find no basis to elevate
this case to the Court en banc.
Motion for Reconsideration
CORPORATION LAW CASES
LLB 3
Three principal arguments were raised in the petitioners
Motion for Reconsideration. First, that a fair resolution of
the case should be based on contract law, not on policy
considerations; the contracts do not authorize the right to
top to be derived from the right of first refusal.[22]
Second, that neither the right of first refusal nor the right
to top can be legally exercised by the consortium which is
not the proper party granted such right under either the
JVA or the Asset Specific Bidding Rules (ASBR).[23] Third,
that the maintenance of the 60%-40% relationship between
the National Investment and Development Corporation
(NIDC) and KAWASAKI arises from contract and from the
Constitution because PHILSECO is a landholding corporation
and need not be a public utility to be bound by the 60%-40%
constitutional limitation.[24]
On the other hand, private respondent PHILYARDS asserts
that J.G. Summit has not been able to show compelling
reasons to warrant a reconsideration of the Decision of the
Court.[25] PHILYARDS denies that the Decision is based
mainly on policy considerations and points out that it is
premised on principles governing obligations and contracts
and corporate law such as the rule requiring respect for
contractual stipulations, upholding rights of first refusal,
and recognizing the assignable nature of contracts rights.
[26] Also, the ruling that shipyards are not public utilities
relies on established case law and fundamental rules of
statutory construction. PHILYARDS stresses that KAWASAKIs
right of first refusal or even the right to top is not limited
to the 40% equity of the latter.[27] On the landholding issue
raised by J.G. Summit, PHILYARDS emphasizes that this is a
non-issue and even involves a question of fact. Even
assuming that this Court can take cognizance of such
question of fact even without the benefit of a trial,
PHILYARDS opines that landholding by PHILSECO at the time
of the bidding is irrelevant because what is essential is that
ultimately a qualified entity would eventually hold
PHILSECOs real estate properties.[28] Further, given the
assignable nature of the right of first refusal, any
applicable nationality restrictions, including landholding
limitations, would not affect the right of first refusal itself,
but only the manner of its exercise.[29] Also, PHILYARDS
argues that if this Court takes cognizance of J.G. Summits
allegations of fact regarding PHILSECOs landholding, it must
also recognize PHILYARDS assertions that PHILSECOs
landholdings were sold to another corporation.[30] As
regards the right of first refusal, private respondent
explains that KAWASAKIs reduced shareholdings (from 40%
to 2.59%) did not translate to a deprivation or loss of its
contractually granted right of first refusal.[31] Also, the
bidding was valid because PHILYARDS exercised the right to
Page 82 of 160
top and it was of no moment that losing bidders later
joined PHILYARDS in raising the purchase price.[32]
In cadence with the private respondent PHILYARDS, public
respondents COP and APT contend:
1. The conversion of the right of first refusal into a right to
top by 5% does not violate any provision in the JVA between
NIDC and KAWASAKI.
2. PHILSECO is not a public utility and therefore not
governed by the constitutional restriction on foreign
ownership.
3. The petitioner is legally estopped from assailing the
validity of the proceedings of the public bidding as it
voluntarily submitted itself to the terms of the ASBR which
included the provision on the right to top.
4. The right to top was exercised by PHILYARDS as the
nominee of KAWASAKI and the fact that PHILYARDS formed a
consortium to raise the required amount to exercise the
right to top the highest bid by 5% does not violate the JVA
or the ASBR.
5. The 60%-40% Filipino-foreign constitutional requirement
for the acquisition of lands does not apply to PHILSECO
because as admitted by petitioner itself, PHILSECO no
longer owns real property.
6. Petitioners motion to elevate the case to the Court en
banc is baseless and would only delay the termination of
this case.[33]
In a Consolidated Comment dated March 8, 2004, J.G.
Summit countered the arguments of the public and private
respondents in this wise:
1. The award by the APT of 87.67% shares of PHILSECO to
PHILYARDS with losing bidders through the exercise of a
right to top, which is contrary to law and the constitution is
null and void for being violative of substantive due process
and the abuse of right provision in the Civil Code.
a. The bidders[] right to top was actually exercised by
losing bidders.
b. The right to top or the right of first refusal cannot co-
exist with a genuine competitive bidding.
MAYORDO, M.A
c. The benefits derived from the right to top were
unwarranted.
2. The landholding issue has been a legitimate issue since
the start of this case but is shamelessly ignored by the
respondents.
a. The landholding issue is not a non-issue.
b. The landholding issue does not pose questions of fact.
c. That PHILSECO owned land at the time that the right of
first refusal was agreed upon and at the time of the bidding
are most relevant.
d. Whether a shipyard is a public utility is not the core
issue in this case.
3. Fraud and bad faith attend the alleged conversion of an
inexistent right of first refusal to the right to top.
a. The history behind the birth of the right to top shows
fraud and bad faith.
b. The right of first refusal was, indeed, effectively useless.
4. Petitioner is not legally estopped to challenge the right
to top in this case.
a. Estoppel is unavailing as it would stamp validity to an act
that is prohibited by law or against public policy.
b. Deception was patent; the right to top was an attractive
nuisance.
c. The 10% bid deposit was placed in escrow.
J.G. Summits insistence that the right to top cannot be
sourced from the right of first refusal is not new and we
have already ruled on the issue in our Resolution of
September 24, 2003. We upheld the mutual right of first
refusal in the JVA.[34] We also ruled that nothing in the JVA
prevents KAWASAKI from acquiring more than 40% of
PHILSECOs total capitalization.[35] Likewise, nothing in the
JVA or ASBR bars the conversion of the right of first refusal
to the right to top. In sum, nothing new and of significance
in the petitioners pleading warrants a reconsideration of
our ruling.
Likewise, we already disposed of the argument that neither
the right of first refusal nor the right to top can legally be
CORPORATION LAW CASES
LLB 3
exercised by the consortium which is not the proper party
granted such right under either the JVA or the ASBR. Thus,
we held:
The fact that the losing bidder, Keppel Consortium
(composed of Keppel, SM Group, Insular Life Assurance,
Mitsui and ICTSI), has joined PHILYARDS in the latter's effort
to raise P2.131 billion necessary in exercising the right to
top is not contrary to law, public policy or public morals.
There is nothing in the ASBR that bars the losing bidders
from joining either the winning bidder (should the right to
top is not exercised) or KAWASAKI/PHI (should it exercise its
right to top as it did), to raise the purchase price. The
petitioner did not allege, nor was it shown by competent
evidence, that the participation of the losing bidders in the
public bidding was done with fraudulent intent. Absent any
proof of fraud, the formation by [PHILYARDS] of a
consortium is legitimate in a free enterprise system. The
appellate court is thus correct in holding the petitioner
estopped from questioning the validity of the transfer of
the National Government's shares in PHILSECO to
respondent.[36]
Further, we see no inherent illegality on PHILYARDS act in
seeking funding from parties who were losing bidders. This
is a purely commercial decision over which the State should
not interfere absent any legal infirmity. It is emphasized
that the case at bar involves the disposition of shares in a
corporation which the government sought to privatize. As
such, the persons with whom PHILYARDS desired to enter
into business with in order to raise funds to purchase the
shares are basically its business. This is in contrast to a
case involving a contract for the operation of or
construction of a government infrastructure where the
identity of the buyer/bidder or financier constitutes an
important consideration. In such cases, the government
would have to take utmost precaution to protect public
interest by ensuring that the parties with which it is
contracting have the ability to satisfactorily construct or
operate the infrastructure.
On the landholding issue, J.G. Summit submits that since
PHILSECO is a landholding company, KAWASAKI could
exercise its right of first refusal only up to 40% of the
shares of PHILSECO due to the constitutional prohibition on
landholding by corporations with more than 40% foreign-
owned equity. It further argues that since KAWASAKI already
held at least 40% equity in PHILSECO, the right of first
refusal was inutile and as such, could not subsequently be
converted into the right to top. [37] Petitioner also asserts
that, at present, PHILSECO continues to violate the
Page 83 of 160
constitutional provision on landholdings as its shares are
more than 40% foreign-owned.[38] PHILYARDS admits that it
may have previously held land but had already divested
such landholdings.[39] It contends, however, that even if
PHILSECO owned land, this would not affect the right of
first refusal but only the exercise thereof. If the land is
retained, the right of first refusal, being a property right,
could be assigned to a qualified party. In the alternative,
the land could be divested before the exercise of the right
of first refusal. In the case at bar, respondents assert that
since the right of first refusal was validly converted into a
right to top, which was exercised not by KAWASAKI, but by
PHILYARDS which is a Filipino corporation (i.e., 60% of its
shares are owned by Filipinos), then there is no violation of
the Constitution.[40] At first, it would seem that questions
of fact beyond cognizance by this Court were involved in
the issue. However, the records show that PHILYARDS
admits it had owned land up until the time of the bidding.
[41] Hence, the only issue is whether KAWASAKI had a valid
right of first refusal over PHILSECO shares under the JVA
considering that PHILSECO owned land until the time of the
bidding and KAWASAKI already held 40% of PHILSECOs
equity.
We uphold the validity of the mutual rights of first refusal
under the JVA between KAWASAKI and NIDC. First of all, the
right of first refusal is a property right of PHILSECO
shareholders, KAWASAKI and NIDC, under the terms of their
JVA. This right allows them to purchase the shares of their
co-shareholder before they are offered to a third party. The
agreement of co-shareholders to mutually grant this right
to each other, by itself, does not constitute a violation of
the provisions of the Constitution limiting land ownership to
Filipinos and Filipino corporations. As PHILYARDS correctly
puts it, if PHILSECO still owns land, the right of first refusal
can be validly assigned to a qualified Filipino entity in order
to maintain the 60%-40% ratio. This transfer, by itself, does
not amount to a violation of the Anti-Dummy Laws, absent
proof of any fraudulent intent. The transfer could be made
either to a nominee or such other party which the holder of
the right of first refusal feels it can comfortably do
business with. Alternatively, PHILSECO may divest of its
landholdings, in which case KAWASAKI, in exercising its
right of first refusal, can exceed 40% of PHILSECOs equity.
In fact, it can even be said that if the foreign shareholdings
of a landholding corporation exceeds 40%, it is not the
foreign stockholders ownership of the shares which is
adversely affected but the capacity of the corporation to
own land that is, the corporation becomes disqualified to
own land. This finds support under the basic corporate law
principle that the corporation and its stockholders are
MAYORDO, M.A
separate juridical entities. In this vein, the right of first
refusal over shares pertains to the shareholders whereas
the capacity to own land pertains to the corporation.
Hence, the fact that PHILSECO owns land cannot deprive
stockholders of their right of first refusal. No law
disqualifies a person from purchasing shares in a
landholding corporation even if the latter will exceed the
allowed foreign equity, what the law disqualifies is the
corporation from owning land. This is the clear import of
the following provisions in the Constitution:
Section 2. All lands of the public domain, waters, minerals,
coal, petroleum, and other mineral oils, all forces of
potential energy, fisheries, forests or timber, wildlife, flora
and fauna, and other natural resources are owned by the
State. With the exception of agricultural lands, all other
natural resources shall not be alienated. The exploration,
development, and utilization of natural resources shall be
under the full control and supervision of the State. The
State may directly undertake such activities, or it may
enter into co-production, joint venture, or production-
sharing agreements with Filipino citizens, or corporations
or associations at least sixty per centum of whose capital is
owned by such citizens. Such agreements may be for a
period not exceeding twenty-five years, renewable for not
more than twenty-five years, and under such terms and
conditions as may be provided by law. In cases of water
rights for irrigation, water supply, fisheries, or industrial
uses other than the development of water power, beneficial
use may be the measure and limit of the grant.
xxx xxxxxx
Section 7. Save in cases of hereditary succession, no private
lands shall be transferred or conveyed except to
individuals, corporations, or associations qualified to
acquire or hold lands of the public domain.[42] (emphases
supplied)
The petitioner further argues that an option to buy land is
void in itself (Philippine Banking Corporation v. Lui She, 21
SCRA 52 [1967]). The right of first refusal granted to
KAWASAKI, a Japanese corporation, is similarly void. Hence,
the right to top, sourced from the right of first refusal, is
also void.[43] Contrary to the contention of petitioner, the
case of Lui She did not that say an option to buy land is
void in itself, for we ruled as follows:
x xxTo be sure, a lease to an alien for a reasonable period
is valid. So is an option giving an alien the right to buy real
property on condition that he is granted Philippine
CORPORATION LAW CASES
LLB 3
citizenship. As this Court said in Krivenko vs. Register of
Deeds:
[A]liens are not completely excluded by the Constitution
from the use of lands for residential purposes. Since their
residence in the Philippines is temporary, they may be
granted temporary rights such as a lease contract which is
not forbidden by the Constitution. Should they desire to
remain here forever and share our fortunes and
misfortunes, Filipino citizenship is not impossible to
acquire.
But if an alien is given not only a lease of, but also an
option to buy, a piece of land, by virtue of which the
Filipino owner cannot sell or otherwise dispose of his
property, this to last for 50 years, then it becomes clear
that the arrangement is a virtual transfer of ownership
whereby the owner divests himself in stages not only of the
right to enjoy the land (jus possidendi, jus utendi, jus
fruendi and jus abutendi) but also of the right to dispose of
it (jus disponendi) rights the sum total of which make up
ownership. It is just as if today the possession is
transferred, tomorrow, the use, the next day, the
disposition, and so on, until ultimately all the rights of
which ownership is made up are consolidated in an alien.
And yet this is just exactly what the parties in this case did
within this pace of one year, with the result that Justina
Santos'[s] ownership of her property was reduced to a
hollow concept. If this can be done, then the Constitutional
ban against alien landholding in the Philippines, as
announced in Krivenko vs. Register of Deeds, is indeed in
grave peril.[44] (emphases supplied; Citations omitted)
In Lui She, the option to buy was invalidated because it
amounted to a virtual transfer of ownership as the owner
could not sell or dispose of his properties. The contract in
Lui She prohibited the owner of the land from selling,
donating, mortgaging, or encumbering the property during
the 50-year period of the option to buy. This is not so in the
case at bar where the mutual right of first refusal in favor
of NIDC and KAWASAKI does not amount to a virtual transfer
of land to a non-Filipino. In fact, the case at bar involves a
right of first refusal over shares of stock while the Lui She
case involves an option to buy the land itself. As discussed
earlier, there is a distinction between the shareholders
ownership of shares and the corporations ownership of land
arising from the separate juridical personalities of the
corporation and its shareholders.
We note that in its Motion for Reconsideration, J.G. Summit
alleges that PHILSECO continues to violate the Constitution
Page 84 of 160
as its foreign equity is above 40% and yet owns long-term
leasehold rights which are real rights.[45] It cites Article
415 of the Civil Code which includes in the definition of
immovable property, contracts for public works, and
servitudes and other real rights over immovable property.
[46] Any existing landholding, however, is denied by
PHILYARDS citing its recent financial statements.[47] First,
these are questions of fact, the veracity of which would
require introduction of evidence. The Court needs to
validate these factual allegations based on competent and
reliable evidence. As such, the Court cannot resolve the
questions they pose. Second, J.G. Summit misreads the
provisions of the Constitution cited in its own pleadings, to
wit:
29.2 Petitioner has consistently pointed out in the past that
private respondent is not a 60%-40% corporation, and this
violates the Constitution x xxThe violation continues to this
day because under the law, it continues to own real
property
xxx xxxxxx
32. To review the constitutional provisions involved, Section
14, Article XIV of the 1973 Constitution (the JVA was signed
in 1977), provided:
Save in cases of hereditary succession, no private lands
shall be transferred or conveyed except to individuals,
corporations, or associations qualified to acquire or hold
lands of the public domain.
32.1 This provision is the same as Section 7, Article XII of
the 1987 Constitution.
32.2 Under the Public Land Act, corporations qualified to
acquire or hold lands of the public domain are corporations
at least 60% of which is owned by Filipino citizens (Sec. 22,
Commonwealth Act 141, as amended). (emphases supplied)
As correctly observed by the public respondents, the
prohibition in the Constitution applies only to ownership of
land.[48] It does not extend to immovable or real property
as defined under Article 415 of the Civil Code. Otherwise,
we would have a strange situation where the ownership of
immovable property such as trees, plants and growing fruit
attached to the land[49] would be limited to Filipinos and
Filipino corporations only.
III.
MAYORDO, M.A
WHEREFORE, in view of the foregoing, the petitioners
Motion for Reconsideration is DENIED WITH FINALITY and
the decision appealed from is AFFIRMED. The Motion to
Elevate This Case to the Court En Banc is likewise DENIED
for lack of merit.
SO ORDERED.
G.R. No. 111008 November 7, 1994
TRAMAT MERCANTILE, INC. AND DAVID ONG, petitioners,
vs. HON. COURT OF APPEALS AND MELCHOR DE LA
CUESTA, respondents.
VITUG, J.:
This petition for review on certiorari challenges the 04th
March 1993 decision of the Court of Appeals and its
resolution of 01 July 1993 denying the motion for
reconsideration.
On 09 April 1984, Melchor de la Cuesta, doing business
under the name and style of "Farmers Machineries," sold to
Tramat Mercantile, Inc. ("Tramat"), one (1) unit HINOMOTO
TRACTOR Model MB 1100D powered by a 13 H.P. diesel
engine. In payment, David Ong, Tramat's president and
manager, issued a check for P33,500.00 (apparently
replacing an earlier postdated check for P33,080.00).
Tramat, in turn, sold the tractor, together with an attached
lawn mower fabricated by it, to the Metropolitan
Waterworks and Sewerage System ("NAWASA") for
P67,000.00. David Ong caused a "stop payment" of the
check when NAWASA refused to pay the tractor and lawn
mower after discovering that, aside from some stated
defects of the attached lawn mower, the engine (sold by de
la Cuesta) was a reconditioned unit.
On 28 May 1985, de la Cuesta filed an action for the
recovery of P33,500.00, as well as attorney's fees of
P10,000.00, and the costs of suit. Ong, in his answer,
averred, among other things, that de la Cuesta had no
cause of action; that the questioned transaction was
between plaintiff and Tramat Mercantile, Inc., and not with
Ong in his personal capacity; and that the payment of the
check was stopped because the subject tractor had been
priced as a brand new, not as a reconditioned unit.
On 02 November 1989, after the reception of evidence, the
trial court rendered a decision, the dispositive portions of
which read:
CORPORATION LAW CASES
LLB 3
WHEREFORE, in view of the foregoing consideration,
judgment is hereby rendered:
1. Ordering the defendants, jointly and severally, to
pay the plaintiff the sum of P33,500.00 with legal interest
thereon at the rate of 12% per annum from July 7, 1984
until fully paid; and
2. Ordering the defendants, jointly and severally, to
pay the plaintiff the sum of P10,000.00 as attorney's fees,
and the costs of this suit.
SO ORDERED. 1
An appeal was timely interposed by the defendants. On 04
March 1993, the Court of Appeals affirmed in toto the
decision of the trial court. Defendant-appellants' motion for
reconsideration was denied.
Hence, the instant petition.
We could find no reason to reverse the factual findings of
both the trial court and the appellate court, particularly in
holding that the contract between de la Cuesta and
TRAMAT was one of absolute, not conditional, sale of the
tractor and that de la Cuesta did not violate any warranty
on the sale of the tractor to TRAMAT. The appellate court,
in its decision, adequately explained:
If the perfection of the sale was dependent upon
acceptance by the MWSS of the subject tractor why did the
appellants issue a check in payment of the item to the
appellee? And long after MWSS had complained about the
defective tractor engine, and after the appellee had failed
to remedy the defect, why did the appellants still draw and
deliver a replacement check to the appellee for the
increased amount of P33,500.00?
These payments argue against the claim now made by the
defendants that the sale was conditional.
According to the appellee, the additional amount covered
the cost of replacing the oil gasket of the tractor engine
when it was repaired in Soledad Cac's gasoline station in
Quezon City. The appellants, on the other hand, claims the
amount represented the freight charges for transporting
the tractor from Cauayan, Isabela to Metro Manila.
The appellants should have explained why they failed to
include the freight charges in the first check. The tractor
was transported from Isabela to Metro Manila as early as
Page 85 of 160
April 1984, and the first check was drawn at about the
same time. The freight charges cannot be said to have been
incurred when the tractor engine was delivered back to the
supplier for repairs. The appellants admitted that the
engine was not brought back to Isabela. The repairs were
done at Soledad Cac's gasoline station in Quezon City.
Anent the first assigned error, We sustain the trial court's
finding that at the time of the purchase, the appellants did
not reveal to the appellee the true purpose for which the
tractor would be used. Granting that the appellants
informed the appellee that they would be reselling the unit
to the MWSS, an entity admittedly not engaged in farming,
and that they ordered the tractor without the power tiller,
an indispensable accessory if the tractor would be used in
farming, these in themselves would not constitute the
required implied notice to the appellee as seller.
xxx xxx xxx
In regard to the second assigned error, We do not agree
that the appellee should have been held liable for the
tractor's alleged hidden defects. . . .
It has to be noted in this regard that, to satisfy the
requirements of the MWSS, the appellants borrowed a lawn
mower from the MWSS so they could fabricate one such
mower. The appellants' witness stated that the kind of mid-
mounted lawn mower was being manufactured by their
competitor, Alpha Machinery, which had by then stopped
supplying the same (tsn, Nov. 29, 1988, pp. 73-74). There is
no showing that the appellants had had any previous
experience in the fabrication of this lawn mower. In fact, as
aforesaid, they had to borrow one from the MWSS which
they could copy. But although they made a copy with the
same specifications and design, there was no assurance
that the copy would function as well as with the model.
xxx xxx xxx
Although the trial court discussed it in a different light, We
view the matter in the same way the trial court did — that
the lawn mower as fabricated by the appellants was the
root of the parties' problems.
Having had no previous experience in the manufacture of
lawn mowers of the same type as that in litigation, and in a
possibly patent-infringing effort to undercut their
competition, the appellants gathered enough daring to do
the fabrication themselves. But the product might have
proved too much for the subject tractor to power, and the
tractor's engine was strained beyond its limits, causing it to
overheat and damage its gaskets.
MAYORDO, M.A
No wonder, then, it was a gasket Soledad Cac had to
replace, at a cost chargeable to the appellants. No wonder,
furthermore, the appellants' witness declared that even
after the replacement of that one gasket, the engine still
leaked oil after being torture-tested. The integrity of the
other engine gaskets might have been impaired, too. Such
was the burden placed on the engine. The engine
malfunctioned not necessarily because the engine, as
alleged by the appellants, had been a reconditioned, and
not a brand new, one. It malfunctioned because it was
made to do what it simply could not.2
It was, nevertheless, an error to hold David Ong jointly and
severally liable with TRAMAT to de la Cuesta under the
questioned transaction. Ong had there so acted, not in his
personal capacity, but as an officer of a corporation,
TRAMAT, with a distinct and separate personality. As such, it
should only be the corporation, not the person acting for
and on its behalf, that properly could be made liable
thereon.3
Personal liability of a corporate director, trustee or officer
along (although not necessarily) with the corporation may
so validly attach, as a rule, only when —
1. He assents (a) to a patently unlawful act of the
corporation, or (b) for bad faith, or gross negligence in
directing its affairs, or (c) for conflict of interest, resulting
in damages to the corporation, its stockholders or other
persons;4
2. He consents to the issuance of watered stocks or
who, having knowledge thereof, does not forthwith file
with the corporate secretary his written objection thereto;
5
3. He agrees to hold himself personally and
solidarily liable with the corporation;6 or
4. He is made, by a specific provision of law, to
personally answer for his corporate action.7
In the case at bench, there is no indication that petitioner
David Ong could be held personally accountable under any
of the abovementioned cases.
WHEREFORE, the petition is given DUE COURSE and the
decision of the trial court, affirmed by the appellate court,
is MODIFIED insofar as it holds petitioner David Ong jointly
and severally liable with Tramat Mercantile, Inc., which
CORPORATION LAW CASES
LLB 3
portion of the questioned judgment is SET ASIDE. In all
other respects, the decision appealed from is AFFIRMED. No
costs.
SO ORDERED.
G.R. No. L-5081 February 24, 1954
MARVEL BUILDING CORPORATION, ET AL., plaintiffs-
appellees, vs. SATURNINO DAVID, in his capacity as
Collector, Bureau of Internal Revenue, defendant-
appellant.
LABRADOR, J.:
This action was brought by plaintiffs as stockholders of the
Marvel Building Corporation to enjoin the defendant
Collector of Internal Revenue from selling at public auction
various properties described in the complaint, including
three parcels of land, with the buildings situated thereon,
known as the Aguinaldo Building, the Wise Building, and the
Dewey Boulevard-Padre Faura Mansion, all registered in the
name of the said corporation. Said properties were seized
and distrained by defendant to collect war profits taxes
assessed against plaintiff Maria B. Castro (Exhibit B).
Plaintiffs allege that the said three properties (lands and
buildings) belong to Marvel Building Corporation and not to
Maria B. Castro, while the defendant claims that Maria B.
Castro is the true and sole owner of all the subscribed stock
of the Marvel Building Corporation, including those
appearing to have been subscribed and paid for by the
other members, and consequently said Maria B. Castro is
also the true and exclusive owner of the properties seized.
The trial court held that the evidence, which is mostly
circumstantial, fails to show to its satisfaction that Maria B.
Castro is the true owner of all the stock certificates of the
corporation, because the evidence is susceptible of two
interpretations and an interpretation may not be made
which would deprive one of the property without due
process of law.
It appears that on September 15, 1950, the Secretary of
Finance, upon consideration of the report of a special
committee assigned to study the war profits tax case of
Mrs. Maria B. Castro, recommended the collection of
P3,593,950.78 as war profits taxes for the latter, and on
September 22, 1953 the President instructed the Collector
that steps be taken to collect the same (Exhibits 114, 114-A
to 114-D). Pursuant thereto various properties, including
the three above mentioned, were seized by the Collector of
Internal Revenue on October 31, 1950. On November 13,
1950, the original complaint in this case was filed. After
Page 86 of 160
MAYORDO, M.A
trial, the Court of First Instance of Manila rendered Of the incorporators of the Marvel Building Corporation,
judgment ordering the release of the properties mentioned, Maximo Cristobal and Antonio Cristobal are half-brothers of
and enjoined the Collector of Internal Revenue from selling Maria B. Castro, Maria Cristobal is a half-sister, and Segundo
the same. The Collector of Internal Revenue has appealed Esguerra, Sr. a brother-in-law, husband of Maria Cristobal,
to this Court against the judgment. Maria B. Castro's half-sister. Maximo B. Cristobal did not file
any income tax returns before the year 1946, except for
The following facts are not disputed, or are satisfactorily three years 1939 and 1940, but in these years he was
proved by the evidence: exempted from the tax. He has not filed any war profits tax
return (Exhibit 54). Antonio Cristobal, Segundo Esguerra, Sr.
The Articles of Incorporation of the Marvel Building and Jose T. Lopez did not file any income tax returns for
Corporation is dated February 12, 1947 and according to it the years prior to 1946, and neither did they file any war
the capital stock is P2,000,000, of which P1,025,000 was profits tax returns (Exhibit 52). Maria Cristobal filed income
(at the time of incorporation) subscribed and paid for by tax returns for the year 1929 to 1942, but they were
the following incorporators: exempt from the tax (Exhibit 53). Benita A. Lamagna did
not file any income tax returns prior to 1945, except for
1942 which was exempt. She did not file any was profits tax
Maria B. Castro 250 shares P 250,000.00
(Exhibit 55). Ramon M. Sangalang did not file income tax
Amado A. Yatco 100       " 100,000.00 returns up to 1945 except for the years 1936, 1937, 1938,
1939 and 1940. He has not filed any war profits tax return
Santiago Tan 100       " 100,000.00 (Exhibit 57). Amada A. Yatco did not file income tax returns
prior to 1945, except for the years 1937, 1938, 1939, 1941
Jose T. Lopez   90       " 90,000.00 and 1942, but these were exempt. He did not file any war
profits tax return (Exhibit 58).
Benita Lamagna   90       " 90,000.00
C.S. Gonzales   80       " 80,000.00 Antonio Cristobal's income in 1946 is P15,630, and in 1947,
P4,550 (Exhibits 59-60); Maximo B. Cristobal's income in
Maria Cristobal   70       " 70,000.00 1946 is P19,759.10, in 1947, P9,773.47 (Exhibits 61-62);
Segundo Esquerra's income in 1946 is P5,500, in 1947,
Segundo Esguerra, Sr.   75       " 75,000.00 P7,754.32 (Exhibits 63-64); Jose T. Lopez's income in 1946 is
P20,785, in 1947, P14,302.77 (Exhibits 69-70); Benita A.
Ramon Sangalang   70       " 70,000.00
Lamagna's income in 1945 is P1,559, in 1946, P6,463.36, in
Maximo Cristobal   55       " 55,000.00 1947, P6,189.79 and her husband's income in 1947 is
P10,825.53 (Exhibits 65-68); Ramon M. Sangalang's income
Antonio Cristobal   45       "       45,000.00 in 1945 is P5,500, in 1946, P18,300.00 (Exhibits 71-72);
Santiago Tan's income in 1945 is P456, in 1947 is P9,167.95,
P1,025,000.00 and in 1947, P7,620.11 (Exhibits 73-75); and Amado Yatco's
income in 1945 is P12,600, in 1946, P23,960, and in 1947,
Maria B Castro was elected President and Maximo Cristobal, P11,160 (Exhibits 76-78).
Secretary-Treasurer (Exhibit A).
In October, 1945 Maria B. Castro, NicasioYatco, Maxima
The Wise Building was purchased on September 4, 1946, Cristobal de Esquerra, Maria Cristobal Lopez and Maximo
the purchase being made in the name of Dolores Trinidad, Cristobal organized the Maria B. Castro, Inc. with capital
wife of Amado A. Yatco (Exhibit V), and the Aguinaldo stock of P100,000, of which Maria B. Castro subscribed for
Building, on January 17, 1947, in the name of Segundo P99,600 and all others for P100 each. This was increased in
Esguerra, Sr. (Exhibit M). Both building were purchased for 1950 to P500,000 and Maria B. Castro subscribed P76,000
P1,800,000, but as the corporation had only P1,025,000, and the others P1,000 each (Exhibit 126).
the balance of the purchase price was obtained as loans
from the Insular Life Assurance Co., Ltd. and the Philippine It does not appear that the stockholders or the board of
Guaranty Co., Inc. (Exhibit C). directors of the Marvel Building Corporation have ever held
a business meeting, for no books thereof or minutes
meeting were ever mentioned by the officers thereof or
CORPORATION LAW CASES
LLB 3
presented by them at the trial. The by-laws of the
corporation, if any had ever been approved, has not been
presented. Neither does it appear that any report of the
affairs of the corporation has been made, either of its
transactions or accounts.
From the book of accounts of the corporation, advances to
the Marvel Building Corporation of P125,000 were made by
Maria B. Castro in 1947, P102,916.05 in 1948 and
P102,916.05 in 1948, and P160,910.96 in 1949 (Exhibit 118).
The main issue involved in these proceedings is: Is Maria B.
Castro the owner of all the shares of stocks of Marvel
Building Corporation and the other stockholders mere
dummies of hers?
The most important evidence presented by the Collector of
Internal Revenue to prove his claim that Maria B. Castro is
the sole and exclusive owner of the shares of stock of the
Marvel Building Corporation is supposed endorsement in
blank of the shares of stock issued in the name of the other
incorporators, and the possession thereof by Maria B.
Castro. The existence of said endorsed certificates was
testified to by witnesses Felipe Aquino, internal revenue
examiner, Antonio Mariano, examiner, and Crispin Llamado,
Under Secretary of Finance, who declared as follows:
Towards the end of the year 1948 and about the beginning
of the year 1949, while Aquino and Mariano were examining
the books and papers were furnished by its secretary,
Maximo Cristobal, they came across an envelope containing
eleven stock certificates, bound together by an Acco
fastener, which (certificates) corresponded in number and
in amount on their face to the subscriptions of the
stockholders that all the certificates, except that in the
name of Maria B. Castro, were endorsed in the bank by the
subscribers; that as the two revenue agents could not agree
what to do with the certificates, Aquino brought them to
Under-Secretary of Finance Llamado, who thereupon
suggested that photostatic copies thereof be taken; that
this was done, and the photostatic copies taken are
(Exhibits 4, 5, 6, 7, 8, 9, 10, 11, 12 and 13; and in that
July, 1950, copy-cat copies of the above photostats were
taken, and said copy-cat copies are Exhibits 40-49.
Julio Llamado, bookkeeper of the Marvel Building
Corporation from 1947 to May, 1948, also testified that he
was the one who had prepared the original certificates,
putting therein the number of shares in words in handprint;
that the originals were given to him by Maria B. Castro for
comparison with the articles of incorporation; that they
were not yet signed by the President and by the Secretary-
Page 87 of 160
Treasurer when he had the certificates; and that after the
checking he returned all of them to Mrs. Castro. He
recognized the photostats, Exhibit 4 to 13 as photostats of
the said originals. He also declared that he also prepared a
set of stock certificates, similar to the certificates which
were copied in the photostats, the number of shares, and
the date issue, and that the certificates he had prepared
are Exhibits H, H-1 to H-7 and J (Exhibits 30-38). This set of
certificates was made by him first and the set of which
photostats were taken, a few days later.
The plaintiffs offered a half-hearted denial of the existence
of the endorsed blank certificates, Maximo Cristobal,
secretary of the corporation, saying that no investigation
was ever made by Aquino and Mariano in which said
certificates were discovered by the latter. They, however,
vigorously attack the credibility of the witnesses for the
defendant, imputing to the Llamados, enmity against Maria
B. Castro, and to Aquino and Mariano, a very doubtful
conduct in not divulging the existence of the certificates
either Lobrin, Chief Income Tax Examiner, or to the
Collector of Internal Revenue, both their immediate chiefs.
Reliance is also placed on a certificate, Exhibit W, wherein
Aquino and others declare that the certificates (Exhibits 30
to 38, or H, H-1 to H-7 and J) were regular and were not
endorsed when the same were examined. In connection
with this certificate, Exhibit W, we note that it states that
the certificates examined were Exhibits 30 to 38, the
existence or character of which are not disputed. But the
statement contains nothing to the effect that the above
certificates were the only one existence, according to their
knowledge. Again the certificate was issued for an
examination on September 1949, not by Aquino and Mariano
at the end of 1948 or the beginning of 1949. The
certificate, therefore, neither denies the existence of the
endorsed certificates, nor that Aquino and Mariano had
made an examination of the papers of the corporation at
the end of the year 1948. It ca not, therefore, discredit the
testimonies of the defendant's witnesses.
As to the supposed enmity of the Llamados towards the
plaintiff Maria B. Castro, we note that, supposing that
there really was such enmity, it does not appear that it was
of such magnitude or force as could have induced the
Llamados and Maria B. Castro were close friends way back
in 1947 and up to 1949; but that at the time of the trial the
friendship had been marred by misunderstandings. We
believe that in 1948 and 1949 the Llamados were trusted
friends of Maria B. Castro, and this explains why they had
knowledge of her secret transactions. The younger Llamado
even made advances for the hand of Maria B. Castro's
MAYORDO, M.A
daughter, and this at the time when as a bookkeeper he
was entrusted with checking up the certificates of stock.
When the older Llamado kept secret the existence of the
endorsed certificates, the friendship between the two
families was yet intact; hence, the existence of the
endorsed certificates must have been kept to himself by
the older Llamado. All the above circumstances reinforce
our belief that the Llamados had personal knowledge of the
facts they testify to, and the existence of this knowledge in
turn renders improbable plaintiffs' claim that their
testimonies were biased.
Attempt was also made by the plaintiffs to show by expert
evidence that the endorsement could have been
superimposed, i.e., that the signatures made on other
papers and these were pasted and thereafter the
documents photographed. Judicial experience is to the
effect that the expert witnesses can always be obtained for
both sides of an issue, most likely because expert witnesses
are no longer impermeable to the influence of fees (II
Wigmore, Sec. 563(2), p. 646). And if parties are capable of
paying fees, expert opinion should be received with
caution. In the case at bar, the opinion on the supposed
superimposition was merely a possibility, and we note
various circumstances which proved that the signatures
were not superimposed and corroborate defendant's claim
that they were genuine. In the first place,, the printed
endorsement contains a very heavy line at the bottom for
the signature of the endorsee. This line in almost all the
endorsements is as clear as the printed letters above it,
and at the points where the letters of the signature extend
down and transversed it (the line), there is no indication
that the line is covered by a superimposed paper. Again in
these places both the signatures and the lines are clear and
distinct where they cross one another. Had there been
superimpositions the above features could not have been
possible. In the second place, Maria B. Castro admitted
having signed 25 stock certificates, but only eleven were
issued (t. s. n., p. 662). No explanation is given by her why
she had to sign as many as 25 forms when there were only
eleven subscribers and eleven forms to be filed. This
circumstances corroborate the young Llamado's declaration
that two sets of certificates had been prepared. The
nineteen issue must be Exhibits H, H-1 to H-7 and J, or Nos.
30 to 38, and the stock certificates endorsed whose
photostatic copies are Exhibits 4 to 13. It is to be
remembered also, that it is a common practice among
unscrupulous merchants to carry two sets of books, one set
for themselves and another to be shown to tax collectors.
This practice could not have been unknown to Maria B.
Castro, who apparently had been able to evade the
CORPORATION LAW CASES
LLB 3
payment of her war profits taxes. These circumstances,
coupled with the testimony of Julio Llamado that two sets
of certificates were given to him for checking, show to an
impartial mind the existence of the set of certificates
endorsed in blank, thus confirming the testimonies of the
defendant's witnesses, Aquino, Mariano and Crispin
Llamado, and thus discrediting the obviously partial
testimony of the expert presented by plaintiffs. The
genuineness of the signatures on the endorsements is not
disputed. How could the defendant have secured these
genuine signatures? Plaintiffs offer no explanation for this,
although they do not question them. It follows that the
genuine signatures must have been made on the stock
certificates themselves.
Next in importance among the evidence submitted by the
defendant collector to prove his contention that Maria B.
Castro is the sole owner of the shares of stock of the Marvel
Building Corporation, is the fact that the other stockholders
did not have incomes in such amounts, during the time of
the organization of the corporation in 1947, or immediately
thereto, as to enable them to pay in full for their supposed
subscriptions. This fact is proved by their income tax
returns, or the absence thereof. Let us take Amado A. Yatco
as an example. Before 1945 his returns were exempt from
the tax, in 1945 he had P12,600 and in 1946, P23,000. He
has four children. How could he have paid P100,000 in 1945
and 1946? Santiago Tan who also contributed P100,000 had
no appreciable income before 1946, and this year an
income of only P9,167.95. Jose T. Lopez also did not file
any income tax returns before 1940 and 1946 he had an
income of only P20,785, whereas he is supposed to have
subscribed P90,000 worth of stock early in 1947. Benita
Lamagna had no returns either up to 1945, except in 1942,
which was exempt and in 1945 she had an income of P1,550
and in 1946, P6,463.36. In the same situation are all the
others, and besides, brothers and sisters and brother-in-law
of Maria B. Castro. On the other hand, Maria B. Castro had
been found to have made enormous gains or profits in her
business such that the taxes thereon were assessed at
around P3,000,000. There was, therefore, a prima facie
case out by the defendant collector that Maria B. Castro
had furnished (& all the money that the Marvel Building
Corporation had.
In order the meet the above evidence only three of the
plaintiffs testified, namely, Maximo Cristobal, the
corporation's secretary, who made the general assertion on
the witness stand that the other stockholders paid for their
shares in full, Maria B. Castro, who stated that payments
for the subscription were made to her, and C.S. Gonzales,
Page 88 of 160
who admitted that Maria B. Castro, paid for his
subscription. After a careful study of the above
testimonies, however, we find them subject to various
objections. Maximo Cristobal declared that he issued
provincial receipts for the subscriptions supposedly paid to
him in 1946; but none of the supposed receipts were
presented. If the subscriptions were really received by him,
big as the amounts were, he would have been able to tell
specifically, by dates and in fix amounts, when and how the
payments were made. The general assertion of alleged
payments, without the concrete days and amounts of
payments, are, according to our experience, positive
identifications of untruthfulness, for when a witness
testified to a fact that actually occurs, the act is concretely
stated and no generalization is made.
With respect to Maria B. Castro's testimony, we find it to be
as untruthful as that of Cristobal. She declared that
payments of the subscriptions took place between July and
December, 1946, and that first payments were first
deposited by her in the National City Bank of New York. A
study of her account in said bank (Exhibit 82), however,
fails to show the alleged deposit of the subscriptions during
the year 1946 (See Exhibits 83-112). This fact completely
belies her assertion. As to the testimony of C.S. Gonzales
that Maria B. Castro advanced his subscription, there is
nothing in the evidence to corroborate it, and the
circumstances show otherwise. If he had really been a
stockholder and Maria B. Castro advanced his subscription,
the agreement between him and Castro should have been
put in writing, the amount advanced being quite
considerable (P80,000), and it appearing further that
Gonzales is no close relative or confidant of Castro.
Lastly, it is significant that the plaintiffs, the supposed
subscribers, who should have come to court to assert that
they actually paid for their subscriptions, and are not mere
dummies, did not do so. They could not have afforded such
a costly indifference, valued at from P70,000 to P100,000
each, if they were not actual dummies. This failure on their
part to take the witness stand to deny or refute the charge
that they were mere dummies is to us of utmost
significance. What could have been easier to disprove the
charge that they were dummies, than for them to come to
court and show their receipts and testify on the payments
they have paid on their subscriptions? This they, however
refused to do so. They had it in their power to rebut the
charges, but they chose to keep silent. The non-production
of evidence that would naturally have been produced by an
honest and therefore fearless claimant permits the
inference that its tenor is unfavorable to the party's cause
MAYORDO, M.A
(II Wigmore, Sec. 285, p.162). A party's silence to adverse
testimony is equivalent to an admission of its truth (Ibid,
Sec. 289, p. 175).
Our consideration of the evidence submitted on both sides
leads us to a conclusion exactly opposite that arrived at by
the trial court. In general the evidence offered by the
plaintiffs is testimonial and direct evidence, easy of
fabrication; that offered by defendant, documentary and
circumstantial, not only difficult of fabrication but in most
cases found in the possession of plaintiffs. There is very
little room for choice as between the two. The
circumstantial evidence is not only convincing; it is
conclusive. The existence of endorsed certificates,
discovered by the internal revenue agents between 1948
and 1949 in the possession of the Secretary-Treasurer, the
fact that twenty-five certificates were signed by the
president of the corporation, for no justifiable reason, the
fact that two sets of certificates were issued, the
undisputed fact that Maria B. Castro had made enormous
profits and, therefore, had a motive to hide them to evade
the payment of taxes, the fact that the other subscribers
had no incomes of sufficient magnitude to justify their big
subscriptions, the fact that the subscriptions were not
receipted for and deposited by the treasurer in the name of
the corporation but were kept by Maria B. Castro herself,
the fact that the stockholders or the directors never
appeared to have ever met to discuss the business of the
corporation, the fact that Maria B. Castro advanced big
sums of money to the corporation without any previous
arrangement or accounting, and the fact that the books of
accounts were kept as if they belonged to Maria B. Castro
alone — these facts are of patent and potent significance.
What are their necessary implications? Maria B. Castro
would not have asked them to endorse their stock
certificates, or be keeping these in her possession, if they
were really the owners. They never would have consented
that Maria B. Castro keep the funds without receipts or
accounting, nor that she manages the business without
their knowledge or concurrence, were they owners of the
stocks in their own rights. Each and every one of the facts
all set forth above, in the same manner, is inconsistent with
the claim that the stockholders, other than Maria B. Castro,
own their shares in their own right. On the other hand,
each and every one of them, and all of them, can point to
no other conclusion than that Maria B. Castro was the sole
and exclusive owner of the shares and that they were only
her dummies.
In our opinion, the facts and circumstances duly set forth
above, all of which have been proved to our satisfaction,
CORPORATION LAW CASES
LLB 3
prove conclusively and beyond reasonable doubt (section
89, Rule 123 of the Rules of Court and section 42 of the
Provisional law for the application of the Penal Code) that
Maria B. Castro is the sole and exclusive owner of all the
shares of stock of the Marvel Building Corporation and that
the other partners are her dummies.
Wherefore, the judgment appealed from should be, as it
hereby is, reversed and the action filed by plaintiffs-
appellees, dismissed, with costs against plaintiffs-
appellees. So ordered.
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.
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
Page 89 of 160
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 IsabeloCalingasan 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".
MAYORDO, M.A
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:
CORPORATION LAW CASES
LLB 3
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 IsabeloCalingasan its president and
general manager, to evade his subsidiary civil liability.
The Court agrees with this contention of the plaintiffs.
IsabeloCalingasan and defendant Fely Transportation may
be regarded as one and the same person. It is evident that
IsabeloCalingasan's main purpose in forming the corporation
was to evade his subsidiary civil liability1 resulting from the
conviction of his driver, Alfredo Carillo. This conclusion is
borne out by the fact that the incorporators of the Fely
Transportation are IsabeloCalingasan, 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 mgaManggagawa, 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.
Page 90 of 160
And while it is true that IsabeloCalingasan 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
IsabeloCalingasan are ordered to pay, jointly and severally,
the plaintiffs the amount of P500.00 and the costs.
G.R. No. L-20886 April 27, 1967
NATIONAL MARKETING CORPORATION (NAMARCO),
plaintiff-appellant, vs. ASSOCIATED FINANCE COMPANY,
INC., and FRANCISCO SYCIP, defendants.
FRANCISCO SYCIP, defendant-appellee.
DIZON, J.:
Appeal by the National Marketing Corporation — hereinafter
referred to as NAMARCO, from the decision of the Court of
First Instance of Manila in Civil Case No. 45770 ordering the
Associated Finance Company, Inc. — hereinafter referred to
as the ASSOCIATED — to pay the NAMARCO the sum of
MAYORDO, M.A
P403,514.28, with legal interest thereon from the date of
filing of the action until fully paid, P80,702.26 as liquidated
damages, P5,000.00 as attorney's fees, plus costs, but
dismissing the complaint insofar as defendant Francisco
Sycip was concerned, as well as the latter's counterclaim.
The appeal is only from that portion of the decision
dismissing the case as against Francisco Sycip.
On March 25, 1958, ASSOCIATED, a domestic corporation,
through its President, appellee Francisco Sycip, entered
into an agreement to exchange sugar with NAMARCO,
represented by its then General Manager, Benjamin
Estrella, whereby the former would deliver to the latter
22,516 bags (each weighing 100 pounds) of "Victorias" and/
or "National" refined sugar in exchange for 7,732.71 bags of
"Busilak" and 17,285.08 piculs of "Pasumil" raw sugar
belonging to NAMARCO, both agreeing to pay liquidated
damages equivalent to 20% of the contractual value of the
sugar should either party fail to comply with the terms and
conditions stipulated (Exhibit A). Pursuant thereto, on May
19,1958, NAMARCO delivered to ASSOCIATED 7,732.71 bars
of "Busilak" and 17,285.08 piculs of "Pasumil" domestic raw
sugar. As ASSOCIATED failed to deliver to NAMARCO the
22,516 bags of "Victoria" and/or "National" refined sugar
agreed upon, the latter, on January 12, 1959, demanded in
writing from the ASSOCIATED either (a) immediate delivery
thereof before January 20, or (b) payment of its equivalent
cash value amounting to P372,639.80.
On January 19, 1959, ASSOCIATED, through Sycip, offered to
pay NAMARCO the value of 22,516 bags of refined sugar at
the rate of P15.30 per bag, but the latter rejected the
offer. Instead, on January 21 of the same year it demanded
payment of the 7,732.71 bags of "Busilak" raw sugar at
P15.30 per bag, amounting to P118,310.40. and of the
17,285.08 piculs of "Pasumil" raw sugar at P16.50 per picul,
amounting, to P285.203.82, or a total price of P403,514.28
for both kinds of sugar, based on the sugar quotations (Exh.
H) as of March 20, 1958 — the date when the exchange
agreement was entered into.
As ASSOCIATED refused to deliver the raw sugar or pay for
the refined sugar delivered to it, inspite of repeated
demands therefore, NAMARCO instituted the present action
in the lower court to recover the sum of P403,514.28 in
payment of the raw sugar received by defendants from it;
P80,702.86 as liquidated damages; P10,000.00 as attorney's
fees, expenses of litigation and exemplary damages, with
legal interest thereon from the filing of the complaint until
fully paid.
CORPORATION LAW CASES
LLB 3
In their amended answer defendants, by way of affirmative
defenses, alleged that the correct value of the sugar
delivered by NAMARCO to them was P259,451.09 or P13.30
per bag of 100 lbs. weight (quedan basis) and not
P403,514.38 as claimed by NAMARCO. As counterclaim they
prayed for the award of P500,000.00 as moral damages,
P100,000.00 as exemplary damages and P10,000.00 as
attorney's fees.
After due trial court rendered the appealed judgment. The
appeal was taken to the Court of Appeals, but on January
15, 1963 the latter certified the case to us for final
adjudication pursuant to sections 17 and 31 of the Judiciary
Act of 1948, as amended, the amount involved being more
than P200,000.00, exclusive of interests and cost.
The only issue to be resolved is whether, upon the facts
found by the trial court, — which, in our opinion, are fully
supported by the evidence — Francisco Sycip may be held
liable, jointly and severally with his co-defendant, for the
sums of money adjudged in favor of NAMARCO.
The evidence of record shows that, of the capital stock of
ASSOCIATED, Sycip owned P60,000.00 worth of shares,
while his wife — the second biggest stockholder — owned
P20,000.00 worth of shares; that the par value of the
subscribed capital stock of ASSOCIATED was only
P105,000.00; that negotiations that lead to the execution
of the exchange agreement in question were conducted
exclusively by Sycip on behalf of ASSOCIATED; that, as a
matter of fact, in the course of his testimony, Sycip
referred to himself as the one who contracted or
transacted the business in his personal capacity, and
asserted that the exchange agreement was his personal
contract; that it was Sycip who made personal
representations and gave assurances that ASSOCIATED was
in actual possession of the 22,516 bags of "Victorias" and/or
"National" refined sugar which the latter had agreed to
deliver to NAMARCO, and that the same was ready for
delivery; that, as a matter of fact, ASSOCIATED was at that
time already insolvent; that when NAMARCO made demands
upon ASSOCIATED to deliver the 22,516 bags of refined
sugar it was under obligation to deliver to the former,
ASSOCIATED and Sycip, instead of making delivery of the
sugar, offered to pay its value at the rate of P15.30 per bag
— a clear indication that they did not have the sugar
contracted for.1äwphï1.ñët
The foregoing facts, fully established by the evidence, can
lead to no other conclusion than that Sycip was guilty of
fraud because through false representations he succeeded
Page 91 of 160
in inducing NAMARCO to enter into the aforesaid exchange
agreement, with full knowledge, on his part, on the fact
that ASSOCIATED whom he represented and over whose
business and affairs he had absolute control, was in no
position to comply with the obligation it had assumed.
Consequently, he can not now seek refuge behind the
general principle that a corporation has a personality
distinct and separate from that of its stockholders and that
the latter are not personally liable for the corporate
obligations. To the contrary, upon the proven facts, We feel
perfectly justified in "piercing the veil of corporate fiction"
and in holding Sycip personally liable, jointly and severally
with his co-defendant, for the sums of money adjudged in
favor of appellant. It is settled law in this and other
jurisdictions that when the corporation is the mere alter
ego of a person, the corporate fiction may be disregarded;
the same being true when the corporation is controlled,
and its affairs are so conducted as to make it merely an
instrumentality, agency or conduit of another (Koppel
Phils., etc. vs. Yatco, etc., 43 O.G. No. 11. Nov. 1947;
Yutivo Sons, etc. vs. Court of Tax Appeals, etc., G.R. No.
L-13203, promulgated on January 28, 1961).
Wherefore, the decision appealed from is modified by
sentencing defendant-appellee Francisco Sycip to pay,
jointly and severally with the Associated Finance Company,
Inc., the sum of money which the trial court sentenced the
latter to pay to the National Marketing Corporation, as
follows: the sum of FOUR HUNDRED THREE THOUSAND FIVE
HUNDRED FOURTEEN PESOS, and TWENTY-EIGHT CENTAVOS
P403,514.28), with interest at the legal rate from the date
of the filing of the action until fully paid plus an additional
amount of EIGHTY THOUSAND SEVEN HUNDRED TWO PESOS
and EIGHTY-SIX CENTAVOS (P80,702.86) as liquidated
damages and P5,000.00 as attorney's fees and further to
pay the costs. With costs.
G.R. No. L-41337 June 30, 1988
TAN BOON BEE & CO., INC., petitioner, vs. THE
HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE
OF BRANCH XVIII of the Court of First Instance of Manila,
GRAPHIC PUBLISHING, INC., and PHILIPPINE AMERICAN
CAN DRUG COMPANY, respondents.
PARAS, J.:
This is a petition for certiorari, with prayer for preliminary
injunction, to annul and set aside the March 26, 1975 Order
of the then Court of First Instance of Manila, Branch XXIII,
setting aside the sale of "Heidelberg" cylinder press
MAYORDO, M.A
executed by the sheriff in favor of the herein petitioner, as
well as the levy on the said property, and ordering the
sheriff to return the said machinery to its owner, herein
private respondent Philippine American Drug Company.
Petitioner herein, doing business under the name and style
of Anchor Supply Co., sold on credit to herein private
respondent Graphic Publishing, Inc. (GRAPHIC for short)
paper products amounting to P55,214.73. On December 20,
1972, GRAPHIC made partial payment by check to
petitioner in the total amount of P24,848.74; and on
December 21, 1972, a promissory note was executed to
cover the balance of P30,365.99. In the said promissory
note, it was stipulated that the amount will be paid on
monthly installments and that failure to pay any
installment would make the amount immediately
demandable with an interest of 12% per annum. On
September 6, 1973, for failure of GRAPHIC to pay any
installment, petitioner filed with the then Court of First
Instance of Manila, Branch XXIII, presided over by herein
respondent judge, Civil Case No. 91857 for a Sum of Money
(Rollo, pp. 36-38). Respondent judge declared GRAPHIC in
default for failure to file its answer within the
reglementary period and plaintiff (petitioner herein) was
allowed to present its evidence ex parte. In a Decision
dated January 18, 1974 (Ibid., pp. 39-40), the trial court
ordered GRAPHIC to pay the petitioner the sum of
P30,365.99 with 12% interest from March 30, 1973 until
fully paid, plus the costs of suit. On motion of petitioner, a
writ of execution was issued by respondent judge; but the
aforestated writ having expired without the sheriff finding
any property of GRAPHIC, an alias writ of execution was
issued on July 2, 1974.
Pursuant to the said issued alias writ of execution, the
executing sheriff levied upon one (1) unit printing machine
Identified as "Original Heidelberg Cylinder Press" Type H
222, NR 78048, found in the premises of GRAPHIC. In a
Notice of Sale of Execution of Personal Property dated July
29, 1974, said printing machine was scheduled for auction
sale on July 26, 1974 at 10:00 o'clock at 14th St., Cor.
Atlanta St., Port Area, Manila (lbid., p. 45); but in a letter
dated July 19, 1974, herein private respondent, Philippine
American Drug Company (PADCO for short) had informed
the sheriff that the printing machine is its property and not
that of GRAPHIC, and accordingly, advised the sheriff to
cease and desist from carrying out the scheduled auction
sale on July 26, 1974. Notwithstanding the said letter, the
sheriff proceeded with the scheduled auction sale, sold the
property to the petitioner, it being the highest bidder, and
issued a Certificate of Sale in favor of petitioner (Rollo, p.
48). More than five (5) hours after the auction sale and the
CORPORATION LAW CASES
LLB 3
issuance of the certificate of sale, PADCO filed an "Affidavit
of Third Party Claim" with the Office of the City Sheriff
(Ibid., p. 47). Thereafter, on July 30,1974, PADCO filed with
the Court of First Instance of Manila, Branch XXIII, a Motion
to Nullify Sale on Execution (With Injunction) (Ibid., pp,
49-55), which was opposed by the petitioner (Ibid., pp.
5668). Respondent judge, in an Order dated March 26, 1975
(Ibid., pp. 64-69), ruled in favor of PADCO. The decretal
portion of the said order, reads:
WHEREFORE, the sale of the 'Heidelberg cylinder press
executed by the Sheriff in favor of the plaintiff as well as
the levy on the said property is hereby set aside and
declared to be without any force and effect. The Sheriff is
ordered to return the said machinery to its owner, the
Philippine American Drug Co.
Petitioner filed a Motion For Reconsideration (Ibid., pp.
7093) and an Addendum to Motion for Reconsideration
(Ibid., pp. 94-08), but in an Order dated August 13, 1975,
the same was denied for lack of merit (Ibid., p. 109).
Hence, the instant petition.
In a Resolution dated September 12, 1975, the Second
Division of this Court resolved to require the respondents to
comment, and to issue a temporary restraining order
(Rollo, p. 111 ). After submission of the parties'
Memoranda, the case was submitted for decision in the
Resolution of November 28, 1975 (Ibid., p. 275).
Petitioner, to support its stand, raised two (2) issues, to
wit:
I instead of facilitate the prompt dispatch of the controversy
THE RESPONDENT JUDGE GRAVELY EXCEEDED, IF NOT ACTED
WITHOUT JURISDICTION WHEN HE ACTED UPON THE MOTION
OF PADCO, NOT ONLY BECAUSE SECTION 17, RULE 39 OF THE
RULES OF COURT WAS NOT COMPLIED WITH, BUT ALSO
BECAUSE THE CLAIMS OF PADCO WHICH WAS NOT A PARTY
TO THE CASE COULD NOT BE VENTILATED IN THE CASE
BEFORE HIM BUT IN INDEPENDENT PROCEEDING.
II
THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION
WHEN HE REFUSED TO PIERCE THE PADCO'S (IDENTITY) AND
DESPITE THE ABUNDANCE OF EVIDENCE CLEARLY SHOWING
THAT PADCO WAS CONVENIENTLY SHIELDING UNDER THE
THEORY OF CORPORATE PETITION.
Page 92 of 160
Petitioner contends that respondent judge gravely
exceeded, if not, acted without jurisdiction, in nullifying
the sheriffs sale not only because Section 17, Rule 39 of the
Rules of Court was not complied with, but more
importantly because PADCO could not have litigated its
claim in the same case, but in an independent civil
proceeding.
This contention is well-taken.
In the case of Bayer Philippines, Inc. vs. Agana (63 SCRA
355, 366-367 [1975]), this Court categorically ruled as
follows:
In other words, constitution, Section 17 of Rule 39 of the
Revised Rules of Court, the rights of third-party claimants
over certain properties levied upon by the sheriff to satisfy
the judgment should not be decided inthe action where the
third-party claims have been presented, but in the separate
action instituted by the claimants.
... Otherwise stated, the court issuing a writ of execution is
supposed to enforce the authority only over properties of
the judgment debtor, and should a third party appeal- to
claim the property levied upon by the sheriff, the
procedure laid down by the Rules is that such claim should
be the subject of a separate and independent action.
xxx xxx xxx
... This rule is dictated by reasons of convenience, as
"intervention is more likely to inject confusion into the
issues between the parties in the case . . . with which the
third-party claimant has nothing to do and thereby retard
which is the underlying objective of the rules of pleading
and practice." Besides, intervention may not be permitted
after trial has been concluded and a final judgment
rendered in the case.
However, the fact that petitioner questioned the
jurisdiction of the court during the initial hearing of the
case but nevertheless actively participated in the trial, bars
it from questioning now the court's jurisdiction. A party who
voluntarily participated in the trial, like the herein
petitioner, cannot later on raise the issue of the court's lack
of jurisdiction (Philippine National Bank vs. Intermediate
Appellate Court, 143 SCRA [1986]).
As to the second issue (the non-piercing of PADCO's
corporate Identity) the decision of respondent judge is as
follows:
MAYORDO, M.A
The plaintiff, however, contends that the controlling
stockholders of the Philippine American Drug Co. are also
the same controlling stockholders of the Graphic
Publishing, Inc. and, therefore, the levy upon the said
machinery which was found in the premises occupied by
the Graphic Publishing, Inc. should be upheld. This
contention cannot be sustained because the two
corporations were duly incorporated under the Corporation
Law and each of them has a juridical personality distinct
and separate from the other and the properties of one
cannot be levied upon to satisfy the obligation of the other.
This legal preposition is elementary and fundamental.
It is true that a corporation, upon coming into being, is
invested by law with a personality separate and distinct
from that of the persons composing it as well as from any
other legal entity to which it may be related (Yutivo& Sons
Hardware Company vs. Court of Tax Appeals, 1 SCRA 160
[1961]; and Emilio Cano Enterprises, Inc. vs. CIR, 13 SCRA
290 [1965]). As a matter of fact, the doctrine that a
corporation is a legal entity distinct and separate from the
members and stockholders who compose it is recognized
and respected in all cases which are within reason and the
law (Villa Rey Transit, Inc. vs. Ferrer, 25 SCRA 845 [1968]).
However, this separate and distinct personality is merely a
fiction created by law for convenience and to promote
justice (Laguna Transportation Company vs. SSS, 107 Phil.
833 [1960]). 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 fraud or 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 [1976]). 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 (Chenplex Philippines, Inc., et al. vs.
Hon. Pamatian et al., 57 SCRA 408 (19741). Likewise, this is
true when the corporation is merely an adjunct, business
conduit or alter ego of another corporation. In such case,
the fiction of separate and distinct corporation entities
should be disregarded (Commissioner of Internal Revenue
vs. Norton & Harrison, 11 SCRA 714 [1964]).
In the instant case, petitioner's evidence established that
PADCO was never engaged in the printing business; that the
board of directors and the officers of GRAPHIC and PADCO
were the same; and that PADCO holds 50% share of stock of
GRAPHIC. Petitioner likewise stressed that PADCO's own
evidence shows that the printing machine in question had
CORPORATION LAW CASES
LLB 3
been in the premises of GRAPHIC since May, 1965, long
before PADCO even acquired its alleged title on July 11,
1966 from Capitol Publishing. That the said machine was
allegedly leased by PADCO to GRAPHIC on January 24, 1966,
even before PADCO purchased it from Capital Publishing on
July 11, 1966, only serves to show that PADCO's claim of
ownership over the printing machine is not only farce and
sham but also unbelievable.
Considering the aforestated principles and the
circumstances established in this case, respondent judge
should have pierced PADCO's veil of corporate Identity.
Respondent PADCO argues that if respondent judge erred in
not piercing the veil of its corporate fiction, the error is
merely an error of judgment and not an error of
jurisdiction correctable by appeal and not by certiorari.
To this argument of respondent, suffice it to say that the
same is a mere technicality. In the case of Rubio vs.
Mariano (52 SCRA 338, 343 [1973]), this Court ruled:
While We recognize the fact that these movants — the
MBTC, the Phillips spouses, the Phillips corporation and the
Hacienda Benito, Inc.— did raise in their respective answers
the issue as to the propriety of the instant petition for
certiorari on the ground that the remedy should have been
appeal within the reglementary period, We considered such
issue as a mere technicality which would have
accomplished nothing substantial except to deny to the
petitioner the right to litigate the matters he raised ...
Litigations should, as much as possible, be decided on their
merits and not on technicality (De las Alas vs. Court of
Appeals, 83 SCRA 200, 216 [1978]). Every party-litigant
must be afforded the amplest opportunity for the proper
and just determination of his cause, free from the
unacceptable plea of technicalities (Heirs of Ceferino
Morales vs. Court of Appeals, 67 SCRA 304, 310 [1975]).
PREMISES CONSIDERED, the March 26,1975 Order of the
then Court of First Instance of Manila, is ANNULLED and SET
ASIDE, and the Temporary Restraining Order issued is
hereby made permanent.
SO ORDERED.
G.R. No. 58168 December 19, 1989
CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD
MAGSAYSAY-CABRERA, LUISA MAGSAYSAY-CORPUZ,
assisted be her husband, Dr. Jose Corpuz, FELICIDAD P.
Page 93 of 160
MAGSAYSAY, and MERCEDES MAGSAYSAY-DIAZ, petitioners,
vs. THE COURT OF APPEALS and ADELAIDA RODRIGUEZ-
MAGSAYSAY, Special Administratrix of the Estate of the
late Genaro F. Magsaysay respondents.
FERNAN, C.J.:
In this petition for review on certiorari, petitioners seek to
reverse and set aside [1] the decision of the Court of
Appeals dated July l3, 1981, 1 affirming that of the Court
of First Instance of Zambales and Olongapo City which
denied petitioners' motion to intervene in an annulment
suit filed by herein private respondent, and [2] its
resolution dated September 7, 1981, denying their motion
for reconsideration.
Petitioners are raising a purely legal question; whether or
not respondent Court of Appeals correctly denied their
motion for intervention.
The facts are not controverted.
On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow
and special administratix of the estate of the late Senator
Genaro Magsaysay, brought before the then Court of First
Instance of Olongapo an action against Artemio Panganiban,
Subic Land Corporation (SUBIC), Filipinas Manufacturer's
Bank (FILMANBANK) and the Register of Deeds of Zambales.
In her complaint, she alleged that in 1958, she and her
husband acquired, thru conjugal funds, a parcel of land
with improvements, known as "Pequena Island", covered by
TCT No. 3258; that after the death of her husband, she
discovered [a] an annotation at the back of TCT No. 3258
that "the land was acquired by her husband from his
separate capital;" [b] the registration of a Deed of
Assignment dated June 25, 1976 purportedly executed by
the late Senator in favor of SUBIC, as a result of which TCT
No. 3258 was cancelled and TCT No. 22431 issued in the
name of SUBIC; and [c] the registration of Deed of Mortgage
dated April 28, 1977 in the amount of P 2,700,000.00
executed by SUBIC in favor of FILMANBANK; that the
foregoing acts were void and done in an attempt to defraud
the conjugal partnership considering that the land is
conjugal, her marital consent to the annotation on TCT No.
3258 was not obtained, the change made by the Register of
Deeds of the titleholders was effected without the approval
of the Commissioner of Land Registration and that the late
Senator did not execute the purported Deed of Assignment
or his consent thereto, if obtained, was secured by
mistake, violence and intimidation. She further alleged
that the assignment in favor of SUBIC was without
MAYORDO, M.A
consideration and consequently null and void. She prayed
that the Deed of Assignment and the Deed of Mortgage be
annulled and that the Register of Deeds be ordered to
cancel TCT No. 22431 and to issue a new title in her favor.
On March 7, 1979, herein petitioners, sisters of the late
senator, filed a motion for intervention on the ground that
on June 20, 1978, their brother conveyed to them one-half
(1/2 ) of his shareholdings in SUBIC or a total of 416,566.6
shares and as assignees of around 41 % of the total
outstanding shares of such stocks of SUBIC, they have a
substantial and legal interest in the subject matter of
litigation and that they have a legal interest in the success
of the suit with respect to SUBIC.
On July 26, 1979, the court denied the motion for
intervention, and ruled that petitioners have no legal
interest whatsoever in the matter in litigation and their
being alleged assignees or transferees of certain shares in
SUBIC cannot legally entitle them to intervene because
SUBIC has a personality separate and distinct from its
stockholders.
On appeal, respondent Court of Appeals found no factual or
legal justification to disturb the findings of the lower court.
The appellate court further stated that whatever claims
the petitioners have against the late Senator or against
SUBIC for that matter can be ventilated in a separate
proceeding, such that with the denial of the motion for
intervention, they are not left without any remedy or
judicial relief under existing law.
Petitioners' motion for reconsideration was denied. Hence,
the instant recourse.
Petitioners anchor their right to intervene on the purported
assignment made by the late Senator of a certain portion of
his shareholdings to them as evidenced by a Deed of Sale
dated June 20, 1978. 2 Such transfer, petitioners posit,
clothes them with an interest, protected by law, in the
matter of litigation.
Invoking the principle enunciated in the case of PNB v. Phil.
Veg. Oil Co., 49 Phil. 857,862 & 853 (1927), 3 petitioners
strongly argue that their ownership of 41.66% of the entire
outstanding capital stock of SUBIC entitles them to a
significant vote in the corporate affairs; that they are
affected by the action of the widow of their late brother
for it concerns the only tangible asset of the corporation
and that it appears that they are more vitally interested in
the outcome of the case than SUBIC.
CORPORATION LAW CASES
LLB 3
Viewed in the light of Section 2, Rule 12 of the Revised
Rules of Court, this Court affirms the respondent court's
holding that petitioners herein have no legal interest in the
subject matter in litigation so as to entitle them to
intervene in the proceedings below. In the case of Batama
Farmers' Cooperative Marketing Association, Inc. v. Rosal, 4
we held: "As clearly stated in Section 2 of Rule 12 of the
Rules of Court, to be permitted to intervene in a pending
action, the party must have a legal interest in the matter in
litigation, or in the success of either of the parties or an
interest against both, or he must be so situated as to be
adversely affected by a distribution or other disposition of
the property in the custody of the court or an officer
thereof ."
To allow intervention, [a] it must be shown that the movant
has legal interest in the matter in litigation, or otherwise
qualified; and [b] consideration must be given as to
whether the adjudication of the rights of the original
parties may be delayed or prejudiced, or whether the
intervenor's rights may be protected in a separate
proceeding or not. Both requirements must concur as the
first is not more important than the second. 5
The interest which entitles a person to intervene in a suit
between other parties must be in the matter in litigation
and of such direct and immediate character that the
intervenor will either gain or lose by the direct legal
operation and effect of the judgment. Otherwise, if
persons not parties of the action could be allowed to
intervene, proceedings will become unnecessarily
complicated, expensive and interminable. And this is not
the policy of the law. 6
The words "an interest in the subject" mean a direct
interest in the cause of action as pleaded, and which would
put the intervenor in a legal position to litigate a fact
alleged in the complaint, without the establishment of
which plaintiff could not recover. 7
Here, the interest, if it exists at all, of petitioners-movants
is indirect, contingent, remote, conjectural, consequential
and collateral. At the very least, their interest is purely
inchoate, or in sheer expectancy of a right in the
management of the corporation and to share in the profits
thereof and in the properties and assets thereof on
dissolution, after payment of the corporate debts and
obligations.
Page 94 of 160
While a share of stock represents a proportionate or aliquot
interest in the property of the corporation, it does not vest
the owner thereof with any legal right or title to any of the
property, his interest in the corporate property being
equitable or beneficial in nature. Shareholders are in no
legal sense the owners of corporate property, which is
owned by the corporation as a distinct legal person. 8
Petitioners further contend that the availability of other
remedies, as declared by the Court of appeals, is totally
immaterial to the availability of the remedy of
intervention.
We cannot give credit to such averment. As earlier stated,
that the movant's interest may be protected in a separate
proceeding is a factor to be considered in allowing or
disallowing a motion for intervention. It is significant to
note at this juncture that as per records, there are four
pending cases involving the parties herein, enumerated as
follows: [1] Special Proceedings No. 122122 before the CFI
of Manila, Branch XXII, entitled "Concepcion Magsaysay-
Labrador, et al. v. Subic Land Corp., et al.", involving the
validity of the transfer by the late Genaro Magsaysay of
one-half of his shareholdings in Subic Land Corporation; [2]
Civil Case No. 2577-0 before the CFI of Zambales, Branch
III, "Adelaida Rodriguez-Magsaysay v. Panganiban, etc.;
Concepcion Labrador, et al. Intervenors", seeking to annul
the purported Deed of Assignment in favor of SUBIC and its
annotation at the back of TCT No. 3258 in the name of
respondent's deceased husband; [3] SEC Case No. 001770,
filed by respondent praying, among other things that she be
declared in her capacity as the surviving spouse and
administratrix of the estate of Genaro Magsaysay as the
sole subscriber and stockholder of SUBIC. There,
petitioners, by motion, sought to intervene. Their motion
to reconsider the denial of their motion to intervene was
granted; [4] SP No. Q-26739 before the CFI of Rizal, Branch
IV, petitioners herein filing a contingent claim pursuant to
Section 5, Rule 86, Revised Rules of Court. 9 Petitioners'
interests are no doubt amply protected in these cases.
Neither do we lend credence to petitioners' argument that
they are more interested in the outcome of the case than
the corporation-assignee, owing to the fact that the latter
is willing to compromise with widow-respondent and since
a compromise involves the giving of reciprocal concessions,
the only conceivable concession the corporation may give is
a total or partial relinquishment of the corporate assets. 10
Such claim all the more bolsters the contingent nature of
petitioners' interest in the subject of litigation.
MAYORDO, M.A
The factual findings of the trial court are clear on this
point. The petitioners cannot claim the right to intervene
on the strength of the transfer of shares allegedly executed
by the late Senator. The corporation did not keep books and
records. 11 Perforce, no transfer was ever recorded, much
less effected as to prejudice third parties. The transfer
must be registered in the books of the corporation to affect
third persons. The law on corporations is explicit. Section
63 of the Corporation Code provides, thus: "No transfer,
however, shall be valid, except as between the parties,
until the transfer is recorded in the books of the
corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares
transferred."
And even assuming arguendo that there was a valid
transfer, petitioners are nonetheless barred from
intervening inasmuch as their rights can be ventilated and
amply protected in another proceeding.
WHEREFORE, the instant petition is hereby DENIED. Costs
against petitioners.
SO ORDERED.
G.R. No. 96490 February 3, 1992
INDOPHIL TEXTILE MILL WORKERS UNION-PTGWO,
petitioner, vs. VOLUNTARY ARBITRATOR TEODORICO P.
CALICA and INDOPHIL TEXTILE MILLS, INC., respondents.
MEDIALDEA, J.:
This is a petition for certiorari seeking the nullification of
the award issued by the respondent Voluntary Arbitrator
Teodorico P. Calica dated December 8, 1990 finding that
Section 1 (c), Article I of the Collective Bargaining
Agreement between Indophil Textile Mills, Inc. and Indophil
Textile Mill Workers Union-PTGWO does not extend to the
employees of Indophil Acrylic Manufacturing Corporation as
an extension or expansion of Indophil Textile Mills,
Incorporated.
The antecedent facts are as follows:
Petitioner Indophil Textile Mill Workers Union-PTGWO is a
legitimate labor organization duly registered with the
Department of Labor and Employment and the exclusive
bargaining agent of all the rank-and-file employees of
Indophil Textile Mills, Incorporated. Respondent Teodorico
CORPORATION LAW CASES
LLB 3
P. Calica is impleaded in his official capacity as the
Voluntary Arbitrator of the National Conciliation and
Mediation Board of the Department of Labor and
Employment, while private respondent Indophil Textile
Mills, Inc. is a corporation engaged in the manufacture,
sale and export of yarns of various counts and kinds and of
materials of kindred character and has its plants at Barrio
Lambakin. Marilao, Bulacan.
In April, 1987, petitioner Indophil Textile Mill Workers
Union-PTGWO and private respondent Indophil Textile Mills,
Inc. executed a collective bargaining agreement effective
from April 1, 1987 to March 31, 1990.
On November 3, 1967 Indophil Acrylic Manufacturing
Corporation was formed and registered with the Securities
and Exchange Commission. Subsequently, Acrylic applied for
registration with the Board of Investments for incentives
under the 1987 Omnibus Investments Code. The application
was approved on a preferred non-pioneer status.
In 1988, Acrylic became operational and hired workers
according to its own criteria and standards. Sometime in
July, 1989, the workers of Acrylic unionized and a duly
certified collective bargaining agreement was executed.
In 1990 or a year after the workers of Acrylic have been
unionized and a CBA executed, the petitioner union
claimed that the plant facilities built and set up by Acrylic
should be considered as an extension or expansion of the
facilities of private respondent Company pursuant to
Section 1(c), Article I of the CBA, to wit,.
c) This Agreement shall apply to the Company's
plant facilities and installations and to any extension and
expansion thereat. (Rollo, p.4)
In other words, it is the petitioner's contention that Acrylic
is part of the Indophil bargaining unit.
The petitioner's contention was opposed by private
respondent which submits that it is a juridical entity
separate and distinct from Acrylic.
The existing impasse led the petitioner and private
respondent to enter into a submission agreement on
September 6, 1990. The parties jointly requested the public
respondent to act as voluntary arbitrator in the resolution
of the pending labor dispute pertaining to the proper
interpretation of the CBA provision.
Page 95 of 160
After the parties submitted their respective position papers
and replies, the public respondent Voluntary Arbitrator
rendered its award on December 8, 1990, the dispositive
portion of which provides as follows:
PREMISES CONSIDERED, it would be a strained
interpretation and application of the questioned CBA
provision if we would extend to the employees of Acrylic
the coverage clause of Indophil Textile Mills CBA.
Wherefore, an award is made to the effect that the proper
interpretation and application of Sec. l, (c), Art. I, of the
1987 CBA do (sic) not extend to the employees of Acrylic as
an extension or expansion of Indophil Textile Mills, Inc.
(Rollo, p.21)
Hence, this petition raising four (4) issues, to wit:
1. WHETHER OR NOT THE RESPONDENT ARBITRATOR
ERRED IN INTERPRETING SECTION 1(c), ART I OF THE CBA
BETWEEN PETITIONER UNION AND RESPONDENT COMPANY.
2. WHETHER OR NOT INDOPHIL ACRYLIC IS A
SEPARATE AND DISTINCT ENTITY FROM RESPONDENT
COMPANY FOR PURPOSES OF UNION REPRESENTATION.
3. WHETHER OR NOT THE RESPONDENT ARBITRATOR
GRAVELY ABUSED HIS DISCRETION AMOUNTING TO LACK OR
IN EXCESS OF HIS JURISDICTION.
4. WHETHER OR NOT THE RESPONDENT ARBITRATOR
VIOLATED PETITIONER UNION'S CARDINAL PRIMARY RIGHT TO
DUE PROCESS. (Rollo, pp. 6-7)
The central issue submitted for arbitration is whether or
not the operations in Indophil Acrylic Corporation are an
extension or expansion of private respondent Company.
Corollary to the aforementioned issue is the question of
whether or not the rank-and-file employees working at
Indophil Acrylic should be recognized as part of, and/or
within the scope of the bargaining unit.
Petitioner maintains that public respondent Arbitrator
gravely erred in interpreting Section l(c), Article I of the
CBA in its literal meaning without taking cognizance of the
facts adduced that the creation of the aforesaid Indophil
Acrylic is but a devise of respondent Company to evade the
application of the CBA between petitioner Union and
respondent Company.
Petitioner stresses that the articles of incorporation of the
two corporations establish that the two entities are
MAYORDO, M.A
engaged in the same kind of business, which is the
manufacture and sale of yarns of various counts and kinds
and of other materials of kindred character or nature.
Contrary to petitioner's assertion, the public respondent
through the Solicitor General argues that the Indophil
Acrylic Manufacturing Corporation is not an alter ego or an
adjunct or business conduit of private respondent because
it has a separate legitimate business purpose. In addition,
the Solicitor General alleges that the primary purpose of
private respondent is to engage in the business of
manufacturing yarns of various counts and kinds and
textiles. On the other hand, the primary purpose of
Indophil Acrylic is to manufacture, buy, sell at wholesale
basis, barter, import, export and otherwise deal in yarns of
various counts and kinds. Hence, unlike private respondent,
Indophil Acrylic cannot manufacture textiles while private
respondent cannot buy or import yarns.
Furthermore, petitioner emphasizes that the two
corporations have practically the same incorporators,
directors and officers. In fact, of the total stock
subscription of Indophil Acrylic, P1,749,970.00 which
represents seventy percent (70%) of the total subscription
of P2,500,000.00 was subscribed to by respondent
Company.
On this point, private respondent cited the case of Diatagon
Labor Federation v. Ople, G.R. No. L-44493-94, December
3, 1980, 10l SCRA 534, which ruled that two corporations
cannot be treated as a single bargaining unit even if their
businesses are related. It submits that the fact that there
are as many bargaining units as there are companies in a
conglomeration of companies is a positive proof that a
corporation is endowed with a legal personality distinctly
its own, independent and separate from other corporations
(see Rollo, pp. 160-161).
Petitioner notes that the foregoing evidence sufficiently
establish that Acrylic is but an extension or expansion of
private respondent, to wit:
(a) the two corporations have their physical plants,
offices and facilities situated in the same compound, at
Barrio Lambakin, Marilao, Bulacan;
(b) many of private respondent's own machineries,
such as dyeing machines, reeling, boiler, Kamitsus among
others, were transferred to and are now installed and being
used in the Acrylic plant;
CORPORATION LAW CASES
LLB 3
(c) the services of a number of units, departments or
sections of private respondent are provided to Acrylic; and
(d) the employees of private respondent are the
same persons manning and servicing the units of Acrylic.
(see Rollo, pp. 12-13)
Private respondent insists that the existence of a bonafide
business relationship between Acrylic and private
respondent is not a proof of being a single corporate entity
because the services which are supposedly provided by it to
Acrylic are auxiliary services or activities which are not
really essential in the actual production of Acrylic. It also
pointed out that the essential services are discharged
exclusively by Acrylic personnel under the control and
supervision of Acrylic managers and supervisors.
In sum, petitioner insists that the public respondent
committed grave abuse of discretion amounting to lack or
in excess of jurisdiction in erroneously interpreting the CBA
provision and in failing to disregard the corporate entity of
Acrylic.
We find the petition devoid of merit.
Time and again, We stress that the decisions of voluntary
arbitrators are to be given the highest respect and a
certain measure of finality, but this is not a hard and fast
rule, it does not preclude judicial review thereof where
want of jurisdiction, grave abuse of discretion, violation of
due process, denial of substantial justice, or erroneous
interpretation of the law were brought to our attention.
(see Ocampo, et al. v. National Labor Relations
Commission, G.R. No. 81677, 25 July 1990, First Division
Minute Resolution citing Oceanic Bic Division (FFW) v.
Romero, G.R. No. L-43890, July 16, 1984, 130 SCRA 392)
It should be emphasized that in rendering the subject
arbitral award, the voluntary arbitrator TeodoricoCalica, a
professor of the U.P. Asian Labor Education Center, now the
Institute for Industrial Relations, found that the existing
law and jurisprudence on the matter, supported the private
respondent's contentions. Contrary to petitioner's assertion,
public respondent cited facts and the law upon which he
based the award. Hence, public respondent did not abuse
his discretion.
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
Page 96 of 160
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 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. (Umali et al. v. Court of Appeals, G.R.
No. 89561, September 13, 1990, 189 SCRA 529, 542)
In the case at bar, petitioner seeks to pierce the veil of
corporate entity of Acrylic, alleging that the creation of the
corporation is a devise to evade the application of the CBA
between petitioner Union and private respondent Company.
While we do not discount the possibility of the similarities
of the businesses of private respondent and Acrylic, neither
are we inclined to apply the doctrine invoked by petitioner
in granting the relief sought. The fact that the businesses
of private respondent and Acrylic are related, that some of
the employees of the private respondent are the same
persons manning and providing for auxilliary services to the
units of Acrylic, and that the physical plants, offices and
facilities are situated in the same compound, it is our
considered opinion that these facts are not sufficient to
justify the piercing of the corporate veil of Acrylic.
In the same case of Umali, et al. v. Court of Appeals
(supra), We already emphasized that "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, petitioner does not seek to
impose a claim against the members of the Acrylic.
Furthermore, We already ruled in the case of Diatagon
Labor Federation Local 110 of the ULGWP v. Ople (supra)
that it is grave abuse of discretion to treat two companies
as a single bargaining unit when these companies are
indubitably distinct entities with separate juridical
personalities.
Hence, the Acrylic not being an extension or expansion of
private respondent, the rank-and-file employees working at
Acrylic should not be recognized as part of, and/or within
the scope of the petitioner, as the bargaining
representative of private respondent.
MAYORDO, M.A
All premises considered, the Court is convinced that the
public respondent Voluntary Arbitrator did not commit
grave abuse of discretion in its interpretation of Section
l(c), Article I of the CBA that the Acrylic is not an extension
or expansion of private respondent.
ACCORDINGLY, the petition is DENIED and the award of the
respondent Voluntary Arbitrator are hereby AFFIRMED.
SO ORDERED.
G.R. No. 80043 June 6, 1991
ROBERTO A. JACINTO, petitioner, vs. HONORABLE COURT
OF APPEALS and METROPOLITAN BANK AND TRUST
COMPANY, respondents.
DAVIDE, JR., J.:
This is an appeal by certiorari to partially set aside the
Decision of the Court of Appeals in C.A-G.R. CV No.
081531.promulgated on 19 August 1987, which affirmed in
toto the decision of the Regional Trial Court of Manila,
Branch 11, in Civil Case No. 133164 entitled "Metropolitan
Bank and Trust Co. vs. Inland Industries Inc. and Roberto
Jacinto," the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered ordering
defendants to pay, jointly and severally, the plaintiff, the
principal obligation of P382,015.80 (Annex J-1 to J-3 of
Stipulation), with interest/charges thereon at the rate of
16 % per annum from January 1, 1979 up to the time the
said amount is fully paid, plus the sum of P20,000.00 as
attorney's fees. Said defendants are further ordered to pay
in solidum the costs of this suit.
SO ORDERED.2
Petitioner's co-defendant in the courts below, Inland
Industries Inc., just as in the case of petitioner's motion to
reconsider the questioned decision,3 chose not to join him
in this appeal.
In Our resolution of 28 August 1988 We required the
respondent to comment on the petition. Respondent
Metropolitan Bank and Trust Co. filed its comment4 on 12
October 1988. We required the petitioner to file a reply
thereto,5 which he comment plied with on 20 December
1988.6
We gave due course to the petition on 8 May 19897 and
required the parties to submit their respective memoranda.
CORPORATION LAW CASES
LLB 3
Private respondent filed its memorandum on 29 June 19898
while petitioner asked leave to adopt his petition and reply
as his memorandum,9 which We granted on 14 June
1989.10
Petitioner submits the following issues:
1. Whether or not the respondent Court of Appeals
can validly pierce the fiction of corporate identity of the
defendant corporation Inland Industries, Inc. even if there
is no allegation in the complaint regarding the same, nor is
there anything in the prayer demanding the piercing of the
corporate veil of the corporation Inland Industries, Inc.;
2. Whether or not the Court of Appeals can validly
pierce the fiction of corporate identity of the defendant
Inland Industries, Inc. even if absolutely no proof was
presented in court to serve as legal justification for the
same.
We find this petition to be bereft of merit. The issues are
basically factual and a careful scrutiny of the decisions of
both courts below reveals that their findings and
conclusions on the matter of piercing the veil of corporate
fiction and on the liability of herein petitioner are
overwhelmingly supported by the evidence.
Insofar as material and relevant to the issues raised, the
trial court found and held:11
As to [the] liability of [the] defendant Roberto A. Jacinto, it
would appear that he is in factetum (sic), or, in fact, the
corporation itself known as Inland Industries, Inc. Aside
from the fact that he is admittedly the President and
General Manager of the corporation and a substantial
stockholders (sic) thereof, it was defendant Roberto A.
Jacinto who dealt entirely with the plaintiff in those
transactions. In the Trust Receipts that he signed
supposedly in behalf of Inland Industries, Inc., it is not even
mentioned that he did so in this official capacity.
x xxxxxxxx
In this case, the Court is satisfied that Roberto A. Jacinto
was practically the corporation itself, the Inland industries,
Inc.
In a detailed fashion, the respondent Court of Appeals
brushed aside the posturing of petitioner as follows:
Page 97 of 160
Defendant Roberto Jacinto, tried to escape liability and
shift the entire blame under the trust receipts solely and
exclusively on defendant-appellant corporation. He
asserted that he cannot be held solidarily liable with the
latter (defendant corporation) because he just signed said
instruments in his official capacity as president of Inland
Industries, Inc. and the latter (defendant corporation) has a
juridical personality distinct and separate from its officers
and stockholders. It is likewise asserted, citing an American
case, that the principle of piercing the fiction of corporate
entity should be applied with great caution and not
precipitately, because a dual personality by a corporation
and its stockholders would defeat the principal purpose for
which a corporation is formed. Upon the other hand,
plaintiff-appellee reiterated its allegation in the complaint
that defendant corporation is just a mere alter ego of
defendant Roberto Jacinto who is its President and General
Manager, while the wife of the latter owns a majority of its
shares of stock.
Defendants-appellants' assertion is plainly without legal
basis. This is shown by the undisputed fact that Roberto
Jacinto even admitted that he and his wife own 52% of the
stocks of defendant corporation (TSN, April 22, 1985, p. 6).
We cannot accept as true the assertion of defendant
Jacinto that he only acted in his official capacity as
President and General Manager of Inland Industries, Inc.
when he signed the aforesaid trust receipts. To Our mind
the same is just a clever ruse and a convenient ploy to
thwart his personal liability therefor by taking refuge under
the protective mantle of the separate corporate personality
of defendant corporation.
As could be expected, Roberto Jacinto in his direct
testimony presented a different corporate scenario
regarding Inland Industries, Inc. and vehemently declared
that it is BienvenidaCatabas who is its President, while
Aurora Heresa is its Chairman of the Board. His assertion on
this point, however, is not convincing in view of his
admission in the same breath, that his wife, Hedy U.
Jacinto, own (sic) with him 52% of the shares of stock of
said corporation. Indeed, this circumstance –– even if
standing alone –– cannot but engender in the most
unprejudiced mind doubt and misgiving why Catabas and
Heresa would be defendant corporation's President and
Chairman of the Board, respectively. Pertinent portion of
his testimony on this point is quoted hereunder:
Atty. Carlos Do you know the defendant Inland Industries,
Inc.?
MAYORDO, M.A
A Yes, sir. Because I am the General Manager of this
corporation.
Q Aside from being the General Manager of the
defendant corporation are you in any other way connected
with the same?
A I am also a stockholder.
Q Does your corporation have a Board of Directors?
A Yes, sir.
Q By the way, who are the stockholders of this
corporation?
A BienvenidaCatabas, Aurora Heresa, Paz Yulo,
Hedy Y. Jacinto and myself.
Q Who is the President of the defendant
corporation?
A BienvenidaCatabas.
Q Who is the Chairman of the Board?
A Aurora Heresa.
Q Do you have any relation with Hedy Y. Jacinto?
A She is my wife.
Q If you combine the stockholdings of your wife
together with yours and percentage wise, how much is your
equity?
Atty. Dizon raised some objections. However, the Court
allowed the same.
A About 52 % (Ibid., pp. 3-6)
Furthermore, a cursory perusal of the Stipulation of facts
clearly shows that defendant Roberto Jacinto acted in his
capacity as President and General Manager of Inland
Industries, Inc. when he signed said trust receipts.
Pertinent portion of his testimony are quoted below:
(d) All the goods covered by the three (3) Letters of
Credit (Annexes "A", "B" & "C") and paid for under the Bills
of Exchange (Annexes "D", "E" & "F") were delivered to and
received by defendant Inland Industries, Inc. through its co-
defendant Roberto A. Jacinto, its President and General
Manager, who signed for and in behalf of defendant Inland
and agreed to the terms and conditions of three (3)
separate trust receipts covering the same and herein
identified as follows: . . . (p. 3 of Stipulations of Facts and
Formulation of Issues [p. 95, Records]).
CORPORATION LAW CASES
LLB 3
The conflicting statements by defendant Jacinto place in
extreme doubt his credibility anent his alleged
participation in said transactions and We are thus
persuaded to agree with the findings of the lower court
that the latter (Roberto Jacinto) was practically the
corporation itself. Indeed, a painstaking examination of the
records show that there is no clear-cut delimitation
between the personality of Roberto Jacinto as an individual
and the personality of Inland Industries, Inc. as a
corporation.
The circumstances aforestated lead Us to conclude that the
corporate veil that en-shrouds defendant Inland Industries,
Inc. could be validly pierced, and a host of cases decided
by our High Court is supportive of this view. Thus it held
that "when the veil of corporate fiction is made as a shield
to perpetuate fraud and/or confuse legitimate issues, the
same should be pierced." (Republic vs. Razon, 20 SCRA 234;
A.D. Santos, Inc. vs. Vasquez, 22 SCRA 1156; Emilio Cano
Enterprises, Inc. vs. Court of Appeals, 13 SCRA 290). Almost
in the same vein is the dictum enunciated by the same
court in the case of Commissioner of Internal Revenue vs.
Norton & Harrison Co., (11 SCRA 714), that "Where a
corporation is merely an adjunct, business conduit or alter
ego, the fiction of separate and distinct corporate entity
should be disregarded."
In its resolution of 29 September 1987, the respondent
Court of Appeals, on the contention again of petitioner that
the finding that defendant corporation is his mere alter ego
is not supported by the evidence and has no legal
justification, ruled that:
The contention . . . is nothing but an empty assertion. A
cursory perusal of the decision would at once readily show
on pages 11-13 of the same that said factual findings of the
court is well grounded as the same in fact even include a
portion of the very testimony of said defendant-appellant
admitting that he and his wife own 52% of the stocks of
defendant corporation. The stipulation of facts also show
(sic) that appellant Roberto Jacinto acted in his capacity as
President/General Manager of defendant corporation and
that "all the goods covered by the three (3) Letters of
Credit (Annexes "A", "B" & "C") and paid for under the Bills
of Exchange (Annexes "D", "E" & "F") were delivered to and
received by defendant Inland Industries, Inc. through its co-
defendant Roberto A. Jacinto, its President and General
Manager, who signed for and in behalf of defendant Inland
and agreed to the terms and conditions of three (3)
separate trust receipts covering the same.
Page 98 of 160
Petitioner, however, faults the courts below for piercing the
veil of corporate fiction despite the absence of any
allegation in the complaint questioning the separate
identity and existence of Inland Industries, Inc. This is not
accurate.1âwphi1 While on the face of the complaint there
is no specific allegation that the corporation is a mere alter
ego of petitioner, subsequent developments, from the
stipulation of facts up to the presentation of evidence and
the examination of witnesses, unequivocally show that
respondent Metropolitan Bank and Trust Company sought to
prove that petitioner and the corporation are one or that
he is the corporation. No serious objection was heard from
petitioner. Section 5 of Rule 10 of the Rules of Court
provides:
Sec. 5. Amendment to conform to or authorize
presentation of evidence. –– When issues not raised by the
pleadings are tried by express or implied consent of the
parties, they shall be treated in all respects, as if they had
been raised in the pleadings. Such amendment of the
pleadings as may be necessary to cause them to conform to
the evidence and to raise these issues may be made upon
motion of any party at any time, even after judgment; but
failure so to amend does not affect the trial of these
issues. If the evidence is objected to at the time of trial on
the ground that it is not within the issues made by the
pleadings, the court may allow the pleadings to be
amended and shall do so freely when the presentation of
the merits of the action will be subserved thereby and the
objecting party fails to satisfy the court that the admission
of such evidence would prejudice him in maintaining his
action or defense upon the merits. The court may grant
continuance to enable the objecting party to meet such
evidence.
Pursuant thereto, "when evidence is presented by one
party, with the express or implied consent of the adverse
party, as to issues not alleged in the pleadings, judgment
may be rendered validly as regards those issues, which shall
be considered as if they have been raised in the pleadings.
There is implied consent to the evidence thus presented
when the adverse party fails to object thereto.12
WHEREFORE, for lack of merit, the Petition is DISMISSED
with costs against petitioner.
SO ORDERED.
G.R. No. 108734. May 29, 1996]
MAYORDO, M.A
CONCEPT BUILDERS, INC., petitioner, vs. THE NATIONAL
LABOR RELATIONS COMMISSION, (First Division); and
Norberto Marabe, Rodolfo Raquel, Cristobal Riego,
Manuel Gillego, PalcronioGiducos, Pedro Aboigar,
Norberto Comendador, Rogello Salut, Emilio Garcia, Jr.,
Mariano Rio, Paulina Basea, AifredoAlbera, Paquito Salut,
Domingo Guarino, Romeo Galve, Dominador Sabina,
Felipe Radiana, GavinoSualibio, Moreno Escares,
Ferdinand Torres, Felipe Basilan, and Ruben Robalos,
respondents.
DECISION
HERMOSISIMA, JR., J.:
The corporate mask may be lifted and the corporate veil
may be pierced when a corporation is just but the alter ego
of a person or of another corporation. Where badges of
fraud exist; where public convenience is defeated; where a
wrong is sought to be justified thereby, the corporate
fiction or the notion of legal entity should come to naught.
The law in these instances will regard the corporation as a
mere association of persons and, in case of two
corporations, merge them into one.
Thus, where a sister corporation is used as a shield to
evade a corporations subsidiary liability for damages, the
corporation may not be heard to say that it has a
personality separate and distinct from the other
corporation. The piercing of the corporate veil comes into
play.
This special civil action ostensibly raises the question of
whether the National Labor Relations Commission
committed grave abuse of discretion when it issued a
break-open order to the sheriff to be enforced against
personal property found in the premises of petitioners
sister company.
Petitioner Concept Builders, Inc., a domestic corporation,
with principal office at 355 Maysan Road, Valenzuela, Metro
Manila, is engaged in the construction business. Private
respondents were employed by said company as laborers,
carpenters and riggers.
On November, 1981, private respondents were served
individual written notices of termination of employment by
petitioner, effective on November 30, 1981. It was stated in
the individual notices that their contracts of employment
had expired and the project in which they were hired had
been completed.
CORPORATION LAW CASES MAYORDO, M.A
LLB 3

The said writ had not been enforced by the special sheriff Antonio W. Lim 2,900,000.00
Public respondent found it to be, the fact, however, that at because, as stated in his progress report, dated November Dennis S. Cuyegkeng 300.00
the time of the termination of private respondents 2, 1989: Elisa C. Lim 100,000.00
employment, the project in which they were hired had not Teodulo R. Dino 100.00
yet been finished and completed. Petitioner had to engage 1. All the employees inside petitioners premises at 355 Virgilio O. Casino 100.00
the services of sub-contractors whose workers performed Maysan Road, Valenzuela, Metro Manila, claimed that they
the functions of private respondents. were employees of Hydro Pipes Philippines, Inc. (HPPI) and 2. Board of Directors
not by respondent;
Aggrieved, private respondents filed a complaint for illegal Antonio W. Lim Chairman
dismissal, unfair labor practice and non-payment of their 2. Levy was made upon personal properties he found in the Dennis S. Cuyegkeng Member
legal holiday pay, overtime pay and thirteenth-month pay premises; Elisa C. Lim Member
against petitioner. Teodulo R. Dino Member
3. Security guards with high-powered guns prevented him Virgilio O. Casino Member
On December 19, 1984, the Labor Arbiter rendered from removing the properties he had levied upon.4
judgment1 ordering petitioner to reinstate private 3. Corporate Officers
respondents and to pay them back wages equivalent to one The said special sheriff recommended that a break-open
year or three hundred working days. order be issued to enable him to enter petitioners premises Antonio W. Lim President
so that he could proceed with the public auction sale of the Dennis S. Cuyegkeng Assistant to the
On November 27, 1985, the National Labor Relations aforesaid personal properties on November 7, 1989. President
Commission (NLRC) dismissed the motion for Elisa 0. Lim Treasurer
reconsideration filed by petitioner on the ground that the On November 6, 1989, a certain Dennis Cuyegkeng filed a Virgilio O. Casino Corporate Secretary
said decision had already become final and executory.2 third-party claim with the Labor Arbiter alleging that the
properties sought to be levied upon by the sheriff were 4. Principal Office
On October 16, 1986, the NLRC Research and Information owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice-
Department made the finding that private respondents President. 355 Maysan Road, Valenzuela, Metro Manila.5
backwages amounted to P199,800.00.3
On November 23, 1989, private respondents filed a Motion On the other hand, the General Information Sheet of
On October 29, 1986, the Labor Arbiter issued a writ of for Issuance of a Break-Open Order, alleging that HPPI and HPPI revealed the following:
execution directing the sheriff to execute the Decision, petitioner corporation were owned by the same
dated December 19, 1984. The writ was partially satisfied incorporator! stockholders. They also alleged that 1. Breakdown of Subscribed Capital
through garnishment of sums from petitioners debtor, the petitioner temporarily suspended its business operations in
Metropolitan Waterworks and Sewerage Authority, in the order to evade its legal obligations to them and that Name of Stockholder Amount Subscribed
amount of P81,385.34. Said amount was turned over to the private respondents were willing to post an indemnity bond
cashier of the NLRC. to answer for any damages which petitioner and HPPI may Antonio W. Lim P400,000.00
suffer because of the issuance of the break-open order. Elisa C. Lim 57,700.00
On February 1, 1989, an Alias Writ of Execution was issued AWL Trading 455,000.00
by the Labor Arbiter directing the sheriff to collect from In support of their claim against HPPI, private respondents Dennis S. Cuyegkeng 40,100.00
herein petitioner the sum of P117,414.76, representing the presented duly certified copies of the General Informations Teodulo R. Dino 100.00
balance of the judgment award, and to reinstate private Sheet, dated May 15, 1987, submitted by petitioner to the Virgilio O. Casino 100.00
respondents to their former positions. Securities and Exchange Commission (SEC) and the General
Information Sheet, dated May 15, 1987, submitted by HPPI 2. Board of Directors
On July 13, 1989, the sheriff issued a report stating that he to the Securities and Exchange Commission.
tried to serve the alias writ of execution on petitioner Antonio W. Lim Chairman
through the security guard on duty but the service was The General Information Sheet submitted by the Elisa C. Lim Member
refused on the ground that petitioner no longer occupied petitioner1 revealed the following: Dennis S. Cuyegkeng Member
the premises. Virgilio O. Casino Member
1. Breakdown of Subscribed Capital Teodulo R. Dino Member
On September 26, 1986, upon motion of private
respondents, the Labor Arbiter issued a second alias writ of Name of Stockholder Amount Subscribed 3. Corporate Officers
execution.
HPPI P6,999,500.00 Antonio W. Lim President

Page 99 of 160
CORPORATION LAW CASES
LLB 3
Dennis S. Cuyegkeng Assistant to the
President
Elisa O. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road, Valenzuela, Metro Manila.6
On February 1, 1990, HPPI filed an Opposition to private
respondents motion for issuance of a break-open order,
contending that HPPI is a corporation which is separate and
distinct from petitioner. HPPI also alleged that the two
corporations are engaged in two different kinds of
businesses, i.e., HPPI is a manufacturing firm while
petitioner was then engaged in construction.
On March 2, 1990, the Labor Arbiter issued an Order which
denied private respondents motion for break-open order.
Private respondents then appealed to the NLRC. On April
23, 1992, the NLRC set aside the order of the Labor Arbiter,
issued a break-open order and directed private respondents
to file a bond. Thereafter, it directed the sheriff to proceed
with the auction sale of the properties already levied upon.
It dismissed the third-party claim for lack of merit.
Petitioner moved for reconsideration but the motion was
denied by the NLRC in a Resolution, dated December 3,
1992.
Hence, the resort to the present petition.
Petitioner alleges that the NLRC committed grave abuse of
discretion when it ordered the execution of its decision
despite a third-party claim on the levied property.
Petitioner further contends, that the doctrine of piercing
the corporate veil should not have been applied, in this
case, in the absence of any showing that it created HPPI in
order to evade its liability to private respondents. It also
contends that HPPI is engaged in the manufacture and sale
of steel, concrete and iron pipes, a business which is
distinct and separate from petitioners construction
business. Hence, it is of no consequence that petitioner and
HPPI shared the same premises, the same President and the
same set of officers and subscribers.7
We find petitioners contention to be unmeritorious.
It is a fundamental principle of corporation law that a
corporation is an entity separate and distinct from its
Page 100 of 160
stockholders and from other corporations to which it may
be connected.8 But, this separate and distinct personality
of a corporation is merely a fiction created by law for
convenience and to promote justice.9 So, when the notion
of separate juridical personality is used to defeat public
convenience, justify wrong, protect fraud or defend crime,
or is used as a device to defeat the labor laws,10 this
separate personality of the corporation may be disregarded
or the veil of corporate fiction pierced.11 This is true
likewise when the corporation is merely an adjunct, a
business conduit or an alter ego of another corporation.12
The conditions under which the juridical entity may be
disregarded vary according to the peculiar facts and
circumstances of each case. No hard and fast rule can be
accurately laid down, but certainly, there are some
probative factors of identity that will justify the
application of the doctrine of piercing the corporate veil,
to wit:
1. Stock ownership by one or common ownership of both
corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business.13
The SEC en banc explained the instrumentality rule which
the courts have applied in disregarding the separate
juridical personality of corporations as follows:
Where one corporation is so organized and controlled and
its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the
corporate entity of the instrumentality may be disregarded.
The control necessary to invoke the rule is not majority or
even complete stock control but such domination of
finances, policies and practices that the controlled
corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal.
It must be kept in mind that the control must be shown to
have been exercised at the time the acts complained of
took place. Moreover, the control and breach of duty must
proximately cause the injury or unjust loss for which the
complaint is made.
The test in determining the applicability of the doctrine of
piercing the veil of corporate fiction is as follows:
MAYORDO, M.A
1. Control, not mere majority or complete stock control,
but complete domination, not only of finances but of policy
and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs legal rights; and
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of.
The absence of any one of these elements prevents piercing
the corporate veil. in applying the instrumentality or alter
ego doctrine, the courts are concerned with reality and not
form, with how the corporation operated and the individual
defendants relationship to that operation. 14
Thus, the question of whether a corporation is a mere alter
ego, a mere sheet or paper corporation, a sham or a
subterfuge is purely one of fact.15
In this case, the NLRC noted that, while petitioner claimed
that it ceased its business operations on April 29, 1986, it
filed an Information Sheet with the Securities and Exchange
Commission on May 15, 1987, stating that its office address
is at 355 Maysan Road, Valenzuela, Metro Manila. On the
other hand, HPPI, the third-party claimant, submitted on
the same day, a similar information sheet stating that its
office address is at 355 Maysan Road, Valenzuela, Metro
Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O.
Casino as the corporate secretary of both corporations. It
would also not be amiss to note that both corporations had
the same president, the same board of directors, the same
corporate officers, and substantially the same subscribers.
From the foregoing, it appears that, among other things,
the respondent (herein petitioner) and the third-party
claimant shared the same address and/or premises. Under
this circumstances, (sic) it cannot be said that the property
levied upon by the sheriff were not of respondents.16
Clearly, petitioner ceased its business operations in order to
evade the payment to private respondents of backwages
and to bar their reinstatement to their former positions.
CORPORATION LAW CASES
LLB 3
HPPI is obviously a business conduit of petitioner
corporation and its emergence was skillfully orchestrated
to avoid the financial liability that already attached to
petitioner corporation.
The facts in this case are analogous to Claparols v. Court of
Industrial Relations17 where we had the occasion to rule:
Respondent courts findings that indeed the Claparols Steel
and Nail Plant, which ceased operation of June 30, 1957,
was SUCCEEDED by the Claparols Steel Corporation
effective the next day, July 1, 1957, up to December 7,
1962, when the latter finally ceased to operate, were not
disputed by petitioner. it is very clear that the latter
corporation was a continuation and successor of the first
entity x xx. Both predecessors and successor were owned
and controlled by petitioner Eduardo Claparols and there
was no break in the succession and continuity of the same
business. This avoiding-the-liability scheme is very patent,
considering that 90% of the subscribed shares of stock of
the Claparols Steel Corporation (the second corporation)
was owned by respondent x xxClaparols 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.
Page 101 of 160
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.
G.R. No. L-30822 July 31, 1975
EDUARDO CLAPAROLS, ROMULO AGSAM and/or
CLAPAROLS STEEL AND NAIL PLANT, petitioners, vs.
COURT OF INDUSTRIAL RELATIONS, ALLIED WORKERS'
ASSOCIATION and/or DEMETRIO GARLITOS, ALFREDO
ONGSUCO, JORGE SEMILLANO, SALVADOR DOROTEO,
ROSENDO ESPINOSA, LUDOVICO BALOPENOS, ASER
AMANCIO, MAXIMO QUIOYO, GAUDENCIO QUIOYO, and
IGNACIO QUIOYO, respondents.
MAKASIAR, J.:
A petition for certiorari to set aside the order of
respondent Court of Industrial Relations dated May 30, 1969
directing petitioners to pay back wages and bonuses to
private respondents as well as its resolution of July 5, 1969
denying the motion for reconsideration of said order in
Case No. 32-ULP-Iloilo entitled "Allied Workers' Association,
et. al., versus Eduardo Claparols, et. al.."
It appears that on August 6, 1957, a complaint for unfair
labor practice was filed by herein private respondent Allied
Workers' Association, respondent Demetrio Garlitos and ten
(10) respondent workers against herein petitioners on
account of the dismissal of respondent workers from
petitioner Claparols Steel and Nail Plant.
On September 16, 1963, respondent Court rendered its
decision finding "Mr. Claparols guilty of union busting and"
of having "dismissed said complainants because of their
union activities," and ordering respondents "(1) To cease
and desist from committing unfair labor practices against
their employees and laborers; (2) To reinstate said
complainants to their former or equivalent jobs, as soon as
possible, with back wages from the date of their dismissal
MAYORDO, M.A
up to their actual reinstatement" (p. 12, Decision; p. 27,
rec.).
A motion to reconsider the above decision was filed by
herein petitioners, which respondent Court, sitting en
banc, denied in a resolution dated January 27, 1964.
On March 30, 1964, counsel for herein respondent workers
(complainants in the ULP case) filed a motion for execution
of respondent Court's September 16, 1963 decision.
On May 14, 1964, respondent Court, in its order of
September 16, 1963, granted execution and directed herein
petitioners
to reinstate the above complainants to their former or
equivalent jobs within five (5) days after receipt of a copy
of this order. In order to implement the award of back
wages, the Chief of the Examining Division or any of his
assistants is hereby directed to proceed to the office of the
respondents at Matab-ang, Talisay, Negros Occidental, and
examine its payrolls and other pertinent records and
compute the back wages of the complainants in accordance
with the decision dated September 16, 1963, and, upon
termination, to submit his report as soon as possible for
further disposition (p. 7, Brief for Respondents, p. 113,
rec.).
which was reiterated by respondent Court in a subsequent
order dated November 10, 1964 (pp. 7-8, Brief for
Respondents, p. 113, rec.).
On December 14, 1964, respondent workers were
accompanied by the Chief of Police of Talisay, Negros
Occidental to the compound of herein petitioner company
to report for reinstatement per order of the court.
Respondent workers were, however, refused reinstatement
by company accountant Francisco Cusi for he had no order
from plant owner Eduardo Claparols nor from his lawyer
Atty. PlaridelKatalbas, to reinstate respondent workers.
Again, on December 15, 1964, respondent workers were
accompanied by a police officer to the company compound,
but then, they were again refused reinstatement by Cusi on
the same ground.
On January 15, 1965, the CIR Chief Examiner Submitted his
report containing three computations, to wit:
The first computation covers the period February 1, 1957 to
October 31, 1964. The second is up to and including
CORPORATION LAW CASES
LLB 3
December 7, 1962, when the corporation stopped
operations, while the third is only up to June 30, 1957
when the Claparols Steel and Nail Plant ceased to operate
(Annex B, Petition for Review on Certiorari, p. 14, Brief for
appellees, p. 113, rec.) with the explanation that:
6. Since the records of the Claparols Steel
Corporation show that it was established on July 1, 1957
succeeding the Claparols Steel and Nail Plant which ceased
operations on June 30, 1957, and that the Claparols Steel
Corporation stopped operations on December 7, 1962,
three (3) computations are presented herein for the
consideration of this Honorable Court (p. 2, Report of
Examiner, p. 29, rec.).
On January 23, 1965, petitioners filed an opposition
alleging that under the circumstances presently engulfing
the company, petitioner Claparols could not personally
reinstate respondent workers; that assuming the workers
are entitled to back wages, the same should only be limited
to three months pursuant to the court ruling in the case of
Sta. Cecilia Sawmills vs. CIR (L-19273-74, February 20,
1964); and that since Claparols Steel Corporation ceased to
operate on December 7, 1962, re-employment of
respondent workers cannot go beyond December 7, 1962.
A reply to petitioner's opposition was filed by respondent
workers, alleging among others, that Claparols Steel and
Nail Plant and Claparols Steel and Nail Corporation are one
and the same corporation controlled by petitioner
Claparols, with the latter corporation succeeding the
former.
On November 28, 1966, after conducting a series of
hearings on the report of the examiner, respondent Court
issued an order, the dispositive portion of which reads:
WHEREFORE, the Report of the. Examiner filed on January
15, 1965, is hereby approved subject to the foregoing
findings and dispositions. Consequently, the Corporation
Auditing Examiner is directed to recompute the back wages
of complainants Demetrio Garlitos and Alfredo Ongsuco on
the basis of P200.00 and P270.00 a month, respectively; to
compute those of complainant Ignacio Quioyo as aforesaid;
to compute the deductible earnings of complainants
Ongsuco, Jorge Semillano and Garlitos, as found in the body
of this order; and to compute the bonuses of each and
every complainant, except Honorato Quioyo. Thereafter, as
soon as possible, the Examiner should submit a report in
compliance herewith of the Court's further disposition (p.
24, Brief for Respondents, p. 113, rec.).
Page 102 of 160
MAYORDO, M.A
same end was reiterated by private respondents on June
On December 7, 1966, a motion for reconsideration was 14, 1967.
filed by petitioner, assailing respondent Court's ruling that
(1) the ruling in the case of Sta. Cecilia Sawmills Inc. CIR, On July 13, 1967, respondent Court directed a
et. al, does not apply in the case at bar; and (2) that bonus recomputation of the back wages of respondent workers in
should be included in the recoverable wages. accordance with its order dated November 28, 1966. The
said order in part reads:
On December 14, 1966, a counter-opposition was filed by
private respondents alleging that petitioners' motion for WHEREFORE, the Chief Auditing Examiner of the Court or
reconsideration was pro forma, it not making express any of his assistants, is hereby directed to recompute the
reference to the testimony or documentary evidence or to back wages of the workers involved in this case in
the provision of law alleged to be contrary to such findings accordance with the Order of November 28, 1966 within 20
or conclusions of respondent Court. days from receipt of a copy of this Order (p. 28, Brief for
Respondents, p. 113, rec.).
On February 8, 1967, respondent Court of Industrial
Relations dismissed petitioners' motion for reconsideration Then on March 21, 1968, the Chief Examiner came out with
for being pro forma. his report, the disputed portion of which (regarding
bonuses) reads:
Whereupon, petitioners filed a petition for certiorari with
this COURT in G.R. No. L-27272 to set aside the November xxx xxx xxx
28, 1966 order of respondent Court, as well as its February
8, 1967 resolution. Petitioners assigned therein as errors of 4. The yearly bonuses of the employees and laborers
law the very same assignment of errors it raises in the of respondent corporation are given on the following basis:
present case, to wit:
Basic Additional:
I
a. For every dependent 1% of
THE RESPONDENT COURT ERRED AND/OR ACTED WITH monthly salary
GRAVE ABUSE OF DISCRETION, AMOUNTING TO LACK OF
b. For every dependent in elementary grade 2% of
JURISDICTION, IN HOLDING IN THE ORDER UNDER REVIEW
monthly salary
THAT BONUSES SHOULD BE PAID TO THE RESPONDENT
WORKERS DESPITE THE FACT THAT THE SAME WAS NOT c. For every dependent in high school 3% of monthly salary
ADJUDICATED IN ITS ORIGINAL DECISION.
d. For every dependent in college 5% of
II monthly salary
THE RESPONDENT COURT ERRED AND/OR ACTED WITH xxx xxx xxx
GRAVE ABUSE OF DISCRETION, AMOUNTING TO LACK OF
JURISDICTION, IN NOT APPLYING THE DOCTRINE LAID DOWN 7. The computed ... bonuses after deducting the
BY THIS HONORABLE TRIBUNAL IN THE CASE OF "STA. earnings elsewhere of Messrs. Ongsuco, Garlitos and
CECILIA SAWMILLS, INC. VS. C.I.R., ET. AL.," G.R. No. Semillano are as follows:
L-19273-74, PROMULGATED ON FEBRUARY 29, 1964 (pp.
10-11, rec.). Name x xx Bonuses x xx
On April 27, 1967, the Supreme Court denied petitioners' 1. Alfredo Ongsuco P1,620.00
petition for certiorari (p. 77, rec. of L-27272), which was 2. Demetrio Garlitos 1,200.00
reiterated on May 19, 1967 (p. 27, Respondent's Brief, p. 3. Ignacio Quioyo 455.23
113, rec.; p. 81, rec. of L-27272). 4. AserAbancio 461.00
5. Ludovico Belopeños 752.05
On May 3, 1967, private respondents moved to have the 6. Salvador Doroteo 714.70
workers' back wages properly recomputed. A motion to the 7. Rosendo Espinosa 1,075.40
CORPORATION LAW CASES
LLB 3
8. Gaudencio Quioyo 1,167.92
9. Jorge Semillano 1,212.08
10. Maximo Quioyo 449.41
Total P9,107.79
(Pp. 30-31, Respondent's Brief, p. 113, rec.)
On April 16, 1968, petitioners filed their opposition to the
report of the Examiner dated March 21, 1968 on grounds
already rejected by respondent Court in its order dated
November 28, 1966, and by the Supreme Court also in its
ruling in G.R. No. L-27272.
On May 4, 1968, a rejoinder to petitioners' opposition was
filed by private respondents, alleging among others "that
the grounds of petitioners' opposition were the same
grounds raised by them before and passed upon by
respondent Court and this Honorable Tribunal; that this
order of November 28, 1966 which passed upon these issues
became final and executory on June 3, 1967 from the
Honorable Supreme Court. (Order of respondent Court
dated July 13, 1967). [p. 32, Brief for Respondents, p. 113,
rec.].
On July 26, 1968, private respondents filed their motion for
approval of the Report of the Examiner submitted on March
21, 1968, alleging, among others, that petitioners, in their
opposition, did not actually dispute the data elicited by the
Chief Examiner but rather harped on grounds which, as
already stated, had already been turned down by the
Supreme Court.
On October 19, 1968, herein private respondents filed their
"Constancia", submitting the case for resolution of
respondent Court of Industrial Relations.
On May 30, 1969, respondent Court issued an order, subject
of the present appeal, the dispositive portion of which
reads:
WHEREFORE, there being no proof offered to substantiate
respondent Eduardo Claparols' opposition, the Examiner's
Report should be, and it is hereby, APPROVED.
Consequently, pursuant to the decision dated September
16, 1963, respondent ... (petitioners herein) are hereby
directed to pay the respective back wages and bonuses of
the complainants (respondents herein) ... (p. 35, Brief for
Respondents; p. 113, rec.; emphasis supplied).1äwphï1.ñët
Page 103 of 160
On June 7, 1969, petitioners filed a motion for
reconsideration on practically the same grounds previously
raised by them.
On June 30, 1969, respondents filed an opposition to
petitioners' motion for reconsideration, with the following
allegations:
1. The issues raised, namely, whether bonuses
should be included in the award for back wages had already
been resolved by respondent court in its orders dated
November 28, 1966, and December 7, 1966, and in the
Resolution of the Honorable Supreme Court in G.R. No.
L-27272 dated April 26, 1967 and May 19, 1967, and the
same is already a settled and final issue.
2. Petitioners' motion for reconsideration is merely a
rehash of previous arguments, effete and unrejuvenated,
pro forma, and intended merely to delay the proceedings.
As correctly contended by private respondents, the present
petition is barred by Our resolutions of April 26, 1967 and
May 19, 1967 in G.R. No. L-27272 (Eduardo Claparols, et.
al. vs. CIR, et. al.) [pp. 77-83, rec. of L- 27272], dismissing
said case, wherein said petitioners invoked the applicability
of the doctrine in Sta. Cecilia Sawmills, Inc. vs. CIR, et. al.
(L-19273-74, Feb. 29, 1964, 10 SCRA 433) and impugned the
illegality of the order of respondent Court dated November
28, 1966 directing the computation and payment of the
bonuses, aside from back wages on the ground that these
bonuses were not included in the decision of September 16,
1963, which had long become final.
The aforesaid resolutions in G.R. No. L-27272 constitute the
law of the instant case, wherein herein petitioners raised
again practically the same issues invoked in the
abovementioned case. The denial of the petition in G.R.
No. L-27272 suffices to warrant the denial of the present
petition; and We need not go any further.
However, without lending a sympathetic ear to the obvious
desire of herein petitioners of this Court to re-examine —
which would be an exercise in futility — the final ruling in
G.R. No. L-27272, which as above-stated is the law of the
instant case, but solely to remind herein petitioners, We
reiterate the governing principles.
WE uniformly held that "a bonus is not a demandable and
enforceable obligation, except when it is a part of the
wage or salary compensation" (Philippine Education Co. vs.
CIR and the Union of Philippine Co. Employees [NLU], 92
MAYORDO, M.A
Phil. 381; Ansay, et. al. vs. National Development Co., et.
al., 107 Phil. 998, 999; Emphasis supplied).
In Atok Big Wedge Mining Co. vs. Atok Big Wedge Mutual
Benefit Association (92 Phil. 754), this Court, thru Justice
Labrador, held:
Whether or not bonus forms part of wages depends upon
the condition or circumstance for its payment. If it is an
additional compensation WHICH THE EMPLOYER PROMISED
AND AGREED to give without any condition imposed for its
payment ... then it is part of the wage. (Emphasis
supplied).1äwphï1.ñët
In Altomonte vs. Philippine American Drug Co. (106 Phil.
137), the Supreme Court held that an employee is not
entitled to bonus where there is no showing that it had
been granted by the employer to its employees periodically
or regularly as to become part of their wages or salaries.
The clear implication is that bonus is recoverable as part of
the wage or salary where the employer regularly or
periodically gives it to employees.
American jurisprudence equally regards bonuses as part of
compensation or recoverable wages.
Thus, it was held that "... it follows that in determining the
regular rate of pay, a bonus which in fact constitutes PART
OF AN EMPLOYEE'S compensation, rather than a true gift or
gratuity, has to be taken into consideration." (48 Am. Jur.
2d, Labor and Labor Relations, No. 1555, citing the cases of
Triple "AAA" Co. vs. Wirtz and Haber vs. Americana
Corporation; Emphasis supplied). It was further held that
"... the regular rate includes incentive bonuses paid to the
employees in addition to the guaranteed base rates
regardless of any contract provision to the contrary and
even though such bonuses could not be determined or paid
until such time after the pay day" (48 Am. Jur. 2d, Labor
and Labor Relations, No. 1555, citing the case of Walling vs.
Harnischfeger Corp., 325 US 427, 89 L Ed 1711, 65 S Ct.
1246; Emphasis supplied).1äwphï1.ñët
Petitioners in the present case do not dispute that as a
matter of tradition, the company has been doling out
bonuses to employees. In fact, the company balance sheets
for the years 1956 to 1962 contained bonus and pension
computations which were never repudiated or questioned
by petitioners. As such, bonus for a given year earmarked
as a matter of tradition for distribution to employees has
formed part of their recoverable wages from the company.
Moreover, with greater reason, should recovery of bonuses
CORPORATION LAW CASES
LLB 3
as part of back wages be observed in the present case since
the company, in the light of the very admission of company
accountant Francisco Cusi, distributes bonuses to its
employees even if the company has suffered losses.
Specifically, petitioner company has done this in 1962
(t.s.n., p. 149, Sept. 20, 1965).
Since bonuses are part of back wages of private
respondents, the order of May 30, 1969, directing the
payment of their bonuses, did not amend the decision of
September 16, 1963 of respondent Court directing payment
of their wages, which has long become final and executory,
in the same way that the previous order of May 14, 1964
granting execution of said decision of September 16, 1963
also directed the computation of the wages to be paid to
private respondents as decreed by the decision of
September 16, 1963. All the orders of May 30, 1969,
November 28, 1966 and May 14, 1964 merely implement the
already final and executory decision of September 16,
1963.
Petitioners insist that We adopt the ruling in the Sta.
Cecilia Sawmills case wherein the recoverable back wages
were limited to only three (3) months; because as in the
Sta. Cecilia Sawmills case, the Claparols Steel and Nail
Plant ceased operations due to enormous business reverses.
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 petitioners. It is very clear that the latter
corporation was a continuation and successor of the first
entity, and its emergence was skillfully timed to avoid the
financial liability that already attached to its predecessor,
the Claparols Steel and Nail Plant. Both predecessors and
successor were owned and controlled by the 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 stocks of the Claparols Steel
Corporation (the second corporation) was owned by
respondent (herein petitioner) 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
Page 104 of 160
deliberately and maliciously designed to evade its financial
obligation to its employees.
It is well remembering that in Yutivo& Sons Hardware
Company vs. Court of Tax Appeals (L-13203, Jan. 28, 1961,
1 SCRA 160), We held that 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 or persons, or, in the case of two
corporations, will merge them into one.
In Liddel& Company, Inc. vs. Collector of Internal Revenue
(L-9687, June 30, 1961, 2 SCRA 632), this Court likewise
held that where a corporation is a dummy and serves no
business purpose and is intended only as a blind, the
corporate fiction may be ignored.
In Commissioner of Internal Revenue vs. Norton and
Harrison Company (L-17618, Aug. 31, 1964, 11 SCRA 714),
We ruled that where a corporation is merely an adjunct,
business conduit or alter ego of another corporation, the
fiction of separate and distinct corporate entities should be
disregarded.
To the same uniform effect are the decisions in the cases of
Republic vs. Razon (L-17462, May 29, 1967, 20 SCRA 234)
and A.D. Santos, Inc. vs. Vasquez (L-23586, March 20, 1968,
22 SCRA 1156).
WE agree with respondent Court of Industrial Relations,
therefore, that the amount of back wages recoverable by
respondent workers from petitioners should be the amount
accruing up to December 7, 1962 when the Claparols Steel
Corporation ceased operations.
WHEREFORE, PETITION IS HEREBY DENIED WITH TREBLE
COSTS AGAINST PETITIONERS TO BE PAID BY THEIR
COUNSEL.
G.R. No. L-23893 October 29, 1968
VILLA REY TRANSIT, INC., plaintiff-appellant, vs. EUSEBIO
E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and
PUBLIC SERVICE COMMISSION, defendants.
EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION
CO., INC., defendants-appellants.
PANGASINAN TRANSPORTATION CO., INC., third-party
plaintiff-appellant, vs. JOSE M. VILLARAMA, third-party
defendant-appellee.
ANGELES, J.:
MAYORDO, M.A
This is a tri-party appeal from the decision of the Court of
First Instance of Manila, Civil Case No. 41845, declaring null
and void the sheriff's sale of two certificates of public
convenience in favor of defendant Eusebio E. Ferrer and
the subsequent sale thereof by the latter to defendant
Pangasinan Transportation Co., Inc.; declaring the plaintiff
Villa Rey Transit, Inc., to be the lawful owner of the said
certificates of public convenience; and ordering the private
defendants, jointly and severally, to pay to the plaintiff,
the sum of P5,000.00 as and for attorney's fees. The case
against the PSC was dismissed.
The rather ramified circumstances of the instant case can
best be understood by a chronological narration of the
essential facts, to wit:
Prior to 1959, Jose M. Villarama was an operator of a bus
transportation, under the business name of Villa Rey
Transit, pursuant to certificates of public convenience
granted him by the Public Service Commission (PSC, for
short) in Cases Nos. 44213 and 104651, which authorized
him to operate a total of thirty-two (32) units on various
routes or lines from Pangasinan to Manila, and vice-versa.
On January 8, 1959, he sold the aforementioned two
certificates of public convenience to the Pangasinan
Transportation Company, Inc. (otherwise known as
Pantranco), for P350,000.00 with the condition, among
others, that the seller (Villarama) "shall not for a period of
10 years from the date of this sale, apply for any TPU
service identical or competing with the buyer."
Barely three months thereafter, or on March 6, 1959: a
corporation called Villa Rey Transit, Inc. (which shall be
referred to hereafter as the Corporation) was organized
with a capital stock of P500,000.00 divided into 5,000
shares of the par value of P100.00 each; P200,000.00 was
the subscribed stock; Natividad R. Villarama (wife of Jose
M. Villarama) was one of the incorporators, and she
subscribed for P1,000.00; the balance of P199,000.00 was
subscribed by the brother and sister-in-law of Jose M.
Villarama; of the subscribed capital stock, P105,000.00 was
paid to the treasurer of the corporation, who was Natividad
R. Villarama.
In less than a month after its registration with the
Securities and Exchange Commission (March 10, 1959), the
Corporation, on April 7, 1959, bought five certificates of
public convenience, forty-nine buses, tools and equipment
from one Valentin Fernando, for the sum of P249,000.00, of
which P100,000.00 was paid upon the signing of the
CORPORATION LAW CASES
LLB 3
contract; P50,000.00 was payable upon the final approval
of the sale by the PSC; P49,500.00 one year after the final
approval of the sale; and the balance of P50,000.00 "shall
be paid by the BUYER to the different suppliers of the
SELLER."
The very same day that the aforementioned contract of
sale was executed, the parties thereto immediately applied
with the PSC for its approval, with a prayer for the issuance
of a provisional authority in favor of the vendee
Corporation to operate the service therein involved.1 On
May 19, 1959, the PSC granted the provisional permit
prayed for, upon the condition that "it may be modified or
revoked by the Commission at any time, shall be subject to
whatever action that may be taken on the basic application
and shall be valid only during the pendency of said
application." Before the PSC could take final action on said
application for approval of sale, however, the Sheriff of
Manila, on July 7, 1959, levied on two of the five
certificates of public convenience involved therein, namely,
those issued under PSC cases Nos. 59494 and 63780,
pursuant to a writ of execution issued by the Court of First
Instance of Pangasinan in Civil Case No. 13798, in favor of
Eusebio Ferrer, plaintiff, judgment creditor, against
Valentin Fernando, defendant, judgment debtor. The
Sheriff made and entered the levy in the records of the
PSC. On July 16, 1959, a public sale was conducted by the
Sheriff of the said two certificates of public convenience.
Ferrer was the highest bidder, and a certificate of sale was
issued in his name.
Thereafter, Ferrer sold the two certificates of public
convenience to Pantranco, and jointly submitted for
approval their corresponding contract of sale to the PSC.2
Pantranco therein prayed that it be authorized provisionally
to operate the service involved in the said two certificates.
The applications for approval of sale, filed before the PSC,
by Fernando and the Corporation, Case No. 124057, and
that of Ferrer and Pantranco, Case No. 126278, were
scheduled for a joint hearing. In the meantime, to wit, on
July 22, 1959, the PSC issued an order disposing that during
the pendency of the cases and before a final resolution on
the aforesaid applications, the Pantranco shall be the one
to operate provisionally the service under the two
certificates embraced in the contract between Ferrer and
Pantranco. The Corporation took issue with this particular
ruling of the PSC and elevated the matter to the Supreme
Court,3 which decreed, after deliberation, that until the
issue on the ownership of the disputed certificates shall
have been finally settled by the proper court, the
Page 105 of 160
Corporation should be the one to operate the lines
provisionally.
On November 4, 1959, the Corporation filed in the Court of
First Instance of Manila, a complaint for the annulment of
the sheriff's sale of the aforesaid two certificates of public
convenience (PSC Cases Nos. 59494 and 63780) in favor of
the defendant Ferrer, and the subsequent sale thereof by
the latter to Pantranco, against Ferrer, Pantranco and the
PSC. The plaintiff Corporation prayed therein that all the
orders of the PSC relative to the parties' dispute over the
said certificates be annulled.
In separate answers, the defendants Ferrer and Pantranco
averred that the plaintiff Corporation had no valid title to
the certificates in question because the contract pursuant
to which it acquired them from Fernando was subject to a
suspensive condition — the approval of the PSC — which has
not yet been fulfilled, and, therefore, the Sheriff's levy and
the consequent sale at public auction of the certificates
referred to, as well as the sale of the same by Ferrer to
Pantranco, were valid and regular, and vested unto
Pantranco, a superior right thereto.
Pantranco, on its part, filed a third-party complaint against
Jose M. Villarama, alleging that Villarama and the
Corporation, are one and the same; that Villarama and/or
the Corporation was disqualified from operating the two
certificates in question by virtue of the aforementioned
agreement between said Villarama and Pantranco, which
stipulated that Villarama "shall not for a period of 10 years
from the date of this sale, apply for any TPU service
identical or competing with the buyer."
Upon the joinder of the issues in both the complaint and
third-party complaint, the case was tried, and thereafter
decision was rendered in the terms, as above stated.
As stated at the beginning, all the parties involved have
appealed from the decision. They submitted a joint record
on appeal.
Pantranco disputes the correctness of the decision insofar
as it holds that Villa Rey Transit, Inc. (Corporation) is a
distinct and separate entity from Jose M. Villarama; that
the restriction clause in the contract of January 8, 1959
between Pantranco and Villarama is null and void; that the
Sheriff's sale of July 16, 1959, is likewise null and void; and
the failure to award damages in its favor and against
Villarama.
MAYORDO, M.A
Ferrer, for his part, challenges the decision insofar as it
holds that the sheriff's sale is null and void; and the sale of
the two certificates in question by Valentin Fernando to the
Corporation, is valid. He also assails the award of P5,000.00
as attorney's fees in favor of the Corporation, and the
failure to award moral damages to him as prayed for in his
counterclaim.
The Corporation, on the other hand, prays for a review of
that portion of the decision awarding only P5,000.00 as
attorney's fees, and insisting that it is entitled to an award
of P100,000.00 by way of exemplary damages.
After a careful study of the facts obtaining in the case, the
vital issues to be resolved are: (1) Does the stipulation
between Villarama and Pantranco, as contained in the deed
of sale, that the former "SHALL NOT FOR A PERIOD OF 10
YEARS FROM THE DATE OF THIS SALE, APPLY FOR ANY TPU
SERVICE IDENTICAL OR COMPETING WITH THE BUYER," apply
to new lines only or does it include existing lines?; (2)
Assuming that said stipulation covers all kinds of lines, is
such stipulation valid and enforceable?; (3) In the
affirmative, that said stipulation is valid, did it bind the
Corporation?
For convenience, We propose to discuss the foregoing issues
by starting with the last proposition.
The evidence has disclosed that Villarama, albeit was not
an incorporator or stockholder of the Corporation, alleging
that he did not become such, because he did not have
sufficient funds to invest, his wife, however, was an
incorporator with the least subscribed number of shares,
and was elected treasurer of the Corporation. The finances
of the Corporation which, under all concepts in the law, are
supposed to be under the control and administration of the
treasurer keeping them as trust fund for the Corporation,
were, nonetheless, manipulated and disbursed as if they
were the private funds of Villarama, in such a way and
extent that Villarama appeared to be the actual owner-
treasurer of the business without regard to the rights of the
stockholders. The following testimony of Villarama,4
together with the other evidence on record, attests to that
effect:
Q. Doctor, I want to go back again to the incorporation
of the Villa Rey Transit, Inc. You heard the testimony
presented here by the bank regarding the initial opening
deposit of ONE HUNDRED FIVE THOUSAND PESOS, of which
amount Eighty-Five Thousand Pesos was a check drawn by
yourself personally. In the direct examination you told the
CORPORATION LAW CASES MAYORDO, M.A
LLB 3

Court that the reason you drew a check for Eighty-Five Q. The subscription of your brother-in-law, Mr. Reyes, is
Thousand Pesos was because you and your wife, or your Fifty-Two Thousand Pesos, did your wife give you Fifty-two Exhibits 6 to 19 and Exh. 22, which are photostatic copies
wife, had spent the money of the stockholders given to her Thousand Pesos? of ledger entries and vouchers showing that Villarama had
for incorporation. Will you please tell the Honorable Court co-mingled his personal funds and transactions with those
if you knew at the time your wife was spending the money A. I have testified before that sometimes my wife gives made in the name of the Corporation, are very illuminating
to pay debts, you personally knew she was spending the me money and I do not know exactly for what. evidence. Villarama has assailed the admissibility of these
money of the incorporators? exhibits, contending that no evidentiary value whatsoever
The evidence further shows that the initial cash should be given to them since "they were merely
A. You know my money and my wife's money are one. capitalization of the corporation of P105,000.00 was mostly photostatic copies of the originals, the best evidence being
We never talk about those things. financed by Villarama. Of the P105,000.00 deposited in the the originals themselves." According to him, at the time
First National City Bank of New York, representing the Pantranco offered the said exhibits, it was the most likely
Q. Doctor, your answer then is that since your money initial paid-up capital of the Corporation, P85,000.00 was possessor of the originals thereof because they were stolen
and your wife's money are one money and you did not know covered by Villarama's personal check. The deposit slip for from the files of the Corporation and only Pantranco was
when your wife was paying debts with the incorporator's the said amount of P105,000.00 was admitted in evidence able to produce the alleged photostat copies thereof.
money? as Exh. 23, which shows on its face that P20,000.00 was
paid in cash and P85,000.00 thereof was covered by Check Section 5 of Rule 130 of the Rules of Court provides for the
A. Because sometimes she uses my money, and No. F-50271 of the First National City Bank of New York. requisites for the admissibility of secondary evidence when
sometimes the money given to her she gives to me and I The testimonies of Alfonso Sancho5 and Joaquin Amansec,6 the original is in the custody of the adverse party, thus: (1)
deposit the money. both employees of said bank, have proved that the drawer opponent's possession of the original; (2) reasonable notice
of the check was Jose Villarama himself. to opponent to produce the original; (3) satisfactory proof
Q. Actually, aside from your wife, you were also the of its existence; and (4) failure or refusal of opponent to
custodian of some of the incorporators here, in the Another witness, Celso Rivera, accountant of the produce the original in court.11 Villarama has practically
beginning? Corporation, testified that while in the books of the admitted the second and fourth requisites.12 As to the
corporation there appears an entry that the treasurer third, he admitted their previous existence in the files of
A. Not necessarily, they give to my wife and when my received P95,000.00 as second installment of the paid-in the Corporation and also that he had seen some of them.13
wife hands to me I did not know it belonged to the subscriptions, and, subsequently, also P100,000.00 as the Regarding the first element, Villarama's theory is that since
incorporators. first installment of the offer for second subscriptions worth even at the time of the issuance of the subpoena duces
P200,000.00 from the original subscribers, yet Villarama tecum, the originals were already missing, therefore, the
Q. It supposes then your wife gives you some of the directed him (Rivera) to make vouchers liquidating the Corporation was no longer in possession of the same.
money received by her in her capacity as treasurer of the sums.7 Thus, it was made to appear that the P95,000.00 However, it is not necessary for a party seeking to
corporation? was delivered to Villarama in payment for equipment introduce secondary evidence to show that the original is in
purchased from him, and the P100,000.00 was loaned as the actual possession of his adversary. It is enough that the
A. Maybe. advances to the stockholders. The said accountant, circumstances are such as to indicate that the writing is in
however, testified that he was not aware of any amount of his possession or under his control. Neither is it required
Q. What did you do with the money, deposit in a regular money that had actually passed hands among the parties that the party entitled to the custody of the instrument
account? involved,8 and actually the only money of the corporation should, on being notified to produce it, admit having it in
was the P105,000.00 covered by the deposit slip Exh. 23, of his possession.14 Hence, secondary evidence is admissible
A. Deposit in my account. which as mentioned above, P85,000.00 was paid by where he denies having it in his possession. The party
Villarama's personal check. calling for such evidence may introduce a copy thereof as
Q. Of all the money given to your wife, she did not in the case of loss. For, among the exceptions to the best
receive any check? Further, the evidence shows that when the Corporation was evidence rule is "when the original has been lost,
in its initial months of operation, Villarama purchased and destroyed, or cannot be produced in court."15 The originals
A. I do not remember. paid with his personal checks Ford trucks for the of the vouchers in question must be deemed to have been
Corporation. Exhibits 20 and 21 disclose that the said lost, as even the Corporation admits such loss. Viewed upon
Q. Is it usual for you, Doctor, to be given Fifty Thousand purchases were paid by Philippine Bank of Commerce this light, there can be no doubt as to the admissibility in
Pesos without even asking what is this? Checks Nos. 992618-B and 993621-B, respectively. These evidence of Exhibits 6 to 19 and 22.
checks have been sufficiently established by Fausto Abad,
xxx xxxxxx Assistant Accountant of Manila Trading & Supply Co., from Taking account of the foregoing evidence, together with
which the trucks were purchased9 and Aristedes Solano, an Celso Rivera's testimony,16 it would appear that: Villarama
JUDGE: Reform the question. employee of the Philippine Bank of Commerce,10 as having supplied the organization expenses and the assets of the
been drawn by Villarama. Corporation, such as trucks and equipment;17 there was no

Page 106 of 160

CORPORATION LAW CASES
LLB 3
actual payment by the original subscribers of the amounts
of P95,000.00 and P100,000.00 as appearing in the books;18
Villarama made use of the money of the Corporation and
deposited them to his private accounts;19 and the
Corporation paid his personal accounts.20
Villarama himself admitted that he mingled the corporate
funds with his own money.21 He also admitted that gasoline
purchases of the Corporation were made in his name22
because "he had existing account with Stanvac which was
properly secured and he wanted the Corporation to benefit
from the rebates that he received."23
The foregoing circumstances are strong persuasive evidence
showing that Villarama has been too much involved in the
affairs of the Corporation to altogether negative the claim
that he was only a part-time general manager. They show
beyond doubt that the Corporation is his alter ego.
It is significant that not a single one of the acts enumerated
above as proof of Villarama's oneness with the Corporation
has been denied by him. On the contrary, he has admitted
them with offered excuses.
Villarama has admitted, for instance, having paid
P85,000.00 of the initial capital of the Corporation with the
lame excuse that "his wife had requested him to reimburse
the amount entrusted to her by the incorporators and
which she had used to pay the obligations of Dr. Villarama
(her husband) incurred while he was still the owner of Villa
Rey Transit, a single proprietorship." But with his admission
that he had received P350,000.00 from Pantranco for the
sale of the two certificates and one unit,24 it becomes
difficult to accept Villarama's explanation that he and his
wife, after consultation,25 spent the money of their
relatives (the stockholders) when they were supposed to
have their own money. Even if Pantranco paid the
P350,000.00 in check to him, as claimed, it could have
been easy for Villarama to have deposited said check in his
account and issued his own check to pay his obligations.
And there is no evidence adduced that the said amount of
P350,000.00 was all spent or was insufficient to settle his
prior obligations in his business, and in the light of the
stipulation in the deed of sale between Villarama and
Pantranco that P50,000.00 of the selling price was
earmarked for the payments of accounts due to his
creditors, the excuse appears unbelievable.
On his having paid for purchases by the Corporation of
trucks from the Manila Trading & Supply Co. with his
personal checks, his reason was that he was only sharing
Page 107 of 160
with the Corporation his credit with some companies. And
his main reason for mingling his funds with that of the
Corporation and for the latter's paying his private bills is
that it would be more convenient that he kept the money
to be used in paying the registration fees on time, and
since he had loaned money to the Corporation, this would
be set off by the latter's paying his bills. Villarama
admitted, however, that the corporate funds in his
possession were not only for registration fees but for other
important obligations which were not specified.26
Indeed, while Villarama was not the Treasurer of the
Corporation but was, allegedly, only a part-time manager,
27 he admitted not only having held the corporate money
but that he advanced and lent funds for the Corporation,
and yet there was no Board Resolution allowing it.28
Villarama's explanation on the matter of his involvement
with the corporate affairs of the Corporation only renders
more credible Pantranco's claim that his control over the
corporation, especially in the management and disposition
of its funds, was so extensive and intimate that it is
impossible to segregate and identify which money belonged
to whom. The interference of Villarama in the complex
affairs of the corporation, and particularly its finances, are
much too inconsistent with the ends and purposes of the
Corporation law, which, precisely, seeks to separate
personal responsibilities from corporate undertakings. It is
the very essence of incorporation that the acts and conduct
of the corporation be carried out in its own corporate name
because it has its own personality.
The doctrine that a corporation is a legal entity distinct
and separate from the members and stockholders who
compose it is recognized and respected in all cases which
are within reason and the law.29 When the fiction is urged
as a means of perpetrating a fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection
of a monopoly or generally the perpetration of knavery or
crime,30 the veil with which the law covers and isolates
the corporation from the members or stockholders who
compose it will be lifted to allow for its consideration
merely as an aggregation of individuals.
Upon the foregoing considerations, We are of the opinion,
and so hold, that the preponderance of evidence have
shown that the Villa Rey Transit, Inc. is an alter ego of Jose
M. Villarama, and that the restrictive clause in the contract
entered into by the latter and Pantranco is also enforceable
and binding against the said Corporation. For the rule is
MAYORDO, M.A
that a seller or promisor may not make use of a corporate
entity as a means of evading the obligation of his covenant.
31 Where the Corporation is substantially the alter ego of
the covenantor to the restrictive agreement, it can be
enjoined from competing with the covenantee.32
The Corporation contends that even on the supposition that
Villa Rey Transit, Inc. and Villarama are one and the same,
the restrictive clause in the contract between Villarama
and Pantranco does not include the purchase of existing
lines but it only applies to application for the new lines.
The clause in dispute reads thus:
(4) The SELLER shall not, for a period of ten (10)
years from the date of this sale apply for any TPU service
identical or competing with the BUYER. (Emphasis supplied)
As We read the disputed clause, it is evident from the
context thereof that the intention of the parties was to
eliminate the seller as a competitor of the buyer for ten
years along the lines of operation covered by the
certificates of public convenience subject of their
transaction. The word "apply" as broadly used has for frame
of reference, a service by the seller on lines or routes that
would compete with the buyer along the routes acquired by
the latter. In this jurisdiction, prior authorization is needed
before anyone can operate a TPU service,33whether the
service consists in a new line or an old one acquired from a
previous operator. The clear intention of the parties was to
prevent the seller from conducting any competitive line for
10 years since, anyway, he has bound himself not to apply
for authorization to operate along such lines for the
duration of such period.34
If the prohibition is to be applied only to the acquisition of
new certificates of public convenience thru an application
with the Public Service Commission, this would, in effect,
allow the seller just the same to compete with the buyer as
long as his authority to operate is only acquired thru
transfer or sale from a previous operator, thus defeating
the intention of the parties. For what would prevent the
seller, under the circumstances, from having a
representative or dummy apply in the latter's name and
then later on transferring the same by sale to the seller?
Since stipulations in a contract is the law between the
contracting parties,
Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone
his due, and observe honesty and good faith. (Art. 19, New
Civil Code.)
CORPORATION LAW CASES
LLB 3
We are not impressed of Villarama's contention that the re-
wording of the two previous drafts of the contract of sale
between Villarama and Pantranco is significant in that as it
now appears, the parties intended to effect the least
restriction. We are persuaded, after an examination of the
supposed drafts, that the scope of the final stipulation,
while not as long and prolix as those in the drafts, is just as
broad and comprehensive. At most, it can be said that the
re-wording was done merely for brevity and simplicity.
The evident intention behind the restriction was to
eliminate the sellers as a competitor, and this must be,
considering such factors as the good will35 that the seller
had already gained from the riding public and his adeptness
and proficiency in the trade. On this matter, Corbin, an
authority on Contracts has this to say.36
When one buys the business of another as a going concern,
he usually wishes to keep it going; he wishes to get the
location, the building, the stock in trade, and the
customers. He wishes to step into the seller's shoes and to
enjoy the same business relations with other men. He is
willing to pay much more if he can get the "good will" of
the business, meaning by this the good will of the
customers, that they may continue to tread the old
footpath to his door and maintain with him the business
relations enjoyed by the seller.
... In order to be well assured of this, he obtains and pays
for the seller's promise not to reopen business in
competition with the business sold.
As to whether or not such a stipulation in restraint of trade
is valid, our jurisprudence on the matter37says:
The law concerning contracts which tend to restrain
business or trade has gone through a long series of changes
from time to time with the changing condition of trade and
commerce. With trifling exceptions, said changes have
been a continuous development of a general rule. The early
cases show plainly a disposition to avoid and annul all
contract which prohibited or restrained any one from using
a lawful trade "at any time or at any place," as being
against the benefit of the state. Later, however, the rule
became well established that if the restraint was limited to
"a certain time" and within "a certain place," such contracts
were valid and not "against the benefit of the state." Later
cases, and we think the rule is now well established, have
held that a contract in restraint of trade is valid providing
there is a limitation upon either time or place. A contract,
Page 108 of 160
however, which restrains a man from entering into business
or trade without either a limitation as to time or place, will
be held invalid.
The public welfare of course must always be considered
and if it be not involved and the restraint upon one party is
not greater than protection to the other requires, contracts
like the one we are discussing will be sustained. The
general tendency, we believe, of modern authority, is to
make the test whether the restraint is reasonably necessary
for the protection of the contracting parties. If the
contract is reasonably necessary to protect the interest of
the parties, it will be upheld. (Emphasis supplied.)
Analyzing the characteristics of the questioned stipulation,
We find that although it is in the nature of an agreement
suppressing competition, it is, however, merely ancillary or
incidental to the main agreement which is that of sale. The
suppression or restraint is only partial or limited: first, in
scope, it refers only to application for TPU by the seller in
competition with the lines sold to the buyer; second, in
duration, it is only for ten (10) years; and third, with
respect to situs or territory, the restraint is only along the
lines covered by the certificates sold. In view of these
limitations, coupled with the consideration of P350,000.00
for just two certificates of public convenience, and
considering, furthermore, that the disputed stipulation is
only incidental to a main agreement, the same is
reasonable and it is not harmful nor obnoxious to public
service.38 It does not appear that the ultimate result of the
clause or stipulation would be to leave solely to Pantranco
the right to operate along the lines in question, thereby
establishing monopoly or predominance approximating
thereto. We believe the main purpose of the restraint was
to protect for a limited time the business of the buyer.
Indeed, the evils of monopoly are farfetched here. There
can be no danger of price controls or deterioration of the
service because of the close supervision of the Public
Service Commission.39 This Court had stated long ago,40
that "when one devotes his property to a use in which the
public has an interest, he virtually grants to the public an
interest in that use and submits it to such public use under
reasonable rules and regulations to be fixed by the Public
Utility Commission."
Regarding that aspect of the clause that it is merely
ancillary or incidental to a lawful agreement, the
underlying reason sustaining its validity is well explained in
36 Am. Jur. 537-539, to wit:
MAYORDO, M.A
... Numerous authorities hold that a covenant which is
incidental to the sale and transfer of a trade or business,
and which purports to bind the seller not to engage in the
same business in competition with the purchaser, is lawful
and enforceable. While such covenants are designed to
prevent competition on the part of the seller, it is
ordinarily neither their purpose nor effect to stifle
competition generally in the locality, nor to prevent it at all
in a way or to an extent injurious to the public. The
business in the hands of the purchaser is carried on just as
it was in the hands of the seller; the former merely takes
the place of the latter; the commodities of the trade are as
open to the public as they were before; the same
competition exists as existed before; there is the same
employment furnished to others after as before; the profits
of the business go as they did before to swell the sum of
public wealth; the public has the same opportunities of
purchasing, if it is a mercantile business; and production is
not lessened if it is a manufacturing plant.
The reliance by the lower court on tile case of Red Line
Transportation Co. v. Bachrach41 and finding that the
stipulation is illegal and void seems misplaced. In the said
Red Line case, the agreement therein sought to be
enforced was virtually a division of territory between two
operators, each company imposing upon itself an obligation
not to operate in any territory covered by the routes of the
other. Restraints of this type, among common carriers have
always been covered by the general rule invalidating
agreements in restraint of trade. 42
Neither are the other cases relied upon by the plaintiff-
appellee applicable to the instant case. In Pampanga Bus
Co., Inc. v. Enriquez,43the undertaking of the applicant
therein not to apply for the lifting of restrictions imposed
on his certificates of public convenience was not an
ancillary or incidental agreement. The restraint was the
principal objective. On the other hand, in Red Line
Transportation Co., Inc. v. Gonzaga,44 the restraint there in
question not to ask for extension of the line, or trips, or
increase of equipment — was not an agreement between
the parties but a condition imposed in the certificate of
public convenience itself.
Upon the foregoing considerations, Our conclusion is that
the stipulation prohibiting Villarama for a period of 10
years to "apply" for TPU service along the lines covered by
the certificates of public convenience sold by him to
Pantranco is valid and reasonable. Having arrived at this
conclusion, and considering that the preponderance of the
evidence have shown that Villa Rey Transit, Inc. is itself the
CORPORATION LAW CASES
LLB 3
alter ego of Villarama, We hold, as prayed for in
Pantranco's third party complaint, that the said Corporation
should, until the expiration of the 1-year period
abovementioned, be enjoined from operating the line
subject of the prohibition.
To avoid any misunderstanding, it is here to be emphasized
that the 10-year prohibition upon Villarama is not against
his application for, or purchase of, certificates of public
convenience, but merely the operation of TPU along the
lines covered by the certificates sold by him to Pantranco.
Consequently, the sale between Fernando and the
Corporation is valid, such that the rightful ownership of the
disputed certificates still belongs to the plaintiff being the
prior purchaser in good faith and for value thereof. In view
of the ancient rule of caveat emptor prevailing in this
jurisdiction, what was acquired by Ferrer in the sheriff's
sale was only the right which Fernando, judgment debtor,
had in the certificates of public convenience on the day of
the sale.45
Accordingly, by the "Notice of Levy Upon Personalty" the
Commissioner of Public Service was notified that "by virtue
of an Order of Execution issued by the Court of First
Instance of Pangasinan, the rights, interests, or
participation which the defendant, VALENTIN A. FERNANDO
— in the above entitled case may have in the following
realty/personalty is attached or levied upon, to wit: The
rights, interests and participation on the Certificates of
Public Convenience issued to Valentin A. Fernando, in Cases
Nos. 59494, etc. ... Lines — Manila to Lingayen, Dagupan,
etc. vice versa." Such notice of levy only shows that Ferrer,
the vendee at auction of said certificates, merely stepped
into the shoes of the judgment debtor. Of the same
principle is the provision of Article 1544 of the Civil Code,
that "If the same thing should have been sold to different
vendees, the ownership shall be transferred to the person
who may have first taken possession thereof in good faith,
if it should be movable property."
There is no merit in Pantranco and Ferrer's theory that the
sale of the certificates of public convenience in question,
between the Corporation and Fernando, was not
consummated, it being only a conditional sale subject to
the suspensive condition of its approval by the Public
Service Commission. While section 20(g) of the Public
Service Act provides that "subject to established limitation
and exceptions and saving provisions to the contrary, it
shall be unlawful for any public service or for the owner,
lessee or operator thereof, without the approval and
authorization of the Commission previously had ... to sell,
Page 109 of 160
alienate, mortgage, encumber or lease its property,
franchise, certificates, privileges, or rights or any part
thereof, ...," the same section also provides:
... Provided, however, That nothing herein contained shall
be construed to prevent the transaction from being
negotiated or completed before its approval or to prevent
the sale, alienation, or lease by any public service of any of
its property in the ordinary course of its business.
It is clear, therefore, that the requisite approval of the PSC
is not a condition precedent for the validity and
consummation of the sale.
Anent the question of damages allegedly suffered by the
parties, each of the appellants has its or his own version to
allege.
Villa Rey Transit, Inc. claims that by virtue of the "tortious
acts" of defendants (Pantranco and Ferrer) in acquiring the
certificates of public convenience in question, despite
constructive and actual knowledge on their part of a prior
sale executed by Fernando in favor of the said corporation,
which necessitated the latter to file the action to annul the
sheriff's sale to Ferrer and the subsequent transfer to
Pantranco, it is entitled to collect actual and compensatory
damages, and attorney's fees in the amount of P25,000.00.
The evidence on record, however, does not clearly show
that said defendants acted in bad faith in their acquisition
of the certificates in question. They believed that because
the bill of sale has yet to be approved by the Public Service
Commission, the transaction was not a consummated sale,
and, therefore, the title to or ownership of the certificates
was still with the seller. The award by the lower court of
attorney's fees of P5,000.00 in favor of Villa Rey Transit,
Inc. is, therefore, without basis and should be set aside.
Eusebio Ferrer's charge that by reason of the filing of the
action to annul the sheriff's sale, he had suffered and
should be awarded moral, exemplary damages and
attorney's fees, cannot be entertained, in view of the
conclusion herein reached that the sale by Fernando to the
Corporation was valid.
Pantranco, on the other hand, justifies its claim for
damages with the allegation that when it purchased
ViIlarama's business for P350,000.00, it intended to build up
the traffic along the lines covered by the certificates but it
was rot afforded an opportunity to do so since barely three
months had elapsed when the contract was violated by
Villarama operating along the same lines in the name of
MAYORDO, M.A
Villa Rey Transit, Inc. It is further claimed by Pantranco
that the underhanded manner in which Villarama violated
the contract is pertinent in establishing punitive or moral
damages. Its contention as to the proper measure of
damages is that it should be the purchase price of
P350,000.00 that it paid to Villarama. While We are fully in
accord with Pantranco's claim of entitlement to damages it
suffered as a result of Villarama's breach of his contract
with it, the record does not sufficiently supply the
necessary evidentiary materials upon which to base the
award and there is need for further proceedings in the
lower court to ascertain the proper amount.
PREMISES CONSIDERED, the judgment appealed from is
hereby modified as follows:
1. The sale of the two certificates of public
convenience in question by Valentin Fernando to Villa Rey
Transit, Inc. is declared preferred over that made by the
Sheriff at public auction of the aforesaid certificate of
public convenience in favor of Eusebio Ferrer;
2. Reversed, insofar as it dismisses the third-party
complaint filed by Pangasinan Transportation Co. against
Jose M. Villarama, holding that Villa Rey Transit, Inc. is an
entity distinct and separate from the personality of Jose M.
Villarama, and insofar as it awards the sum of P5,000.00 as
attorney's fees in favor of Villa Rey Transit, Inc.;
3. The case is remanded to the trial court for the
reception of evidence in consonance with the above
findings as regards the amount of damages suffered by
Pantranco; and
4. On equitable considerations, without costs. So
ordered.
[G.R. No. 160039. June 29, 2004]
RAYMUNDO ODANI SECOSA, EL BUENASENSO SY and
DASSAD WAREHOUSING and PORT SERVICES,
INCORPORATED, petitioners, vs. HEIRS OF ERWIN SUAREZ
FRANCISCO, respondents.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review under Rule 45 of the Rules of
Court seeking the reversal of the decision[1] of the Court of
Appeals dated February 27, 2003 in CA-G.R. CV No. 61868,
which affirmed in toto the June 19, 1998 decision[2] of
CORPORATION LAW CASES
LLB 3
Branch 20 of the Regional Trial Court of Manila in Civil Case
No. 96-79554.
The facts are as follows:
On June 27, 1996, at around 4:00 p.m., Erwin Suarez
Francisco, an eighteen year old third year physical therapy
student of the Manila Central University, was riding a
motorcycle along Radial 10 Avenue, near the Veteran
Shipyard Gate in the City of Manila. At the same time,
petitioner, Raymundo OdaniSecosa, was driving an Isuzu
cargo truck with plate number PCU-253 on the same road.
The truck was owned by petitioner, Dassad Warehousing
and Port Services, Inc.
Traveling behind the motorcycle driven by Francisco was a
sand and gravel truck, which in turn was being tailed by the
Isuzu truck driven by Secosa. The three vehicles were
traversing the southbound lane at a fairly high speed. When
Secosa overtook the sand and gravel truck, he bumped the
motorcycle causing Francisco to fall. The rear wheels of the
Isuzu truck then ran over Francisco, which resulted in his
instantaneous death. Fearing for his life, petitioner Secosa
left his truck and fled the scene of the collision.[3]
Respondents, the parents of Erwin Francisco, thus filed an
action for damages against Raymond OdaniSecosa, Dassad
Warehousing and Port Services, Inc. and Dassads president,
El Buenasucenso Sy. The complaint was docketed as Civil
Case No. 96-79554 of the RTC of Manila, Branch 20.
On June 19, 1998, after a full-blown trial, the court a quo
rendered a decision in favor of herein respondents, the
dispositive portion of which states:
WHEREFORE, premised on the foregoing, judgment is
hereby rendered in favor of the plaintiffs ordering the
defendants to pay plaintiffs jointly and severally:
1. The sum of P55,000.00 as actual and compensatory
damages;
2. The sum of P20,000.00 for the repair of the motorcycle;
3. The sum of P100,000.00 for the loss of earning capacity;
4. The sum of P500,000.00 as moral damages;
5. The sum of P50,000.00 as exemplary damages;
Page 110 of 160
6. The sum of P50,000.00 as attorneys fees plus cost of
suit.
SO ORDERED.
Petitioners appealed the decision to the Court of Appeals,
which affirmed the appealed decision in toto.[4]
Hence the present petition, based on the following
arguments:
I.
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT
AFFIRMED THE DECISION OF THE TRIAL COURT THAT
PETITIONER DASSAD DID NOT EXERCISE THE DILIGENCE OF A
GOOD FATHER OF A FAMILY IN THE SELECTION AND
SUPERVISION OF ITS EMPLOYEES WHICH IS NOT IN
ACCORDANCE WITH ARTICLE 2180 OF THE NEW CIVIL CODE
AND RELATED JURISPRUDENCE ON THE MATTER.
II.
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT
AFFIRMED THE DECISION OF THE TRIAL COURT IN HOLDING
PETITIONER EL BUENASENSO SY SOLIDARILY LIABLE WITH
PETITIONERS DASSAD AND SECOSA IN VIOLATION OF THE
CORPORATION LAW AND RELATED JURISPRUDENCE ON THE
MATTER.
III.
THE JUDGMENT OF THE TRIAL COURT AS AFFIRMED BY THE
COURT OF APPEALS AWARDING P500,000.00 AS MORAL
DAMAGES IS MANIFESTLY ABSURD, MISTAKEN AND UNJUST.[5]
The petition is partly impressed with merit.
On the issue of whether petitioner Dassad Warehousing and
Port Services, Inc. exercised the diligence of a good father
of a family in the selection and supervision of its
employees, we find the assailed decision to be in full
accord with pertinent provisions of law and established
jurisprudence.
Article 2176 of the Civil Code provides:
Whoever by act or omission causes damage to another,
there being fault or negligence, is obliged to pay for the
damage done. Such fault or negligence, if there is no pre-
existing contractual relation between the parties, is called
MAYORDO, M.A
a quasi-delict and is governed by the provisions of this
Chapter.
On the other hand, Article 2180, in pertinent part, states:
The obligation imposed by article 2176 is demandable not
only for ones own acts or omissions, but also for those of
persons for whom one is responsible x xx.
Employers shall be liable for the damages caused by their
employees and household helpers acting within the scope
of their assigned tasks, even though the former are not
engaged in any business or industry x xx.
The responsibility treated of in this article shall cease when
the persons herein mentioned prove that they observed all
the diligence of a good father of a family to prevent
damage.
Based on the foregoing provisions, when an injury is caused
by the negligence of an employee, there instantly arises a
presumption that there was negligence on the part of the
employer either in the selection of his employee or in the
supervision over him after such selection. The presumption,
however, may be rebutted by a clear showing on the part of
the employer that it exercised the care and diligence of a
good father of a family in the selection and supervision of
his employee. Hence, to evade solidary liability for quasi-
delict committed by an employee, the employer must
adduce sufficient proof that it exercised such degree of
care.[6]
How does an employer prove that he indeed exercised the
diligence of a good father of a family in the selection and
supervision of his employee? The case of Metro Manila
Transit Corporation v. Court of Appeals[7] is instructive:
In fine, the party, whether plaintiff or defendant, who
asserts the affirmative of the issue has the burden of
presenting at the trial such amount of evidence required by
law to obtain a favorable judgment[8] . . . In making proof
in its or his case, it is paramount that the best and most
complete evidence is formally entered.[9]
Coming now to the case at bar, while there is no rule which
requires that testimonial evidence, to hold sway, must be
corroborated by documentary evidence, inasmuch as the
witnesses testimonies dwelt on mere generalities, we
cannot consider the same as sufficiently persuasive proof
that there was observance of due diligence in the selection
and supervision of employees. Petitioners attempt to prove
CORPORATION LAW CASES
LLB 3
its deligentissimipatrisfamilias in the selection and
supervision of employees through oral evidence must fail as
it was unable to buttress the same with any other
evidence, object or documentary, which might obviate the
apparent biased nature of the testimony.[10]
Our view that the evidence for petitioner MMTC falls short
of the required evidentiary quantum as would convincingly
and undoubtedly prove its observance of the diligence of a
good father of a family has its precursor in the underlying
rationale pronounced in the earlier case of Central Taxicab
Corp. vs. Ex-Meralco Employees Transportation Co., et al.,
[11] set amidst an almost identical factual setting, where
we held that:
The failure of the defendant company to produce in court
any record or other documentary proof tending to establish
that it had exercised all the diligence of a good father of a
family in the selection and supervision of its drivers and
buses, notwithstanding the calls therefor by both the trial
court and the opposing counsel, argues strongly against its
pretensions.
We are fully aware that there is no hard-and-fast rule on
the quantum of evidence needed to prove due observance
of all the diligence of a good father of a family as would
constitute a valid defense to the legal presumption of
negligence on the part of an employer or master whose
employee has by his negligence, caused damage to another.
x xx (R)educing the testimony of Albert to its proper
proportion, we do not have enough trustworthy evidence
left to go by. We are of the considered opinion, therefore,
that the believable evidence on the degree of care and
diligence that has been exercised in the selection and
supervision of Roberto Leon y Salazar, is not legally
sufficient to overcome the presumption of negligence
against the defendant company.
The above-quoted ruling was reiterated in a recent case
again involving the Metro Manila Transit Corporation,[12]
thus:
In the selection of prospective employees, employers are
required to examine them as to their qualifications,
experience, and service records.[13] On the other hand,
with respect to the supervision of employees, employers
should formulate standard operating procedures, monitor
their implementation, and impose disciplinary measures for
breaches thereof. To establish these factors in a trial
involving the issue of vicarious liability, employers must
submit concrete proof, including documentary evidence.
Page 111 of 160
In this case, MMTC sought to prove that it exercised the
diligence of a good father of a family with respect to the
selection of employees by presenting mainly testimonial
evidence on its hiring procedure. According to MMTC,
applicants are required to submit professional driving
licenses, certifications of work experience, and clearances
from the National Bureau of Investigation; to undergo tests
of their driving skills, concentration, reflexes, and vision;
and, to complete training programs on traffic rules, vehicle
maintenance, and standard operating procedures during
emergency cases.
x xxxxxxxx
Although testimonies were offered that in the case of Pedro
Musa all these precautions were followed, the records of
his interview, of the results of his examinations, and of his
service were not presented. . . [T]here is no record that
Musa attended such training programs and passed the said
examinations before he was employed. No proof was
presented that Musa did not have any record of traffic
violations. Nor were records of daily inspections, allegedly
conducted by supervisors, ever presented. . . The failure of
MMTC to present such documentary proof puts in doubt the
credibility of its witnesses.
Jurisprudentially, therefore, the employer must not merely
present testimonial evidence to prove that he observed the
diligence of a good father of a family in the selection and
supervision of his employee, but he must also support such
testimonial evidence with concrete or documentary
evidence. The reason for this is to obviate the biased
nature of the employers testimony or that of his witnesses.
[14]
Applying the foregoing doctrines to the present case, we
hold that petitioner Dassad Warehousing and Port Services,
Inc. failed to conclusively prove that it had exercised the
requisite diligence of a good father of a family in the
selection and supervision of its employees.
EdilbertoDuerme, the lone witness presented by Dassad
Warehousing and Port Services, Inc. to support its position
that it had exercised the diligence of a good father of a
family in the selection and supervision of its employees,
testified that he was the one who recommended petitioner
Raymundo Secosa as a driver to Dassad Warehousing and
Port Services, Inc.; that it was his duty to scrutinize the
capabilities of drivers; and that he believed petitioner to
MAYORDO, M.A
be physically and mentally fit for he had undergone rigid
training and attended the PPA safety seminar.[15]
Petitioner Dassad Warehousing and Port Services, Inc. failed
to support the testimony of its lone witness with
documentary evidence which would have strengthened its
claim of due diligence in the selection and supervision of its
employees. Such an omission is fatal to its position, on
account of which, Dassad can be rightfully held solidarily
liable with its co-petitioner Raymundo Secosa for the
damages suffered by the heirs of Erwin Francisco.
However, we find that petitioner El Buenasenso Sy cannot
be held solidarily liable with his co-petitioners. While it
may be true that Sy is the president of petitioner Dassad
Warehousing and Port Services, Inc., such fact is not by
itself sufficient to hold him solidarily liable for the
liabilities adjudged against his co-petitioners.
It is a settled precept in this jurisdiction that a corporation
is invested by law with a personality separate from that of
its stockholders or members.[16] It has a personality
separate and distinct from those of the persons composing
it as well as from that of any other entity to which it may
be related. Mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock
of a corporation is not in itself sufficient ground for
disregarding the separate corporate personality.[17] A
corporations authority to act and its liability for its actions
are separate and apart from the individuals who own it.[18]
The so-called veil of corporation fiction treats as separate
and distinct the affairs of a corporation and its officers and
stockholders. As a general rule, a corporation will be
looked upon as a legal entity, unless and until sufficient
reason to the contrary appears. When the notion of legal
entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the
corporation as an association of persons.[19] Also, the
corporate entity may be disregarded in the interest of
justice in such cases as fraud that may work inequities
among members of the corporation internally, involving no
rights of the public or third persons. In both instances,
there must have been fraud and proof of it. For the
separate juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly and
convincingly established.[20] It cannot be presumed.[21]
The records of this case are bereft of any evidence tending
to show the presence of any grounds enumerated above
that will justify the piercing of the veil of corporate fiction
CORPORATION LAW CASES
LLB 3
such as to hold the president of Dassad Warehousing and
Port Services, Inc. solidarily liable with it.
The Isuzu cargo truck which ran over Erwin Francisco was
registered in the name of Dassad Warehousing and Port
Services, Inc., and not in the name of El Buenasenso Sy.
Raymundo Secosa is an employee of Dassad Warehousing
and Port Services, Inc. and not of El Buenasenso Sy. All
these things, when taken collectively, point toward El
Buenasenso Sys exclusion from liability for damages arising
from the death of Erwin Francisco.
Having both found Raymundo Secosa and Dassad
Warehousing and Port Services, Inc. liable for negligence
for the death of Erwin Francisco on June 27, 1996, we now
consider the question of moral damages which his parents,
herein respondents, are entitled to recover. Petitioners
assail the award of moral damages of P500,000.00 for being
manifestly absurd, mistaken and unjust. We are not
persuaded.
Under Article 2206, the spouse, legitimate and illegitimate
descendants and ascendants of the deceased may demand
moral damages for mental anguish for the death of the
deceased. The reason for the grant of moral damages has
been explained in this wise:
. . . the award of moral damages is aimed at a restoration,
within the limits possible, of the spiritual status quo ante;
and therefore, it must be proportionate to the suffering
inflicted. The intensity of the pain experienced by the
relatives of the victim is proportionate to the intensity of
affection for him and bears no relation whatsoever with the
wealth or means of the offender.[22]
In the instant case, the spouses Francisco presented
evidence of the searing pain that they felt when the
premature loss of their son was relayed to them. That pain
was highly evident in the testimony of the father who was
forever deprived of a son, a son whose untimely death
came at that point when the latter was nearing the
culmination of every parents wish to educate their
children. The death of Francis has indeed left a void in the
lives of the respondents. Antonio Francisco testified on the
effect of the death of his son, Francis, in this manner:
Q: (Atty. Balanag): What did you do when you learned that
your son was killed on June 27, 1996?
A: (ANTONIO FRANCISCO): I boxed the door and pushed the
image of St. Nio telling why this happened to us.
Page 112 of 160
Q: Mr. Witness, how did you feel when you learned of the
untimely death of your son, Erwin Suares (sic)?
A: Masakit po ang mawalan ng anak. Its really hard for me,
the thought that my son is dead.
x xxxxxxxx
Q: How did your family react to the death of Erwin Suarez
Francisco?
A: All of my family and relatives were felt (sic) sorrow
because they knew that my son is (sic) good.
Q: We know that it is impossible to put money terms(s) [on]
the life of [a] human, but since you are now in court and if
you were to ask this court how much would you and your
family compensate? (sic)
A: Even if they pay me millions, they cannot remove the
anguish of my son (sic).[23]
Moral damages are emphatically not intended to enrich a
plaintiff at the expense of the defendant. They are
awarded to allow the former to obtain means, diversion or
amusements that will serve to alleviate the moral suffering
he has undergone due to the defendants culpable action
and must, perforce, be proportional to the suffering
inflicted.[24] We have previously held as proper an award
of P500,000.00 as moral damages to the heirs of a deceased
family member who died in a vehicular accident. In our
2002 decision in Metro Manila Transit Corporation v. Court
of Appeals, et al.,[25] we affirmed the award of moral
damages of P500,000.00 to the heirs of the victim, a
mother, who died from injuries she sustained when a bus
driven by an employee of the petitioner hit her. In the case
at bar, we likewise affirm the portion of the assailed
decision awarding the moral damages.
Since the petitioners did not question the other damages
adjudged against them by the court a quo, we affirm the
award of these damages to the respondents.
WHEREFORE, the petition is DENIED. The assailed decision
is AFFIRMED with the MODIFICATION that petitioner El
Buenasenso Sy is ABSOLVED from any liability adjudged
against his co-petitioners in this case.
Costs against petitioners.
MAYORDO, M.A
SO ORDERED.
G.R. No. 97212 June 30, 1993
BENJAMIN YU, petitioner, vs. NATIONAL LABOR
RELATIONS COMMISSION and JADE MOUNTAIN PRODUCTS
COMPANY LIMITED, WILLY CO, RHODORA D. BENDAL, LEA
BENDAL, CHIU SHIAN JENG and CHEN HO-
FU, respondents.
FELICIANO, J.:
Petitioner Benjamin Yu was formerly the Assistant General
Manager of the marble quarrying and export business
operated by a registered partnership with the firm name of
"Jade Mountain Products Company Limited" ("Jade
Mountain"). The partnership was originally organized on 28
June 1984 with Lea Bendal and Rhodora Bendal as general
partners and Chin Shian Jeng, Chen Ho-Fu and Yu Chang, all
citizens of the Republic of China (Taiwan), as limited
partners. The partnership business consisted of exploiting a
marble deposit found on land owned by the Sps. Ricardo
and Guillerma Cruz, situated in Bulacan Province, under a
Memorandum Agreement dated 26 June 1984 with the Cruz
spouses.  1  The partnership had its main office in Makati,
Metropolitan Manila.
Benjamin Yu was hired by virtue of a Partnership Resolution
dated 14 March 1985, as Assistant General Manager with a
monthly salary of P4,000.00. According to petitioner Yu,
however, he actually received only half of his stipulated
monthly salary, since he had accepted the promise of the
partners that the balance would be paid when the firm
shall have secured additional operating funds from abroad.
Benjamin Yu actually managed the operations and finances
of the business; he had overall supervision of the workers
at the marble quarry in Bulacan and took charge of the
preparation of papers relating to the exportation of the
firm's products.
Sometime in 1988, without the knowledge of Benjamin Yu,
the general partners Lea Bendal and Rhodora Bendal sold
and transferred their interests in the partnership to private
respondent Willy Co and to one Emmanuel Zapanta. Mr. Yu
Chang, a limited partner, also sold and transferred his
interest in the partnership to Willy Co. Between Mr.
Emmanuel Zapanta and himself, private respondent Willy
Co acquired the great bulk of the partnership interest. The
partnership now constituted solely by Willy Co and
Emmanuel Zapanta continued to use the old firm name of
Jade Mountain, though they moved the firm's main office
from Makati to Mandaluyong, Metropolitan Manila. A
Supplement to the Memorandum Agreement relating to the
operation of the marble quarry was entered into with the
CORPORATION LAW CASES
LLB 3
Cruz spouses in February of 1988.2 The actual operations of
the business enterprise continued as before. All the
employees of the partnership continued working in the
business, all, save petitioner Benjamin Yu as it turned out.
On 16 November 1987, having learned of the transfer of the
firm's main office from Makati to Mandaluyong, petitioner
Benjamin Yu reported to the Mandaluyong office for work
and there met private respondent Willy Co for the first
time. Petitioner was informed by Willy Co that the latter
had bought the business from the original partners and that
it was for him to decide whether or not he was responsible
for the obligations of the old partnership, including
petitioner's unpaid salaries. Petitioner was in fact not
allowed to work anymore in the Jade Mountain business
enterprise. His unpaid salaries remained unpaid.3
On 21 December 1988. Benjamin Yu filed a complaint for
illegal dismissal and recovery of unpaid salaries accruing
from November 1984 to October 1988, moral and exemplary
damages and attorney's fees, against Jade Mountain, Mr.
Willy Co and the other private respondents. The
partnership and Willy Co denied petitioner's charges,
contending in the main that Benjamin Yu was never hired as
an employee by the present or new partnership.4
In due time, Labor Arbiter Nieves Vivar-De Castro rendered
a decision holding that petitioner had been illegally
dismissed. The Labor Arbiter decreed his reinstatement and
awarded him his claim for unpaid salaries, backwages and
attorney's fees.5
On appeal, the National Labor Relations Commission
("NLRC") reversed the decision of the Labor Arbiter and
dismissed petitioner's complaint in a Resolution dated 29
November 1990. The NLRC held that a new partnership
consisting of Mr. Willy Co and Mr. Emmanuel Zapanta had
bought the Jade Mountain business, that the new
partnership had not retained petitioner Yu in his original
position as Assistant General Manager, and that there was
no law requiring the new partnership to absorb the
employees of the old partnership. Benjamin Yu, therefore,
had not been illegally dismissed by the new partnership
which had simply declined to retain him in his former
managerial position or any other position. Finally, the NLRC
held that Benjamin Yu's claim for unpaid wages should be
asserted against the original members of the preceding
partnership, but these though impleaded had, apparently,
not been served with summons in the proceedings before
the Labor Arbiter.6
Page 113 of 160
Petitioner Benjamin Yu is now before the Court on a
Petition for Certiorari, asking us to set aside and annul the
Resolution of the NLRC as a product of grave abuse of
discretion amounting to lack or excess of jurisdiction.
The basic contention of petitioner is that the NLRC has
overlooked the principle that a partnership has a juridical
personality separate and distinct from that of each of its
members. Such independent legal personality subsists,
petitioner claims, notwithstanding changes in the identities
of the partners. Consequently, the employment contract
between Benjamin Yu and the partnership Jade Mountain
could not have been affected by changes in the latter's
membership.7
Two (2) main issues are thus posed for our consideration in
the case at bar: (1) whether the partnership which had
hired petitioner Yu as Assistant General Manager had been
extinguished and replaced by a new partnerships composed
of Willy Co and Emmanuel Zapanta; and (2) if indeed a new
partnership had come into existence, whether petitioner Yu
could nonetheless assert his rights under his employment
contract as against the new partnership.
In respect of the first issue, we agree with the result
reached by the NLRC, that is, that the legal effect of the
changes in the membership of the partnership was the
dissolution of the old partnership which had hired
petitioner in 1984 and the emergence of a new firm
composed of Willy Co and Emmanuel Zapanta in 1987.
The applicable law in this connection — of which the NLRC
seemed quite unaware — is found in the Civil Code
provisions relating to partnerships. Article 1828 of the Civil
Code provides as follows:
Art. 1828. The dissolution of a partnership is the change in
the relation of the partners caused by any partner ceasing
to be associated in the carrying on  as distinguished from
the winding up of the business. (Emphasis supplied)
Article 1830 of the same Code must also be noted:
Art. 1830. Dissolution is caused:
(1) without violation of the agreement between the
partners;
x x x           x x x          x x x
(b) by the express will of any partner, who must act in good
faith, when no definite term or particular undertaking is
specified;
x x x           x x x          x x x
MAYORDO, M.A
(2) in contravention of the agreement between the
partners, where the circumstances do not permit a
dissolution under any other provision of this article, by the
express will of any partner at any time;
x x x           x x x          x x x
(Emphasis supplied)
In the case at bar, just about all of the partners had sold
their partnership interests (amounting to 82% of the total
partnership interest) to Mr. Willy Co and Emmanuel
Zapanta. The record does not show what happened to the
remaining 18% of the original partnership interest. The
acquisition of 82% of the partnership interest by new
partners, coupled with the retirement or withdrawal of the
partners who had originally owned such 82% interest, was
enough to constitute a new partnership.
The occurrence of events which precipitate the legal
consequence of dissolution of a partnership do not,
however, automatically result in the termination of the
legal personality of the old partnership. Article 1829 of the
Civil Code states that:
[o]n dissolution the partnership is not terminated, but
continues until the winding up of partnership affairs is
completed.
In the ordinary course of events, the legal personality of
the expiring partnership persists for the limited purpose of
winding up and closing of the affairs of the partnership. In
the case at bar, it is important to underscore the fact that
the business of the old partnership was simply continued by
the new partners,  without  the old partnership undergoing
the procedures relating to dissolution and winding up of its
business affairs. In other words, the new partnership simply
took over the business enterprise owned by the preceeding
partnership, and continued using the old name of Jade
Mountain Products Company Limited, without winding up
the business affairs of the old partnership, paying off its
debts, liquidating and distributing its net assets, and then
re-assembling the said assets or most of them and opening
a new business enterprise. There were, no doubt, powerful
tax considerations which underlay such an informal
approach to business on the part of the retiring and the
incoming partners. It is not, however, necessary to inquire
into such matters.
What is important for present purposes is that, under the
above described situation,  not only the retiring partners
(Rhodora Bendal, et al.) but also the new partnership itself
which continued the business of the old, dissolved, one, are
CORPORATION LAW CASES
LLB 3
liable for the debts of the preceding partnership.
In Singson, et al. v. Isabela Saw Mill, et al,8 the Court held
that under facts very similar to those in the case at bar, a
withdrawing partner remains liable to a third party creditor
of the old partnership.9  The liability of the new
partnership, upon the other hand, in the set of
circumstances obtaining in the case at bar, is established in
Article 1840 of the Civil Code which reads as follows:
Art. 1840. In the following cases creditors of the dissolved
partnership are  also  creditors of the person or partnership
continuing the business:
(1) When any new partner is admitted into an existing
partnership, or when any partner retires and assigns (or the
representative of the deceased partner assigns) his rights in
partnership property to two or more of the partners, or to
one or more of the partners and one or more third
persons, if the business is continued without liquidation of
the partnership affairs;
(2) When all but one partner retire and assign (or the
representative of a deceased partner assigns) their rights in
partnership property to the remaining partner,
who  continues the business without liquidation of
partnership affairs, either alone or with others;
(3) When any Partner retires or dies and the business of the
dissolved partnership is continued as set forth in Nos. 1 and
2 of this Article, with the consent of the retired partners or
the representative of the deceased partner, but without
any assignment of his right in partnership property;
(4) When all the partners or their representatives assign
their rights in partnership property to one or more third
persons  who promise to pay the debts and  who continue
the business of the dissolved partnership;
(5) When any partner wrongfully causes a dissolution and
remaining partners continue the business  under the
provisions of article 1837, second paragraph, No. 2, either
alone or with others,  and  without liquidation of the
partnership affairs;
(6) When a partner is expelled and the remaining
partners  continue the business either alone or with others
without liquidation of the partnership affairs;
The liability of a third person becoming a partner in the
partnership continuing the business, under this article, to
the creditors of the dissolved partnership shall be satisfied
Page 114 of 160
out of the partnership property only, unless there is a
stipulation to the contrary.
When the business of a partnership after dissolution is
continued under any conditions set forth in this article the
creditors of the retiring or deceased partner or the
representative of the deceased partner, have a prior right
to any claim of the retired partner or the representative of
the deceased partner against the person or partnership
continuing the business on account of the retired or
deceased partner's interest in the dissolved partnership or
on account of any consideration promised for such interest
or for his right in partnership property.
Nothing in this article shall be held to modify any right of
creditors to set assignment on the ground of fraud.
xxx xxx xxx
(Emphasis supplied)
Under Article 1840 above, creditors of the old Jade
Mountain are also creditors of the new Jade Mountain
which continued the business of the old one without
liquidation of the partnership affairs. Indeed, a creditor of
the old Jade Mountain, like petitioner Benjamin Yu in
respect of his claim for unpaid wages, is entitled to
priority  vis-a-vis  any claim of any retired or previous
partner insofar as such retired partner's interest in the
dissolved partnership is concerned. It is not necessary for
the Court to determine under which one or mare of the
above six (6) paragraphs, the case at bar would fall, if only
because the facts on record are not detailed with sufficient
precision to permit such determination. It is, however,
clear to the Court that under Article 1840 above, Benjamin
Yu is entitled to enforce his claim for unpaid salaries, as
well as other claims relating to his employment with the
previous partnership, against the new Jade Mountain.
It is at the same time also evident to the Court that the
new partnership was entitled to appoint and hire a new
general or assistant general manager to run the affairs of
the business enterprise take over. An assistant general
manager belongs to the most senior ranks of management
and a new partnership is entitled to appoint a top manager
of its own choice and confidence. The non-retention of
Benjamin Yu as Assistant General Manager did not therefore
constitute unlawful termination, or termination without
just or authorized cause. We think that the precise
authorized cause for termination in the case at bar
was  redundancy.  10  The new partnership had its own new
General Manager, apparently Mr. Willy Co, the principal new
owner himself, who personally ran the business of Jade
MAYORDO, M.A
Mountain. Benjamin Yu's old position as Assistant General
Manager thus became superfluous or redundant.  11It
follows that petitioner Benjamin Yu is entitled to
separation pay at the rate of one month's pay for each year
of service that he had rendered to the old partnership, a
fraction of at least six (6) months being considered as a
whole year.
While the new Jade Mountain was entitled to decline to
retain petitioner Benjamin Yu in its employ, we consider
that Benjamin Yu was very shabbily treated by the new
partnership. The old partnership certainly benefitted from
the services of Benjamin Yu who, as noted, previously ran
the whole marble quarrying, processing and exporting
enterprise. His work constituted value-added to the
business itself and therefore, the new partnership similarly
benefitted from the labors of Benjamin Yu. It is worthy of
note that the new partnership did not try to suggest that
there was any cause consisting of some blameworthy act or
omission on the part of Mr. Yu which compelled the new
partnership to terminate his services. Nonetheless, the new
Jade Mountain did not notify him of the change in
ownership of the business, the relocation of the main office
of Jade Mountain from Makati to Mandaluyong and the
assumption by Mr. Willy Co of control of operations. The
treatment (including the refusal to honor his claim for
unpaid wages) accorded to Assistant General Manager
Benjamin Yu was so summary and cavalier as to amount to
arbitrary, bad faith treatment, for which the new Jade
Mountain may legitimately be required to respond by
paying moral damages. This Court, exercising its discretion
and in view of all the circumstances of this case, believes
that an indemnity for moral damages in the amount of
P20,000.00 is proper and reasonable.
In addition, we consider that petitioner Benjamin Yu is
entitled to interest at the legal rate of six percent (6%) per
annum  on the amount of unpaid wages, and of his
separation pay, computed from the date of promulgation of
the award of the Labor Arbiter. Finally, because the new
Jade Mountain compelled Benjamin Yu to resort to
litigation to protect his rights in the premises, he is
entitled to attorney's fees in the amount of ten percent
(10%) of the total amount due from private respondent
Jade Mountain.
WHEREFORE, for all the foregoing, the Petition
for Certiorari is GRANTED DUE COURSE, the Comment filed
by private respondents is treated as their Answer to the
Petition for Certiorari, and the Decision of the NLRC dated
29 November 1990 is hereby NULLIFIED and SET ASIDE. A
CORPORATION LAW CASES
LLB 3
new Decision is hereby ENTERED requiring private
respondent Jade Mountain Products Company Limited to
pay to petitioner Benjamin Yu the following amounts:
(a) for unpaid wages which, as found by the Labor Arbiter,
shall be computed at the rate of P2,000.00 per month
multiplied by thirty-six (36) months (November 1984 to
December 1987) in the total amount of P72,000.00;
(b) separation pay computed at the rate of P4,000.00
monthly pay multiplied by three (3) years of service or a
total of P12,000.00;
(c) indemnity for moral damages in the amount of
P20,000.00;
(d) six percent (6%) per annum legal interest computed on
items (a) and (b) above, commencing on 26 December 1989
and until fully paid; and
(e) ten percent (10%) attorney's fees on the total amount
due from private respondent Jade Mountain.
Costs against private respondents.
SO ORDERED.
G.R. No. L-33172 October 18, 1979
ERNESTO CEASE, CECILIA CEASE, MARION CEASE, TERESA
CEASE-LACEBAL and the F.L. CEASE PLANTATION CO.,
INC. as Trustee of properties of the defunct TIAONG
MILLING & PLANTATION CO., petitioners,  vs. HONORABLE
COURT OF APPEALS, (Special Seventh Division), HON.
MANOLO L. MADDELA, Presiding Judge, Court of First
Instance of Quezon, BENJAMIN CEASE and FLORENCE
CEASE, respondents.
GUERRERO, J:
Appeal by certiorari from the decision of the Court of
Appeals in CA-G.R. No. 45474, entitled "Ernesto Cease, et
al. vs. Hon. Manolo L. Maddela, Judge of the Court of First
Instance of Quezon, et al."  1  which dismissed the petition
for certiorari, mandamus, and prohibition instituted by the
petitioners against the respondent judge and the private
respondents.
The antecedents of the case, as found by the appellate
court, are as follows:
IT RESULTING: That the antecedents are not difficult to
understand; sometime in June 1908, one Forrest L. Cease
common predecessor in interest of the parties together
with five (5) other American citizens organized the Tiaong
Page 115 of 160
Milling and Plantation Company and in the course of its
corporate existence the company acquired various
properties but at the same time all the other original
incorporators were bought out by Forrest L. Cease together
with his children namely Ernest, Cecilia, Teresita,
Benjamin, Florence and one Bonifacia Tirante also
considered a member of the family; the charter of the
company lapsed in June 1958; but whether there were
steps to liquidate it, the record is silent; on 13 August
1959, Forrest L. Cease died and by extrajudicial partition of
his shares, among the children, this was disposed of on 19
October 1959; it was here where the trouble among them
came to arise because it would appear that Benjamin and
Florence wanted an actual division while the other children
wanted reincorporation; and proceeding on that, these
other children Ernesto, Teresita and Cecilia and
aforementioned other stockholder Bonifacia Tirante
proceeded to incorporate themselves into the F.L. Cease
Plantation Company and registered it with the Securities
and Exchange Commission on 9 December, 1959; apparently
in view of that, Benjamin and Florence for their part
initiated a Special Proceeding No. 3893 of the Court of First
Instance of Tayabas for the settlement of the estate of
Forest L. Cease on 21 April, 1960 and one month afterwards
on 19 May 1960 they filed Civil Case No. 6326 against
Ernesto, Teresita and Cecilia Cease together with Bonifacia
Tirante asking that the Tiaong Milling and Plantation
Corporation be declared Identical to F.L. Cease and that its
properties be divided among his children as his intestate
heirs; this Civil Case was resisted by aforestated defendants
and notwithstanding efforts of the plaintiffs to have the
properties placed under receivership, they were not able to
succeed because defendants filed a bond to remain as they
have remained in possession; after that and already, during
the pendency of Civil Case No. 6326 specifically on 21 May,
1961 apparently on the eve of the expiry of the three (3)
year period provided by the law for the liquidation of
corporations, the board of liquidators of Tiaong Milling
executed an assignment and conveyance of properties and
trust agreement in favor of F.L. Cease Plantation Co. Inc. as
trustee of the Tiaong Milling and Plantation Co. so Chat
upon motion of the plaintiffs trial Judge ordered that this
alleged trustee be also included as party defendant; now
this being the situation, it will be remembered that there
were thus two (2) proceedings pending in the Court of First
Instance of Quezon namely Civil Case No. 6326 and Special
Proceeding No. 3893 but both of these were assigned to the
Honorable Respondent Judge Manolo L. Maddela p. 43 and
the case was finally heard and submitted upon stipulation
of facts pp, 34-110, rollo; and trial Judge by decision dated
27 December 1969 held for the plaintiffs Benjamin and
MAYORDO, M.A
Florence, the decision containing the following dispositive
part:
VIEWED IN THE LIGHT OF ALL THE FOREGOING, judgment is
hereby rendered in favor of plaintiffs and against the
defendants declaring that:
1) The assets or properties of the defunct Tiaong Milling
and Plantation Company now appearing under the name of
F.L. Cease Plantation Company as Trustee, is the estate also
of the deceased Forrest L. Cease and ordered divided,
share and share alike, among his six children the plaintiffs
and the defendants in accordance with Rule 69, Rules of
Court;
2) The Resolution to Sell dated October 12, 1959 and the
Transfer and Conveyance with Trust Agreement is hereby
set aside as improper and illegal for the purposes and
effect that it was intended and, therefore, null and void;
3) That F.L. Cease Plantation Company is removed as
'Trustee for interest against the estate and essential to the
protection of plaintiffs' rights and is hereby ordered to
deliver and convey all the properties and assets of the
defunct Tiaong Milling now under its name, custody and
control to whomsoever be appointed as Receiver -
disqualifying and of the parties herein - the latter to act
accordingly upon proper assumption of office; and
4) Special Proceedings No. 3893 for administration is
terminated and dismissed; the instant case to proceed but
on issues of damages only and for such action inherently
essential for partition.
SO ORDERED.
Lucena City, December 27, 1969., pp. 122-a-123, rollo.
upon receipt of that, defendants there filled a notice of
appeal p. 129, rollo together with an appeal bond and a
record on appeal but the plaintiffs moved to dismiss the
appeal on the ground that the judgment was in fact
interlocutory and not appealable p. 168 rollo and this
position of defendants was sustained by trial Judge, His
Honor ruling that
IN VIEW OF THE FOREGOING, the appeal interposed by
plaintiffs is hereby dismissed as premature and the Record
on Appeal is necessarily disapproved as improper at this
stage of the proceedings.
CORPORATION LAW CASES
LLB 3
SO ORDERED.
Lucena City, April 27, 1970.
and so it was said defendants brought the matter first to
the Supreme Court, on mandamus on 20 May, 1970 to
compel the appeal and certiorari and prohibition to annul
the order of 27 April, 1970 on the ground that the decision
was "patently erroneous" p. 16, rollo; but the Supreme
Court remanded the case to this Court of Appeals by
resolution of 27 May 1970, p. 173, and this Court of Appeals
on 1 July 1970 p. 175 dismissed the petition so far as the
mandamus was concerned taking the view that the decision
sought to be appealed dated 27 December, 1969 was
interlocutory and not appealable but on motion for
reconsideration of petitioners and since there was possible
merit so far as its prayer for certiorari and prohibition was
concerned, by resolution of the Court on 19 August, 1970,
p. 232, the petition was permitted to go ahead in that
capacity; and it is the position of petitioners that the
decision of 27 December, 1969 as well as the order of 27
April, 1970 suffered of certain fatal defects, which
respondents deny and on their part raise the preliminary
point that this Court of Appeals has no authority to give
relief to petitioners because not in aid of its appellate
jurisdiction, and that the questions presented cannot be
raised for the first time before this Court of Appeals;
Respondent Court of Appeals in its decision promulgated
December 9, 1970 dismissed the petition with costs against
petitioners, hence the present petition to this Court on the
following assignment of errors:
THE COURT OF APPEALS ERRED -
I. IN SANCTIONING THE WRONGFUL EXERCISE OF
JURISDICTION BEYOND THE LIMITS OF AUTHORITY
CONFERRED BY LAW UPON THE LOWER COURT, WHEN IT
PROCEEDED TO HEAR, ADJUDGE AND ADJUDICATE -
(a) Special Proceedings No. 3893 for the settlement of
the Estate of Forrest L. Cease, simultaneously and
concurrently with -
(b) Civil Case No. 6326, wherein the lower Court
ordered Partition under Rule 69, Rules of Court -
THE ISSUE OF LEGAL OWNERSHIP OF THE PROPERTIES
COMMONLY INVOLVED IN BOTH ACTIONS HAVING BEEN
RAISED AT THE OUTSET BY THE TIAONG MILLING AND
PLANTATION COMPANY, AS THE REGISTERED OWNER OF
SUCH PROPERTIES UNDER ACT 496.
Page 116 of 160
II. IN AFFIRMING - UNSUPPORTED BY ANY EVIDENCE
WHATSOEVER NOR CITATION OF ANY LAW TO JUSTIFY - THE
UNWARRANTED CONCLUSION THAT SUBJECT PROPERTIES,
FOUND BY THE LOWER COURT AND THE COURT OF APPEALS
AS ACTUALLY REGISTERED IN THE NAME OF PETITIONER
CORPORATION AND/OR ITS PREDECESSOR IN INTEREST, THE
TIAONG MILLING AND PLANTATION COMPANY, DURING ALL
THE 50 YEARS OF ITS CORPORATE EXISTENCE "ARE ALSO
PROPERTIES OF THE ESTATE OF FOREST L. CEASE."
III. IN AFFIRMING THE ARBITRARY CONCLUSION OF THE
LOWER COURT THAT ITS DECISION OF DECEMBER 27,1969 IS
AN "INTERLUCUTORY DECISION." IN DISMISSED NG THE
PETITION FOR WRIT OF MANDAMUS, AND IN AFFIRMING THE
MANIFESTLY UNJUST JUDGMENT RENDERED WHICH
CONTRADICTS THE FINDINGS OF ULTIMATE FACTS THEREIN
CONTAINED.
During the period that ensued after the filing in this Court
of the respective briefs and the subsequent submission of
the case for decision, some incidents had transpired, the
summary of which may be stated as follows:
1. Separate from this present appeal, petitioners filed a
petition for certiorari and prohibition in this Court,
docketed as G.R. No. L-35629 (Ernesto Cease, et al. vs.
Hon. Manolo L. Maddela, et al.) which challenged the order
of respondent judge dated September 27, 1972 appointing
his Branch Clerk of Court, Mr. Eleno M. Joyas, as receiver of
the properties subject of the appealed civil case, which
order, petitioners saw as a virtual execution of the lower
court's judgment (p. 92, rollo). In Our resolution of
November 13, 1972, issued in G.R. No. L-35629, the
petition was denied since respondent judge merely
appointed an auxilliary receiver for the preservation of the
properties as well as for the protection of the interests of
all parties in Civil Case No. 6326; but at the same time, We
expressed Our displeasure in the appointment of the branch
clerk of court or any other court personnel for that matter
as receiver. (p. 102, rollo).
2. Meanwhile, sensing that the appointed receiver was
making some attempts to take possession of the properties,
petitioners filed in this present appeal an urgent petition to
restrain proceedings in the lower court. We resolved the
petition on January 29, 1975 by issuing a corresponding
temporary restraining order enjoining the court a quo from
implementing its decision of December 27, 1969, more
particularly, the taking over by a receiver of the properties
subject of the litigation, and private respondents Benjamin
and Florence Cease from proceeding or taking any action on
MAYORDO, M.A
the matter until further orders from this Court (pp. 99-100,
r o l l o ) . Pr i v a t e r e s p o n d e n t s f i l e d a m o t i o n f o r
reconsideration of Our resolution of January 29, 1975. After
weighing the arguments of the parties and taking note of
Our resolution in G.R. No. L-35629 which upheld the
appointment of a receiver, We issued another resolution
dated April 11, 1975 lifting effective immediately Our
previous temporary restraining order which enforced the
earlier resolution of January 29, 1975 (pp. 140-141, rollo).
3. On February 6, 1976, private respondents filed an urgent
petition to restrain proceedings below in view of the
precipitate replacement of the court appointed receiver
Mayor Francisco Escueta (vice Mr. Eleno M. Joyas) and the
appointment of Mr. Guillermo Lagrosa on the eve of
respondent Judge Maddela's retirement (p. 166, rollo). The
urgent petition was denied in Our resolution of February
18, 1976 (p. 176, rollo).
4. Several attempts at a compromise agreement failed to
materialize. A Tentative Compromise Agreement dated July
30, 1975 was presented to the Court on August 6, 1976 for
the signature of the parties, but respondents
"unceremoniously" repudiated the same by leaving the
courtroom without the permission of the court (Court of
First Instance of Quezon, Branch 11) as a result of which
respondents and their counsel were cited for contempt (p.
195, 197, rollo) that respondents' reason for the
repudiation appears to be petitioners' failure to render an
audited account of their administration covering the period
from May 31, 1961 up to January 29, 1974, plus the
inclusion of a provision on waiver and relinquishment by
respondents of whatever rights that may have accrued to
their favor by virtue of the lower court's decision and the
affirmative decision of the appellate court.
We go now to the alleged errors committed by the
respondent Court of Appeals.
As can be gleaned from petitioners' brief and the petition
itself, two contentions underlie the first assigned error.
First, petitioners argue that there was an irregular and
arbitrarte termination and dismissal of the special
proceedings for judicial administration simultaneously
ordered in the lower court . s decision in Civil Case No.
6326 adjudicating the partition of the estate, without
categorically, reasoning the opposition to the petition for
administration Second, that the issue of ownership had
been raised in the lower court when Tiaong Milling asserted
title over the properties registered in its corporate name
adverse to Forrest L. Cease or his estate, and that the said
CORPORATION LAW CASES
LLB 3
issue was erroneously disposed of by the trial court in the
partition proceedings when it concluded that the assets or
properties of the defunct company is also the estate of the
deceased proprietor.
The propriety of the dismissal and termination of the
special proceedings for judicial administration must be
affirmed in spite of its rendition in another related case in
view of the established jurisprudence which favors
partition when judicial administration become,
unnecessary. As observed by the Court of Appeals, the
dismissal at first glance is wrong, for the reason that what
was actually heard was Civil Case No. 6326. The technical
consistency, however, it is far less importance than the
reason behind the doctrinal rule against placing an estate
under administration. Judicial rulings consistently hold the
view that where partition is possible, either judicial or
extrajudicial, the estate should not be burdened with an
administration proceeding without good and compelling
reason. When the estate has no creditors or pending
obligations to be paid, the beneficiaries in interest are not
bound to submit the property to judicial administration
which is always long and costly, or to apply for the
appointment of an administrator by the court, especially
when judicial administration is unnecessary and
superfluous. Thus –
When a person dies without leaving pending obligations to
be paid, his heirs, whether of age or not, are bound to
submit the property to a judicial administration, which is
always long and costly, or to apply for the appointment of
an administrator by the court. It has been uniformly held
that in such case the judicial administration and the
appointment of an administrator are superfluous and
unnecessary proceedings (Ilustre vs. Alaras Frondosa, 17
Phil., 321; Malahacan vs. Ignacio, 19 Phil, 434; Bondad vs.
Bondad, 34 Phil., 232; Baldemor vs. Malangyaon, 34 Phil.,
367; Fule vs. Fule, 46 Phil., 317). Syllabus, Intestate estate
of the deceased Luz Garcia. Pablo G. Utulo vs. Leona Pasion
Viuda de Garcia, 66 Phil. 302.
Where the estate has no debts, recourse may be had to an
administration proceeding only if the heirs have good
reasons for not resorting to an action for partition. Where
partition is possible, either in or out of court, the estate
should not be burdened with an administration proceeding
without good and compelling reasons. (Intestate Estate of
Mercado vs. Magtibay, 96 Phil. 383)
In the records of this case, We find no indication of any
indebtedness of the estate. No creditor has come up to
Page 117 of 160
charge the estate within the two-year period after the
death of Forrest L. Cease, hence, the presumption under
Section 1, Rule 74 that the estate is free from creditors
must apply. Neither has the status of the parties as legal
heirs, much less that of respondents, been raised as an
issue. Besides, extant in the records is the stipulation of
the parties to submit the pleadings and contents of the
administration proceedings for the cognizance of the trial
judge in adjudicating the civil case for partition
(Respondents' Brief, p, 20, rollo). As respondents observe,
the parties in both cases are the same, so are the
properties involved; that actual division is the primary
objective in both actions; the theory and defense of the
respective parties are likewise common; and that both
cases have been assigned to the same respondent judge.
We feel that the unifying effect of the foregoing
circumstances invites the wholesome exception to the
structures of procedural rule, thus allowing, instead, room
for judicial flexibility. Respondent judge's dismissal of the
administration proceedings then, is a judicious move,
appreciable in today's need for effective and speedy
administration of justice. There being ample reason to
support the dismissal of the special proceedings in this
appealed case, We cannot see in the records any
compelling reason why it may not be dismissed just the
same even if considered in a separate action. This is
inevitably certain specially when the subject property has
already been found appropriate for partition, thus reducing
the petition for administration to a mere unnecessary
solicitation.
The second point raised by petitioners in their first assigned
error is equally untenable. In effect, petitioners argue that
the action for partition should not have prospered in view
of the repudiation of the co-ownership by Tiaong Milling
and Plantation Company when, as early in the trial court, it
already asserted ownership and corporate title over the
properties adverse to the right of ownership of Forrest L.
Cease or his estate. We are not unmindful of the doctrine
relied upon by petitioners in Rodriguez vs. Ravilan, 17 Phil.
63 wherein this Court held that in an action for partition, it
is assumed that the parties by whom it is prosecuted are all
co-owners or co-proprietors of the property to be divided,
and that the question of common ownership is not to be
argued, not the fact as to whether the intended parties are
or are not the owners of the property in question, but only
as to how and in what manner and proportion the said
property of common ownership shall be distributed among
the interested parties by order of the Court. Consistent
with this dictum, it has been field that if any party to a suit
for partition denies the pro-indivisocharacter of the estate
MAYORDO, M.A
whose partition is sought, and claims instead, exclusive
title thereto the action becomes one for recovery of
property cognizable in the courts of ordinary jurisdiction. 2
Petitioners' argument has only theoretical persuasion, to
say the least, rather apparent than real. It must be
remembered that when Tiaong Milling adduced its defense
and raised the issue of ownership, its corporate existence
already terminated through the expiration of its charter. It
is clear in Section 77 of Act No. 1459 (Corporation Law)
that upon the expiration of the charter period, the
corporation ceases to exist and is dissolved  ipso
facto  except for purposes connected with the winding up
and liquidation. The provision allows a three year, period
from expiration of the charter within which the entity
gradually settles and closes its affairs, disposes and convey
its property and to divide its capital stock, but not for the
purpose of continuing the business for which it was
established. At this terminal stage of its existence, Tiaong
Milling may no longer persist to maintain adverse title and
ownership of the corporate assets as against the
prospective distributees when at this time it merely holds
the property in trust, its assertion of ownership is not only
a legal contradiction, but more so, to allow it to maintain
adverse interest would certainly thwart the very purpose of
liquidation and the final distribute loll of the assets to the
proper, parties.
We agree with the Court of Appeals in its reasoning that
substance is more important than form when it sustained
the dismissal of Special Proceedings No. 3893, thus –
a) As to the dismissal of Special Proceedings No. 3893, of
course, at first glance, this was wrong, for the reason that
the case trial had been heard was Civil Case No. 6326; but
what should not be overlooked either is Chat respondent
Judge was the same Judge that had before him in his own
sala, said Special Proceedings No. 3893, p. 43 rollo, and the
parties to the present Civil Case No. 6326 had themselves
asked respondent Judge to take judicial notice of the same
and its contents page 34, rollo; it is not difficult to see that
when respondent Judge in par. 4 of the dispositive part of
his decision complained of, ordered that,
4) Special Proceedings No. 3893 for administration is
terminated and dismissed; the instant case to proceed but
on issues of damages only and for such action inherently
essential or partition. p. 123, rollo, in truth and in fact, His
Honor was issuing that order also within Civil Case No. 632
but in connection with Special Proceedings No. 389:3: for
substance is more important Chan form, the contending par
CORPORATION LAW CASES
LLB 3
ties in both proceedings being exactly the same, but not
only this, let it not be forgotten that when His Honor
dismissed Special Proceedings No. 3893, that dismissal
precisely was a dismissal that petitioners herein had
themselves sought and solicited from respondent Judge as
petitioners themselves are in their present petition pp. 5-6,
rollo; this Court must find difficulty in reconciling
petitioners' attack with the fact that it was they
themselves that had insisted on that dismissal; on the
principle that not he who is favored but he who is hurt by a
judicial order is he only who should be heard to complain
and especially since extraordinary legal remedies are
remedies in extermies granted to parties ' who have been
the victims not merely of errors but of grave wrongs, and it
cannot be seen how one who got what he had asked could
be heard to claim that he had been the victim of a wrong,
petitioners should not now complain of an order they had
themselves asked in order to attack such an order
afterwards; if at all, perhaps, third parties, creditors, the
Bureau of Internal Revenue, might have been prejudiced,
and could have had the personality to attack that dismissal
of Special Proceedings No. 3893, but not petitioners herein,
and it is not now for this Court of Appeals to protect said
third persons who have not come to the Court below or
sought to intervene herein; On the second assigned error,
petitioners argue that no evidence has been found to
support the conclusion that the registered properties of
Tiaong Milling are also properties of the estate of Forrest L.
Cease; that on the contrary, said properties are registered
under Act No. 496 in the name of Tiaong Milling as lawful
owner and possessor for the last 50 years of its corporate
existence.
We do not agree. In reposing ownership to the estate of
Forrest L. Cease, the trial court indeed found strong
support, one that is based on a well-entrenched principle
of law. In sustaining respondents' theory of "merger of
Forrest L. Cease and The Tiaong Milling as one personality",
or that "the company is only the business conduit and alter
ego of the deceased Forrest L. Cease and the registered
properties of Tiaong Milling are actually properties of
Forrest L. Cease and should be divided equally, share and
share alike among his six children, ... ", the trial court did
aptly apply the familiar exception to the general rule by
disregarding the legal fiction of distinct and separate
corporate personality and regarding the corporation and
the individual member one and the same. In shredding the
fictitious corporate veil, the trial judge narrated the
undisputed factual premise, thus:
Page 118 of 160
While the records showed that originally its incorporators
were aliens, friends or third-parties in relation of one to
another, in the course of its existence, it developed into a
close family corporation. The Board of Directors and
stockholders belong to one family the head of which Forrest
L. Cease always retained the majority stocks and hence the
control and management of its affairs. In fact, during the
reconstruction of its records in 1947 before the Security
and Exchange Commission only 9 nominal shares out of 300
appears in the name of his 3 eldest children then and
another person close to them. It is likewise noteworthy to
observe that as his children increase or perhaps become of
age, he continued distributing his shares among them
adding Florence, Teresa and Marion until at the time of his
death only 190 were left to his name. Definitely, only the
members of his family benefited from the Corporation.
The accounts of the corporation and therefore its
operation, as well as that of the family appears to be
indistinguishable and apparently joined together. As
admitted by the defendants (Manifestation of Compliance
with Order of March 7, 1963 [Exhibit "21"] the corporation
'never' had any account with any banking institution or if
any account was carried in a bank on its behalf, it was in
the name of Mr. Forrest L. Cease. In brief, the operation of
the Corporation is merged with those of the majority
stockholders, the latter using the former as his
instrumentality and for the exclusive benefits of all his
family. From the foregoing indication, therefore, there is
truth in plaintiff's allegation that the corporation is only a
business conduit of his father and an extension of his
personality, they are one and the same thing. Thus, the
assets of the corporation are also the estate of Forrest L.
Cease, the father of the parties herein who are all
legitimate children of full blood.
A rich store of jurisprudence has established the rule known
as the doctrine of disregarding or piercing the veil of
corporate fiction. Generally, a corporation is invested by
law with a personality separate and distinct from that of
the persons composing it as well as from that of any other
legal entity to which it may be related. By virtue of this
attribute, a corporation may not, generally, be made to
answer for acts or liabilities of its stockholders or those of
the legal entities to which it may be connected, and  vice
versa.  This separate and distinct personality is, however,
merely a fiction created by law for convenience and to
promote the ends of justice (Laguna Transportation
Company vs. Social Security System, L-14606, April 28,
1960; La Campana Coffee Factory, Inc. vs. Kaisahan ng mga
Manggagawa sa La Campana, L-5677, May 25, 1953). For
MAYORDO, M.A
this reason, it may not be used or invoked for ends
subversive of the policy and purpose behind its creation
(Emiliano Cano Enterprises, Inc. vs. CIR, L-20502, Feb. 26,
1965) or which could not have been intended by law to
which it owes its being McConnel vs. Court of Appeals, L-
10510, March 17, 1961, 1 SCRA 722). This is particularly
true where the fiction is used to defeat public
convenience, justify wrong, protect fraud, defend crime
(Yutivo Sons Hardware Company vs. Court of Tax Appeals,
L-13203, Jan. 28, 1961, 1 SCRA 160), confuse legitimate
legal or judicial issues (R. F. Sugay & Co. vs. Reyes,
L-20451, Dec. 28, 1964), perpetrate deception or otherwise
circumvent the law (Gregorio Araneta, Inc. vs. reason de
Paterno, L-2886, Aug. 22, 1952, 49 O.G. 721). This is
likewise true where the corporate entity is being used as an
alter ego, adjunct, or business conduit for the sole benefit
of the stockholders or of another corporate entity
(McConnel vs. Court of Appeals,  supra; Commissioner of
Internal Revenue vs. Norton Harrison Co., L-7618, Aug. 31,
1964).
In any of these cases, the notion of corporate entity will be
pierced or disregarded, and the corporation will be treated
merely as an association of persons or, where there are two
corporations, they will be merged as one, the one being
merely regarded as part or the instrumentality of the otter
(Koppel [Phil.] Inc. vs. Yatco, 77 Phil. 496, Yutivo Sons
Hardware Company vs. Court of Tax Appeals, supra).
So must the case at bar add to this jurisprudence. An
indubitable deduction from the findings of the trial court
cannot but lead to the conclusion that the business of the
corporation is largely, if not wholly, the personal venture of
Forrest L. Cease. There is not even a shadow of a showing
that his children were subscribers or purchasers of the
stocks they own. Their participation as nominal
shareholders emanated solely from Forrest L. Cease's
gratuitous dole out of his own shares to the benefit of his
children and ultimately his family.
Were we sustain the theory of petitioners that the trial
court acted in excess of jurisdiction or abuse of discretion
amounting to lack of jurisdiction in deciding Civil Case No.
6326 as a case for partition when the defendant therein,
Tiaong Milling and Plantation Company, Inc. as registered
owner asserted ownership of the assets and properties
involved in the litigation, which theory must necessarily be
based on the assumption that said assets and properties of
Tiaong Milling and Plantation Company, Inc. now appearing
under the name of F. L. Cease Plantation Company as
Trustee are distinct and separate from the estate of Forrest
L. Cease to which petitioners and respondents as legal heirs
CORPORATION LAW CASES
LLB 3
of said Forrest L. Cease are equally entitled share and
share alike, then that legal fiction of separate corporate
personality shall have been used to delay and ultimately
deprive and defraud the respondents of their successional
rights to the estate of their deceased father. For Tiaong
Milling and Plantation Company shall have been able to
extend its corporate existence beyond the period of its
charter which lapsed in June, 1958 under the guise and
cover of F. L, Cease Plantation Company, Inc. as Trustee
which would be against the law, and as Trustee shall have
been able to use the assets and properties for the benefit
of the petitioners, to the great prejudice and defraudation.
of private respondents. Hence, it becomes necessary and
imperative to pierce that corporate veil.
Under the third assigned error, petitioners claim that the
decision of the lower court in the partition case is not
interlocutory but rather final for it consists of final and
determinative dispositions of the contentions of the
parties. We find no merit in petitioners' stand.
Under the 1961 pronouncement and ruling of the Supreme
Court in Vda. de Zaldarriaga vs. Enriquez, 1 SCRA 1188 (and
the sequel case of  Vda. de Zaldarriaga vs. Zaldarriaga, 2
SCRA 356), the lower court's dismissal of petitioners'
proposed appeal from its December 27, 1969 judgment as
affirmed by the Court of Appeals on the ground of
prematurity in that the judgment was not final but
interlocutory was in order. As was said in said case:
It is true that in  Africa vs. Africa, 42 Phil. 934 and other
cases it was held - contrary to the rule laid down in Ron vs.
Mojica, 8 Phil. 328; Rodriguez vs. Ravilan, 17 Phil. 63 - that
in a partition case where defendant relies on the defense
of exclusive ownership, the action becomes one for title
and the decision or order directing partition is final, but
the ruling to this effect has been expressly reversed in the
Fuentebella case which, in our opinion, expresses the
correct view, considering that a decision or order directing
partition is not final because it leaves something more to
be done in the trial court for the complete disposition of
the case, namely, the appointment of commissioners, the
proceedings to be had before them, the submission of their
report which, according to law, must be set for hearing. In
fact, it is only after said hearing that the court may render
a final judgment finally disposing of the action (Rule 71,
section 7, Rules of Court). (1 SCRA at page 1193).
It should be noted, however, that the said ruling in
Zaldarriaga as based on  Fuentebella vs. Carrascoso, XIV
Lawyers Journal 305 (May 27, 1942), has been expressly
Page 119 of 160
abandoned by the Court in Miranda vs. Court of Appeals, 71
SCRA 295; 331-333 (June 18, 1976) wherein Mr. Justice
Teehankee, speaking for the Court, laid down the following
doctrine:
The Court, however, deems it proper for the guidance of
the bench and bar to now declare as is clearly indicated
from the compelling reasons and considerations
hereinabove stated:
- that the Court considers the better rule to be that stated
in H. E. Heacock Co. vs. American Trading Co., to wit, that
where the primary purpose of a case is to ascertain and
determine who between plaintiff and defendant is the true
owner and entitled to the exclusive use of the disputed
property, "the judgment . . . rendered by the lower court
[is] a judgment on the  merits  as to those questions, and
[that] the order of the court for an  accounting  was based
upon, and is incidental to the judgment on the merits. That
is to say, that the judgment . . . [is] a final judgment ...
that in this kind of a case an accounting is a mere incident
to the judgment; that an appeal lies from the rendition of
the judgment as rendered ... "(as is widely held by a great
number of judges and members of the bar, as shown by the
cases so decided and filed and still pending with the Court)
for the fundamental reasons therein stated that "this is
more in harmony with the administration of justice and the
spirit and intent of the [Rules]. If on appeal the judgment
of the lower court is affirmed, it would not in the least
work an injustice to any of the legal rights of [appellee].
On the other hand, if for any reason this court should
reverse the judgment of the lower court, the accounting
would be a waste of time and money, and might work a
material injury to the [appellant]; and - that accordingly,
the contrary ruling in  Fuentebella vs. Carrascoso  which
expressly reversed the Heacock case and a line of similar
decisions and ruled that such a decision for recovery of
property with accounting "is not final but merely
interlocutory and therefore not appealable" and subsequent
cases adhering to the same must be now in turn abandoned
and set aside.
Fuentebella adopted instead the opposite line of conflicting
decisions mostly in partition proceedings and exemplified
by  Ron vs. Mojica  8 Phil. 928 (under the old Code of Civil
Procedure) that an order for partition of real property is
not final and appealable until after the actual partition of
the property as reported by the court appointed
commissioners and approved by the court in
its  judgment  accepting the report. lt must be especially
noted that such rule governing partitions is now so
MAYORDO, M.A
expressly provided and spelled out in Rule 69 of the Rules
of Court, with special reference to Sections 1, 2, 3, 6, 7
and 11, to wit, that there must first be a preliminar, order
for partition of the real estate (section 2) and where the
parties-co-owners cannot agree, the court appointed
commissioners make a plan of actual partition which must
first be passed upon and accepted by the trial court and
embodied in a judgment to be rendered by it (sections 6
and 11). In partition cases, it must be further borne in mind
that Rule 69, section 1 refers to "a person having
the right to compel the partition of real estate," so that the
general rule of partition that an appeal will not lie until the
partition or distribution proceedings are terminated will
not apply where appellant claims  exclusive ownership  of
the whole property and denies the adverse party's right to
any partition, as was the ruling in  Villanueva vs.
Capistrano  and  Africa vs .Africa, supra, Fuentebellas
express rehearsal of these cases must likewise be deemed
now also abandoned in view of the Court's expressed
preference for the rationale of the Heacock case.
The Court's considered opinion is that imperative
considerations of public policy and of sound practice in the
courts and adherence to the  constitutional mandate  of
simplified, just, speedy and inexpensive determination of
every action call for considering such judgments for
recovery of property with  accounting as final  judgments
which are duly  appealable  (and would therefore become
final and executory if not appealed within the reglementary
period) with the  accounting  as a mere incident of the
judgment to be rendered during the course of the appeal as
provided in Rule 39, section 4 or to be implemented at the
execution stage upon final affirmance on appeal of the
judgment (as in Court of Industrial Relations unfair labor
practice cases ordering the reinstatement of the worker
with accounting, computation and payment of his
backwages less earnings elsewhere during his layoff) and
that the only reason given in Fuentebelia for the contrary
ruling, viz, "the general harm that would follow from
throwing the door open to multiplicity of appeals in a single
case" of lesser import and consequence. (Emphasis copied).
The miranda ruling has since then been applied as the new
rule by a unanimous Court in  Valdez vs. Bagasao, 82 SCRA
22 (March 8, 1978).
If there were a valid genuine claim of Exclusive ownership
of the inherited properties on the part of petitioners to
respondents' action for partition, then under the Miranda
ruling, petitioners would be sustained, for as expressly held
therein " the general rule of partition that an appeal will
CORPORATION LAW CASES
LLB 3
not lie until the partition or distribution proceedings are
terminated will not apply where appellant claims exclusive
ownership of the whole property and denies the adverse
party's right to any partition."
But this question has now been rendered moot and
academic for the very issue of exclusive ownership claimed
by petitioners to deny and defeat respondents' right to
partition - which is the very core of their rejected appeal -
has been squarely resolved herein against them, as if the
appeal had been given due course. The Court has herein
expressly sustained the trial court's findings, as affirmed by
the Court of Appeals, that the assets or properties of the
defunct company constitute the estate of the deceased
proprietor (supra at page 7) and the defunct company's
assertion of ownership of the properties is a legal
contradiction and would but thwart the liquidation and
final distribution and partition of the properties among the
parties hereof as children of their deceased father Forrest
L. Cease. There is therefore no further hindrance to effect
the partition of the properties among the parties in
implementation of the appealed judgment.
One last consideration. Parties are brothers and sisters,
legal heirs of their deceased father, Forrest L. Cease. By all
rights in law and jurisprudence, each is entitled to share
and share alike in the estate, which the trial court
correctly ordained and sustained by the appellate court.
Almost 20 years have lapsed since the filing of Special
Proceedings No. 3893 for the administration of the Estate
of Forrest L. Cease and Civil Case No. 6326 for liquidation
and partition of the assets of the defunct Tiaong Milling and
Plantation Co., Inc. A succession of receivers were
appointed by the court to take, keep in possession,
preserve and manage properties of the corporation which
at one time showed an income of P386,152.90 and expenses
of P308,405.01 for the period covering January 1, 1960 to
August 31, 1967 as per Summary of Operations of
Commissioner for Finance appointed by the Court (Brief for
Respondents, p. 38). In the meantime, ejectment cases
were filed by and against the heirs in connection with the
properties involved, aggravating the already strained
relations of the parties. A prudent and practical realization
of these circumstances ought and must constrain the
parties to give each one his due in law and with fairness
and dispatch that their basic rights be enjoyed. And by
remanding this case to the court  a quo  for the actual
partition of the properties, the substantial rights of
everyone of the heirs have not been impaired, for in fact,
they have been preserved and maintained.
Page 120 of 160
WHEREFORE, IN VIEW OF THE FOREGOING, the judgment
appealed from is hereby AFFIRMED with costs against the
petitioners.
SO ORDERED.
G.R. No. L-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN
PACHECO, petitioners,  vs. INTERMEDIATE APPELLATE
COURT and HYDRO PIPES PHILIPPINES, INC., respondents.
GUTIERREZ, JR., J.:
The petitioners question the decision of the Intermediate
Appellate Court which sustained the private respondent's
contention that the deed of exchange whereby Delfin
Pacheco and Pelagia Pacheco conveyed a parcel of land to
Delpher Trades Corporation in exchange for 2,500 shares of
stock was actually a deed of sale which violated a right of
first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco,
were the owners of 27,169 square meters of real estate
Identified as Lot. No. 1095, Malinta Estate, in the
Municipality of Polo (now Valenzuela), Province of Bulacan
(now Metro Manila) which is covered by Transfer Certificate
of Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction
Components International Inc. the same property and
providing that during the existence or after the term of this
lease the lessor should he decide to sell the property
leased shall first offer the same to the lessee and the letter
has the priority to buy under similar conditions (Exhibits A
to A-5)
On August 3, 1974, lessee Construction Components
International, Inc. assigned its rights and obligations under
the contract of lease in favor of Hydro Pipes Philippines,
Inc. with the signed conformity and consent of lessors
Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6
inclusive)
The contract of lease, as well as the assignment of lease
were annotated at he back of the title, as per stipulation of
the parties (Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed
between lessors Delfin and Pelagia Pacheco and defendant
Delpher Trades Corporation whereby the former conveyed
to the latter the leased property (TCT No.T-4240) together
with another parcel of land also located in Malinta Estate,
MAYORDO, M.A
Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of
stock of defendant corporation with a total value of
P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy
the leased property pursuant to the proviso in the lease
agreement, respondent Hydro Pipes Philippines, Inc., filed
an amended complaint for reconveyance of Lot. No. 1095 in
its favor under conditions similar to those whereby Delpher
Trades Corporation acquired the property from Pelagia
Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in
favor of the plaintiff. The dispositive portion of the
decision reads:
ACCORDINGLY, the judgment is hereby rendered declaring
the valid existence of the plaintiffs preferential right to
acquire the subject property (right of first refusal) and
ordering the defendants and all persons deriving rights
therefrom to convey the said property to plaintiff who may
offer to acquire the same at the rate of P14.00 per square
meter, more or less, for Lot 1095 whose area is 27,169
square meters only. Without pronouncement as to
attorney's fees and costs. (Appendix I; Rec., pp. 246- 247).
(Appellant's Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the
Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a
petition for certiorari to review the appellate court's
decision.
We initially denied the petition but upon motion for
reconsideration, we set aside the resolution denying the
petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the
petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, ("private
respondent") will acquire from petitioners a parcel
of industrial land consisting of 27,169 square meters or 2.7
hectares (located right after the Valenzuela, Bulacan exit
of the toll expressway) for only  P14/sq. meter, or a total
of  P380,366, although the prevailing value thereof is
approximately P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first
refusal even if there is no "sale" or transfer of actual
ownership interests by petitioners to third parties; and
CORPORATION LAW CASES
LLB 3
3. Assuming  arguendo  that there has been a transfer of
actual ownership interests, private respondent will acquire
the land  not  under "similar conditions" by which it was
transferred to petitioner Delpher Trades Corporation, as
provided in the same contractual provision invoked by
private respondent. (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the
"Deed of Exchange" of the properties executed by the
Pachecos on the one hand and the Delpher Trades
Corporation on the other was meant to be a contract of
sale which, in effect, prejudiced the private respondent's
right of first refusal over the leased property included in
the "deed of exchange."
Eduardo Neria, a certified public accountant and son-in-law
of the late Pelagia Pacheco testified that Delpher Trades
Corporation is a family corporation; that the corporation
was organized by the children of the two spouses (spouses
Pelagia Pacheco and Benjamin Hernandez and spouses
Delfin Pacheco and Pilar Angeles) who owned in common
the parcel of land leased to Hydro Pipes Philippines in order
to perpetuate their control over the property through the
corporation and to avoid taxes; that in order to accomplish
this end, two pieces of real estate, including Lot No. 1095
which had been leased to Hydro Pipes Philippines, were
transferred to the corporation; that the leased property
was transferred to the corporation by virtue of a deed of
exchange of property; that in exchange for these
properties, Pelagia and Delfin acquired 2,500 unissued no
par value shares of stock which are equivalent to a 55%
majority in the corporation because the other owners only
owned 2,000 shares; and that at the time of incorporation,
he knew all about the contract of lease of Lot. No. 1095 to
Hydro Pipes Philippines. In the petitioners' motion for
reconsideration, they refer to this scheme as "estate
planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that
there was actually no transfer of ownership of the subject
parcel of land since the Pachecos remained in control of
the property. Thus, the petitioners allege: "Considering that
the beneficial ownership and control of petitioner
corporation remained in the hands of the original co-
owners, there was no transfer of actual ownership interests
over the land when the same was transferred to petitioner
corporation in exchange for the latter's shares of stock. The
transfer of ownership, if anything, was merely in form but
not in substance. In reality, petitioner corporation is a mere
alter ego or conduit of the Pacheco co-owners; hence the
Page 121 of 160
corporation and the co-owners should be deemed to be the
same, there being in substance and in effect an Identity of
interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the
property. They argue that there was no sale and that they
exchanged the land for shares of stocks in their own
corporation. "Hence, such transfer is not within the letter,
or even spirit of the contract. There is a sale when
ownership is transferred for a price certain in money or its
equivalent (Art. 1468, Civil Code) while there is a barter or
exchange when one thing is given in consideration of
another thing (Art. 1638, Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that
Delpher Trades Corporation is a corporate entity separate
and distinct from the Pachecos. Thus, it contends that it
cannot be said that Delpher Trades Corporation is the
Pacheco's same alter ego or conduit; that petitioner Delfin
Pacheco, having treated Delpher Trades Corporation as such
a separate and distinct corporate entity, is not a party who
may allege that this separate corporate existence should be
disregarded. It maintains that there was actual transfer of
ownership interests over the leased property when the
same was transferred to Delpher Trades Corporation in
exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a
corporation by subscription or by purchasing stock directly
from the corporation or from individual owners thereof
(Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v.
Fulton [1912], 233 Pa., 609). In the case at bar, in exchange
for their properties, the Pachecos acquired 2,500 original
unissued no par value shares of stocks of the Delpher Trades
Corporation. Consequently, the Pachecos became
stockholders of the corporation by subscription "The
essence of the stock subscription is an agreement to take
and pay for original unissued shares of a corporation,
formed or to be formed." (Rohrlich 243, cited in Agbayani,
Commentaries and Jurisprudence on the Commercial Laws
of the Philippines, Vol. III, 1980 Edition, p. 430) It is
significant that the Pachecos took no par value shares in
exchange for their properties.
A no-par value share does not purport to represent any
stated proportionate interest in the capital stock measured
by value, but only an aliquot part of the whole number of
such shares of the issuing corporation. The holder of no-par
shares may see from the certificate itself that he is only an
MAYORDO, M.A
aliquot sharer in the assets of the corporation. But this
character of proportionate interest is not hidden beneath a
false appearance of a given sum in money, as in the case of
par value shares. The capital stock of a corporation issuing
only no-par value shares is not set forth by a stated amount
of money, but instead is expressed to be divided into a
stated number of shares, such as, 1,000 shares. This
indicates that a shareholder of 100 such shares is an aliquot
sharer in the assets of the corporation, no matter what
value they may have, to the extent of 100/1,000 or 1/10.
Thus, by removing the par value of shares, the attention of
persons interested in the financial condition of a
corporation is focused upon the value of assets and the
amount of its debts. (Agbayani, Commentaries and
Jurisprudence on the Commercial Laws of the Philippines,
Vol. III, 1980 Edition, p. 107).
Moreover, there was no attempt to state the true or current
market value of the real estate. Land valued at P300.00 a
square meter was turned over to the family's corporation
for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no
par shares of stock, the Pachecos have control of the
corporation. Their equity capital is 55% as against 45% of
the other stockholders, who also belong to the same family
group.
In effect, the Delpher Trades Corporation is a business
conduit of the Pachecos. What they really did was to invest
their properties and change the nature of their ownership
from unincorporated to incorporated form by organizing
Delpher Trades Corporation to take control of their
properties and at the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any
benefit to the spouses Hernandez and Pacheco in
connection with their execution of a deed of exchange on
the properties for no par value shares of the defendant
corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in
entering in the deed of exchange.
ATTY. LINSANGAN:
CORPORATION LAW CASES
LLB 3
Q (What do you mean by "point of view"?) What are these
benefits to the spouses of this deed of exchange?
A Continuous control of the property, tax exemption
benefits, and other inherent benefits in a corporation.
Q What are these advantages to the said spouses from the
point of view of taxation in entering in the deed of
exchange?
A Having fulfilled the conditions in the income tax law,
providing for tax free exchange of property, they were able
to execute the deed of exchange free from income tax and
acquire a corporation.
Q What provision in the income tax law are you referring
to?
A I refer to Section 35 of the National Internal Revenue
Code under par. C-sub-par. (2) Exceptions regarding the
provision which I quote: "No gain or loss shall also be
recognized if a person exchanges his property for stock in a
corporation of which as a result of such exchange said
person alone or together with others not exceeding four
persons gains control of said corporation."
Q Did you explain to the spouses this benefit at the time
you executed the deed of exchange?
A Yes, sir
Q You also, testified during the last hearing that the
decision to have no par value share in the defendant
corporation was for the purpose of flexibility. Can you
explain flexibility in connection with the ownership of the
property in question?
A There is flexibility in using no par value shares as the
value is determined by the board of directors in increasing
capitalization. The board can fix the value of the shares
equivalent to the capital requirements of the corporation.
Q Now also from the point of taxation, is there any
flexibility in the holding by the corporation of the property
in question?
A Yes, since a corporation does not die it can continue to
hold on to the property indefinitely for a period of at least
50 years. On the other hand, if the property is held by the
spouse the property will be tied up in succession
proceedings and the consequential payments of estate and
inheritance taxes when an owner dies.
Q Now what advantage is this continuity in relation to
ownership by a particular person of certain properties in
respect to taxation?
Page 122 of 160
A The property is not subjected to taxes on succession as
the corporation does not die.
Q So the benefit you are talking about are inheritance
taxes?
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
The records do not point to anything wrong or
objectionable about this "estate planning" scheme resorted
to by the Pachecos. "The legal right of a taxpayer to
decrease the amount of what otherwise could be his taxes
or altogether avoid them, by means which the law permits,
cannot be doubted." (Liddell & Co., Inc. v.The collector of
Internal Revenue, 2 SCRA 632 citing Gregory v. Helvering,
293 U.S. 465, 7 L. ed. 596).
The "Deed of Exchange" of property between the Pachecos
and Delpher Trades Corporation cannot be considered a
contract of sale. There was no transfer of actual ownership
interests by the Pachecos to a third party. The Pacheco
family merely changed their ownership from one form to
another. The ownership remained in the same hands.
Hence, the private respondent has no basis for its claim of
a light of first refusal under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The
questioned decision and resolution of the then
Intermediate Appellate Court are REVERSED and SET ASIDE.
The amended complaint in Civil Case No. 885-V-79 of the
then Court of First Instance of Bulacan is DISMISSED. No
costs.
SO ORDERED.
173 F. Supp. 915 (1959)
W. H. GARRETT v. SOUTHERN RAILWAY COMPANY.
Civ. A. No. 3465.
United States District Court E. D. Tennessee, N. D.
May 8, 1959.
*916 Hodges & Doughty, Knoxville, Tenn., for plaintiff.
Key & Lee, Knoxville, Tenn., for defendant.
ROBERT L. TAYLOR, District Judge.
The plaintiff in this case was employed as a wheel moulder
by Lenoir Car Works, a Tennessee corporation. He claims
injuries from silicosis contracted from silica dust
permeating the foundry. But the questions whether he had
silicosis, and the amount of injury, are not reached in this
phase of the case.
MAYORDO, M.A
The sole question here is whether defendant, Southern
Railway Company (hereinafter referred to as Southern),
which acquired the entire capital stock of Lenoir Car Works
(referred to hereinafter as Lenoir) in 1904, the year of the
latter's organization, so completely dominated Lenoir that
the latter was but an adjunct, or instrumentality, of
Southern. If it did, then the complainant would, for the
purpose of this case, be an employee of Southern and
would be entitled to recover under the Federal Employers'
Liability Act, 45 U.S.C.A. § 51 et seq. Because there is a
real question that Lenoir is but an instrumentality of
Southern, the plaintiff in order to protect his rights, has
also brought suit in the State courts against Lenoir for
Workmen's Compensation.
The general rule is that 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. Sheridan v. Pan-
American Refining Co., D.C.N.Y. 123 F. Supp. 81. The
general rule is also stated in an Annotation appearing in 50
A.L.R. 611. See also Kentucky Electric Power Co. v. Norton
Coal Mining Co., 6 Cir., 93 F.2d 923, 926. Whether the
subsidiary is an instrumentality of the owner corporation is
a question to be determined from all the surrounding
circumstances. Fletcher Cyclopedia Corporations, Sec. 43
(p. 157), Sec. 6222; Berkey v. Third Ave. R. Co., 244 N.Y.
84, 155 N.E. 58, 50 A.L.R. 599 (opinion by Cardozo); Costan
v. Manila Electric Co., 2 Cir., 24 F.2d 383, 384. Items to be
considered in reaching such a determination are common
directorships, common officers, common fiscal set up, etc.
The plaintiff relies upon the following circumstances:
That all directors and officers of Lenoir are employees of
Southern and live in Washington; that Southern owns all
the *917 stock of Lenoir except five qualifying shares; that
between 1942-1957 Lenoir sold to Southern, or its
affiliates, over 30 million dollars worth of its products
while selling approximately four and a half million to
outside purchasers; that all profits of Lenoir went to
Southern; that all claims of Lenoir employees for accidents
are handled by the claim's office of Southern; that all
litigation against Lenoir is handled by Southern's attorneys;
that general accounting of Lenoir is handled in Washington
by personnel of Southern; that the Railroad Retirement
Board decided that employees of Lenoir were entitled to
benefits under the Railroad Retirement Act, 45 U.S.C.A. §
215 et seq., because of the relationship between Lenoir
CORPORATION LAW CASES
LLB 3
and Southern; that Lenoir has the power of eminent
domain; and that on May 13, 1904, the Board of Directors
of Southern authorized the purchase of the entire capital
stock of Lenoir.
Our question is whether these factors would establish
Lenoir as the mere creature of Southern. The defendant
railroad says that these matters are not controlling and to
sustain its position emphasizes the following facts:
That although Lenoir sells the majority of its products to
Southern or its affiliates, it does not sell to them
exclusively and in the fifteen-year period prior to the suit
sold twelve percent to other customers; that Lenoir
maintains its offices and business in Lenoir City, Tennessee,
although it concedes that the corporate and accounting
offices are in Washington in a building owned by Southern;
that the management of Lenoir is vested in a manager,
Henry Marius, who has held the position continuously since
July 1, 1945, is paid by Lenoir, and although he holds and
votes the proxy of Southern at the annual stockholders
meeting, he has no other connection with Southern; that
never has any individual served at the same time as a
Director of Lenoir and Southern; that the work of Lenoir is
a specialty and in the last 20 years no official or supervising
employee of Southern has by training, or experience, been
in a position to direct or supervise the operation of such a
business; that Southern has not purchased all its wheels,
steel and brass castings from Lenoir, but has bought
substantial amounts from others; that Southern has
followed the custom in the trade as to price quotations and
supplying scrap material in its dealings with Lenoir, and all
sales to Southern have been upon the basis of a bid price or
negotiated price; that in every case Southern obtains bids
from several manufacturers and purchases from the lowest
bidder; that the manager of Lenoir establishes the prices of
all prospective purchases, including that of Southern; that
the manager expects to make a profit and is not informed
by Southern of bids of its competitors even when the prices
are negotiated; that bids are revised sometimes, but never
with knowledge of the bids of competitors; that all sales
are the result of the business judgment of the Manager and
not the result of threats, persuasion or intimidation by
Southern; that at no time has any individual occupied the
same official position in both companies with the exception
of corporate and financial officials; that Lenior has since
1919 been a duly qualified employer under the Tennessee
Workmen's Compensation Law, T.C.A. § 50-901 et seq., and
with the exception of this and several similar suits has
settled all claims made under and covered by the
Tennessee Workmen's Compensation Law; that Lenoir
Page 123 of 160
maintains a separate bank account and has never
intermingled its funds with those of Southern; that the
companies keep separate books and Lenoir pays its own
taxes; that Southern issues no passes to the manager or any
other employee of Lenoir; that Lenoir owns no track or
rolling stock, publishes no tariffs, files no reports with the
Interstate Commerce Commission and uses no facilities or
property jointly with Southern; that claims of employees
are investigated and settled by the Claim Department of
the Southern Railway System, which likewise defends
claims litigation; that the general accounting of Lenoir is
handled *918by the Accounting Department of the Southern
Railway System, but local accounting is handled by Lenoir
employees at Lenoir City; that salaries of employees of the
System doing this general work are paid by Southern, but
reimbursement of its fair proportionate part thereof is
made by Lenoir and other members of the System at
monthly intervals, and that the share of Lenoir is $2,000
monthly; that Lenoir makes separate collective bargaining
agreements with its employees and there is no interchange
of seniority between operations of Lenoir and the railroad,
or vice versa; that Lenoir has its own legal counsel in Lenoir
City, selected by its manager in addition to the use it makes
of the Legal Department of the System.
Counsel have been commendably frank and candid in the
pre-trial conference, and in answering interrogatories and
filing exhibits. The factual data before the Court is not in
conflict. The Court's responsibility is to determine whether
Lenoir is operated as a sham for Southern, or as the
instrumentality, or as an adjunct of its operation.
The facts set forth above outline with singular sharpness
the relation between the two companies. The Court finds
the existence of two distinct operations. There is no
evidence that Southern dictated the management of Lenoir.
In fact, the evidence indicates that Henry Marius was in full
control of the operation. He established prices. He handled
all negotiations in collective bargaining agreements. Lenoir
paid local taxes, had local counsel, maintained Workmen's
Compensation. There is no evidence that Lenoir was run
solely for the benefit of Southern. In fact a substantial part
of its requirements in the field of operation of Lenior were
bought elsewhere. Lenoir sold substantial quantities to
other companies. It operated no rolling stock and had
nothing to do with the transportation business.
The situation here is not like that in Southern Pacific Co. v.
Gileo, 351 U.S. 493, 76 S. Ct. 952, 100 L. Ed. 1357, where
the railroad itself operated a wheel foundry. The only
question there as to employee Aranda was whether his
MAYORDO, M.A
duties as a wheel moulder served to further interstate
commerce. The Supreme Court decided he was entitled to
the benefit of the Federal Employers' Liability Act.
But before the Gileo decision applies here we must first
determine whether Lenoir was operated so tightly by
Southern that it was an agency or instrumentality of
Southern. In our opinion it was not. Policy decisions and
pricings remained in the hands of Marius. Certain
accounting and claims work was done in Washington to
eliminate duplication. But there is no evidence that policy
decisions of Lenoir were made or dictated by Southern.
Marius operated the business as a going concern in the
fields it was equipped to handle. Where Southern, or the
Southern Railway System, did work for Lenoir there was
careful accounting and adjustment of costs at the end of
each month. The facts do not reveal the intimacy and
inseparability of control which would lead the Court to hold
that Southern and Lenoir were one and the same. There is
no such control here as in Costan v. Manila Electric Co.,
supra.
Lenoir was not in the words of the Act a "common carrier by
railroad." It was not performing what have been called non-
delegable duties of the railroad. It was not an operator of a
terminal, performed no switching or transportation
functions at all. It was a manufacturer and plaintiff was
one of its employees. It was hence not an "agent" of
Southern in the sense used in some of the cases cited by
the plaintiff, since it performed no common carrier
operations. Chicago, M. & St. P. Ry. Co. v. Minnesota Civic &
Commerce Ass'n,  247 U.S. 490, 38 S. Ct. 553, 62 L. Ed.
1229; Davis v. Alexander,  269 U.S. 114, 46 S. Ct. 34, 70 L.
Ed. 186; Sinkler v. Missouri Pacific R. Co., 356 U.S. 326, 78
S. Ct. 758, 2 L. Ed. 2d 799.
Defendant manufactured car wheels, bearings of various
kinds and items of a related nature. Southern could
produce such items for its own use and if it did  *919  so
would be liable in tort under the F.E. L.A. for accidents
occurring in the activity. But Southern did not manufacture
these things in its own plants. Although necessary to keep
its rolling stock in good repair, the items could be
purchased anywhere. In fact the evidence indicates that
substantial purchases of these products were made
elsewhere. If purchased of a completely independent
company, no claim could be made that such company was
an instrumentality of Southern.
The question only arises because of the ownership of Lenoir
by Southern and because of the other relationships listed
CORPORATION LAW CASES
LLB 3
above. We come back to the question whether the control
was such as to make Lenoir a mere adjunct of Southern. We
repeat again that it was not. Friedman v. Vandalia R. Co., 8
Cir., 254 F. 292, 294; Atlantic Coast Line R. Co. v. Shields, 5
Cir., 220 F.2d 242, 246.
In a case not involving a tort the Court of Appeals for the
Sixth Circuit has set down the following guide lines.
Kentucky Electric Power Co. v. Norton Coal Mining Co.,
supra:
 
"On the other hand, it is likewise well settled that a
corporation is ordinarily an entity, separate and apart from
its stockholders, and mere ownership of all the stock of one
corporation by another, and the identity of officers of one
with officers of another, are not alone sufficient to create
identity of corporate interest between the two companies
or to create the relation of principal and agent or to create
a representative or fiduciary relationship between the two.
If such stock ownership and potential control be resorted to
only for the purpose of normally participating in the affairs
of the subsidiary corporation in a manner usual to
stockholders and not for the purpose of taking some unfair
advantage of the subsidiary or using it as a mere adjunct to
the main corporation or as a subterfuge to justify
wrongdoing, their identity as separate corporations will not
be disregarded but their respective rights when dealing
with each other in respect to their separate property will
be recognized and maintained. The extent of stock
ownership and mere potential control of one company over
another has never been regarded as the determining factor
in the consideration of such cases. Something must be
disclosed to indicate the exercise of undue domination or
influence resulting in an infringement upon the rights of
the subservient corporation for the benefit of the dominant
one. Otherwise, the rights of the separate corporations in
respect to their corporate property must be governed by
the rules applicable in ordinary cases." [93 F.2d 926.]
This excerpt from the Kentucky Electric Power case was
quoted with approval in a footnote to the case of Taylor v.
Standard Gas & Electric Co., 10 Cir., 96 F.2d 693, 704. In
that case the Court in considering the indicia of control
quoted at length from Powell on Parent and Subsidiary
Corporations:
 
"There is respectable authority for the proposition that to
justify the application of the instrumentality rule between
parent and subsidiary corporation, there must be present in
addition to the elements of control through stock
ownership and common directorates and officers, elements
Page 124 of 160
of fraud or wrongdoing on the part of the parent
corporation to the detriment of the susbidiary and third
persons in their relations with the subsidiary.
 
"Sections 5 and 6 of Powell on Parent and Subsidiary
Corporations, in part, read:
"`The Instrumentality Rule, in its shortest form, may now
be stated:
"`So far as the question of control alone is concerned, the
parent corporation will be responsible for the obligations of
its subsidiary when its control has been exercised to
such *920 a degree that the subsidiary has become its mere
instrumentality.
 
"`The Instrumentality Rule is recognized in all jurisdictions
in this country and our problem therefore is to determine
the circumstances which render the subsidiary an
"instrumentality" within the meaning of the decisions. This
is primarily a question of fact and of degree.'
 
"`The circumstances 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 it by the parent corporation.
MAYORDO, M.A
 
"`(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 in the latter's
interest.
 
"`(k) The formal legal requirements of the subsidiary are
not observed.'"
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 by Southern
to the capital stock of Lenoir. In our opinion the principles
of the Kentucky Electric Power case apply here, and when
applied we conclude that the control of Southern over
Lenoir was not such as to constitute the latter an adjunct
of Southern. The complaint must be dismissed.
G.R. No. 151438 July 15, 2005
JARDINE DAVIES, INC., Petitioners, vs. JRB REALTY, INC.,
Respondent.
DECISION
CALLEJO, SR., J.:
 
Before us is a petition for review of the Decision[1] of the
Court of Appeals (CA) in CA-G.R. CV No. 54201 affirming in
toto that of the Regional Trial Court (RTC) in Civil Case No.
90-237 for specific performance; and the Resolution dated
January 11, 2002 denying the motion for reconsideration
thereof.


The facts are as follows:
 
In 1979-1980, respondent JRB Realty, Inc. built a nine-
storey building, named Blanco Center, on its parcel of land
located at 119 Alfaro St., Salcedo Village, Makati City. An
air conditioning system was needed for the Blanco Law Firm
housed at the second floor of the building. On March 13,
1980, the respondents Executive Vice-President, Jose R.
Blanco, accepted the contract quotation of Mr. A.G.
Morrison, President of Aircon and Refrigeration Industries,
Inc. (Aircon), for two (2) sets of Fedders Adaptomatic
CORPORATION LAW CASES
LLB 3
30,000 kcal (Code: 10-TR) air conditioning equipment with
a net total selling price of  P99,586.00.[2]  Thereafter, two
(2) brand new packaged air conditioners of 10 tons capacity
each to deliver 30,000 kcal or 120,000 BTUH[3]  were
installed by Aircon. When the units with rotary compressors
were installed, they could not deliver the desired cooling
temperature. Despite several adjustments and corrective
measures, the respondent conceded that Fedders Air
Conditioning USAs technology for rotary compressors for big
capacity conditioners like those installed at the Blanco
Center had not yet been perfected. The parties thereby
agreed to replace the units with reciprocating/semi-
hermetic compressors instead. In a Letter dated March 26,
1981,[4] Aircon stated that it would be replacing the units
currently installed with new ones using rotary compressors,
at the earliest possible time. Regrettably, however, it could
not specify a date when delivery could be effected.
TempControl Systems, Inc. (a subsidiary of Aircon until
1987) undertook the maintenance of the units, inclusive of
parts and services. In October 1987, the respondent
learned, through newspaper ads,[5]  that Maxim Industrial
and Merchandising Corporation (Maxim, for short) was the
new and exclusive licensee of Fedders Air Conditioning USA
in the Philippines for the manufacture, distribution, sale,
installation and maintenance of Fedders air conditioners.
The respondent requested that Maxim honor the obligation
of Aircon, but the latter refused. Considering that the ten-
year period of prescription was fast approaching, to expire
on March 13, 1990, the respondent then instituted, on
January 29, 1990, an action for specific performance with
damages against Aircon & Refrigeration Industries, Inc.,
Fedders Air Conditioning USA, Inc., Maxim Industrial &
Merchandising Corporation and petitioner Jardine Davies,
Inc.[6] The latter was impleaded as defendant, considering
that Aircon was a subsidiary of the petitioner. The
respondent prayed that judgment be rendered, as follows:
 
 1. Ordering the defendants to jointly and severally at their
account and expense deliver, install and place in operation
two  brand new units of each 10-tons capacity Fedders
unitary packaged air conditioners with Fedders USAs
technology perfected rotary compressors to always deliver
30,000 kcal or 120,000 BTUH to the second floor of the
Blanco Center building at 119 Alfaro St., Salcedo Village,
Makati, Metro Manila;
 
2. Ordering defendants to jointly and severally reimburse
plaintiff not only the sums of  P415,118.95 for unsaved
electricity from 21st  October 1981 to 7th  January 1990
and  P99,287.77 for repair costs of the two service units
Page 125 of 160
from 7th  March 1987 to 11th  January 1990, with legal
interest thereon from the filing of this Complaint until fully
reimbursed, but also like unsaved electricity costs and like
repair costs therefrom until Prayer No. 1 above shall have
been complied with;
 
3. Ordering defendants to jointly and severally pay
plaintiffs  P150,000.00 attorneys fees and other costs of
litigation, as well as exemplary damages in an amount not
less than or equal to Prayer 2 above; and
 
4. Granting plaintiff such other and further relief as shall
be just and equitable in the premises.[7]
 
Of the four defendants, only the petitioner filed its Answer.
The court did not acquire jurisdiction over Aircon because
the latter ceased operations, as its corporate life ended on
December 31, 1986.[8]  Upon motion, defendants Fedders
Air Conditioning USA and Maxim were declared in default.
[9]
On May 17, 1996, the RTC rendered its Decision, the
dispositive portion of which reads:
 
WHEREFORE, judgment is hereby rendered ordering
defendants Jardine Davies, Inc., Fedders Air Conditioning
USA, Inc. and Maxim Industrial and Merchandising
Corporation, jointly and severally:
 
1.                  To deliver, install and place into operation
the two (2) brand new units of Fedders unitary packaged
airconditioning units each of 10 tons capacity with rotary
compressors to deliver 30,000 kcal or 120,000 BTUH to the
second floor of the Blanco Center building, or to pay
plaintiff the current price for two such units;
 
2.                                    To reimburse plaintiff the amount
of P556,551.55 as and for the unsaved electricity bills from
October 21, 1981 up to April 30, 1995; and another amount
of P185,951.67 as and for repair costs;
 
3.                                   To pay plaintiff P50,000.00 as and for
attorneys fees; and
 
4.                  Cost of suit.[10]
 
The petitioner filed its notice of appeal with the CA,
alleging that the trial court erred in holding it liable
because it was not a party to the contract between JRB
Realty, Inc. and Aircon, and that it had a personality
separate and distinct from that  of Aircon. On March 23,
MAYORDO, M.A
2000, the CA affirmed the trial courts ruling in toto; hence,
this petition.
 
The petitioner raises the following assignment of errors:
I. THE COURT OF APPEALS ERRED IN HOLDING
JARDINE LIABLE FOR THE ALLEGED CONTRACTUAL BREACH
OF AIRCON SOLELY BECAUSE THE LATTER WAS FORMERLY
JARDINES SUBSIDIARY.
 
II. ASSUMING  ARGUENDO  THAT AIRCON MAY BE
CONSIDERED AS JARDINES MERE ALTER EGO, THE COURT OF
APPEALS ERRED IN NOT DECLARING AIRCONS OBLIGATION TO
DELIVER THE TWO (2) AIRCONDITIONING UNITS TO JRB AS
HAVING BEEN SUBSTANTIALLY COMPLIED WITH IN GOOD
FAITH.
 III. ASSUMING  ARGUENDO  THAT AIRCON MAY BE
CONSIDERED AS JARDINES MERE ALTER EGO, THE COURT OF
APPEALS ERRED IN NOT DECLARING JRBS CAUSES OF ACTION
AS HAVING BEEN BARRED BY LACHES.
IV. ASSUMING  ARGUENDO  THAT AIRCON MAY BE
CONSIDERED AS JARDINES MERE ALTER EGO, THE COURT OF
APPEALS ERRED IN FINDING JRB ENTITLED TO RECOVER
ALLEGED UNSAVED ELECTRICITY EXPENSES.
 
V. THE COURT OF APPEALS ERRED IN HOLDING
JARDINE LIABLE TO PAY ATTORNEYS FEES.
VI. THE COURT OF APPEALS ERRED IN NOT HOLDING
JRB LIABLE TO JARDINE FOR DAMAGES.[11]
 
It is the well-settled rule that factual findings of the trial
court, as affirmed by the CA, are accorded high respect,
even finality at times. However, considering that the
factual findings of the CA and the RTC were based on
speculation and conjectures, unsupported by substantial
evidence, the Court finds that the instant case falls under
one of the excepted instances. There is, thus, a need to
correct the error.
 
The trial court ruled that Aircon was a subsidiary of the
petitioner, and concluded, thus:
 
Plaintiffs documentary evidence shows that at the time it
contracted with Aircon on March 13, 1980 (Exhibit D) and
on the date the revised agreement was reached on March
26, 1981, Aircon was a subsidiary of Jardine. The phrase A
subsidiary of Jardine Davies, Inc. was printed on Aircons
letterhead of its March 13, 1980 contract with plaintiff
CORPORATION LAW CASES
LLB 3
(Exhibit D-1), as well as the Aircons letterhead of Jardines
Director and Senior Vice-President A.G. Morrison and
Aircons President in his March 26, 1981 letter to plaintiff
(Exhibit J-2) confirming the revised agreement. Aircons
newspaper ads of April 12 and 26, 1981 and a press release
on August 30, 1982 (Exhibits E, F and L) also show that
defendant Jardine publicly represented Aircon to be its
subsidiary.
 
Records from the Securities and Exchange Commission (SEC)
also reveal that as per Jardines December 31, 1986 and
1985 Financial Statements that The company acts as
general manager of its subsidiaries (Exhibit P). Jardines
Consolidated Balance Sheet as of December 31, 1979 filed
with the SEC listed Aircon as its subsidiary by owning
94.35% of Aircon (Exhibit P-1). Also, Aircons reportorial
General Information Sheet as of April 1980 and April 1981
filed with the SEC show that Jardine was 94.34% owner of
Aircon (Exhibits Q and R) and that out of seven members of
the Board of Directors of Aircon, four (4) are also of
Jardine.
 
Defendant Jardines witness, Atty. Fe delos Santos-Quiaoit
admitted that defendant Aircon, renamed Aircon &
Refrigeration Industries, Inc. is one of the subsidiaries of
Jardine Davies (TSN, September 22, 1995, p. 12). She also
testified that Jardine nominated, elected, and appointed
the controlling majority of the Board of Directors and the
highest officers of Aircon (Ibid, pp. 10,13-14).
 
The foregoing circumstances provide justifiable basis for
this Court to disregard the fiction of corporate entity and
treat defendant Aircon as part of the instrumentality of co-
defendant Jardine.[12]
 
  The respondent court arrived at the same conclusion
basing its ruling on the following documents, to wit:
 
(a)    Contract/Quotation #78-No. 80-1639 dated March 03,
1980 (Exh. D-1);
 
(b)   Newspaper Advertisements (Exhs. E-1 and F-1);
 
(c) Letter dated March 26, 1981 of A.G. Morrison, President
of Aircon, to Atty. J.R. Blanco (Exh. J);
 
(d)      News items of Bulletin Today dated August 30, 1982
(Exh. L);
 
(e)    Balance Sheet of Jardine Davies, Inc. as of December
31, 1979 listing Aircon as one of its subsidiaries (Exh. P);
Page 126 of 160
(f) Financial Statement of Aircon as of December 31, 1982
and 1981 (Exh. S);
 
(g) Financial Statement of Aircon as of December 31, 1981
(Exh. S-1).[13]
 
  Applying the doctrine of piercing the veil of corporate
fiction, both the respondent and trial courts conveniently
held the petitioner liable for the alleged omissions of
Aircon, considering that the latter was its instrumentality
or corporate alter ego. The petitioner is now before us,
reiterating its defense of separateness, and the fact that it
is not a party to the contract.
 
We find merit in the petition.
 
It is an elementary and fundamental principle of
corporation law that a corporation is an artificial being
invested by law with a personality separate and distinct
from its stockholders and from other corporations to which
it may be connected. While a corporation is allowed to
exist solely for a lawful purpose, the law will regard it as
an association of persons or in case of two corporations,
merge them into one, when this corporate legal entity is
used as a cloak for fraud or illegality.[14]  This is the
doctrine of piercing the veil of corporate  fiction which
applies only when such corporate fiction is used to defeat
public convenience, justify wrong, protect fraud or defend
crime.[15]  The rationale behind piercing a corporations
identity is to remove the barrier between the corporation
from the persons comprising it to thwart the fraudulent and
illegal schemes of those who use the corporate personality
as a shield for undertaking certain proscribed activities.[16]
 
While it is true that Aircon is a subsidiary of the petitioner,
it does not necessarily follow that Aircons corporate legal
existence can just be disregarded. In Velarde v. Lopez, Inc.,
[17]  the Court categorically held that a subsidiary has an
independent and separate juridical personality, distinct
from that of its parent company; hence, any claim or suit
against the latter does not bind the former, and vice versa.
In applying the doctrine, the following requisites must be
established: (1) control, not merely majority or complete
stock control; (2) such control must have been used by the
defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or
dishonest acts in contravention of plaintiffs legal rights;
and (3) the aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of.
[18]
MAYORDO, M.A
 
The records bear out that Aircon is a subsidiary of the
petitioner only because the latter acquired Aircons majority
of capital stock. It, however, does not exercise complete
control over Aircon; nowhere can it be gathered that the
petitioner manages the business affairs of Aircon. Indeed,
no management agreement exists between the petitioner
and Aircon, and the latter is an entirely different entity
from the petitioner.[19]
 
Jardine Davies, Inc., incorporated as early as June 28,
1946,[20]  is primarily a financial and trading company. Its
Articles of Incorporation states among many others that the
purposes for which the said corporation was formed, are as
follows:
(a) To carry on the business of merchants, commission
merchants, brokers, factors, manufacturers, and agents;
 
(b) Upon complying with the requirements of law
applicable thereto, to act as agents of companies and
underwriters doing and engaging in any and all kinds of
insurance business.[21]
 
On the other hand, Aircon, incorporated on December 27,
1952,[22]  is a manufacturing firm. Its Articles of
Incorporation states that its purpose is mainly -
 
To carry on the business of manufacturers of commercial
and household appliances and accessories of any form,
particularly to manufacture, purchase, sell or deal in air
conditioning and refrigeration products of every class and
description as well as accessories and parts thereof,  or
other kindred articles; and to erect, or buy, lease, manage,
or otherwise acquire manufactories, warehouses, and
depots for manufacturing, assemblage, repair and storing,
buying, selling, and dealing in the aforesaid appliances,
accessories and products. [23]
 
The existence of interlocking directors, corporate officers
and shareholders, which the respondent court considered,
is not enough justification to pierce the veil of corporate
fiction, in the absence of fraud or other public policy
considerations.[24] But even when there is dominance over
the affairs of the subsidiary, the doctrine of piercing the
veil of corporate fiction applies only when such fiction is
used to defeat public convenience, justify wrong, protect
fraud or defend crime.[25]  To warrant resort to this
extraordinary remedy, there must be proof that the
corporation is being used as a cloak or cover for fraud or
illegality, or to work injustice.[26]  Any piercing of the
CORPORATION LAW CASES
LLB 3
corporate veil has to be done with caution.[27]  The
wrongdoing must be clearly and convincingly established. It
cannot just be presumed.[28]
 
In the instant case, there is no evidence that Aircon was
formed or utilized with the intention of defrauding its
creditors or evading its contracts and obligations. There
was nothing fraudulent in the acts of Aircon in this case.
Aircon, as a manufacturing firm of air  conditioners,
complied with its obligation of providing two air
conditioning units for the second floor of the Blanco Center
in good faith, pursuant to its contract with the respondent.
Unfortunately, the performance of the air conditioning
units did not satisfy the respondent despite several
adjustments and corrective measures. In a Letter[29] dated
October 22, 1980, the respondent even conceded that
Fedders Air Conditioning USA has not yet perhaps perfected
its technology of rotary compressors, and agreed to change
the compressors with the semi-hermetic type. Thus, Aircon
substituted the units with serviceable ones which delivered
the cooling temperature needed for the law office. After
enjoying ten (10) years of its cooling power, respondent
cannot now complain about the performance of these units,
nor can it demand a replacement thereof.
 
Moreover, it was reversible error to award the respondent
the amount of  P556,551.55 representing the alleged 30%
unsaved electricity costs and  P185,951.67 as maintenance
cost without showing any basis for such award. To justify a
grant of actual or compensatory damages, it is necessary to
prove with a reasonable degree of certainty, premised upon
competent proof and on the best evidence obtainable by
the injured party, the actual amount of loss.[30]  The
respondent merely based its cause of action on Aircons
alleged representation that Fedders air conditioners with
rotary compressors can save as much as 30% on electricity
compared to other brands. Offered in evidence were
newspaper advertisements published on April 12 and 26,
1981. The respondent then recorded its electricity
consumption from October 21, 1981 up to April 3, 1995 and
computed 30% thereof, which amounted to  P556,551.55.
The Court rules that this amount is highly speculative and
merely hypothetical, and for which the petitioner can not
be held accountable.
 
First. The respondent merely relied on the newspaper
advertisements showing the Fedders window-type air
conditioners, which are far different from the big capacity
air conditioning units installed at Blanco Center.
 
Page 127 of 160
Second. After such print advertisements, the respondent
informed Aircon that it was going to install an electric
meter to register its electric consumption so as to
determine the electric costs not saved by the presently
installed units with semi-hermetic compressors. Contrary to
the allegations of the respondent that this was in pursuance
to their Revised Agreement, no proof was adduced that
Aircon agreed to the respondents proposition. It was a
unilateral act on the part of the respondent, which Aircon
did not oblige or commit itself to pay.
Third. Needless to state, the amounts computed are mere
estimates representing the respondents self-serving claim
of unsaved electricity cost, which is too speculative and
conjectural to merit consideration. No other proofs, reports
or bases of comparison showing that Fedders Air
Conditioning USA could indeed cut down electricity cost by
30% were adduced.
Likewise, there is no basis for the award of  P185,951.67
representing maintenance cost. The respondent merely
submitted a schedule[31]  prepared by the respondents
accountant, listing the alleged repair costs from March
1987 up to June 1994. Such evidence is self-serving and can
not also be given probative weight, considering that there
are no proofs of receipts, vouchers,  etc., which would
substantiate the amounts paid for such services. Absent any
more convincing proof, the Court finds that the
respondents claims are without basis, and cannot,
therefore, be awarded.
 
We sustain the petitioners separateness from that of Aircon
in this case. It bears stressing that the petitioner was never
a party to the contract. Privity of contracts take effect only
between parties, their successors-in-interest, heirs and
assigns.[32]  The petitioner, which has a  separate and
distinct legal personality from that of Aircon, cannot,
therefore, be held liable.
IN VIEW OF THE FOREGOING, the petition is GRANTED. The
assailed decision of the Court of Appeals, affirming the
decision of the Regional Trial Court is  REVERSED  and  SET
ASIDE. The complaint of the respondent is DISMISSED. Costs
against the respondent.
 
SO ORDERED.
G.R. No. L-47673             October 10, 1946
KOPPEL (PHILIPPINES), INC., plaintiff-appellant,  vs.
ALFREDO L. YATCO, Collector of Internal
Revenue, defendant-appellee.
MAYORDO, M.A


HILADO, J.:
This is an appeal by Koppel (Philippines), Inc., from the
judgment of the Court of First Instance of Manila in civil
case No. 51218 of said court dismissing said corporation's
complaint for the recovery of the sum of P64,122.51 which
it had paid under protest to the Collector of Internal
Revenue on October 30, 1936, as merchant sales tax. The
main facts of the case were stipulated in the court below
as follows:
AGREED STATEMENT OF FACTS
Now come the plaintiff by attorney Eulogio P. Revilla and
the defendant by the Solicitor General and undersigned
Assistant Attorney of the Bureau of Justice and, with leave
of this Honorable Court, hereby respectfully stipulated and
agree to the following facts, to wit:
I. That plaintiff is a corporation duly organized and existing
under and by virtue of the laws of the Philippines, with
principal office therein at the City of Manila, the capital
stock of which is divided into thousand (1,000) shares of
P100 each. The Koppel Industrial Car and Equipment
company, a corporation organized and existing under the
laws of the State of Pennsylvania, United States of America,
and not licensed to do business in the Philippines, owned
nine hundred and ninety-five (995) shares out of the total
capital stock of the plaintiff from the year 1928 up to and
including the year 1936, and the remaining five (5) shares
only were and are owned one each by officers of the
plaintiff corporation.
II. That plaintiff, at all times material to this case, was and
now is duly licensed to engage in business as a merchant
and commercial broker in the Philippines; and was and is
the holder of the corresponding merchant's and commercial
broker's privilege tax receipts.
III. That the defendant Collector of Internal revenue is now
Mr. Bibiano L. Meer in lieu of Mr. Alfredo L. Yatco.
IV. That during the period from January 1, 1929, up to and
including December 31, 1932, plaintiff transacted business
in the Philippines in the following manner, with the
exception of the transactions which are described in
paragraphs V and VI of this stipulation:
When a local buyer was interested in the purchase of
railway materials, machinery, and supplies, it asked for
price quotations from plaintiff. Atypical form of such
CORPORATION LAW CASES
LLB 3
request is attached hereto and made a part hereof as
Exhibit A. (Exhibit A represents typical transactions arising
from written requests for quotations, while Exhibits B to G,
inclusive, are typical transactions arising from verbal
requests for quotation.) Plaintiff then cabled for the
quotation desired for Koppel Industrial Car and Equipment
Company. A sample of the pertinent cable is hereto
attached and made a part hereof as Exhibit B. Koppel
Industrial Car and Equipment Company answered by cable
quoting its cost price, usually A. C. I. F. Manila cost price,
which was later followed by a letter of confirmation. A
sample of the said cable quotation and of the letter of
confirmation are hereto attached and made a part hereof
as Exhibits C and C-1. Plaintiff, however, quoted by Koppel
Industrial Car and Equipment Company. Copy of the
plaintiff's letter to purchaser is hereto attached and made
a part hereof as Exhibit D. On the basis of these quotations,
orders were placed by the local purchasers, copies of which
orders are hereto attached as Exhibits E and E-1.
A cable was then sent to Koppel Industrial Car and
Equipment company giving instructions to ship the
merchandise to Manila forwarding the customer's order.
Sample of said cable is hereto attached as Exhibit F. The
bills of lading were usually made to "order" and indorsed in
blank with notation to the effect that the buyer be notified
of the shipment of the goods covered in the bills of lading;
commercial invoices were issued by Koppel Industrial Car
and Equipment Company in the names of the purchasers
and certificates of insurance were likewise issued in their
names, or in the name of Koppel Industrial Car and
Equipment Company but indorsed in blank and attached to
drafts drawn by Koppel Industrial Car and Equipment
Company on the purchasers, which were forwarded through
foreign banks to local banks. Samples of the bills of lading
are hereto attached as Exhibits F-1, I-1, I-2 and I-3. Bills of
ladings, Exhibits I-1, I-2 and I-3, may equally have been
employed, but said Exhibits I-1, I-2 and I-3 have no
connection with the transaction covered by Exhibits B to G,
inclusive. The purchasers secured the shipping papers by
arrangement with the banks, and thereupon received and
cleared the shipments. If the merchandise were of
European origin, and if there was not sufficient time to
forward the documents necessary for clearance, through
foreign banks to local banks, to the purchasers, the Koppel
Industrial Car and Equipment company did, in many cases,
send the documents directly from Europe to plaintiff with
instructions to turn these documents over to the
purchasers. In many cases, where sales was effected on the
basis of C. I. F. Manila, duty paid, plaintiff advanced the
sums required for the payment of the duty, and these sums,
Page 128 of 160
so advanced, were in every case reimbursed to plaintiff by
Koppel Industrial Car and Equipment Company. The price
were payable by drafts agreed upon in each case and drawn
by Koppel Industrial Car and Equipment Company on
respective purchasers through local banks, and payments
were made to the banks by the purchasers on presentation
and delivery to them of the above-mentioned shipping
documents or copies thereof. A sample of said drafts is
hereto attached as Exhibit G. Plaintiff received by way of
compensation a percentage of the profits realized on the
above transactions as fixed in paragraph 6 of the plaintiff's
contract with Koppel Industrial Car and Equipment
Company, which contract is hereto attached as Exhibit H,
and suffered its corresponding share in the losses resulting
from some of the transactions.
That the total gross sales from January 1, 1929, up to and
including December 31, 1932, effected in the foregoing
manner and under the above specified conditions, amount
to P3, 596,438.84.
V. That when a local sugar central was interested in the
purchase of railway materials, machinery and supplies, it
secured quotations from, and placed the corresponding
orders with, the plaintiff in substantially the same manner
as outlined in paragraph IV of this stipulation, with the only
difference that the purchase orders which were agreed to
by the central and the plaintiff are similar to the sample
hereto attached and made a part hereof as Exhibit I.
Typical samples of the bills of lading covering the herein
transaction are hereto attached and made a part hereto as
Exhibits I-1, I-2 and I-3. The value of the sales carried out
in the manner mentioned in this paragraph is P133,964.98.
VI. That sometime in February, 1929, Miguel J. Ossorio, of
Manila, Philippines, placed an option with Koppel Industrial
Car and Equipment Company, through plaintiff, to purchase
within three months a pair of Atlas-Diesel Marine Engines.
Koppel Industrial Car and Equipment Company purchased
said Diesel Engines in Stockholm, Sweden, for $16,508.32.
The suppliers drew a draft for the amount of $16,508.32 on
the Koppel Industrial Car and Equipment Company, which
paid the amount covered by the draft. Later, Miguel J.
Ossorio definitely called the deal off, and as Koppel
Industrial Car and Equipment Company could not ship to or
draw on said Mr. Miguel J. Ossorio, it in turn drew another
draft on plaintiff for the same amount at six months sight,
with the understanding that Koppel Industrial Car and
Equipment Company would reimburse plaintiff when said
engines were disposed of. Plaintiff honored the draft and
debited the said sum of $16,508.32 to merchandise
MAYORDO, M.A
account. The engines were left stored at Stockholm,
Sweden. On April 1, 1930, a new local buyer, Mr. Cesar
Barrios, of Iloilo, Philippines, was found and the same
engines were sold to him for $21,000 (P42,000) C. I. F.
Hongkong. The engines were shipped to Hongkong and a
draft for $21,000 was drawn by Koppel Industrial Car and
Equipment Company on Mr. Cesar Barrios. After the draft
was fully paid by Mr. Barrios, Koppel Industrial Car and
Equipment Company reimbursed plaintiff with cost price of
$16,508.32 and credited it with $1,152.95 as its share of
the profit on the transaction. Exhibits J and J-1 are
herewith attached and made integral parts of this
stipulation with particular reference to paragraph VI
hereof.
VII. That plaintiff's share in the profits realized out of these
transactions described in paragraphs IV, V and VI hereof
totaling P3,772,403.82, amounts to P132,201.30; and that
plaintiff within the time provided by law returned the
aforesaid amount P132,201.30 for the purpose of the
commercial broker's 4 per cent tax and paid thereon the
sum P5,288.05 as such tax.
VIII. That defendant demanded of the plaintiff the sum of
P64,122.51 as the merchants' sales tax of 1% per cent on
the amount of P3,772,403.82, representing the total gross
value of the sales mentioned in paragraphs IV, V and VI
hereof, including the 25 per cent surcharge for the late
payment of the said tax, which tax and surcharge were
determined after the amount of P5,288.05 mentioned in
paragraph VI hereof was deducted.
IX. That plaintiff, on October 30, 1936, paid under protest
said sum of P64,122.51 in order to avoid further penalties,
levy and distraint proceedings.
X. That defendant, on November 10, 1936, overruled
plaintiff's protest, and defendant has failed and refused
and still fails and refuses, notwithstanding demands by
plaintiff, to return to the plaintiff said sum of P64,122.51
or any part thereof.
xxx     xxx     xxx
That the parties hereby reserve the right to present
additional
evidence in support of their respective contentions.
Manila, Philippines, December 26, 1939
(Sgd.) ROMAN OZAETA           

Solicitor General          
  
CORPORATION LAW CASES
LLB 3
      (Sgd.) ANTONIO CAÑIZARES
 as set forth above, and shall not take possession of any of
       Assistant Attorney
(Sgd.) E. P. REVILLA           
 necessary for clearance were sent directly to plaintiff
Attorney for the Plaintiff           
 (t.s.n., p. 14);
3rd Floor, Perez Samanillo Bldg., Manila           agent or to make commitments on its behalf.
Both parties adduced some oral evidence in clarification of
or addition to their agreed statement of facts. A
preponderance of evidence has established, besides the
facts thus stipulated, the following:
(a) The shares of stock of plaintiff corporation were and are
all owned by Koppel Industries Car and Equipment Company
of Pennsylvania, U. S. A., exceptive which were necessary
to qualify the Board of Directors of said plaintiff
corporation;
(b) In the transactions involved herein the plaintiff
corporation acted as the representative of Koppel Industrial
Car and Equipment Company only, and not as the agent of
both the latter company and the respective local
purchasers — plaintiff's principal witness, A.H. Bishop, its
resident Vice-President, in his testimony invariably referred
to Koppel Industrial Car and Equipment Co. as "our
principal" 9 t. s. n., pp. 10, 11, 12, 19, 75), except that at
the bottom of page 10 to the top of page 11, the witness
stated that they had "several principal" abroad but that "our
principal abroad was, for the years in question, Koppel
Industrial Car and Equipment Company," and on page 68, he
testified that what he actually said was ". . . but
our principal abroad" and not "our principal abroad" — as to
which it is very significant that neither this witness nor any
other gave the name of even a single other principal abroad
of the plaintiff corporation;
(c) The plaintiff corporation bore alone incidental expenses
— as, for instance, cable expenses-not only those of its own
cables but also those of its "principal" (t.s.n., pp. 52, 53);
(d) the plaintiff's "share in the profits" realized from the
transactions in which it intervened was left virtually in the
hands of Koppel Industrial Car and Equipment Company
(t.s.n., p. 51);
(e) Where drafts were not paid by the purchasers, the local
banks were instructed not to protest them but to refer
them to plaintiff which was fully empowered by Koppel
Industrial Car and Equipment company to instruct the banks
with regards to disposition of the drafts and documents
(t.s.n., p. 50; Exhibit G);
Page 129 of 160
(f) Where the goods were European origin, consular
invoices, bill of lading, and, in general, the documents
(g) If the plaintiff had in stock the merchandise desired by
local buyers, it immediately filled the orders of such local
buyers and made delivery in the Philippines without the
necessity of cabling its principal in America either for price
quotations or confirmation or rejection of that agreed upon
between it and the buyer (t.s.n., pp. 39-43);
(h) Whenever the deliveries made by Koppel Industrial Car
and Equipment Company were incomplete or insufficient to
fill the local buyer's orders, plaintiff used to make good the
deficiencies by deliveries from its own local stock, but in
such cases it charged its principal only the actual cost of
the merchandise thus delivered by it from its stock and in
such transactions plaintiff did not realize any profit (t.s.n.,
pp. 53-54);
(i) The contract of sale involved herein were all perfected
in the Philippines.
Those described in paragraph IV of the agreed statement of
facts went through the following process: (1) "When a local
buyer was interested in the purchase of railway materials,
machinery, and supplies, it asked for price quotations from
plaintiff"; (2) "Plaintiff then cabled for the quotation
desired from Koppel Industrial Car and Equipment
Company"; (3) "Plaintiff, however, quoted to the purchaser
a selling price above the figures quoted by Koppel Industrial
Car and Equipment Company"; (4) "On the basis of these
quotations, orders were placed by the local purchasers . . ."
Those described in paragraph V of said agreed statement of
facts were transacted "in substantially the same manner as
outlined in paragraph IV."
As to the single transaction described in paragraph VI of the
same agreed statement of facts, discarding the Ossorio
option which anyway was called off, "On April 1, 1930, a
new local buyer, Mr. Cesar Barrios, of Iloilo, Philippines,
was found and the same engines were sold to him for
$21,000(P42,000) C.I.F. Hongkong." (Emphasis supplied.).
(j) Exhibit H contains the following paragraph:
It is clearly understood that the intent of this contract is
that the broker shall perform only the functions of a broker
MAYORDO, M.A
the materials or equipment applying to said orders or
perform any acts or duties outside the scope of a broker;
and in no sense shall this contract be construed as granting
to the broker the power to represent the principal as its
The Court of First Instance held for the defendant and
dismissed plaintiff's complaint with costs to it.
Upon this appeal, seven errors are assigned to said
judgment as follows:.
1. That the court a quo erred in not holding that appellant
is a domestic corporation distinct and separate from, and
not a mere branch of Koppel Industrial Car and Equipment
Co.;
2. the court  a quo  erred in ignoring the ruling of the
Secretary of Finance, dated January 31, 1931, Exhibit M;
3. the court a quo erred in not holding that a character of a
broker is determined by the nature of the transaction and
not by the basis or measure of his compensation;
4. The court a quo erred in not holding that appellant acted
as a commercial broker in the transactions covered under
paragraph VI of the agreed statement of facts;
5. The court a quo erred in not holding that appellant acted
as a commercial broker in the transactions covered under
paragraph v of the agreed statement of facts;
6. The court a quo erred in not holding that appellant acted
as a commercial broker in the sole transaction covered
under paragraph VI of the agreed statement of facts;
7. the court a quo erred in dismissing appellant's complaint.
The lower court found and held that Koppel (Philippines),
Inc. is a mere dummy or brach ("hechura") of Koppel
industrial Car and Equipment Company. The lower court did
not deny legal personality to Koppel (Philippines), Inc. for
any and all purposes, but in effect its conclusion was that,
in the transactions involved herein, the public interest and
convenience would be defeated and what would amount to
a tax evasion perpetrated, unless resort is had to the
doctrine of "disregard of the corporate fiction."
I. In its first assignment of error appellant submits that the
trial court erred in not holding that it is a domestic
CORPORATION LAW CASES
LLB 3
corporation distinct and separate from and not a mere
branch of Koppel Industrial Car and Equipment Company. It
contends that its corporate existence as Philippine
corporation can not be collaterally attacked and that the
Government is estopped from so doing. As stated above,
the lower court did not deny legal personality to appellant
for any and all purposes, but held in effect that in the
transaction involved in this case the public interest and
convenience would be defeated and what would amount to
a tax evasion perpetrated, unless resort is had to the
doctrine of "disregard of the corporate fiction." In other
words, in looking through the corporate form to the
ultimate person or corporation behind that form, in the
particular transactions which were involved in the case
submitted to its determination and judgment, the court did
so in order to prevent the contravention of the local
internal revenue laws, and the perpetration of what would
amount to a tax evasion, inasmuch as it considered — and
in our opinion, correctly — that appellant Koppel
(Philippines), Inc. was a mere branch or agency or dummy
("hechura") of Koppel Industrial Car and Equipment Co. The
court did not hold that the corporate personality of Koppel
(Philippines), Inc., would also be disregarded in other cases
or for other purposes. It would have had no power to so
hold. The courts' action in this regard must be confined to
the transactions involved in the case at bar "for the purpose
of adjudging the rights and liabilities of the parties in the
case. They have no jurisdiction to do more." (1 Flethcer,
Cyclopedia of Corporation, Permanent ed., p. 124, section
41.)
A leading and much cited case puts it as follows:
If any general rule can be laid down, in the present state of
authority, it is that a corporation will be looked upon as a
legal entity as a general rule, and until sufficient reason to
the contrary appears; but, when the notion of legal entity
is used to defeat public convinience, justify wrong, protect
fraud, or defend crime, the law will regard the corporation
as an association of persons. (1 Fletcher Cyclopedia of
Corporation [Permanent Edition], pp. 135, 136; United
States vs. Milwaukee Refrigeration Transit Co., 142 Fed.,
247, 255, per Sanborn, J.)
In his second special defense appellee alleges "that the
plaintiff was and is in fact a branch or subsidiary of Koppel
Industrial Car and Equipment Co., a Pennsylvania
corporation not licensed to do business in the Philippines
but actually doing business here through the plaintiff; that
the said foreign corporation holds 995 of the 1,000 shares
of the plaintiff's capital stock, the remaining five shares
Page 130 of 160
being held by the officers of the plaintiff herein in order to
permit the incorporation thereof and to enable its
aforesaid officers to act as directors of the plaintiff
corporation; and that plaintiff was organized as a Philippine
corporation for the purpose of evading the payment by its
parent foreign corporation of merchants' sales tax on the
transactions involved in this case and others of similar
nature."
By most courts the entity is normally regarded but is
disregarded to prevent injustice, or the distortion or hiding
of the truth, or  to let in a just defense. (1 Fletcher,
Cyclopedia of Corporation, Permanent Edition, pp. 139,140;
emphasis supplied.)
Another rule is that, when the corporation is the mere alter
ego, or business conduit of a person, it may de
disregarded." (1 Fletcher, Cyclopedia of Corporation,
Permanent Edition, p. 136.)
Manifestly, the principle is the same whether the "person"
be natural or artificial.
A very numerous and growing class of cases wherein the
corporate entity is disregarded is that (it is so organized
and controlled, and its affairs are so conducted, as to make
it merely an instrumentality, agency, conduit or adjunct of
another corporation)." (1 Fletcher, Cyclopedia of
Corporation, Permanent ed., pp. 154, 155.)
While we recognize the legal principle that a corporation
does not lose its entity by the ownership of the bulk or
even the whole of its stock, by another corporation
(Monongahela Co. vs. Pittsburg Co., 196 Pa., 25; 46 Atl., 99;
79 Am. St. Rep., 685) yet it is equally well settled and
ignore corporate forms." (Colonial Trust Co. vs. Montello
Brick Works, 172 Fed., 310.)
Where it appears that two business enterprises are owned,
conducted and controlled by the same parties, both law
and equity will, when necessary to protect the rights of
third persons, disregard the legal fiction that two
corporations are distinct entities, and treat them as
identical. (Abney vs. Belmont Country Club Properties, Inc.,
279 Pac., 829.)
. . . the legal fiction of distinct corporate existence will be
disregarded in a case where a corporation is so organized
and controlled and its affairs are so conducted, as to make
it merely an instrumentality or adjunct of another
MAYORDO, M.A
corporation. (Hanter vs. Baker Motor Vehicle Co., 190 Fed.,
665.)
In United States vs. Lehigh Valley R. Co. 9220 U.S., 257; 55
Law. ed., 458, 464), the Supreme Court of the United
States disregarded the artificial personality of the
subsidiary coal company in order to avoid that the parent
corporation, the Lehigh Valley R. Co., should be able,
through the fiction of that personality, to evade the
prohibition of the Hepburn Act against the transportation
by railroad companies of the articles and commodities
described therein.
Chief Justice White, speaking for the court, said:
. . . Coming to discharge this duty it follows, in view of the
express prohibitions of the commodities clause, it must be
held that while the right of a railroad company as a
stockholder to use its stock ownership for the purpose of
a  bona fide  separate administration of the affairs of a
corporation in which it has a stock interest may not be
denied, the use of such stock ownership in substance for
the purpose of destroying the entity of a producing, etc.,
corporation, and commingling its affairs in administration
with the affairs of the railroad company, so as to make the
two corporations virtually one, brings the railroad company
so voluntarily acting as to such producing, etc., corporation
within the prohibitions of the commodities clause. In other
words, that by operation and effect of the commodities
clause there is duty cast upon a railroad company proposing
to carry in interstate commerce the product of a producing,
etc., corporation in which it has a stock interest, not to
abuse such power so as virtually to do  by indirection  that
which the commodities clause prohibits, — a duty which
plainly would be violated by the unnecessary commingling
of the affairs of the producing company with its own, so as
to cause them to be one and inseparable.
Corrobarative authorities can be cited in support of the
same proposition, which we deem unnecessary to mention
here.
From the facts hereinabove stated, as established by a
preponderance of the evidence , particularly those
narrated in paragraph (a), (b), (c), (d), (e),(f), (h), (i), and
(j) after the agreed statement of facts, we find that, in so
far as the sales involved herein are concerned, Koppel
(Philippines), Inc., and Koppel Industrial Car and Equipment
company are to all intents and purposes one and the same;
or, to use another mode of expression, that, as regards
those transactions, the former corporation is a mere
CORPORATION LAW CASES
LLB 3
branch, subsidiary or agency of the latter. To our mind, this
is conclusively borne out by the fact, among others, that
the amount of he so-called "share in the profits" of Koppel
(Philippines), Inc., was ultimately left to the sole,
unbridled control of Koppel Industrial Car and Equipment
Company. If, in their relations with each other, Koppel
(Philippines), Inc., was considered and intended to function
as a  bona fide  separate corporation, we can not conceive
how this arrangement could have been adopted, for if
there was any factor in its business as to which it would in
that case naturally have been opposed to being thus
controlled, it must have been precisely the amount
of  profit  which it could endeavor and hope to earn. No
group of businessmen could be expected to organize a
mercantile corporation — the ultimate end of which could
only be profit — if the amount of that profit were to be
subjected to such a unilateral control of another
corporation, unless indeed the former has previously been
designed by the incorporators to serve as a mere subsidiary,
branch or agency of the latter. Evidently, Koppel Industrial
Car and Equipment Company made us of its ownership of
the overwhelming majority — 99.5% — of the capital stock
of the local corporation to control the operations of the
latter to such an extent that it had the final say even as to
how much should be allotted to said local entity in the so-
called sharing in the profits. We can not overlook the fact
that in the practical working of corporate organizations of
the class to which these two entities belong, the holder or
holders of the controlling part of the capital stock of the
corporation, particularly where the control is determined
by the virtual ownership of the totality of the shares,
dominate not only the selection of the Board of Directors
but, more often than not, also the action of that Board.
Applying this to the instant case, we can not conceive how
the Philippine corporation could effectively go against the
policies, decisions, and desires of the American corporation
with regards to the scheme which was devised through the
instrumentality of the contract Exhibit H, as well as all the
other details of the system which was adopted in order to
avoid paying the 1½ per cent merchants sales tax. Neither
can we conceive how the Philippine corporation could avoid
following the directions of the American corporation held
99.5 per cent of the capital stock of the Philippine
corporation. In the present instance, we note that Koppel
(Philippines), Inc., was represented in the Philippines by its
"resident Vice-President." This fact necessarily leads to the
inference that the corporation had at least a Vice-
President, and presumably also a President, who were not
resident in the Philippines but in America, where the parent
corporation is domiciled. If Koppel (Philippines), Inc., had
been intended to operate as a regular domestic corporation
Page 131 of 160
in the Philippines, where it was formed, the record and the
evidence do not disclose any reason why all its officers
should not reside and perform their functions in the
Philippines.
Other facts appearing from the evidence, and presently to
be stated, strengthen our conclusion, because they can
only be explained if the local entity is considered as a mere
subsidiary, branch or agency of the parent organization.
Plaintiff charged the parent corporation no more than
actual cost — without profit whatsoever — for merchandise
allegedly of its own to complete deficiencies of shipments
made by said parent corporation (t.s.n., pp. 53, 54) — a
fact which could not conceivably have been the case if
plaintiff had acted in such transactions as an entirely
independent entity doing business — for profit, of course —
with the American concern. There has been no attempt
even to explain, if the latter situation really obtained, why
these two corporations should have thus departed from the
ordinary course of business. Plaintiff was charged by the
American corporation with the cost even of the latter's
cable quotations — from ought that appears from the
evidence, this can only be comprehended by considering
plaintiff as such a subsidiary, branch or agency of the
parent entity, in which case it would be perfectly
understandable that for convenient accounting purposes
and the easy determination of the profits or losses of the
parent corporation's Philippines should be charged against
the Philippine office and set off against its receipts, thus
separating the accounts of said branch from those which
the central organization might have in other countries. The
reference to plaintiff by local banks, under a standing
instruction of the parent corporation, of unpaid drafts
drawn on Philippine customers by said parent corporation,
whenever said customers dishonored the drafts, and the
fact that the American corporation had previously advised
said banks that plaintiff in those cases was "fully
empowered to instruct (the banks) with regard to the
disposition of the drafts and documents" (t.s.n., p. 50), in
the absence of any other satisfactory explanation naturally
give rise to the inference that plaintiff was a subsidiary,
branch or agency of the American concern, rather than an
independent corporation acting as a broker. For, without
such positive explanation, this delegation of power is
indicative of the relations between central and branch
offices of the same business enterprise, with the latter
acting under instructions already given by the former. Far
from disclosing a real separation between the two entities,
particularly in regard to the transactions in question, the
evidence reveals such commongling and interlacing of their
activities as to render even incomprehensible certain
MAYORDO, M.A
accounting operations between them, except upon the
basis that the Philippine corporation was to all intents and
purposes a mere subsidiary, branch, or agency of the
American parent entity. Only upon this basis can it be
comprehended why it seems not to matter at all how much
profit would be allocated to plaintiff, or even that no profit
at all be so allocated to it, at any given time or after any
given period.
As already stated above, under the evidence the sales in
the Philippines of the railway materials, machinery and
supplies imported here by Koppel Industrial Car and
Equipment Company could have been as conviniently and
efficiently transacted and handled — if not more so — had
said corporation merely established a branch or agency in
the Philippines and obtained license to do business locally;
and if it had done so and said sales had been effected by
such branch or agency, there seems to be no dispute that
the 1½ per cent merchants' sales tax then in force would
have been collectible. So far as we can discover, there
would be only one, but very important, difference between
the two schemes — a difference in  tax liability  on the
ground that the sales were made through another and
distinct corporation, as alleged broker, when we have seen
that this latter corporation is  virtually owned  by the
former, or that they practically one and the same, is to
sanction a circumvention of our tax laws, and permit a tax
evasion of no mean proportions and the consequent
commission of a grave injustice to the Government. Not
only this; it would allow the taxpayer to do  by
indirection what the tax laws prohibited to be done directly
(non-payment of legitimate taxes), paraphrasing the United
States Supreme Court in United States vs. Lehigh Valley R.
Co., supra.
The act of one corporation crediting or debiting the other
for certain items, expenses or even merchandise sold or
disposed of, is perfectly compatible with the idea of the
domestic entity being or acting as a mere branch, agency
or subsidiary of the parent organization. Such operations
were called for any way by the exigencies or convenience
of the entire business. Indeed, accounting operation such
as these are invitable, and have to be effected in the
ordinary course of business enterprise extends its trade to
another land through a branch office, or through another
scheme amounting to the same thing.
If plaintiff were to act as broker in the Philippines for any
other corporation, entity or person, distinct from Koppel
Industrial Car and Equipment company, an entirely
CORPORATION LAW CASES
LLB 3
different question will arise, which, however, we are not
called upon, nor in a position, to decide.
As stated above, Exhibit H contains to the following
paragraph:
It is clearly understood that the intent of this contract is
that the broker shall perform only the functions of a broker
as set forth above, and shall not take possession of any of
the materials or equipment applying to said orders or
perform any acts or duties outside the scope of a broker;
and in no sense shall this contract be construed as granting
to the broker the power to represent the principal as its
agent or to make commitments on its behalf.
The foregoing paragraph, construed in the light of other
facts noted elsewhere in this decision, betrays, we think a
deliberate intent, through the medium of a scheme devised
with great care, to avoid the payment of precisely the 1½
per cent merchants' sales tax in force in the Philippines
before, at the time of, and after, the making of the said
contract Exhibit H. If this were to be allowed, the payment
of a tax, which directly could not have been avoided, could
be evaded  by indirection, consideration being had of the
aforementioned peculiar relations between the said
American and local corporations. Such evasion, involving as
it would, a violation of the former Internal Revenue Law,
would even fall within the penal sanction of section 2741 of
the Revised Administrative Code. Which only goes to show
the illegality of the whole scheme. We are not here
concerned with the impossibility of collecting the
merchants' sales tax, as a mere incidental consequence of
transactions legal in themselves and innocent in their
purpose. We are dealing with a scheme the primary, not to
say the sole, object of which the evasion of the payment of
such tax. It is this aim of the scheme that makes it illegal.
We have said above that the contracts of sale involved
herein were all perfected in the Philippines. From the facts
stipulated in paragraph IV of the agreed statement of facts,
it clearly appears that the Philippine purchasers had to wait
for Koppel Industrial Car and Equipment Company to
communicate its cost prices to Koppel (Philippines), Inc.,
were perfected in the Philippines. In those cases where no
such price quotations from the American corporation were
needed, of course, the sales effected in those cases
described in paragraph V of the agreed statement of facts
were, as expressed therein, transacted "in substantially the
same manner as outlined in paragraph VI." Even the single
transaction described in paragraph VI of the agreed
statement of facts was also perfected in the Philippines,
Page 132 of 160
because the contracting parties were here and the consent
of each was given here. While it is true that when the
contract was thus perfected in the Philippines the pair of
Atlas-Diesel Marine Engines were in Sweden and the
agreement was to deliver them C.I.F. Hongkong, the
contract of sale being consensual — perfected by mere
consent — (Civil Code, article 1445; 10 Manresa, 4th ed., p.
11), the location of the property and the place of delivery
did not matter in the question of where the agreement was
perfected.
In said paragraph VI, we read the following, as indicating
where the contract was perfected, considering beforehand
that one party, Koppel (Philippines),Inc., which in
contemplation of law, as to that transaction, was the same
Koppel Industrial Car Equipment Co., was in the Philippines:
. . . on April 1, 1930, a new local buyer Mr. Cesar Barrios,
of Iloilo, Philippines, was found and the same engines were
sold to him  for $21,000 (P42,000) C.I.F. Hongkong . . .
(Emphasis supplied.)
Under the revenue law in force when the sales in question
took place, the merchants' sales tax attached upon the
happening of the respective sales of the "commodities,
goods, wares, and merchandise" involved, and we are
clearly of opinion that such "sales" took place upon the
perfection of the corresponding contracts. If such
perfection took place in the Philippines, the merchants'
sales tax then in force here attached to the transactions.
Even if we should consider that the Philippine buyers in the
cases covered by paragraph IV and V of the agreed
statement of facts, contracted with Koppel Industrial Car
and Equipment company, we will arrive at the same final
result. It can not be denied in that case that said American
corporation contracted through Koppel (Philippines), Inc.,
which was in the Philippines. The real transaction in each
case of sale, in final effect, began with an offer of sale
from the seller, said American corporation, through its
agent, the local corporation, of the railway materials,
machinery, and supplies at the prices quoted, and
perfected or completed by the acceptance of that offer by
the local buyers when the latter, accepting those prices,
placed their orders. The offer could not correctly be said to
have been made by the local buyers when they asked for
price quotations, for they could not rationally be taken to
have bound themselves to buy  before knowing the prices.
And even if we should take into consideration the fact that
the american corporation contracted, at least partly,
through correspondence, according to article 54 of the
MAYORDO, M.A
Code of Commerce, the respective contracts were
completed from the time of the acceptance by the local
buyers, which happened in the Philippines.
Contracts executed through correspondence shall be
completed from the time an answer is made accepting the
proposition  or the conditions by which the latter may be
modified." (Code of Commerce, article 54; emphasis
supplied.)
A contract is as a rule considered as entered into at the
place where the place it is performed. So where delivery is
regarded as made at the place of delivery." (13 C. J.,
580-81, section 581.)
(In the consensual contract of sale delivery is not needed
for its perfection.)
II. Appellant's second assignment of error can be summarily
disposed of. It is clear that the ruling of the Secretary of
Finance, Exhibit M, was not binding upon the trial court,
much less upon this tribunal, since the duty and power of
interpreting the laws is primarily a function of the
judiciary. (Ortua vs. Singson Encarnacion, 59 Phil., 440,
444.) Plaintiff cannot be excused from abiding by this legal
principle, nor can it properly be heard to say that it relied
on the Secretary's ruling and that, therefore, the courts
should not now apply an interpretation at variance
therewith. The rule of stare decisis is undoubtedly entitled
to more respect in the construction of statutes than the
interpretations given by officers of the administrative
branches of the government, even those entrusted with the
administration of particular laws. But this court, in
Philippine Trust Company and Smith, Bell and Co. vs.
Mitchell(59 Phil., 30, 36), said:
. . . The rule of stare decisis is entitled to respect. Stability
in the law, particularly in the business field, is desirable.
But idolatrous reverence for precedent, simply as
precedent, no longer rules. More important than anything
else is that court should be right. . . .
III. In the view we take of the case, and after the
disposition made above of the first assignment of error, it
becomes unnecessary to make any specific ruling on the
third, fourth, fifth, sixth, and seventh assignments of error,
all of which are necessarily disposed of adversely to
appellant's contention.
Wherefore, he judgment appealed from is affirmed, with
costs of both instances against appellant. So ordered.
CORPORATION LAW CASES MAYORDO, M.A
LLB 3

Securities & Exchange Commission approved on March 3,          

G.R. No. L-9687             June 30, 1961 1947. Upon such approval, Frank Liddell subscribed to G. W. Kernot 500 50,000 2.64%
LIDDELL & CO., INC., petitioner-appellant,  vs. THE 3,000 additional shares, for which he paid into the
COLLECTOR OF INTERNAL REVENUE, respondent- corporation P300,000 so that he had in his own name 4,960 P1,900,0 100.00
appellee. shares. 19,000 00 %

BENGZON, C.J.:
Statement. This is an appeal from the decision of the Court
of Tax Appeals imposing a tax deficiency liability of
P1,317,629.61 on Liddell & Co., Inc.
Said Company lists down several issues which may be boiled
to the following:
On May 24, 1957, Frank Liddell, on one hand and Messrs.
Kurz, Darras, Manzano and Serrano on the other, executed
an agreement (Exhibit A) which was further supplemented
by two other agreements (Exhibits B and C) dated May 24,
1947 and June 3, 1948, wherein Frank Liddell transferred
(On June 7, 1948) to various employees of Liddell & Co.
shares of stock.
On November 15, 1948, in accordance with a resolution of a
special meeting of the Board of Directors of Liddell & Co.,
stock dividends were again declared. As a result of said
declaration and in accordance with the agreements,
Exhibits, A, B, and C, the stockholdings in the company
appeared to be:

(a) Whether or not Judge Umali of the Tax Court below At the annual meeting of stockholders of Liddell & Co. held No. of P e r
could validly participate in the making of the decision; on March 9, 1948, a 100% stock dividend was declared, Name Amount
Shares Cent
thereby increasing the issued capital stock of aid
(b) Whether or not Liddell & Co. Inc., and the Liddell corporation from P1,000.000 to P 3,000,000 which increase P1,973,8 6 5 . 7 9 1
Motors, Inc. are (practically) identical corporations, the was duly approved by the Securities and Exchange Frank Liddell 19,738 00 %
latter being merely .the alter ego of the former; Commission on June 7, 1948. Frank Liddell subscribed to
and paid 20% of the increase of P400,000. He paid 25% Irene Liddell 1 100 .003%
(c) Whether or not, granting the identical nature of the thereof in the amount of P100,000 and the balance of
Mercedes Vecin 1 100 .003%
corporations, the assessment of tax liability, including the P3,000,000 was merely debited to Frank Liddell-Drawing
surcharge thereon by the Court of Tax Appeals, is correct. Account and credited to Subscribed Capital Stock on Charles Kurz 2,215 221,500 7.381%
December 11, 1948.
Undisputed Facts. The parties submitted a partial E.J. Darras 2,215 221,500 7.381%
stipulation of facts, each reserving the right to present On March 8, 1949, stock dividends were again issued by
additional evidence. Liddell & Co. and in accordance with the agreements, Angel Manzano 1,810 181,000 6.031%
Exhibits A, B, and C, the stocks of said company stood as
Said undisputed facts are substantially as follows: follows: Julian Serrano 1,700 170,000 5.670%

E. Hasim 830 83,000 2.770%

The petitioner, Liddell & Co. Inc., (Liddell & Co. for short)
No. of P e r
is a domestic corporation establish in the Philippines on Name Amount
Shares Cent          
February 1, 1946, with an authorized capital of P100,000 G. W. Kernot 1,490 149,000 4.970%
divided into 1000 share at P100 each. Of this authorized P1,368,8
capital, 196 shares valued at P19,600 were subscribed and Frank Liddell 13,688 00 72.00% P3,000,0 100.000
paid by Frank Liddell while the other four shares were in 30,000 00 %
the name of Charles Kurz, E.J. Darras, Angel Manzano and Irene Liddell 1 100 .01%
Julian Serrano at one shares each. Its purpose was to
engage in the business of importing and retailing Mercedes Vecin 1 100 .01% On the basis of the agreement Exhibit A, (May, 1947) "40%"
Oldsmobile and Chevrolet passenger cars and GMC and of the earnings available for dividends accrued to Frank
Chevrolet trucks.. Charles Kurz 1,225 122,500 6.45% Liddell although at the time of the execution of aid
instrument, Frank Liddell owned all of the shares in said
E.J. Darras 1,225 122,500 6.45% corporation. 45% accrued to the employees, parties
On January 31, 1947, with the limited paid-in capital of
P20,000, Liddell & Co. was able to declare a 90% stock thereto; Kurz 12-1/2%; Darras 12-1/2%; A. Manzano 12-1/2%
Angel Manzano 1,150 115,000 6.06%
dividend after which declaration on, Frank Liddells holding and Julian Serrano 7-1/2%. The agreement Exhibit A was
in the Company increased to 1,960 shares and the also made retroactive to 1946. Frank Liddell reserved the
Julian Serrano 710 71,000 3.74%
employees, Charles Kurz E.J. Darras, Angel Manzano and right to reapportion the 45% dividends pertaining to the
Julian Serrano at 10 share each. The declaration of stock E. Hasim 500 50,000 2.64% employees in the future for the purpose of including such
dividend was followed by a resolution increasing the other faithful and efficient employees as he may
authorized capital of the company to P1,000.000 which the subsequently designate. (As a matter of fact, Frank Liddell

Page 133 of 160

CORPORATION LAW CASES
LLB 3
did so designate two additional employees namely: E.
Hasim and G. W. Kernot). It was for such inclusion of future
faithful employees that Exhibits B-1 and C were executed.
As per Exhibit C, dated May 13, 1948, the 45% given by
Frank Liddell to his employees was reapportioned as
follows: C. Kurz — 12,%; E. J. Darras — 12%; A. Manzano —
l2%; J. Serrano — 3-1/2%; G. W. Kernot — 2%.
Exhibit B contains the employees' definition in detail of the
manner by which they sought to prevent their share-
holdings from being transferred to others who may be
complete strangers to the business on Liddell & Co.
From 1946 until November 22, 1948 when the purpose
clause of the Articles of Incorporation of Liddell & Co. Inc.,
was amended so as to limit its business activities to
importations of automobiles and trucks, Liddell & Co. was
engaged in business as an importer and at the same time
retailer of Oldsmobile and Chevrolet passenger cars and
GMC and Chevrolet trucks.
On December 20, 1948, the Liddell Motors, Inc. was
organized and registered with the Securities and Exchange
Commission with an authorized capital stock of P100,000 of
which P20,000 was subscribed and paid for as follows: Irene
Liddell wife of Frank Liddell 19,996 shares and Messrs.
Marcial P. Lichauco, E. K. Bromwell, V. E. del Rosario and
Esmenia Silva, 1 share each.
At about the end of the year 1948, Messrs. Manzano, Kurz
and Kernot resigned from their respective positions in the
Retail Dept. of Liddell & Co. and they were taken in and
employed by Liddell Motors, Inc.: Kurz as Manager-
Treasurer, Manzano as General Sales Manager for cars and
Kernot as General Sales Manager for trucks.
Beginning January, 1949, Liddell & Co. stopped retailing
cars and trucks; it conveyed them instead to Liddell Motors,
Inc. which in turn sold the vehicles to the public with a
steep mark-up. Since then, Liddell & Co. paid sales taxes
on the basis of its sales to Liddell Motors Inc. considering
said sales as its original sales.
Upon review of the transactions between Liddell & Co. and
Liddell Motors, Inc. the Collector of Internal Revenue
determined that the latter was but an alter ego of Liddell &
Co. Wherefore, he concluded, that for sales tax purposes,
those sales made by Liddell Motors, Inc. to the public were
considered as the original sales of Liddell & Co.
Accordingly, the Collector of Internal Revenue assessed
against Liddell & Co. a sales tax deficiency, including
Page 134 of 160
surcharges, in the amount of P1,317,629.61. In the
computation, the gross selling price of Liddell Motors, Inc.
to the general public from January 1, 1949 to September
15, 1950, was made the basis without deducting from the
selling price, the taxes already paid by Liddell & Co. in its
sales to the Liddell Motors Inc.
The Court of Tax Appeals upheld the position taken by the
Collector of Internal Revenue.
A.  Judge Umali: Appellant urges the disqualification on of
Judge Roman M. Umali to participate in the decision of the
instant case because he was Chief of the Law Division, then
Acting Deputy Collector and later Chief Counsel of the
Bureau of Internal Revenue during the time when the
assessment in question was made.1 In refusing to disqualify
himself despite admission that had held the
aforementioned offices, Judge Umali stated that he had not
in any way participated, nor expressed any definite
opinion, on any question raised by the parties when this
case was presented for resolution before the said bureau.
Furthermore, after careful inspection of the records of the
Bureau, he (Judge Umali as well as the other members of
the court below), had not found any indication that he had
expressed any opinion or made any decision that would
tend to disqualify him from participating in the
consideration of the case in the Tax Court.
At this juncture, it is well to consider that petitioner did
not question the truth of Judge Umali's statements. In view
thereof, this Tribunal is not inclined to disqualify said
judge. Moreover, in furtherance of the presumption of the
judge's moral sense of responsibility this Court has adopted,
and now here repeats, the ruling that the mere
participation of a judge in prior proceedings relating to the
subject in the capacity of an administrative official does
not necessarily disqualify him from acting as judge.2
Appellant also contends that Judge Umali signed the said
decision contrary to the provision of Section 13, Republic
Act No. 1125;3  that whereas the case was submitted for
decision of the Court of Tax Appeals on July 12, 1955, and
the decision of Associate Judge Luciano and Judge Nable
were both signed on August 11, 1955 (that is, on the last
day of the 30-day period provided for in Section 13,
Republic Act No. 1125), Judge Umali signed the decision
August 31, 1955 or 20 days after the lapse of the 30-day
period allotted by law.
By analogy it may be said that inasmuch as in Republic Act
No. 1125 (law creating the Court of Tax Appeals) like the
MAYORDO, M.A
law governing the procedure in the court of Industrial
Relations, there is no provision invalidating decisions
rendered after the lapse of 30 days, the requirement of
Section 13, Republic Act No. 1125 should be construed as
directory.4
Besides as pointed out by appellee, the third paragraph of
Section 13 of Republic Act No. 1125 (quoted in the
margin)5  confirms this view; because in providing for two
thirty-day periods, the law means that decision may still be
rendered within the second period of thirty days (Judge
Umali signed his decision within that period).
B.  Identity of the two corporations: On the question
whether or not Liddell Motors, Inc. is the  alter ego  of
Liddell & Co. Inc., we are fully convinced that Liddell & Co.
is wholly owned by Frank Liddell. As of the time of its
organization, 98% of the capital stock belonged to Frank
Liddell. The 20% paid-up subscription with which the
company began its business was paid by him. The
subsequent subscriptions to the capital stock were made by
him and paid with his own money.
These stipulations and conditions appear in Exhibit A: (1)
that Frank Liddell had the authority to designate in the
future the employee who could receive earnings of the
corporation; to apportion among the stock holders the
share in the profits; (2) that all certificates of stock in the
names of the employees should be deposited with Frank
Liddell duly indorsed in blank by the employees concerned;
(3) that each employee was required to sign an agreement
with the corporation to the effect that, upon his death or
upon his retirement or separation for any cause whatsoever
from the corporation, the said corporation should, within a
period of sixty days therefor, have the absolute and
exclusive option to purchase and acquire the whole of the
stock interest of the employees so dying, resigning, retiring
or separating.
These stipulations in our opinion attest to the fact that
Frank Liddell also owned it. He supplied the original his
complete control over the corporation.
As to Liddell Motors, Inc. we are fully persuaded that Frank
Liddell also owned it. He supplied the original capital
funds.6  It is not proven that his wife Irene, ostensibly the
sole incorporator of Liddell Motors, Inc. had money of her
own to pay for her P20,000 initial subscription.7  Her
income in the United States in the years 1943 and 1944 and
the savings therefrom could not be enough to cover the
amount of subscription, much less to operate an expensive
CORPORATION LAW CASES
LLB 3
trade like the retail of motor vehicles. The alleged sale of
her property in Oregon might have been true, but the
money received therefrom was never shown to have been
saved or deposited so as to be still available at the time of
the organization of the Liddell Motors, Inc.
The evidence at hand also shows that Irene Liddell had
scant participation in the affairs of Liddell Motors, Inc. She
could hardly be said to possess business experience. The
income tax forms record no independent income of her
own. As a matter of fact, the checks that represented her
salary and bonus from Liddell Motors, Inc. found their way
into the personal account of Frank Liddell. Her frequent
absences from the country negate any active participation
in the affairs of the Motors company.
There are quite a series of conspicuous circumstances that
militate against the separate and distinct personality of
Liddell Motors, Inc. from Liddell & Co.8 We notice that the
bulk of the business of Liddell & Co. was channeled through
Liddell Motors, Inc. On the other hand, Liddell Motors, Inc.
pursued no activities except to secure cars, trucks, and
spare parts from Liddell & Co. Inc. and then sell them to
the general public. These sales of vehicles by Liddell & Co.
to Liddell Motors, Inc. for the most part were shown to
have taken place on the same day that Liddell Motors, Inc.
sold such vehicles to the public. We may even say that the
cars and trucks merely touched the hands of Liddell Motors,
Inc. as a matter of formality.
During the first six months of 1949, Liddell & Co. issued ten
(10) checks payable to Frank Liddell which were deposited
by Frank Liddell in his personal account with the Philippine
National Bank. During this time also, he issued in favor of
Liddell Motors, Inc. six (6) checks drawn against his
personal account with the same bank. The checks issued by
Frank Liddell to the Liddell Motors, Inc. were significantly
for the most part issued on the same day when Liddell &
Co. Inc. issued the checks for Frank Liddell9  and for the
same amounts.
It is of course accepted that the mere fact that one or
more corporations are owned and controlled by a single
stockholder is not of itself sufficient ground for
disregarding separate corporate entities.
Authorities10  support the rule that it is lawful to obtain a
corporation charter, even with a single substantial
stockholder, to engage in a specific activity, and such
activity may co-exist with other private activities of the
stockholder. If the corporation is a substantial one,
Page 135 of 160
conducted lawfully and without fraud on another, its
separate identity is to be respected.
Accordingly, the mere fact that Liddell & Co. and Liddell
Motors, Inc. are corporations owned and controlled by
Frank Liddell directly or indirectly is not by itself sufficient
to justify the disregard of the separate corporate identity
of one from the other. There is, however, in this instant
case, a peculiar consequence of the organization and
activities of Liddell Motors, Inc.
Under the law in force at the time of its incorporation the
sales tax on original sales of cars (sections 184, 185 and 186
of the National Internal Revenue Code), was progressive,
i.e. 10% of the selling price of the car if it did not exceed
P5000, and 15% of the price if more than P5000 but not
more than P7000, etc. This progressive rate of the sales tax
naturally would tempt the taxpayer to employ a way of
reducing the price of the first sale. And Liddell Motors, Inc.
was the medium created by Liddell & Co. to reduce the
price and the tax liability.
Let us illustrate: a car with engine motor No. 212381 was
sold by Liddell & Co. Inc. to Liddell Motors, Inc. on January
17, 1948 for P4,546,000.00 including tax; the price of the
car was P4,133,000.23, the tax paid being P413.22, at 10%.
And when this car was later sold (on the same day) by
Liddell Motors, Inc. to P.V. Luistro for P5500, no more sales
tax was paid.11  In this price of P5500 was included the
P413.32 representing taxes paid by Liddell & Co. Inc. in the
sale to Liddell Motors, Inc. Deducting P413.32 representing
taxes paid by Liddell & Co., Inc. the price of P5500, the
balance of P5,087.68 would have been the net selling price
of Liddell & Co., Inc. to the general public (had Liddell
Motors, Inc. not participated and intervened in the sale),
and 15% sales tax would have been due. In this transaction,
P349.68 in the form of taxes was evaded. All the other
transactions (numerous) examined in this light will
inevitably reveal that the Government coffers had been
deprived of a sizeable amount of taxes.
As opined in the case of Gregory v. Helvering,12 "the legal
right of a taxpayer to decrease the amount of what
otherwise would be his taxes, or altogether avoid them by
means which the law permits, cannot be doubted." But, as
held in another case,13 "where a corporation is a dummy, is
unreal or a sham and serves no business purpose and is
intended only as a blind, the corporate form may be
ignored for the law cannot countenance a form that is bald
and a mischievous fiction."
MAYORDO, M.A
Consistently with this view, the United States Supreme
Court14 held that "a taxpayer may gain advantage of doing
business thru a corporation if he pleases, but the revenue
officers in proper cases, may disregard the separate
corporate entity where it serves but as a shield for tax
evasion and treat the person who actually may take the
benefits of the transactions as the person accordingly
taxable."
Thus, we repeat: to allow a taxpayer to deny tax liability
on the ground that the sales were made through an other
and distinct corporation when it is proved that the latter is
virtually owned by the former or that they are practically
one and the same is to sanction a circumvention of our tax
laws.15
C. Tax liability computation: In the Yutivo case16 the same
question involving the computation of the alleged
deficiency sales tax has been raised. In accordance with
our ruling in said case we hold as correctly stated by Judge
Nable in his concurring and dissenting opinion on this case,
that the deficiency sales tax should be based on the selling
price obtained by Liddell Motors, Inc. to the public AFTER
DEDUCTING THE TAX ALREADY PAID BY LIDDELL & CO., INC.
in its sales to Liddell Motors, Inc.
On the imposition of the 50% surcharge by reason of fraud,
we see that the transactions between Liddell Motors Inc.
and Liddell & Co., Inc. have always been embodied in
proper documents, constantly subject to inspection by the
tax authorities. Liddell & Co., Inc. have always made a full
report of its income and receipts in its income tax returns.
Paraphrasing our decision in the Yutivo case, we may now
say, in filing its return on the basis of its sales to Liddell
Motors, Inc. and not on those by the latter to the public, it
cannot be held that the Liddell & Co., Inc. deliberately
made a false return for the purpose of defrauding the
government of its revenue, and should suffer a 50%
surcharge. But penalty for late payment (25%) should be
imposed.
In view of the foregoing, the decision appealed from is
hereby modified: Liddell & Co., Inc. is declared liable only
for the amount of P426,811.67 with 25% surcharge for late
payment and 6% interest thereon from the time the
judgment becomes final.
As it appears that, during the pendency of this litigation
appellant paid under protest to the Government the total
CORPORATION LAW CASES
LLB 3
amount assessed by the Collector, the latter is hereby
required to return the excess to the petitioner. No costs.
G.R. No. L-5677             May 25, 1953
LA CAMPANA FACTORY, INC., and TAN TONG doing
business under the trial name "LA CAMPANA GAUGAU
PACKING", petitioners,  vs. KAISAHAN NG MGA
MANGGAGAWA SA LA CAMPANA (KKM) and THE COURT OF
INDUSTRIAL RELATIONS, respondents.
REYES, J.:
Tan Tong, one of the herein petitioners, has since 1932
been engaged in the business of buying and selling gaugau
under the trade name La Campana Gaugau Packing with an
establishment in Binondo, Manila, which was later
transferred to España Extension, Quezon City. But on July
6, 1950, Tan Tong, with himself and members of his family
corporation known as La Campana Factory Co., Inc., with
its principal office located in the same place as that of La
Campana Gaugau Packing.
About a year before the formation of the corporation, or on
July 11, 1949, Tan Tong had entered into a collective
bargaining agreement with the Philippine Legion of
Organized Workers, known as PLOW for short, to which the
union of Tan Tong's employees headed by Manuel E. Sadde
was then affiliated. Seceding, however, from the PLOW, Tan
Tong's employees later formed their own organization
known as  Kaisahan Ng Mga Manggagawa Sa La Campana,
one of the herein respondents, and applied for registration
in the Department of Labor as an independent entity.
Pending consideration of this application, the Department
gave the new organization legal standing by issuing it a
permit as an affiliate to the Kalipunan Ng Mga Manggagawa.
On July 19, 1951, the  Kaisahan Ng Mga Manggagawa Sa La
Campana, hereinafter to be referred to as the respondent
Kaisahan, which, as of that date, counted with 66 members
— workers all of them of both La Campana Gaugau Packing
and La Campana Coffee Factory Co., Inc. — presented a
demand for higher wages and more privileges, the demand
being addressed to La Campana Starch and Coffee Factory,
by which name they sought to designate, so it appears, the
La Campana Gaugau Packing and the La Campana Coffee
Factory Co., Inc. As the demand was not granted and an
attempt at settlement through the mediation of the
Conciliation Service of the Department of Labor had given
no result, the said Department certified the dispute to the
Court of Industrial Relations on July 17, 1951, the case
being there docketed as Case No. 584-V.
Page 136 of 160
With the case already pending in the industrial court, the
Secretary of Labor, on September 5, 1951, revoked
the  Kalipunan Ng Mga Kaisahang Manggagawa's  permit as a
labor union on the strength of information received that it
was dominated by subversive elements, and, in
consequence, on the 20th of the same month, also
suspended the permit of its affiliate, the
respondent Kaisahan.
We have it from the court's order of January 15, 1952,
which forms one of the annexes to the present petition,
that following the revocation of the Kaisahan's permit, "La
Campana Gaugau and Coffee Factory" (obviously the
combined name of La Campana Gaugau Packing and La
Campana Coffee Factory Co., Inc,) and the PLOW, which
had been allowed to intervene as a party having an interest
in the dispute, filed separate motions for the dismissal of
the case on the following grounds:
1. That the action is directed against two different entities
with distinct personalities, with "La Campana Starch
Factory" and the "La Campana Coffee Factory, Inc.";
2. That the workers of the "La Campana Coffee Factory,
Inc." are less than thirty-one;
3. That the petitioning union has no legal capacity to sue,
because its registration as an organized union has been
revoked by the Department of Labor on September 5, 1951;
and
4. That there is an existing valid contract between the
respondent "La Campana Gaugau Packing" and the
intervenor PLOW, where-in the petitioner's members are
contracting parties bound by said contract.
Several hearings were held on the above motions, in the
course of which ocular inspections were also made, and on
the basis of the evidence received and the facts observed
in the ocular inspections, the Court of Industrial Relations
denied the said motions in its order of January 14, 1952,
because if found as a fact that:
A. While the coffee corporation is a family corporation with
Mr. Tan Tong, his wife, and children as the incorporations
and stockhelders (Exhibit 1), the La Campana Gaugau
Packing is merely a business name (Exhibit 4).
B. According to the contract of lease (Exhibit 23), Mr. Tan
Tong., propriety and manager of the Ka Campana Gaugau
Factory, leased a space of 200 square meters in the bodega
MAYORDO, M.A
housing the gaugau factory to his son Tan Keng Lim,
manager of the La Campana Coffee Factory. But the lease
was executed only on September 1, 1951, while the dispute
between the parties was pending before the Court.
C. There is only one entity La Campana Starch and Coffee
Factory, as shown by the signboard (Exhibit 1), the
advertisement in the delivery trucks (Exhibit I-1), the
packages of gaugau(Exhibit K), and delivery forms (Exhibits
J, J-1, and J-2).
D. All the laborers working in the gaugau or in the coffee
factory receive their pay from the same person, the
cashier, Miss Natividad Garcia, secretary of Mr. Tan Tong;
and they are transferred from the gaugau to the coffee and
vice-versa as the management so requires.
E. There has been only one payroll for the entire La
Campana personnel and only one person preparing the
same — Miss Natividad Garcia, secretary of Mr. Tan Tong.
But after the case at bar was certified to this Court on July
17, 1951, the company began making separate payrolls for
the coffee factory (Exhibits M-2 and M-3, and for the
gaugau factory (Exhibits O-2, O-3 and O-4). It is to be noted
that before July 21, 1951, the coffee payrolls all began
with number "41-Maria Villanueva" with 24 or more laborers
(Exhibits M and M-1), whereas beginning July 21, 1951, the
payrolls for the coffee factory began with No. 1-Loreta
Bernabe with only 14 laborers (Exhibits M-2 and M-3).
F. During the ocular inspection made in the factory on
August 26, 1951 the Court has found the following:
In the ground floor and second floor of the gaugau factory
there were hundreds of bags of raw coffee behind the pile
of gaugau sacks. There were also women employees
working paper wrappers for gaugau, and, in the same place
there were about 3,000 cans to be used as containers for
coffee.
The Court found out also that there were 16 trucks used
both for the delivery of coffee and gaugau. To show that
those trucks carried both coffee and gaugau, the union
president invited the Court to examine the contents of
delivery truck No. T-582 parked in a garage between the
gaugau building and the coffee factory, and upon
examination, there were found inside the said truck boxes
of gaugau and cans of coffee, and held that:
. . . there is only one management for the business of
gaugau and coffee with whom the laborers are dealing
CORPORATION LAW CASES
LLB 3
regarding their work. Hence, the filing of action against the
Ka Campana Starch and Coffee Factory is proper and
justified.
With regards to the alleged lack of personality, it is to be
noted that before the certification of the case to this Court
on July 17, 1951, the petitioner  Kaisahan Ng Mga
Manggagawa Sa La Campana, had a separate permit from
the Department of Labor. This permit was suspended on
September 30, 1951. (Exhibit M-Intervenor, page 55, of the
record). It is not true that, on July 17, 1951, when this case
forwarded to this Court, the petitioner's permit, as an
independent union, had not yet been issued, for the very
Exhibit MM-Intervenor regarding the permit, conclusively
shows the preexistence of said permit. (Annex G.)
Their motion for reconsideration of the above order having
been denied, Tan Tong and La Campana Coffee Factory, Inc.
(same as La Campana Coffee Factory Co., Inc.), later
joined by the PLOW, filed the present petition for certiorari
on the grounds that the Court of Industrial Relations had no
jurisdiction to take cognizance of the case, for the reason,
according to them, "(1) that the petitioner La Campana
Coffee Factory, Inc. has only 14 employees, only 5 of whom
are members of the respondent union and therefore the
absence of the jurisdictional number (30) as provided by
sections 1 and 4 of Commonwealth Act No. 103; and, (2)
that the suspension of respondent union's permit by the
Secretary of Labor has the effect of taking away the union's
right to collective bargaining under section 2 of
Commonwealth Act No. 213 and consequently, its
personality to sue for ad in behalf of its members."
As to the first ground, petitioners obviously do not question
the fact that the number of employees of the La Campana
Gaugau Packing involved in the case is more than the
jurisdictional number (31) required bylaw, but they do
contend that the industrial court has no jurisdiction to try
the case as against La Campana Coffee Factory, Inc.
because the latter has allegedly only 14 laborers and only
of these are members of the respondent Kaisahan. This
contention loses force when it is noted that, as found by
the industrial court — and this finding is conclusive upon us
— La Campana Gaugau Packing and La Campana Coffee
Factory Co. Inc., are operating under one single
management, that is, as one business though with two
trade names. True, the coffee factory is a corporation and,
by legal fiction, an entity existing separate and apart fro
the persons composing it, that is, Tan Tong and his family.
But it is settled that this fiction of law, which has been
introduced as a matter of convenience and to subserve the
Page 137 of 160
ends of justice cannot be invoked to further an end
subversive of that purpose.
Disregarding Corporate Entity. — The doctrine that a
corporation is a legal entity existing separate and apart
from the person composing it is a legal theory introduced
for purposes of convenience and to subserve the ends of
justice. The concept cannot, therefore, be extended to a
point beyond its reason and policy, and when invoked in
support of an end subversive of this policy, will be
disregarded by the courts. Thus, in an appropriate case and
in furtherance of the ends of justice, a corporation and the
individual or individuals owning all its stocks and assets will
be treated as identical, the corporate entity being
disregarded where used as a cloak or cover for fraud or
illegality. (13 Am. Jur., 160-161.)
. . . A subsidiary or auxiliary corporation which is created
by a parent corporation merely as an agency for the latter
may sometimes be regarded as identical with the parent
corporation, especially if the stockholders or officers of the
two corporations are substantially the same or their system
of operation unified. (Ibid. 162; see Annotation 1 A. L. R.
612, s. 34 A. L. R. 599.)
In the present case Tan Tong appears to be the owner of
the  gaugau  factory. And the coffee factory, though an
incorporated business, is in reality owned exclusively by
Tan Tong and his family. As found by the Court of industrial
Relations, the two factories have but one office, one
management and one payroll, except after July 17, the day
the case was certified to the Court of Industrial Relations,
when the person who was discharging the office of cashier
for both branches of the business began preparing separate
payrolls for the two. And above all, it should not be
overlooked that, as also found by the industrial court, the
laborers of the gaugau factory and the coffee factory were
interchangeable, that is, the laborers from the gaugau
factory were sometimes transferred to the coffee factory
and vice-versa. In view of all these, the attempt to make
the two factories appears as two separate businesses, when
in reality they are but one, is but a device to defeat the
ends of the law (the Act governing capital and labor
relations) and should not be permitted to prevail.
The second point raised by petitioners is likewise with-out
merit. In the first place, there being more than 30 laborers
involved and the Secretary of Labor having certified the
dispute to the Court of Industrial Relations, that court duly
acquired jurisdiction over the case (International Oil
Factory  vs.  NLU, Inc. 73 Phil., 401; section 4, C. A. 103).
MAYORDO, M.A
This jurisdiction was not when the Department of Labor
suspended the permit of the respondent Kaisahan as a labor
organization. For once jurisdiction is acquired by the Court
of Industrial Relations it is retained until the case is
completely decided. (Manila Hotel Employees
Association vs. Manila Hotel Co. et al., 73 Phil., 374.)
In view of the foregoing, the petition is denied, with costs
against the petitioner.
G.R. No. 182770               September 17, 2014
WPM INTERNATIONAL TRADING, INC. and WARLITO P.
MANLAPAZ, Petitioners,  vs. FE CORAZON,
LABAYEN, Respondent.
DECISION
BRION, J.:
We review in this petition for review on certiorari1  the
d e c i s i o n 2  d a t e d S e p t e m b e r 2 8 , 2 0 0 7 a n d t h e
resolution3  dated April 28, 2008 of the Court of Appeals
(CA) in CA-G.R. CV No. 68289 that affirmed with
modification the decision4  of the Regional Trial Court
(RTC), Branch 77, Quezon City.
The Factual Background
The respondent, Fe Corazon Labayen, is the owner of
H.B.O. Systems Consultants, a management and consultant
firm. The petitioner, WPM International Trading, Inc.
(WPM), is a domestic corporation engaged in the restaurant
business, while Warlito P. Manlapaz (Manlapaz) is its
president.
Sometime in 1990, WPM entered into a management
agreement with the respondent, by virtue of which the
respondent was authorized to operate, manage and
rehabilitate Quickbite, a restaurant owned and operated by
WPM. As part of her tasks, the respondent looked for a
contractor who would renovate the two existing Quickbite
outlets in Divisoria, Manila and Lepanto St., University Belt,
Manila. Pursuant to the agreement, the respondent
engaged the services of CLN Engineering Services (CLN) to
renovate Quickbite-Divisoria at the cost of ₱432,876.02.
On June 13, 1990, Quickbite-Divisoria’s renovation was
finally completed, and its possession was delivered to the
respondent. However, out of the ₱432,876.02 renovation
cost, only the amount of ₱320,000.00 was paid to CLN,
leaving a balance of ₱112,876.02.
CORPORATION LAW CASES
LLB 3
Complaint for Sum of Money (Civil Case No. Q-90-7013)
On October 19, 1990, CLN filed a complaint for sum of
money and damages before the RTC against the respondent
and Manlapaz, which was docketed as Civil Case No.
Q-90-7013. CLN later amended the complaint to exclude
Manlapaz as defendant. The respondent was declared in
default for her failure to file a responsive pleading.
The RTC, in its January 28, 1991 decision, found the
respondent liable to pay CLN actual damages inthe amount
of ₱112,876.02 with 12% interest per annum from June
18,1990 (the date of first demand) and 20% of the amount
recoverable as attorney’s fees.
Complaint for Damages (Civil Case No. Q-92-13446)
Thereafter, the respondent instituted a complaint for
damages against the petitioners, WPM and Manlapaz. The
respondent alleged that in Civil Case No. Q-90-7013, she
was adjudged liable for a contract that she entered into for
and in behalf of the petitioners, to which she should be
entitled to reimbursement; that her participation in the
management agreement was limited only to introducing
Manlapaz to Engineer Carmelo Neri (Neri), CLN’s general
manager; that it was actually Manlapaz and Neri who
agreed on the terms and conditions of the agreement; that
when the complaint for damages was filed against her, she
was abroad; and that she did not know of the case until she
returned to the Philippines and received a copy of the
decision of the RTC.
In her prayer, the respondent sought indemnification in the
amount of ₱112,876.60 plus interest at 12%per annum from
June 18, 1990 until fully paid; and 20% of the award as
attorney’s fees. She likewise prayed that an award of
₱100,000.00 as moral damages and ₱20,000.00 as
attorney’s fees be paid to her.
In his defense, Manlapaz claims that it was his fellow
incorporator/director Edgar Alcansajewho was in-charge
with the daily operations of the Quickbite outlets; that
when Alcansaje left WPM, the remaining directors were
compelled to hire the respondent as manager; that the
respondent had entered intothe renovation agreement with
CLN in her own personal capacity; that when he found the
amount quoted by CLN too high, he instructed the
respondent to either renegotiate for a lower price or to
look for another contractor; that since the respondent had
exceeded her authority as agent of WPM, the renovation
agreement should only bind her; and that since WPM has a
Page 138 of 160
separate and distinct personality, Manlapaz cannot be made
liable for the respondent’s claim.
Manlapaz prayed for the dismissal of the complaint for lack
of cause of action, and by way of counterclaim, for the
award of ₱350,000.00 as moral and exemplary damages and
₱50,000.00 attorney’s fees.
The RTC, through an order dated March 2, 1993 declared
WPM in default for its failure to file a responsive pleading.
The Decision of the RTC
In its decision, the RTC held that the respondent is entitled
to indemnity from Manlapaz. The RTC found that based on
the records, there is a clear indication that WPM is a mere
instrumentality or business conduit of Manlapaz and as
such, WPM and Manlapaz are considered one and the same.
The RTC also found that Manlapaz had complete control
over WPM considering that he is its chairman, president and
treasurer at the same time. The RTC thus concluded that
Manlapaz is liable in his personal capacity to reimburse the
respondent the amount she paid to CLN inconnection with
the renovation agreement.
The petitioners appealed the RTC decision with the CA.
There, they argued that in view of the respondent’s act of
entering into a renovation agreement with CLN in excess of
her authority as WPM’s agent, she is not entitled to
indemnity for the amount she paid. Manlapaz also
contended that by virtue ofWPM’s separate and distinct
personality, he cannot be madesolidarily liable with WPM.
The Ruling of the Court of Appeals
On September 28, 2007, the CA affirmed, with modification
on the award of attorney’s fees, the decision of the
RTC.The CA held that the petitioners are barred from
raising as a defense the respondent’s alleged lack of
authority to enter into the renovation agreement in view of
their tacit ratification of the contract.
The CA likewise affirmed the RTC ruling that WPM and
Manlapaz are one and the same based on the following: (1)
Manlapaz is the principal stockholder of WPM; (2) Manlapaz
had complete control over WPM because he concurrently
held the positions of president, chairman of the board and
treasurer, in violation of the Corporation Code; (3) two of
the four other stockholders of WPM are employed by
Manlapaz either directly or indirectly; (4) Manlapaz’s
residence is the registered principal office of WPM; and (5)
the acronym "WPM" was derived from Manlapaz’s initials.
MAYORDO, M.A
The CA applied the principle of piercing the veil of
corporate fiction and agreed with the RTC that Manlapaz
cannot evade his liability by simply invoking WPM’s
separate and distinct personality.
After the CA's denial of their motion for reconsideration,
the petitioners filed the present petition for review on
certiorari under Rule 45 of the Rules of Court.
The Petition
The petitioners submit that the CA gravely erred in
sustaining the RTC’s application of the principle of piercing
the veil of corporate fiction. They argue that the legal
fiction of corporate personality could only be discarded
upon clear and convincing proof that the corporation is
being used as a shield to avoid liability or to commit a
fraud. Since the respondent failed to establish that any of
the circumstances that would warrant the piercing is
present, Manlapaz claims that he cannot be made solidarily
liable with WPM to answerfor damages allegedly incurred
by the respondent.
The petitioners further argue that, assuming they may be
held liable to reimburse to the respondentthe amount she
paid in Civil Case No. Q-90-7013, such liability is only
limited to the amount of ₱112,876.02, representing the
balance of the obligation to CLN, and should not include
the twelve 12% percent interest, damages and attorney’s
fees.
The Issues
The core issues are: (1) whether WPM is a mere
instrumentality, alter-ego, and business conduit of
Manlapaz; and (2) whether Manlapaz is jointly and severally
liable with WPM to the respondent for reimbursement,
damages and interest.
Our Ruling
We find merit in the petition.
We note, at the outset, that the question of whether a
corporation is a mere instrumentality or alter-ego of
another is purely one of fact.5 This is also true with respect
to the question of whether the totality of the evidence
adduced by the respondentwarrants the application of the
piercing the veil of corporate fiction doctrine.6
Generally, factual findings of the lower courts are accorded
the highest degree of respect, if not finality. When adopted
CORPORATION LAW CASES
LLB 3
and confirmed by the CA, these findings are final and
conclusive and may not be reviewed on appeal,7save in
some recognized exceptions8  among others, when the
judgment is based on misapprehension of facts.
We have reviewed the records and found that the
application of the principle of piercing the veil of corporate
fiction is unwarranted in the present case.
On the Application ofthe Principle of Piercing the Veil of
Corporate Fiction
The rule is settled that a corporation has a personality
separate and distinct from the persons acting for and in its
behalf and, in general, from the people comprising it.
9  Following this principle, the obligations incurred by the
corporate officers, orother persons acting as corporate
agents, are the direct accountabilities ofthe corporation
they represent, and not theirs. Thus, a director, officer or
employee of a corporation is generally not held personally
liable for obligations incurred by the corporation;10  it is
only in exceptional circumstances that solidary liability will
attach to them.
Incidentally, the doctrine of piercing the corporate veil
applies only in three (3) basic instances, namely: a) when
the separate and distinct corporate personality defeats
public convenience, as when the corporate fiction is used
as a vehicle for the evasion of an existing obligation; b) in
fraud cases, or when the corporate entity is used to justify
a wrong, protect a fraud, or defend a crime; or c) is used in
alter ego cases, i.e., where a corporation is essentially a
farce, since it is a mere alter ego or business conduit of a
person, or where the corporation is so organized and
controlled and its affairs so conducted as to make it merely
aninstrumentality, agency, conduit or adjunct of another
corporation.11
Piercing the corporate veil based on the alter ego theory
requires the concurrence of three elements, namely:
(1) Control, not mere majority or complete stock control,
but complete domination, not only of finances but of policy
and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own;
(2) Such control must have beenused by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal right; and
Page 139 of 160
(3) The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss complained of.
The absence of any ofthese elements prevents piercing the
corporate veil.12
In the present case, the attendantcircumstances do not
establish that WPM is a mere alter ego of Manlapaz.
Aside from the fact that Manlapaz was the principal
stockholder of WPM, records do not show that WPM was
organized and controlled, and its affairs conducted in a
manner that made it merely an instrumentality, agency,
conduit or adjunct ofManlapaz. As held in Martinez v. Court
of Appeals,13 the mere ownership by a singlestockholder of
even all or nearly all of the capital stocks ofa corporation is
not by itself a sufficient ground to disregard the separate
corporate personality. To disregard the separate juridical
personality of a corporation, the wrongdoing must be
clearly and convincingly established.14
Likewise, the records of the case do not support the lower
courts’ finding that Manlapaz had control or domination
over WPM or its finances. That Manlapaz concurrentlyheld
the positions of president, chairman and treasurer, or that
the Manlapaz’s residence is the registered principal office
of WPM, are insufficient considerations to prove that he
had exercised absolutecontrol over WPM.
In this connection, we stress thatthe control necessary to
invoke the instrumentality or alter ego rule is not majority
or even complete stock control but such domination of
finances, policies and practices that the controlled
corporation has, so tospeak, no separate mind, will or
existence of its own, and is but a conduit for its principal.
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.
Here, the respondent failed to prove that Manlapaz, acting
as president, had absolute control over WPM.1âwphi1 Even
granting that he exercised a certain degree of control over
the finances, policies and practices of WPM, in view of his
position as president, chairman and treasurer of the
corporation, such control does not necessarily warrant
piercing the veil of corporate fiction since there was not a
single proof that WPM was formed to defraud CLN or the
respondent, or that Manlapaz was guilty of bad faith or
fraud.
MAYORDO, M.A
On the contrary, the evidence establishes that CLN and the
respondent knew and acted on the knowledgethat they
were dealing with WPM for the renovation of the latter’s
restaurant, and not with Manlapaz. That WPM later reneged
on its monetary obligation to CLN, resulting to the filing of
a civil case for sum of money against the respondent, does
not automatically indicate fraud, in the absence of any
proof to support it.
This Court also observed that the CA failed to demonstrate
how the separate and distinct personalityof WPM was used
by Manlapaz to defeat the respondent’s right for
reimbursement. Neither was there any showing that WPM
attempted to avoid liability or had no property against
which to proceed.
Since no harm could be said to have been proximately
caused by Manlapaz for which the latter could be held
solidarily liable with WPM, and considering that there was
no proof that WPM had insufficient funds, there was no
sufficient justification for the RTC and the CA to have ruled
that Manlapaz should be held jointly and severally liable to
the respondent for the amount she paid to CLN. Hence,
only WPM is liable to indemnify the respondent.
Finally, we emphasize that the piercing of the veil of
corporate fiction is frowned upon and thus, must be done
with caution.15  It can only be done if it has been clearly
established that the separate and distinct personality of
the corporation is used to justify a wrong, protect fraud, or
perpetrate a deception. The court 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; it cannot be presumed.
On the Award of Moral Damages
On the award of moral damages, we find the same in order
in view of WPM's unjustified refusal to pay a just debt.
Under Article 2220 of the New Civil Code,16 moral damages
may be awarded in cases of a breach of contract where the
defendant acted fraudulently or in bad faith or was guilty
of gross negligence amounting to bad faith.
In the present case, when payment for the balance of the
renovation cost was demanded, WPM, instead of complying
with its obligation, denied having authorized the
respondent to contract in its behalf and accordingly refused
to pay. Such cold refusal to pay a just debt amounts to a
breach of contract in bad faith, as contemplated by Article
CORPORATION LAW CASES
LLB 3
2220. Hence, the CA's order to pay moral damages was in
order.
WHEREFORE, in light of the foregoing, the decision dated
September 28, 2007 of the Court of Appeals in CA-G.R. CV
No. 68289 is MODIFIED and that petitioner Warlito P.
Manlapaz is ABSOLVED from any liability under the
renovation agreement.
SO ORDERED.
G.R. No. L-13119. September 22, 1959

RICARDO TANTONGCO, Petitioner, v. KAISAHAN NG MGA
MANGGAGAWA SA LA CAMPANA (KKM) AND THE
HONORABLE COURT OF INDUSTRIAL RELATIONS,
Respondents.
SYLLABUS
1. CORPORATIONS; DISTINCT PERSONALITY OF A
CORPORATION; JURISDICTION OF COURT OF INDUSTRIAL
RELATIONS NOT AFFECTED BY DEATH OF OWNER. — The
death of an owner and manager of a corporation, against
which cases are pending in the Court of Industrial relations,
does not deprive the latter of its jurisdiction over the
same. The party in those cases being the corporation and
not the owner or manager personally, the claims of the
laborers therein, which are merely incidental to their
demands for reinstatement for having been unjustly
dismissed, and for better working conditions, are not the
claims contemplated by law to be submitted before the
administrator of the estate of a deceased person.
2. ID.; EXISTENCE AND OPERATION; ESTOPPEL. — Having
admitted the existence and operation of the two entities in
a complaint filed for injunction by the said entities and on
two other occasions, Petitioner, who is now estopped from
denying the existence of the same.
Page 140 of 160


DECISION
MONTEMAYOR, J.:


This is a petition for certiorari and prohibition with prayer
for issuance of a writ of preliminary injunction to prohibit
respondent Court of Industrial Relations from proceeding
with the hearing of the contempt proceedings for which
petitioner Ricardo Tantongco was cited to appear and
present his evidence. The contempt proceedings which
petitioner seeks to stop are based on the order of the Court
of Industrial Relations, dated September 30, 1957, which
reads as follows:
"It appearing that the Order of this Court, in the above-
entitled case, dated February 18, 1957 (folios 134-166), has
become final and executory and the respondents have
failed to comply with the same, the said respondents,
namely, the La Campana Starch and Coffee Factory or its
manager or the person who has charge of the management,
and the administrator of the Estate of Ramon Tantongco are
hereby ordered to comply with said Order, within five days
from receipt hereof, particularly the following, to wit: 
 Campana Gaugau Packing involved in the case is more than


"(a) To reinstate the persons named in the said Order of
February 18, 1957;


"(b) To deposit the amount of P65,534.01 with this Court.


"With respect to possible back wages from August 28, 1957
as mentioned in the petition for contempt of August 30,
1957, the same shall first be determined.
"Failure to comply with this Order shall be directly dealt
with accordingly." 
 entity existing separate and apart from the persons


It would appear that petitioner Ricardo Tantongco failed to
comply with said order and so, as already stated, he was
cited to appear and to adduce evidence on his behalf to
show why he should not be punished for indirect contempt.
The facts in this case may be briefly narrated thus:
Sometime in June, 1951, members of the Kaisahan ng mga
Manggagawa sa La Campana, a labor union to which were
affiliated workers in the La Campana Starch Factory and La
Campana Coffee Factory, two separate entities but under
one management, presented demands for higher wages,
and more privileges and benefits in connection with their
work. When the management failed and refused to grant
the demands, the Department of Labor intervened; but
failing to settle the controversy, it certified the dispute to
MAYORDO, M.A
the Court of Industrial Relations on July 17, 1951, where it
was docketed as Case No. 584-V. On the theory that the
laborers presenting the demands were only the ones
working in the coffee factory, said company filed through
the management a motion to dismiss claiming that
inasmuch as there were only 14 of them in said factory, the
Court of Industrial Relations had no jurisdiction to entertain
and decide the case. The motion was denied by the Court
of Industrial Relations, which said:


". . . There was only one management for the business of
gawgaw and coffee with whom the laborers are dealing
regarding their work. Hence, the filing of action against the
La Campana Starch and Coffee Factory is proper and
justified."


The order of denial was appealed to this Tribunal through
certiorari under G. R. No. L-5677. In disposing of the case,
we held: 



"As to the first ground, petitioners obviously do not
question the fact that the number of employees La
the jurisdictional number (31) required by law, but they
contend that the industrial court has no jurisdiction to try
the case against La Campana Coffee Factory, Inc. because
the latter has allegedly only 14 laborers and only five of
these are members of respondent Kaisahan. This contention
loses force when it is noted that, as found by the industrial
court — and this finding is conclusive upon us — La
Campana Gaugau Packing and La Campana Coffee Factory
Co. Inc., are operating under one single management, that
is, one business though with two trade names. True, the
coffee factory is a corporation, and, by legal fiction, an
composing it, that is, Tan Tong and his family. But it is
settled this fiction of law, which has been introduced as a
matter of convenience and to subserve the ends of justice
cannot be invoked to further an end subversive of that
purpose.
". . . The attempt to make the two factories appear as two
separate businesses, when in reality they are but one is but
a device to defeat the ends of the law (the Act governing
capital and labor relations) and should not be permitted to
prevail." (La Campana Coffee Factory, Et. Al. v. Kaisahan ng
mga Manggagawa, etc. Et. Al., 93 Phil., 160; 49 Off. Gaz.,
[6] 2300.)


Upon the return of the case to the Court of Industrial
Relations, the latter proceeded with the hearing. In the
CORPORATION LAW CASES
LLB 3
meantime incidental cases involving the same parties came
up and were filed before the Court of Industrial Relations in
the following cases:


Case No. 584-V(1) — petition for contempt against the La
Campana Starch and Coffee Factory for having employed 21
new laborers in violation of the order of July 21, 1951, filed
on July 25, 1951;
 administrator to dismiss said incidental cases were


Case No. 584-V(2) — petition of La Campana for authority
to dismiss Loreto Bernabe, filed on July 25, 1951;
Case No. 584-V(3) — petition of Union to reinstate Bonifacio
Calderon with backpay, filed on August 3, 1951;
Case No. 584-V(5) — petition of Union to reinstate Marcelo
Estrada and Exequiel Rapiz with back pay and to punish
officials of the company for contempt, filed on February
13, 1952; and
Case No. 584-V(6) — petition of union for reinstatement of
Ibardolaza and seven other member-laborers and to punish
the officers of the company for contempt, filed on July 15,
1953. 
 they were not admitted by the management. Consequently,


These five cases were heard jointly. In the meantime
Ramon Tantongco supposed to be the owner and manager of
the La Campana Starch Factory and the person in charge of
the La Campana Coffee Factory died on May 16, 1956. On
motion of the labor union, the Court of Industrial Relations
ordered the inclusion as party respondent of the
administrator of the estate Ramon Tantongco who was
Ricardo Tantongco.
Ricardo Tantongco, as administrator, under a special
appearance filed a motion to dismiss all the cases including
the main case, that is to say, Cases No. 584-(V) to 584-V(6),
on the ground that said cases involved claims for sums of
money and consequently should be filed before the probate
court having jurisdiction over the estate, pursuant to the
provisions of Rule 3, Section 21, and Rule 88, Section 1 of
the Rules of Court. On August 23, 1956, the Court of
Industrial Relations denied the motion to dismiss and
proceeded to hear the incidental cases against the La
Campana entities. 
 Tantongco, pursuant to the provisions of Rule 3, Section 21


On June 12, 1956, a partial decision was rendered in the
main case No. 584-V, which partial decision was elevated to
us and is still pending appeal. On February 18, 1957, the
Court of Industrial Relations issued an order in incidental
Cases No. 584-V(1), V(2), V(3), V(5) and V(6), directing the
Page 141 of 160
"management of the respondent company and or the
administrator of the Estate of Ramon Tantongco", to
reinstate the dismissed laborers mentioned therein with
back wages. This order of February 18, 1957, as well as the
order directing the inclusion of the administrator of the
estate of Ramon Tantongco as additional respondent in the
incidental cases, and the order denying the petition of the
appealed to this tribunal through certiorari. The appeal,
however, was summarily dismissed by this Court in its
resolution of June 12, 1957, as follows:
"This Court, deliberating upon the allegations of the
petition filed in case L-12355 (La Campana Starch Coffee
Factory Et. Al. v. Kaisahan ng Mga Manggagawa sa La
Campana, KKM, et al) for review, on certiorari of the
decision of the Court of Industrial Relations referred to
therein, and finding that there is no merit in the petition,
RESOLVES TO DISMISS the same."cralaw virtua1aw library
 incidental to their demands for reinstatement for having


The CIR order of February 18, 1957, in the incidental cases
Nos. 584-V to V(6), having become final and executory, the
laborers involved reported for work on August 28, 1957, but
the union filed a petition dated August 30, 1957, to hold
respondents in said cases for contempt. After hearing the
CIR issued the order of September 30, 1957, subject of this
petition, ordering "the La Campana Starch and Coffee
Factory or its manager or the person who has charge of its
management and the administrator of the estate of Ramon
Tantongco" to "reinstate the persons named in the order of
February 18, 1957" and "to deposit the amount of
P65,534.01." For refusal or failure to comply with said
order, petitioner Ricardo Tantongco was required to appear
before the attorney of the CIR in contempt proceedings.
Petitioner now seeks to prohibit the CIR from proceeding
with the trial for contempt and to enjoin respondent CIR
from enforcing its order of September 30, 1957. 
 we still believe that although the family of Ramon


Petitioner contends that upon the death of Ramon
Tantongco, the claims of the laborers should have been
dismissed and that said claims should have been filed with
the probate court having jurisdiction over the
administration proceedings of the estate of Ramon
of the Rules of Court and that the failure to file said claims
with the administrator forever barred said claims as
provided in Rule 87, Section 5 of the Rules of Court,
especially after the assets of the estate had been
distributed among the heirs, and petitioner had ceased to
be the administrator of the estate. As already stated this
MAYORDO, M.A
same question was raised by petitioner in G. R. No.
L-12355, entitled "La Campana Starch and Coffee Factory
and Ricardo Tantongco, etc. v. Kaisahan ng mga
Manggagawa sa La Campana (KKM)," which, as already
stated, was summarily dismissed by this Court in a
resolution dated June 12, 1957. Consequently, said question
may not again be raised in the present case. Furthermore,
it may be recalled that both in the main case and in the
incidental cases No. 584-V to 584-V(6), Ramon Tantongco
was never a party. The party there was the La Campana
Starch and Coffee Factory by which name it was sought to
designate the two entities La Campana Starch Packing and
the La Campana Coffee Factory. Naturally, the claims
contained in said cases were not the claims contemplated
by law to be submitted before the administrator. In other
words the death of Ramon Tantongco did not deprive the
CIR of its jurisdiction over the cases aforementioned.
Moreover, the money claims of the laborers were merely
been unjustly dismissed, and for better working conditions. 



Petitioner, however, contends that in G.R. No. L-5677, we
"pierced the veil of corporate existence", and held that the
La Campana Starch and Coffee Factory and its owner,
Ramon Tantongco, were one; so that with the death of
Ramon, the La Campana entities ceased to exist, resulting
in the loss of jurisdiction of the CIR to enforce its order
against said entities. The reason we applied the so-called
"piercing the veil of corporate existence" in G. R. No.
L-5677 was to avoid the technicality therein advanced in
order to defeat the jurisdiction of the CIR. We there found
that although there were ostensibly two separate
companies or entities, they were managed by the same
person or persons and the workers in both were used
interchangeably so that in order to determine whether or
not the CIR had jurisdiction, the number of workers in both
entities, not in only one, was to be considered. However,
Tantongco was practically the owner of both the coffee
factory and the starch factory, nevertheless these entities
are separate from the personality of Ramon. The coffee
factory is a stock corporation and the shares are owned not
only by Ramon but also by others, such as petitioner
Ricardo who not only is a stockholder and director and
treasurer but also the manager of the same. Furthermore,
petitioner is now estopped from claiming that the two
entities in question and Ramon are one. Thus in Annex 3-
CIR (par. 1 thereof) which is a complaint for injunction filed
by La Campana Food Products, et al and La Campana Starch
Packing against the Consolidated Labor Organization of the
Philippines, in Civil Case No. P-2482 in the Court of First
CORPORATION LAW CASES
LLB 3
Instance of Rizal, petitioner admitted the existence and
operation of said entities; in Annex 4-CIR where petitioner
appeared as General Manager representing the two entities
in its agreement with the La Campana Workers Union to
resolve the dispute between the two entities and the
laborers in cases Nos. 1072-V and 1371-ULP, the existence
of the two entities appears to have been admitted; and in
Annex 5-A-CIR, an answer to the complaint of La Campana
Workers Union in case No. 1471-ULP (Annex 5-CIR),
petitioner admitted the allegation that said two factories
were in existence and doing business with petitioner as
manager of the same. 
 ADELIO C. CRUZ, complainant, vs.QUITERIO L. DALISAY,


In relation to the order of the CIR requiring petitioner to
appear in the contempt proceedings instituted against him,
petitioner contends that after he ceased to be the
administrator of the estate of Ramon Tantongco, he may
not now be compelled to comply with the order of the
court. In answer, it is enough to bear in mind the
jurisdiction and authority of the CIR as to compliance with
and violations of its orders under section 6, Commonwealth
Act No. 143, which we quote below:


". . . The Court or any Judge thereof shall have
furthermore, all the inherent powers of a court of justice
provided in paragraph 5 of Rule 124 of the Supreme Court,
as well as the power to punish direct and indirect contempt
as provided in Rule 64 of the same Court, under the same
procedure and penalties provided therein. 
 2. Respondent likewise caused the service of the alias writ


"Any violation of any order, award, or decision of the Court
of Industrial Relations shall, after such order, award or
decision has become final, conclusive, and executory,
constitute contempt of court: . . .
"In case the employer (or landlord) committing any such
violation or contempt is an association or corporation, the
manager or the person who has the charge of the
management of the business of the association or
corporation and the officers or directors thereof who have
ordered or authorized the violation of contempt shall be
liable. . . ."
In conclusion, we find and hold that the La Campana
Starch and Food Products Company which stands for the La
Campana Starch and Coffee Factory are entities distinct
from the personality of Ramon Tantongco; that after the
death of Ramon these two entities continued to exist and
to operate under the management of petitioner and that
consequently he is the proper person and official to which
the orders of the CIR are addressed and who is in duty
Page 142 of 160
bound to comply with the same. We further find that the
CIR acted within its jurisdiction in issuing its order of
September 30, 1957 and in requiring petitioner to appear to
give his evidence if any in relation with the contempt
proceedings instituted against him. 
 It has been held that the desistance of complainant does


In view of the foregoing, the petition for certiorari is
hereby denied and the writ of preliminary injunction
dissolved, with costs.
Adm. Matter No. R-181-P               July 31, 1987
Deputy Sheriff, RTC, Manila, respondents.
RESOLUTION
FERNAN, J.:
In a sworn complaint dated July 23, 1984, Adelio C. Cruz
charged Quiterio L. Dalisay, Senior Deputy Sheriff of Manila,
with "malfeasance in office, corrupt practices and serious
irregularities" allegedly committed as follows:
1. Respondent sheriff attached and/or levied the money
belonging to complainant Cruz when he was not himself the
judgment debtor in the final judgment of NLRC NCR Case
No. 8-12389-91 sought to be enforced but rather the
company known as "Qualitrans Limousine Service, Inc.," a
duly registered corporation; and,
of execution upon complainant who is a resident of Pasay
City, despite knowledge that his territorial jurisdiction
covers Manila only and does not extend to Pasay City.
In his Comments, respondent Dalisay explained that when
he garnished complainant's cash deposit at the Philtrust
bank, he was merely performing a ministerial duty. While it
is true that said writ was addressed to Qualitrans Limousine
Service, Inc., yet it is also a fact that complainant had
executed an affidavit before the Pasay City assistant fiscal
stating that he is the owner/president of said corporation
and, because of that declaration, the counsel for the
plaintiff in the labor case advised him to serve notice of
garnishment on the Philtrust bank.
On November 12, 1984, this case was referred to the
Executive Judge of the Regional Trial Court of Manila for
investigation, report and recommendation.
Prior to the termination of the proceedings, however,
complainant executed an affidavit of desistance stating
that he is no longer interested in prosecuting the case
MAYORDO, M.A
against respondent Dalisay and that it was just a
"misunderstanding" between them. Upon respondent's
motion, the Executive Judge issued an order dated May 29,
1986 recommending the dismissal of the case.
not preclude the taking of disciplinary action against
respondent. Neither does it dissuade the Court from
imposing the appropriate corrective sanction. One who
holds a public position, especially an office directly
connected with the administration of justice and the
execution of judgments, must at all times be free from the
appearance of impropriety.1
We hold that respondent's actuation in enforcing a
judgment against complainant who is not the judgment
debtor in the case calls for disciplinary action. Considering
the ministerial nature of his duty in enforcing writs of
execution, what is incumbent upon him is to ensure that
only that portion of a decision ordained or decreed in the
dispositive part should be the subject of execution.2 No
more, no less. That the title of the case specifically names
complainant as one of the respondents is of no moment as
execution must conform to that directed in the dispositive
portion and not in the title of the case.
The tenor of the NLRC judgment and the implementing writ
is clear enough. It directed Qualitrans Limousine Service,
Inc. to reinstate the discharged employees and pay them
full backwages. Respondent, however, chose to "pierce the
veil of corporate entity" usurping a power belonging to the
court and assumed improvidently that since the
complainant is the owner/president of Qualitrans Limousine
Service, Inc., they are one and the same. It is a well-
settled doctrine both in law and in equity that as a legal
entity, a corporation has a personality distinct and separate
from its individual stockholders or members. The mere fact
that one is president of a corporation does not render the
property he owns or possesses the property of the
corporation, since the president, as individual, and the
corporation are separate entities.3
Anent the charge that respondent exceeded his territorial
jurisdiction, suffice it to say that the writ of execution
sought to be implemented was dated July 9, 1984, or prior
to the issuance of Administrative Circular No. 12 which
restrains a sheriff from enforcing a court writ outside his
territorial jurisdiction without first notifying in writing and
seeking the assistance of the sheriff of the place where
execution shall take place.
CORPORATION LAW CASES
LLB 3
ACCORDINGLY, we find Respondent Deputy Sheriff Quiterio
L. Dalisay NEGLIGENT in the enforcement of the writ of
execution in NLRC Case-No. 8-12389-91, and a fine
equivalent to three [3] months salary is hereby imposed
with a stern warning that the commission of the same or
similar offense in the future will merit a heavier penalty.
Let a copy of this Resolution be filed in the personal record
of the respondent.
SO ORDERED.
G.R. No. 165442               August 25, 2010
NASECO GUARDS ASSOCIATION-PEMA (NAGA-PEMA),
Petitioner, vs. NATIONAL SERVICE CORPORATION
(NASECO), Respondent.
DECISION
VILLARAMA, JR., J.:
This petition for review on certiorari under Rule 45 assails
the Decision1 dated May 27, 2004 of the Court of Appeals
(CA) in CA-G.R. SP No. 76667. The appellate court set aside
the January 15, 20032 and March 11, 20033 Orders of the
Department of Labor and Employment (DOLE) and ordered
the latter to allow the parties to adduce evidence in
support of their respective positions.
The facts follow.
Respondent National Service Corporation (NASECO) is a
wholly-owned subsidiary of the Philippine National Bank
(PNB) organized under the Corporation Code in 1975. It
supplies security and manpower services to different clients
such as the Securities and Exchange Commission, the
Philippine Deposit Insurance Corporation, Food Terminal
Incorporated, Forex Corporation and PNB. Petitioner
NASECO Guards Association-PEMA (NAGA-PEMA) is the
collective bargaining representative of the regular rank and
file security guards of respondent. NASECO Employees
Union-PEMA (NEMU-PEMA) is the collective bargaining
representative of the regular rank and file (non-security)
employees of respondent such as messengers, janitors,
typists, clerks and radio-telephone operators.4
On December 2, 1993, respondent entered into a
memorandum of agreement5 with petitioner. The terms of
the agreement covered the monetary claims of the
petitioner such as salary adjustments, conversion of salary
scheme under Republic Act (R.A.) No. 67586 to R.A. No.
6727,7 signing bonus, leaves and other benefits. A year
after, petitioner demanded full negotiation for a collective
Page 143 of 160
bargaining agreement (CBA) with the respondent and
submitted its proposals thereto.
On June 8, 1995, petitioner and respondent agreed to sign
a CBA on non-economic terms.8
On September 24, 1996, petitioner filed a notice of strike
because of respondent’s refusal to bargain for economic
benefits in the CBA. Following conciliation hearings, the
parties again commenced CBA negotiations and started to
resolve the issues on wage increase, productivity bonus,
incentive bonus, allowances, and other benefits but failed
to reach an agreement.
Meanwhile, respondent and NEMU-PEMA entered into a CBA
on non-economic terms.9 Unfortunately, a dispute among
the leaders of NEMU-PEMA arose and at a certain point,
leadership of the organization was unclear. Hence, the
negotiations concerning the economic terms of the CBA
were put on hold until the internal dispute could be
resolved.
On April 29, 1997, petitioner filed a notice of strike before
the National Conciliation and Mediation Board (NCMB)
against respondent and PNB due to a bargaining deadlock.
The following day, NEMU-PEMA likewise filed a notice of
strike against respondent and PNB on the ground of unfair
labor practices.10 Efforts by the NCMB to conciliate failed
and pursuant to Article 263(g) of the Labor Code,11 as
amended, then DOLE Secretary Cresenciano B. Trajano
assumed jurisdiction over the strike notices on June 25,
1998.12
On November 19, 1999, then DOLE Secretary Bienvenido E.
Laguesma issued a Resolution13 directing petitioner and
respondent to execute a new CBA incorporating therein his
dispositions regarding benefits of the employees as to wage
increase, productivity bonus, vacation and sick leave,
medical allowances and signing bonus. Respondent was
further ordered to negotiate, for purposes of collective
bargaining agreement, with NEMU-PEMA led by its
president, Ligaya Valencia. The charge of unfair labor
practice against respondent and PNB was dismissed.14
Respondent promptly filed a petition for certiorari before
the CA questioning the DOLE Secretary’s order and arguing
that the ruling of the DOLE Secretary in favor of the unions
and awarding them monetary benefits totaling five hundred
thirty-one million four hundred forty-six thousand six
hundred sixty-six and 67/100 (₱531,446,666.67) was
inimical and deleterious to its financial standing and will
result in closure and cessation of business for the company.
MAYORDO, M.A
By Decision15 dated March 19, 2001 (first CA Decision), the
CA partly granted the petition and ruled that a
recomputation and reevaluation of the benefits awarded
was in order.
WHEREFORE, the instant petition is partly GRANTED in that
the case is remanded to the Secretary of Labor for purposes
of recomputation and reevaluation of the CBA benefits.
SO ORDERED.16
In compliance with the CA directive, then DOLE Secretary
Patricia A. Sto. Tomas conducted several clarificatory
hearings. On January 15, 2003, Secretary Sto. Tomas issued
an Order which provides:
From the above, it is indubitable that the total cost to
NASECO of our questioned award would amount to only
₱322,725,000, not ₱531,446,666.67 as claimed by the
company. Thus, our November 19, 1999 Order is hereby
affirmed en toto.
WHEREFORE, judgment is hereby rendered:
1. [D]irecting NAGA-PEMA and NASECO to execute
a new collective bargaining agreement effective
November 1, 1993, incorporating therein the
dispositions contained in our November 19, 1999
Order as well as all other items agreed upon by
the parties.
2. Ordering NASECO to negotiate with NEMA-PEMA
for a new collective bargaining agreement.
The charges of unfair labor practice against NASECO and
PNB are dismissed for lack of merit.
SO ORDERED.17
Respondent filed a motion for reconsideration with the
DOLE Secretary which was denied on March 11, 2003.
Respondent thus filed a petition for certiorari with the CA
arguing that the DOLE Secretary, in issuing the January 15,
2003 Order deprived respondent of due process of law for
there was no reevaluation that took place in the DOLE. It
also argued that the order merely recomputed the DOLE
Secretary’s initial award of ₱531,446,666.67 and reduced it
to ₱322,725,000.00, contrary to the ruling of the CA to
recompute and reevaluate. Respondent claimed that what
the DOLE Secretary should have done was to let the parties
CORPORATION LAW CASES
LLB 3
introduce evidence to show the proper computation of the
monetary awards under the approved CBA.
In its second Decision dated May 27, 2004, the CA granted
the petition, thus:
WHEREFORE, the orders dated 15 January 2003 and 11
March 2003 are hereby SET ASIDE and the case remanded to
the public respondent to allow the parties to adduce
evidence in support of their respective positions.
SO ORDERED.18
A motion for reconsideration was filed by herein petitioner
but the same was denied by the CA on September 22,
200419 finding no reason to reverse and set aside its earlier
decision.
Petitioner now comes to this Court for relief by way of a
petition for review on certiorari seeking to set aside and
reverse the May 27, 2004 Decision and the September 22,
2004 Resolution of the CA.
The main issue in this case is whether or not the
respondent’s right to due process was violated. A side issue
raised by the petitioner is whether or not PNB, being the
undisputed owner of and exercising control over
respondent, should be made liable to pay the CBA benefits
awarded to the petitioner.
Petitioner argues first that there was no violation of due
process because respondent was never prohibited by the
DOLE Secretary to submit supporting documents when the
instant case was pending on remand. Petitioner contends
that due process is properly observed when there is an
opportunity to be heard, to present evidence and to file
pleadings, which was never denied to respondent.
Second, petitioner argues that the CA erred in stating that
respondent was a company operating at a loss and
therefore cannot be expected to act generously and confer
upon its employees additional benefits exceeding what is
mandated by law. It is the petitioner’s position that based
on the "no loss, no profit" policy of respondent with PNB,
respondent in truth has no "pocket" of its own and is, in
effect, one (1) and the same with PNB with regard to
financial gains and/or liabilities. Thus, petitioners contend
that the CBA benefits should be shouldered by PNB
considering the poor financial condition of respondent. To
support such claim, petitioner submitted evidence20 to
show that PNB is in superb financial condition and is very
much capable of shouldering the CBA award.21
Page 144 of 160
Respondent on the other hand maintains that the DOLE
Secretary violated its right to due process when she merely
recomputed the CBA award instead of reevaluating the
entire case and allowing it to present supporting documents
in accordance with the first CA decision.22 It claims that the
order of the CA to reevaluate included and required a full
assessment of the case together with reception of evidence
such as financial statements, and the omission of such is a
violation of its right to due process.
As to the petitioner’s argument that respondent and PNB
are essentially the same when it comes to financial
condition, respondent contends that although a subsidiary,
it has a separate and distinct personality from PNB with its
own charter. Hence, the issue of PNB’s financial well-being
is immaterial in this case.
The petition is partly meritorious.
In simple terms, the constitutional guarantee of due
process requires that a litigant be given "a day in court." It
is the availability of the opportunity to be heard that
determines whether or not due process was violated. A
litigant may or may not avail of the opportunity to be heard
but as long as such was made available to him/her, there is
no violation of the due process clause. In the case of
Lumiqued v. Exevea,23 this Court declared that "[a]s long as
a party was given the opportunity to defend his interests in
due course, he cannot be said to have been denied due
process of law, for this opportunity to be heard is the very
essence of due process. Moreover, this constitutional
mandate is deemed satisfied if a person is granted an
opportunity to seek reconsideration of the action or ruling
complained of."
The respondent’s right to due process in this case has not
been denied. The order in the first CA decision to
recompute and reevaluate was satisfied when the DOLE
Secretary reexamined their initial findings and adjusted the
awarded benefits. A reevaluation, contrary to what the
respondent claims, is a process by which a person or office
(in this case the DOLE secretary) revisits its own initial
pronouncement and makes another assessment of its
findings. In simple terms, to reevaluate is to take another
look at a previous matter in issue. A reevaluation does not
necessitate the introduction of new materials for review
nor does it require a full hearing for new arguments.
From a procedural standpoint, a reevaluation is a
continuation of the original case and not a new proceeding.
Hence, the evidence, financial reports and other
documents submitted by the parties in the course of the
MAYORDO, M.A
original proceeding are to be visited and reviewed again. In
this light, the respondent has been given the opportunity to
be heard by the DOLE Secretary.
Also, contrary to the claim of the respondent that it was
barred by the DOLE Secretary to introduce supporting
documents during the recomputation and reevaluation, the
records show that an Order by then Secretary of Labor
Patricia A. Sto. Tomas dated July 11, 2002 specifically
allowed both parties to submit their respective
computations as regards the awarded benefits. To wit:
WHEREFORE, the Bureau of Working Conditions is hereby
directed to submit to this Office a detailed computation of
the CBA benefits indicated in the resolution of November
19, 2001 within twenty (20) days from receipt of this Order.
The parties may submit their own computations to the
Bureau for validation.
SO ORDERED.24 (Italics supplied.)
It is thus inaccurate for the respondent to claim that it was
denied due process because it had all the opportunity to
introduce any supporting document in the course of the
recomputation and reevaluation of the DOLE Secretary.
Respondent admits that it did attach the financial
statements and other documents in support of its alleged
financial incapacity to pay the CBA awarded benefits, the
same evidence it had earlier submitted before the CA
(Memorandum in the first CA decision) in the motion for
reconsideration of the DOLE Secretary’s January 15, 2003
Order.25 There is thus no showing that the DOLE Secretary
denied respondent this basic constitutional right.
On the issue of liability, petitioner contends that PNB
should be held liable to shoulder the CBA benefits awarded
to them by virtue of it being a company having full
financial, managerial and functional control over
respondent as its subsidiary, and by reason of the unique
"no loss, no profit" scheme implemented between
respondent and PNB.
We are not persuaded.
Verily, what the petitioner is asking this Court to do is to
pierce the veil of corporate fiction of respondent and hold
PNB (being the mother company) liable for the CBA
benefits.
In Concept Builders, Inc. v. NLRC,26 we explained the
doctrine of piercing the corporate veil, as follows:
CORPORATION LAW CASES
LLB 3
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. But, this separate and distinct personality of
a corporation is merely a fiction created by law for
convenience and to promote justice. 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, this
separate personality of the corporation may be disregarded
or the veil of corporate fiction pierced. This is true likewise
when the corporation is merely an adjunct, a business
conduit or an alter ego of another corporation.
Also in Pantranco Employees Association (PEA-PTGWO) v.
National Labor Relations Commission,27 this Court ruled:
Whether the separate personality of the corporation should
be pierced hinges on obtaining facts appropriately pleaded
or proved. However, any piercing of the corporate veil has
to be done with caution, albeit the Court will not hesitate
to disregard the corporate veil when it is misused or when
necessary in the interest of justice. After all, the concept
of corporate entity was not meant to promote unfair
objectives.
Applying the doctrine to the case at bar, we find no reason
to pierce the corporate veil of respondent and go beyond
its legal personality. Control, by itself, does not mean that
the controlled corporation is a mere instrumentality or a
business conduit of the mother company. Even control over
the financial and operational concerns of a subsidiary
company does not by itself call for disregarding its
corporate fiction. There must be a perpetuation of fraud
behind the control or at least a fraudulent or illegal
purpose behind the control in order to justify piercing the
veil of corporate fiction. Such fraudulent intent is lacking
in this case.
Petitioner argues that the appreciation, analysis and inquiry
of this case may go beyond the presentation of respondent,
and therefore must include the PNB, the bank being the
undisputed whole owner of respondent and the sole
provider of funds for the company’s operations and for the
payment of wages and benefits of the employees, under
the "no loss, no profit" scheme.28
We disagree. There is no showing that such "no loss, no
profit" scheme between respondent and PNB was
implemented to defeat public convenience, justify wrong,
protect fraud or defend crime, or is used as a device to
Page 145 of 160
defeat the labor laws, nor does the scheme show that
respondent is a mere business conduit or alter ego of PNB.
Absent proof of these circumstances, respondent’s
corporate personality cannot be pierced.
It is apparent that petitioner wants the Court to disregard
the corporate personality of respondent and directly go
after PNB in order for it to collect the CBA benefits. On the
same breath, however, petitioner argues that ultimately it
is PNB, by virtue of the "no loss, no profit" scheme, which
shoulders and provides the funds for financial liabilities of
respondent including wages and benefits of employees. If
such scheme was indeed true as the petitioner presents it,
then there was absolutely no need to pierce the veil of
corporate fiction of respondent. Moreover, the Court notes
the pendency of a separate suit for absorption or
regularization of NASECO employees filed by petitioner and
NEMU-PEMA against PNB and respondent, docketed as NLRC
NCR Case No. 06-03944-96), which is still on appeal with
the National Labor Relations Commission (NLRC), as per
manifestation by respondent. In the said case, petitioner
submitted for resolution by the labor tribunal the issues of
whether PNB is the employer of NASECO’s work force and
whether NASECO is a labor-only contractor.29
WHEREFORE, the petition is PARTLY GRANTED. The Decision
dated May 27, 2004 and Resolution dated September 22,
2004 in CA-G.R. SP No. 76667 are hereby REVERSED and SET
ASIDE as to the order to remand the case to the Secretary
of Labor for introduction of supporting evidence.
Accordingly, the Orders of the Secretary of Labor dated
January 15, 2003 and March 11, 2003 are REINSTATED and
UPHELD.
No costs. SO ORDERED.
G.R. No. 199687
PACIFIC REHOUSE CORPORATION, Petitioners, vs. COURT
OF APPEALS and EXPORT AND INDUSTRY BANK, INC.,
Respondents.
G.R. No. 201537
PACIFIC REHOUSE CORPORATION, PACIFIC CONCORDE
CORPORATION, MIZPAH HOLDINGS, INC., FORUM
HOLDINGS CORPORATION and EAST ASIA OIL COMPANY,
INC., Petitioners, vs. EXPORT AND INDUSTRY BANK, INC.,
Respondent.
DECISION
REYES, J.:
MAYORDO, M.A
On the scales of justice precariously lie the right of a
prevailing party to his victor's cup, no more, no less; and
the right of a separate entity from being dragged by the
ball and chain of the vanquished party.
The facts of this case as garnered from the Decision1 dated
April 26, 2012 of the Court of Appeals (CA) in CA-G.R. SP
No. 120979 are as follows:
We trace the roots of this case to a complaint instituted
with the Makati City Regional Trial Court (RTC), Branch 66,
against EIB Securities Inc. (E-Securities) for unauthorized
sale of 32,180,000 DMCI shares of private respondents
Pacific Rehouse Corporation, Pacific Concorde Corporation,
Mizpah Holdings, Inc., Forum Holdings Corporation, and
East Asia Oil Company, Inc. In its October 18, 2005
Resolution, the RTC rendered judgment on the pleadings.
The fallo reads:
WHEREFORE, premises considered, judgment is hereby
rendered directing the defendant [E-Securities] to return
the plaintiffs’ [private respondents herein] 32,180,000
DMCI shares, as of judicial demand.
On the other hand, plaintiffs are directed to reimburse the
defendant the amount of [P]10,942,200.00, representing
the buy back price of the 60,790,000 KPP shares of stocks
at [P]0.18 per share.
SO ORDERED. x x x
The Resolution was ultimately affirmed by the Supreme
Court and attained finality.
When the Writ of Execution was returned unsatisfied,
private respondents moved for the issuance of an alias writ
of execution to hold Export and Industry Bank, Inc. liable
for the judgment obligation as E- Securities is "a wholly-
owned controlled and dominated subsidiary of Export and
Industry Bank, Inc., and is[,] thus[,] a mere alter ego and
business conduit of the latter. E-Securities opposed the
motion[,] arguing that it has a corporate personality that is
separate and distinct from petitioner. On July 27, 2011,
private respondents filed their (1) Reply attaching for the
first time a sworn statement executed by Atty. Ramon F.
Aviado, Jr., the former corporate secretary of petitioner
and E-Securities, to support their alter ego theory; and (2)
Ex-Parte Manifestation alleging service of copies of the Writ
of Execution and Motion for Alias Writ of Execution on
petitioner.
CORPORATION LAW CASES
LLB 3
On July 29, 2011, the RTC concluded that E-Securities is a
mere business conduit or alter ego of petitioner, the
dominant parent corporation, which justifies piercing of
the veil of corporate fiction. The trial court brushed aside
E-Securities’ claim of denial of due process on petitioner as
"xxx case records show that notices regarding these
proceedings had been tendered to the latter, which
refused to even receive them. Clearly, [petitioner] had
been sufficiently put on notice and afforded the chance to
give its side[,] yet[,] it chose not to." Thus, the RTC
disposed as follows:
WHEREFORE, xxx,
Let an Alias Writ of Execution be issued relative to the
above-entitled case and pursuant to the RESOLUTION dated
October 18, 2005 and to this Order directing defendant EIB
Securities, Inc., and/or Export and Industry Bank, Inc., to
fully comply therewith.
The Branch Sheriff of this Court is directed to cause the
immediate implementation of the given alias writ in
accordance with the Order of Execution to be issued anew
by the Branch Clerk of Court.
SO ORDERED. x x x
With this development, petitioner filed an Omnibus Motion
(Ex Abundanti Cautela) questioning the alias writ because
it was not impleaded as a party to the case. The RTC
denied the motion in its Order dated August 26, 2011 and
directed the garnishment of P1,465,799,000.00, the total
amount of the 32,180,000 DMCI shares at P45.55 per share,
against petitioner and/or E-Securities.2 x x x. (Citations
omitted)
The Regional Trial Court (RTC) ratiocinated that being one
and the same entity in the eyes of the law, the service of
summons upon EIB Securities, Inc. (E-Securities) has
bestowed jurisdiction over both the parent and wholly-
owned subsidiary.3 The RTC cited the cases of Sps. Violago
v. BA Finance Corp. et al.4 and Arcilla v. Court of Appeals5
where the doctrine of piercing the veil of corporate fiction
was applied notwithstanding that the affected corporation
was not brought to the court as a party. Thus, the RTC held
in its Order6 dated August 26, 2011:
WHEREFORE, premises considered, the Motion for
Reconsideration with Motion to Inhibit filed by defendant
EIB Securities, Inc. is denied for lack of merit. The Omnibus
Motion Ex Abundanti C[au]tela is likewise denied for lack of
merit.
Page 146 of 160
Pursuant to Rule 39, Section 10 (a) of the Rules of Court,
the Branch Clerk of Court or the Branch Sheriff of this Court
is hereby directed to acquire 32,180,000 DMCI shares of
stock from the Philippine Stock Exchange at the cost of EIB
Securities, Inc. and Export and Industry Bank[,] Inc. and to
deliver the same to the plaintiffs pursuant to this Court’s
Resolution dated October 18, 2005.
To implement this Order, let GARNISHMENT issue against
ALL THOSE HOLDING MONEYS, PROPERTIES OF ANY AND ALL
KINDS, REAL OR PERSONAL BELONGING TO OR OWNED BY
DEFENDANT EIB SECURITIES, INC. AND/OR EXPORT AND
INDUSTRY BANK[,] INC., [sic] in such amount as may be
sufficient to acquire 32,180,000 DMCI shares of stock to the
Philippine Stock Exchange, based on the closing price of
Php45.55 per share of DMCI shares as of August 1, 2011, the
date of the issuance of the Alias Writ of Execution, or the
total amount of PhP1,465,799,000.00.
SO ORDERED.7
CA-G.R. SP No. 120979
Export and Industry Bank, Inc. (Export Bank) filed before
the CA a petition for certiorari with prayer for the issuance
of a temporary restraining order (TRO)8 seeking the
nullification of the RTC Order dated August 26, 2011 for
having been made with grave abuse of discretion amounting
to lack or excess of jurisdiction. In its petition, Export Bank
made reference to several rulings9 of the Court upholding
the separate and distinct personality of a corporation.
In a Resolution10 dated September 2, 2011, the CA issued a
60-day TRO enjoining the execution of the Orders of the
RTC dated July 29, 2011 and August 26, 2011, which
granted the issuance of an alias writ of execution and
ordered the garnishment of the properties of E-Securities
and/or Export Bank. The CA also set a hearing to determine
the necessity of issuing a writ of injunction, viz:
Considering the amount ordered to be garnished from
petitioner Export and Industry Bank, Inc. and the fiduciary
duty of the banking institution to the public, there is grave
and irreparable injury that may be caused to [Export Bank]
if the assailed Orders are immediately implemented. We
thus resolve to GRANT the Temporary Restraining Order
effective for a period of sixty (60) days from notice,
restraining/enjoining the Sheriff of the Regional Trial Court
of Makati City or his deputies, agents, representatives or
any person acting in their behalf from executing the July
29, 2011 and August 26, 2011 Orders. [Export Bank] is
DIRECTED to POST a bond in the sum of fifty million pesos
MAYORDO, M.A
(P50,000,000.00) within ten (10) days from notice, to
answer for any damage which private respondents may
suffer by reason of this Temporary Restraining Order;
otherwise, the same shall automatically become
ineffective.
Let the HEARING be set on September 27, 2011 at 2:00 in
the afternoon at the Paras Hall, Main Building, Court of
Appeals, to determine the necessity of issuing a writ of
preliminary injunction. The Division Clerk of Court is
DIRECTED to notify the parties and their counsel with
dispatch.
SO ORDERED.11
Pacific Rehouse Corporation (Pacific Rehouse), Pacific
Concorde Corporation, Mizpah Holdings, Inc., Forum
Holdings Corporation and East Asia Oil Company, Inc.
(petitioners) filed their Comment12 to Export Bank’s
petition and proffered that the cases mentioned by Export
Bank are inapplicable owing to their clearly different
factual antecedents. The petitioners alleged that unlike the
other cases, there are circumstances peculiar only to E-
Securities and Export Bank such as: 499,995 out of 500,000
outstanding shares of stocks of E-Securities are owned by
Export Bank;13 Export Bank had actual knowledge of the
subject matter of litigation as the lawyers who represented
E-Securities are also lawyers of Export Bank.14 As an alter
ego, there is no need for a finding of fraud or illegality
before the doctrine of piercing the veil of corporate fiction
can be applied.15
After oral arguments before the CA, the parties were
directed to file their respective memoranda.16
On October 25, 2011, the CA issued a Resolution,17 granting
Export Bank’s application for the issuance of a writ of
preliminary injunction, viz:
WHEREFORE, finding [Export Bank’s] application for the
ancillary injunctive relief to be meritorious, and it further
appearing that there is urgency and necessity in restraining
the same, a Writ of Preliminary Injunction is hereby
GRANTED and ISSUED against the Sheriff of the Regional
Trial Court of Makati City, Branch 66, or his deputies,
agents, representatives or any person acting in their behalf
from executing the July 29, 2011 and August 26, 2011
Orders. Public respondents are ordered to CEASE and
DESIST from enforcing and implementing the subject orders
until further notice from this Court.18
CORPORATION LAW CASES
LLB 3
The petitioners filed a Manifestation19 and Supplemental
Manifestation20 challenging the above-quoted CA resolution
for lack of concurrence of Associate Justice Socorro B.
Inting (Justice Inting), who was then on official leave.
On December 22, 2011, the CA, through a Special Division
of Five, issued another Resolution,21 which reiterated the
Resolution dated October 25, 2011 granting the issuance of
a writ of preliminary injunction.
On January 2, 2012, one of the petitioners herein, Pacific
Rehouse filed before the Court a petition for certiorari22
under Rule 65, docketed as G.R. No. 199687,
demonstrating its objection to the Resolutions dated
October 25, 2011 and December 22, 2011 of the CA.
On April 26, 2012, the CA rendered the assailed Decision23
on the merits of the case, granting Export Bank’s petition.
The CA disposed of the case in this wise:
We GRANT the petition. The Orders dated July 29, 2011 and
August 26, 2011 of the Makati City Regional Trial Court,
Branch 66, insofar as [Export Bank] is concerned, are
NULLIFIED. The Writ of Preliminary Injunction (WPI) is
rendered PERMANENT.
SO ORDERED.24
The CA explained that the alter ego theory cannot be
sustained because ownership of a subsidiary by the parent
company is not enough justification to pierce the veil of
corporate fiction. There must be proof, apart from mere
ownership, that Export Bank exploited or misused the
corporate fiction of E-Securities. The existence of
interlocking incorporators, directors and officers between
the two corporations is not a conclusive indication that
they are one and the same.25 The records also do not show
that Export Bank has complete control over the business
policies, affairs and/or transactions of E-Securities. It was
solely E-Securities that contracted the obligation in
furtherance of its legitimate corporate purpose; thus, any
fall out must be confined within its limited liability.26
The petitioners, without filing a motion for
reconsideration, filed a Petition for Review27 under Rule 45
docketed as G.R. No. 201537,28 impugning the Decision
dated April 26, 2012 of the CA.
Considering that G.R. Nos. 199687 and 201537 originated
from the same set of facts, involved the same parties and
raised intertwined issues, the cases were then consolidated
Page 147 of 160
per Resolution dated September 26, 2012, for a thorough
discussion of the merits of the case.
Issues
In précis, the issues for resolution of this Court are the
following:
In G.R. No. 199687,
WHETHER THE CA COMMITTED GRAVE ABUSE OF DISCRETION
IN GRANTING EXPORT BANK’S APPLICATION FOR THE
ISSUANCE OF A WRIT OF PRELIMINARY INJUNCTION.
In G.R. No. 201537,
I.
WHETHER THE CA COMMITTED A REVERSIBLE ERROR IN
RULING THAT EXPORT BANK MAY NOT BE HELD LIABLE FOR A
FINAL AND EXECUTORY JUDGMENT AGAINST E-SECURITIES IN
AN ALIAS WRIT OF EXECUTION BY PIERCING ITS VEIL OF
CORPORATE FICTION; and
II.
WHETHER THE CA COMMITTED A REVERSIBLE ERROR IN
RULING THAT THE ALTER EGO DOCTRINE IS NOT APPLICABLE.
Ruling of the Court
G.R. No. 199687
The Resolution dated October 25, 2011 was initially
challenged by the petitioners in its Manifestation29 and
Supplemental Manifestation 30 due to the lack of
concurrence of Justice Inting, which according to the
petitioners rendered the aforesaid resolution null and void.
To the petitioners’ mind, Section 5, Rule VI of the Internal
Rules of the CA (IRCA)31 requires the submission of the
resolution granting an application for TRO or preliminary
injunction to the absent Justice/s when they report back to
work for ratification, modification or recall, such that when
the absent Justice/s do not agree with the issuance of the
TRO or preliminary injunction, the resolution is recalled
and without force and effect.32 Since the resolution which
granted the application for preliminary injunction appears
short of the required number of consensus, owing to the
absence of Justice Inting’s signature, the petitioners
contest the validity of said resolution.
The petitioners also impugn the CA Resolution dated
December 22, 2011 rendered by the Special Division of
Five. The petitioners maintain that pursuant to Batas
Pambansa Bilang 12933 and the IRCA,34 such division is
MAYORDO, M.A
created only when the three members of a division cannot
reach a unanimous vote in deciding a case on the merits.35
Furthermore, for petitioner Pacific Rehouse, this Resolution
is likewise infirm because the purpose of the formation of
the Special Division of Five is to decide the case on the
merits and not to grant Export Bank’s application for a writ
of preliminary injunction.36
We hold that the opposition to the CA resolutions is already
nugatory because the CA has already rendered its Decision
on April 16, 2012, which disposed of the substantial merits
of the case. Consequently, the petitioners’ concern that the
Special Division of Five should have been created to resolve
cases on the merits has already been addressed by the
rendition of the CA Decision dated April 16, 2012.
"It is well-settled that courts will not determine questions
that have become moot and academic because there is no
longer any justiciable controversy to speak of. The
judgment will not serve any useful purpose or have any
practical legal effect because, in the nature of things, it
cannot be enforced."37 In such cases, there is no actual
substantial relief to which the petitioners would be entitled
to and which would be negated by the dismissal of the
petition.38 Thus, it would be futile and pointless to address
the issue in G.R. No. 199687 as this has become moot and
academic.
G.R. No. 201537
The petitioners bewail that the certified true copy of the
CA Decision dated April 26, 2012 along with its Certification
at the bottom portion were not signed by the Chairperson39
of the Special Division of Five; thus, it is not binding upon
the parties. 40 The petitioners quoted this Court’s
pronouncement in Limkaichong v. Commission on Elections,
41 that a decision must not only be signed by the Justices
who took part in the deliberation, but must also be
promulgated to be considered a Decision.42
A cursory glance on a copy of the signature page43 of the
decision attached to the records would show that, indeed,
the same was not signed by CA Associate Justice Magdangal
M. De Leon. However, it must be noted that the CA, on May
7, 2012, issued a Resolution44 explaining that due to
inadvertence, copies of the decision not bearing the
signature of the Chairperson were sent to the parties on
the same day of promulgation. The CA directed the Division
Clerk of Court to furnish the parties with copies of the
signature page with the Chairperson’s signature.
Consequently, as the mistake was immediately clarified and
CORPORATION LAW CASES
LLB 3
remedied by the CA, the lack of the Chairperson’s signature
on the copies sent to the parties has already become a non-
issue.
It must be emphasized that the instant cases sprang from
Pacific Rehouse Corporation v. EIB Securities, Inc.45 which
was decided by this Court last October 13, 2010.
Significantly, Export Bank was not impleaded in said case
but was unexpectedly included during the execution stage,
in addition to E-Securities, against whom the writ of
execution may be enforced in the Order46 dated July 29,
2011 of the RTC. In including Export Bank, the RTC
considered E-Securities as a mere business conduit of
Export Bank.47 Thus, one of the arguments interposed by
the latter in its Opposition48 that it was never impleaded as
a defendant was simply set aside.
This action by the RTC begs the question: may the RTC
enforce the alias writ of execution against Export Bank?
The question posed before us is not novel.
The Court already ruled in Kukan International Corporation
v. Reyes49 that compliance with the recognized modes of
acquisition of jurisdiction cannot be dispensed with even in
piercing the veil of corporate fiction, to wit:
The principle of piercing the veil of corporate fiction, and
the resulting treatment of two related corporations as one
and the same juridical person with respect to a given
transaction, is basically applied only to determine
established liability; it is not available to confer on the
court a jurisdiction it has not acquired, in the first place,
over a party not impleaded in a case. Elsewise put, a
corporation not impleaded in a suit cannot be subject to
the court’s process of piercing the veil of its corporate
fiction. In that situation, the court has not acquired
jurisdiction over the corporation and, hence, any
proceedings taken against that corporation and its property
would infringe on its right to due process. Aguedo Agbayani,
a recognized authority on Commercial Law, stated as much:
"23. Piercing the veil of corporate entity applies to
determination of liability not of jurisdiction. x x x
This is so because the doctrine of piercing the veil of
corporate fiction comes to play only during the trial of
the case after the court has already acquired jurisdiction
over the corporation. Hence, before this doctrine can be
applied, based on the evidence presented, it is imperative
that the court must first have jurisdiction over the
corporation. x x x"50 (Citations omitted)
Page 148 of 160
From the preceding, it is therefore correct to say that the
court must first and foremost acquire jurisdiction over the
parties; and only then would the parties be allowed to
present evidence for and/or against piercing the veil of
corporate fiction. If the court has no jurisdiction over the
corporation, it follows that the court has no business in
piercing its veil of corporate fiction because such action
offends the corporation’s right to due process.
"Jurisdiction over the defendant is acquired either upon a
valid service of summons or the defendant’s voluntary
appearance in court. When the defendant does not
voluntarily submit to the court’s jurisdiction or when there
is no valid service of summons, ‘any judgment of the court
which has no jurisdiction over the person of the defendant
is null and void.’"51 "The defendant must be properly
apprised of a pending action against him and assured of the
opportunity to present his defenses to the suit. Proper
service of summons is used to protect one’s right to due
process."52
As Export Bank was neither served with summons, nor has it
voluntarily appeared before the court, the judgment sought
to be enforced against E-Securities cannot be made against
its parent company, Export Bank. Export Bank has
consistently disputed the RTC jurisdiction, commencing
from its filing of an Omnibus Motion53 by way of special
appearance during the execution stage until the filing of its
Comment54 before the Court wherein it was pleaded that
"RTC [of] Makati[, Branch] 66 never acquired jurisdiction
over Export [B]ank. Export [B]ank was not pleaded as a
party in this case. It was never served with summons by nor
did it voluntarily appear before RTC [of] Makati[, Branch]
66 so as to be subjected to the latter’s jurisdiction."55
In dispensing with the requirement of service of summons
or voluntary appearance of Export Bank, the RTC applied
the cases of Violago and Arcilla. The RTC concluded that in
these cases, the Court decided that the doctrine of piercing
the veil of corporate personality can be applied even when
one of the affected parties has not been brought to the
Court as a party.56
A closer perusal on the rulings of this Court in Violago and
Arcilla, however, reveals that the RTC misinterpreted the
doctrines on these cases. We agree with the CA that these
cases are not congruent to the case at bar. In Violago,
Spouses Pedro and Florencia Violago (Spouses Violago) filed
a third party complaint against their cousin Avelino Violago
(Avelino), who is also the president of Violago Motor Sales
Corporation (VMSC), for selling them a vehicle which was
MAYORDO, M.A
already sold to someone else. VMSC was not impleaded as a
third party defendant. Avelino contended that he was not a
party to the transaction personally, but VMSC. The Court
ruled that "[t]he fact that VMSC was not included as
defendant in [Spouses Violago’s] third party complaint does
not preclude recovery by Spouses Violago from Avelino;
neither would such non-inclusion constitute a bar to the
application of the piercing-of-the-corporate-veil
doctrine."57 It should be pointed out that although VMSC
was not made a third party defendant, the person who was
found liable in Violago, Avelino, was properly made a third
party defendant in the first instance. The present case
could not be any more poles apart from Violago, because
Export Bank, the parent company which was sought to be
accountable for the judgment against E-Securities, is not a
party to the main case.
In Arcilla, meanwhile, Calvin Arcilla (Arcilla) obtained a
loan in the name of Csar Marine Resources, Inc. (CMRI) from
Emilio Rodulfo. A complaint was then filed against Arcilla
for non-payment of the loan. CMRI was not impleaded as a
defendant. The trial court eventually ordered Arcilla to pay
the judgment creditor for such loan. Arcilla argued that he
is not personally liable for the adjudged award because the
same constitutes a corporate liability which cannot even
bind the corporation as the latter is not a party to the
collection suit. The Court made the succeeding
observations:
[B]y no stretch of even the most fertile imagination may
one be able to conclude that the challenged Amended
Decision directed Csar Marine Resources, Inc. to pay the
amounts adjudged. By its clear and unequivocal language,
it is the petitioner who was declared liable therefor and
consequently made to pay. x x x, even if We are to assume
arguendo that the obligation was incurred in the name of
the corporation, the petitioner would still be personally
liable therefor because for all legal intents and purposes,
he and the corporation are one and the same. Csar Marine
Resources, Inc. is nothing more than his business conduit
and alter ego. The fiction of a separate juridical
personality conferred upon such corporation by law should
be disregarded. x x x.58 (Citation omitted)
It is important to bear in mind that although CMRI was not a
party to the suit, it was Arcilla, the defendant himself who
was found ultimately liable for the judgment award. CMRI
and its properties were left untouched from the main case,
not only because of the application of the alter ego
doctrine, but also because it was never made a party to
that case.
CORPORATION LAW CASES
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The disparity between the instant case and those of Violago
and Arcilla is that in said cases, although the corporations
were not impleaded as defendant, the persons made liable
in the end were already parties thereto since the inception
of the main case. Consequently, it cannot be said that the
Court had, in the absence of fraud and/or bad faith,
applied the doctrine of piercing the veil of corporate
fiction to make a non-party liable. In short, liabilities
attached only to those who are parties. None of the non-
party corporations (VMSC and CMRI) were made liable for
the judgment award against Avelino and Arcilla.
The Alter Ego Doctrine is not applicable
"The question of whether one corporation is merely an alter
ego of another is purely one of fact. So is the question of
whether a corporation is a paper company, a sham or
subterfuge or whether petitioner adduced the requisite
quantum of evidence warranting the piercing of the veil of
respondent’s corporate entity."59
As a rule, the parties may raise only questions of law under
Rule 45, because the Supreme Court is not a trier of facts.
Generally, we are not duty-bound to analyze again and
weigh the evidence introduced in and considered by the
tribunals below.60 However, justice for all is of primordial
importance that the Court will not think twice of reviewing
the facts, more so because the RTC and the CA arrived in
contradicting conclusions.
"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. But, this separate and distinct personality of
a corporation is merely a fiction created by law for
convenience and to promote justice. 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, this
separate personality of the corporation may be disregarded
or the veil of corporate fiction pierced. This is true likewise
when the corporation is merely an adjunct, a business
conduit or an alter ego of another corporation."61
"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
Page 149 of 160
domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind,
will or existence of its own, and is but a conduit for its
principal. It must be kept in mind that the control must be
shown to have been exercised at the time the acts
complained of took place. Moreover, the control and breach
of duty must proximately cause the injury or unjust loss for
which the complaint is made."62
The Court has laid down a three-pronged control test to
establish when the alter ego doctrine should be operative:
(1) Control, not mere majority or complete stock
control, but complete domination, not only of finances
but of policy and business practice in respect to the
transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will
or existence of its own;
(2) Such control must have been used by the defendant
to commit fraud or wrong, to perpetuate the violation
of a statutory or other positive legal duty, or dishonest
and unjust act in contravention of plaintiff’s legal right;
and
(3) The aforesaid control and breach of duty must
[have] proximately caused the injury or unjust loss
complained of.63
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.64 Hence, all three elements
should concur for the alter ego doctrine to be applicable.
In its decision, the RTC maintained that the subsequently
enumerated factors betray the true nature of E-Securities
as a mere alter ego of Export Bank:
1. Defendant EIB Securities, a subsidiary corporation
100% totally owned by Export and Industry Bank, Inc.,
was only re-activated by the latter in 2002-2003 and
the continuance of its operations was geared for no
other reason tha[n] to serve as the securities
brokerage arm of said parent corporation bank;
2. It was the parent corporation bank that provided and
infused the fresh working cash capital needed by
defendant EIB Securities which prior thereto was non-
operating and severely cash-strapped. [This was so
attested by the then Corporate Secretary of both
MAYORDO, M.A
corporations, Atty. Ramon Aviado, Jr., in his submitted
Sworn Statement which is deemed allowable "evidence
on motion", under Sec. 7, Rule 133, Rules on Evidence;
Bravo vs. Borja, 134 SCRA 438];
3. For effective control purposes, defendant EIB
Securities and its operating office and staff are all
housed in Exportbank Plaza located at Chino Roces cor.
Sen. Gil Puyat Avenue, Makati City which is the same
building w[h]ere the bank parent corporation has its
headquarters;
4. As shown in the General Information Sheets annually
filed with the S.E.C. from 2002 to 2011, both defendant
EIB Securities and the bank parent corporation share
common key Directors and corporate officers. Three of
the 5-man Board of Directors of defendant EIB
Securities are Directors of the bank parent corporation,
namely: Jaime C. Gonzales, Pauline C. Tan and Dionisio
E. Carpio, Jr. In addition, Mr. Gonzales is Chairman of
the Board of both corporations, whereas Pauline C. Tan
is concurrently President/General Manager of EIB
Securities, and Dionisio Carpio Jr., is not only director
of the bank, but also Director Treasurer of defendant
EIB Securities;
5. As admitted by the bank parent corporation in its
consolidated audited financial statements[,] EIB
Securities is a CONTROLLED SUBSIDIARY, and for which
reason its financial condition and results of operations
are included and integrated as part of the group’s
consolidated financial statements, examined and
audited by the same auditing firm;
6. The lawyers handling the suits and legal matters of
defendant EIB Securities are the same lawyers in the
Legal Department of the bank parent corporation.
1âwphi1 The Court notes that in [the] above-entitled
suit, the lawyers who at the start represented said
defendant EIB Securities and filed all the pleadings and
filings in its behalf are also the lawyers in the Legal
Services Division of the bank parent corporation. They
are Attys. Emmanuel A. Silva, Leonardo C. Bool, Riva
Khristine E. Maala and Ma. Esmeralda R. Cunanan, all of
whom worked at the Legal Services Division of Export
Industry Bank located at 36/F, Exportbank Plaza, Don
Chino Roces Avenue, cor. Sen. Gil Puyat Avenue, Makati
City.
7. Finally[,] and this is very significant, the control and
sway that the bank parent corporation held over
CORPORATION LAW CASES
LLB 3
defendant EIB Securities was prevailing in June 2004
when the very act complained of in plaintiff’s
Complaint took place, namely the unauthorized
disposal of the 32,180,000 DMCI shares of stock. Being
then under the direction and control of the bank parent
corporation, the unauthorized disposal of those shares
by defendant EIB Securities is attributable to, and the
responsibility of the former.65
All the foregoing circumstances, with the exception of the
admitted stock ownership, were however not properly
pleaded and proved in accordance with the Rules of Court.
66 These were merely raised by the petitioners for the first
time in their Motion for Issuance of an Alias Writ of
Execution67 and Reply,68 which the Court cannot consider.
"Whether the separate personality of the corporation
should be pierced hinges on obtaining facts appropriately
pleaded or proved."69
Albeit the RTC bore emphasis on the alleged control
exercised by Export Bank upon its subsidiary E-Securities,
"[c]ontrol, by itself, does not mean that the controlled
corporation is a mere instrumentality or a business conduit
of the mother company. Even control over the financial and
operational concerns of a subsidiary company does not by
itself call for disregarding its corporate fiction. There must
be a perpetuation of fraud behind the control or at least a
fraudulent or illegal purpose behind the control in order to
justify piercing the veil of corporate fiction. Such
fraudulent intent is lacking in this case."70
Moreover, there was nothing on record demonstrative of
Export Bank’s wrongful intent in setting up a subsidiary, E-
Securities. If used to perform legitimate functions, a
subsidiary’s separate existence shall be respected, and the
liability of the parent corporation as well as the subsidiary
will be confined to those arising in their respective
business.71 To justify treating the sole stockholder or
holding company as responsible, it is not enough that the
subsidiary is so organized and controlled as to make it
"merely an instrumentality, conduit or adjunct" of its
stockholders. It must further appear that to recognize their
separate entities would aid in the consummation of a
wrong.72
As established in the main case73 and reiterated by the CA,
the subject 32,180,000 DMCI shares which E-Securities is
obliged to return to the petitioners were originally bought
at an average price of P0.38 per share and were sold for an
average price of P0.24 per share. The proceeds were then
used to buy back 61,100,000 KPP shares earlier sold by E-
Securities. Quite unexpectedly however, the total amount
Page 150 of 160
of these DMCI shares ballooned to P1,465,799,000.00.74 It
must be taken into account that this unexpected turnabout
did not inure to the benefit of E-Securities, much less
Export Bank.
Furthermore, ownership by Export Bank of a great majority
or all of stocks of E-Securities and the existence of
interlocking directorates may serve as badges of control,
but ownership of another corporation, per se, without
proof of actuality of the other conditions are insufficient to
establish an alter ego relationship or connection between
the two corporations, which will justify the setting aside of
the cover of corporate fiction. The Court has declared that
"mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for
disregarding the separate corporate personality." The Court
has likewise ruled that the "existence of interlocking
directors, corporate officers and shareholders is not enough
justification to pierce the veil of corporate fiction in the
absence of fraud or other public policy considerations."75
While the courts have been granted the colossal authority
to wield the sword which pierces through the veil of
corporate fiction, concomitant to the exercise of this
power, is the responsibility to uphold the doctrine of
separate entity, when rightly so; as it has for so long
encouraged businessmen to enter into economic endeavors
fraught with risks and where only a few dared to venture.
Hence, any application of the doctrine of piercing the
corporate veil should be done with caution. A court should
be mindful of the milieu where it is to be applied. It must
be certain that the corporate fiction was misused to such
an extent that injustice, fraud, or crime was committed
against another, in disregard of its rights. The wrongdoing
must be clearly and convincingly established; it cannot be
presumed. Otherwise, an injustice that was never
unintended may result from an erroneous application.76
In closing, we understand that the petitioners are
disgruntled at the turnout of this case-that they cannot
enforce the award due them on its entirety; however, the
Court cannot supplant a remedy which is not sanctioned by
our laws and prescribed rules.
WHEREFORE, the petition in G.R. No. 199687 is hereby
DISMISSED for having been rendered moot and academic.
The petition in G.R. No. 201537, meanwhile, is hereby
DENIED for lack of merit. Consequently, the Decision dated
April 26, 2012 of the Court of Appeals in CA-G.R. SP No.
120979 is AFFIRMED.
MAYORDO, M.A
SO ORDERED.
G.R. No. 182729               September 29, 2010
KUKAN INTERNATIONAL CORPORATION, Petitioner, 

vs. HON. AMOR REYES, in her capacity as Presiding Judge
of the Regional Trial Court of Manila, Branch 21, and
ROMEO M. MORALES, doing business under the name and
style "RM Morales Trophies and Plaques," Respondents.
DECISION
VELASCO, JR., J.:
The Case
This Petition for Review on Certiorari under Rule 45 seeks
to nullify and reverse the January 23, 2008 Decision1 and
the April 16, 2008 Resolution2 rendered by the Court of
Appeals (CA) in CA-G.R. SP No. 100152.
The assailed CA decision affirmed the March 12, 20073 and
June 7, 20074 Orders of the Regional Trial Court (RTC) of
Manila, Branch 21, in Civil Case No. 99-93173, entitled
Romeo M. Morales, doing business under the name and
style RM Morales Trophies and Plaques v. Kukan, Inc. In the
said orders, the RTC disregarded the separate corporate
identities of Kukan, Inc. and Kukan International
Corporation and declared them to be one and the same
entity. Accordingly, the RTC held Kukan International
Corporation, albeit not impleaded in the underlying
complaint of Romeo M. Morales, liable for the judgment
award decreed in a Decision dated November 28, 20025 in
favor of Morales and against Kukan, Inc.
The Facts
Sometime in March 1998, Kukan, Inc. conducted a bidding
for the supply and installation of signages in a building
being constructed in Makati City. Morales tendered the
winning bid and was awarded the PhP 5 million contract.
Some of the items in the project award were later excluded
resulting in the corresponding reduction of the contract
price to PhP 3,388,502. Despite his compliance with his
contractual undertakings, Morales was only paid the
amount of PhP 1,976,371.07, leaving a balance of PhP
1,412,130.93, which Kukan, Inc. refused to pay despite
demands. Shortchanged, Morales filed a Complaint6 with
the RTC against Kukan, Inc. for a sum of money, the case
docketed as Civil Case No. 99-93173 and eventually raffled
to Branch 17 of the court.
CORPORATION LAW CASES
LLB 3
Following the joinder of issues after Kukan, Inc. filed an
answer with counterclaim, trial ensued. However, starting
November 2000, Kukan, Inc. no longer appeared and
participated in the proceedings before the trial court,
prompting the RTC to declare Kukan, Inc. in default and
paving the way for Morales to present his evidence ex
parte.
On November 28, 2002, the RTC rendered a Decision finding
for Morales and against Kukan, Inc., disposing as follows:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997
Rules of Civil Procedure, and by preponderance of
evidence, judgment is hereby rendered in favor of the
plaintiff, ordering Kukan, Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE
THOUSAND SEVEN HUNDRED TWENTY FOUR PESOS
(P1,201,724.00) with legal interest at 12% per annum
from February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS
(P50,000.00) as moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS,
(P20,000.00) as reasonable attorney’s fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED
SIXTY PESOS and SIX CENTAVOS (P7,960.06) as litigation
expenses.
For lack of factual foundation, the counterclaim is
DISMISSED.
IT IS SO ORDERED.7
After the above decision became final and executory,
Morales moved for and secured a writ of execution8 against
Kukan, Inc. The sheriff then levied upon various personal
properties found at what was supposed to be Kukan, Inc.’s
office at Unit 2205, 88 Corporate Center, Salcedo Village,
Makati City. Alleging that it owned the properties thus
levied and that it was a different corporation from Kukan,
Inc., Kukan International Corporation (KIC) filed an
Affidavit of Third-Party Claim. Notably, KIC was
incorporated in August 2000, or shortly after Kukan, Inc.
had stopped participating in Civil Case No. 99-93173.
In reaction to the third party claim, Morales interposed an
Omnibus Motion dated April 30, 2003. In it, Morales prayed,
applying the principle of piercing the veil of corporate
fiction, that an order be issued for the satisfaction of the
judgment debt of Kukan, Inc. with the properties under the
name or in the possession of KIC, it being alleged that both
corporations are but one and the same entity. KIC opposed
Page 151 of 160
Morales’ motion. By Order of May 29, 20039 as reiterated in
a subsequent order, the court denied the omnibus motion.
In a bid to establish the link between KIC and Kukan, Inc.,
and thus determine the true relationship between the two,
Morales filed a Motion for Examination of Judgment Debtors
dated May 4, 2005. In this motion Morales sought that
subponae be issued against the primary stockholders of
Kukan, Inc., among them Michael Chan, a.k.a. Chan Kai Kit.
This too was denied by the trial court in an Order dated
May 24, 2005.10
Morales then sought the inhibition of the presiding judge,
Eduardo B. Peralta, Jr., who eventually granted the motion.
The case was re-raffled to Branch 21, presided by public
respondent Judge Amor Reyes.
Before the Manila RTC, Branch 21, Morales filed a Motion to
Pierce the Veil of Corporate Fiction to declare KIC as having
no existence separate from Kukan, Inc. This time around,
the RTC, by Order dated March 12, 2007, granted the
motion, the dispositive portion of which reads:
WHEREFORE, premises considered, the motion is hereby
GRANTED. The Court hereby declares as follows:
1. defendant Kukan, Inc. and newly created Kukan
International Corp. as one and the same corporation;
2. the levy made on the properties of Kukan
International Corp. is hereby valid;
3. Kukan International Corp. and Michael Chan are
jointly and severally liable to pay the amount awarded
to plaintiff pursuant to the decision of November [28],
2002 which has long been final and executory.
SO ORDERED.
From the above order, KIC moved but was denied
reconsideration in another Order dated June 7, 2007.
KIC went to the CA on a petition for certiorari to nullify the
aforesaid March 12 and June 7, 2007 RTC Orders.
On January 23, 2008, the CA rendered the assailed
decision, the dispositive portion of which states:
WHEREFORE, premises considered, the petition is hereby
DENIED and the assailed Orders dated March 12, 2007 and
June 7, 2007 of the court a quo are both AFFIRMED. No
costs.
SO ORDERED.11
MAYORDO, M.A
The CA later denied KIC’s motion for reconsideration in the
assailed resolution.
Hence, the instant petition for review, with the following
issues KIC raises for the Court’s consideration:
1. There is no legal basis for the [CA] to resolve and
declare that petitioner’s Constitutional Right to Due
Process was not violated by the public respondent in
rendering the Orders dated March 12, 2007 and June 7,
2007 and in declaring petitioner to be liable for the
judgment obligations of the corporation "Kukan, Inc." to
private respondent – as petitioner is a stranger to the
case and was never made a party in the case before the
trial court nor was it ever served a summons and a copy
of the complaint.
2. There is no legal basis for the [CA] to resolve and
declare that the Orders dated March 12, 2007 and June
7, 2007 rendered by public respondent declaring the
petitioner liable to the judgment obligations of the
corporation "Kukan, Inc." to private respondent are
valid as said orders of the public respondent modify
and/or amend the trial court’s final and executory
decision rendered on November 28, 2002.
3. There is no legal basis for the [CA] to resolve and
declare that the Orders dated March 12, 2007 and June
7, 2007 rendered by public respondent declaring the
petitioner [KIC] and the corporation "Kukan, Inc." as
one and the same, and, therefore, the Veil of Corporate
Fiction between them be pierced – as the procedure
undertaken by public respondent which the [CA] upheld
is not sanctioned by the Rules of Court and/or
established jurisprudence enunciated by this Honorable
Supreme Court.12
In gist, the issues to be resolved boil down to the question
of, first, whether the trial court can, after the judgment
against Kukan, Inc. has attained finality, execute it against
the property of KIC; second, whether the trial court
acquired jurisdiction over KIC; and third, whether the trial
and appellate courts correctly applied, under the premises,
the principle of piercing the veil of corporate fiction.
The Ruling of the Court
The petition is meritorious.
First Issue: Against Whom Can a Final and Executory
Judgment Be Executed
CORPORATION LAW CASES
LLB 3
The preliminary question that must be answered is whether
or not the trial court can, after adjudging Kukan, Inc. liable
for a sum of money in a final and executory judgment,
execute such judgment debt against the property of KIC.
The poser must be answered in the negative.
In Carpio v. Doroja,13 the Court ruled that the deciding
court has supervisory control over the execution of its
judgment:
A case in which an execution has been issued is regarded as
still pending so that all proceedings on the execution are
proceedings in the suit. There is no question that the court
which rendered the judgment has a general supervisory
control over its process of execution, and this power carries
with it the right to determine every question of fact and
law which may be involved in the execution.
We reiterated the above holding in Javier v. Court of
Appeals14 in this wise: "The said branch has a general
supervisory control over its processes in the execution of its
judgment with a right to determine every question of fact
and law which may be involved in the execution."
The court’s supervisory control does not, however, extend
as to authorize the alteration or amendment of a final and
executory decision, save for certain recognized exceptions,
among which is the correction of clerical errors. Else, the
court violates the principle of finality of judgment and its
immutability, concepts which the Court, in Tan v. Timbal,15
defined:
As we held in Industrial Management International
Development Corporation vs. NLRC:
It is an elementary principle of procedure that the
resolution of the court in a given issue as embodied in the
dispositive part of a decision or order is the controlling
factor as to settlement of rights of the parties. Once a
decision or order becomes final and executory, it is
removed from the power or jurisdiction of the court which
rendered it to further alter or amend it. It thereby
becomes immutable and unalterable and any amendment
or alteration which substantially affects a final and
executory judgment is null and void for lack of jurisdiction,
including the entire proceedings held for that purpose. An
order of execution which varies the tenor of the judgment
or exceeds the terms thereof is a nullity. (Emphasis
supplied.)
Page 152 of 160
Republic v. Tango16 expounded on the same principle and its
exceptions:
Deeply ingrained in our jurisprudence is the principle that a
decision that has acquired finality becomes immutable
and unalterable. As such, it may no longer be modified in
any respect even if the modification is meant to correct
erroneous conclusions of fact or law and whether it will be
made by the court that rendered it or by the highest court
of the land. x x x
The doctrine of finality of judgment is grounded on the
fundamental principle of public policy and sound practice
that, at the risk of occasional error, the judgment of courts
and the award of quasi-judicial agencies must become final
on some definite date fixed by law. The only exceptions to
the general rule are the correction of clerical errors, the
so-called nunc pro tunc entries which cause no prejudice to
any party, void judgments, and whenever circumstances
transpire after the finality of the decision which render its
execution unjust and inequitable. None of the exceptions
obtains here to merit the review sought. (Emphasis added.)
So, did the RTC, in breach of the doctrine of immutability
and inalterability of judgment, order the execution of its
final decision in a manner as would amount to its
prohibited alteration or modification?
We repair to the dispositive portion of the final and
executory RTC decision. Pertinently, it provides:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997
Rules of Civil Procedure, and by preponderance of
evidence, judgment is hereby rendered in favor of the
plaintiff, ordering Kukan, Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE
THOUSAND SEVEN HUNDRED TWENTY FOUR PESOS
(P1,201,724.00) with legal interest at 12% per annum
from February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS
(P50,000.00) as moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS
(P20,000.00) as reasonable attorney’s fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED
SIXTY PESOS and SIX CENTAVOS (P7,960.06) as litigation
expenses.
x x x x (Emphasis supplied.)
MAYORDO, M.A
As may be noted, the above decision, in unequivocal terms,
directed Kukan, Inc. to pay the aforementioned awards to
Morales. Thus, making KIC, thru the medium of a writ of
execution, answerable for the above judgment liability is a
clear case of altering a decision, an instance of granting
relief not contemplated in the decision sought to be
executed. And the change does not fall under any of the
recognized exceptions to the doctrine of finality and
immutability of judgment. It is a settled rule that a writ of
execution must conform to the fallo of the judgment; as an
inevitable corollary, a writ beyond the terms of the
judgment is a nullity.17
Thus, on this ground alone, the instant petition can already
be granted. Nonetheless, an examination of the other
issues raised by KIC would be proper.
Second Issue: Propriety of the RTC Assuming Jurisdiction
over KIC
The next issue turns on the validity of the execution the
trial court authorized against KIC and its property, given
that it was neither made a party nor impleaded in Civil
Case No. 99-93173, let alone served with summons. In other
words, did the trial court acquire jurisdiction over KIC?
In the assailed decision, the appellate court deemed KIC to
have voluntarily submitted itself to the jurisdiction of the
trial court owing to its filing of four (4) pleadings adverted
to earlier, namely: (a) the Affidavit of Third-Party Claim;18
(b) the Comment and Opposition to Plaintiff’s Omnibus
Motion;19 (c) the Motion for Reconsideration of the RTC
Order dated March 12, 2007;20 and (d) the Motion for Leave
to Admit Reply.21 The CA, citing Section 20, Rule 14 of the
Rules of Court, stated that "the procedural rule on service
of summons can be waived by voluntary submission to the
court’s jurisdiction through any form of appearance by the
party or its counsel."22
We cannot give imprimatur to the appellate court’s
appreciation of the thrust of Sec. 20, Rule 14 of the Rules
in concluding that the trial court acquired jurisdiction over
KIC.
Orion Security Corporation v. Kalfam Enterprises, Inc.23
explains how courts acquire jurisdiction over the parties in
a civil case:
Courts acquire jurisdiction over the plaintiffs upon the
filing of the complaint. On the other hand, jurisdiction over
the defendants in a civil case is acquired either through the
service of summons upon them or through their voluntary
CORPORATION LAW CASES
LLB 3
appearance in court and their submission to its authority.
(Emphasis supplied.)
In the fairly recent Palma v. Galvez,24 the Court reiterated
its holding in Orion Security Corporation, stating: "[I]n civil
cases, the trial court acquires jurisdiction over the person
of the defendant either by the service of summons or by
the latter’s voluntary appearance and submission to the
authority of the former."
The court’s jurisdiction over a party-defendant resulting
from his voluntary submission to its authority is provided
under Sec. 20, Rule 14 of the Rules, which states:
Section 20. Voluntary appearance. – The defendant’s
voluntary appearance in the actions shall be equivalent to
service of summons. The inclusion in a motion to dismiss of
other grounds aside from lack of jurisdiction over the
person of the defendant shall not be deemed a voluntary
appearance.
To be sure, the CA’s ruling that any form of appearance by
the party or its counsel is deemed as voluntary appearance
finds support in the kindred Republic v. Ker & Co., Ltd.25
and De Midgely v. Ferandos.26
Republic and De Midgely, however, have already been
modified if not altogether superseded27 by La Naval Drug
Corporation v. Court of Appeals,28 wherein the Court
essentially ruled and elucidated on the current view in our
jurisdiction, to wit: "[A] special appearance before the
court––challenging its jurisdiction over the person through a
motion to dismiss even if the movant invokes other
grounds––is not tantamount to estoppel or a waiver by the
movant of his objection to jurisdiction over his person; and
such is not constitutive of a voluntary submission to the
jurisdiction of the court."29
In the instant case, KIC was not made a party-defendant in
Civil Case No. 99-93173. Even if it is conceded that it raised
affirmative defenses through its aforementioned pleadings,
KIC never abandoned its challenge, however implicit, to the
RTC’s jurisdiction over its person. The challenge was
subsumed in KIC’s primary assertion that it was not the
same entity as Kukan, Inc. Pertinently, in its Comment and
Opposition to Plaintiff’s Omnibus Motion dated May 20,
2003, KIC entered its "special but not voluntary
appearance" alleging therein that it was a different entity
and has a separate legal personality from Kukan, Inc. And
KIC would consistently reiterate this assertion in all its
pleadings, thus effectively resisting all along the RTC’s
jurisdiction of its person. It cannot be overemphasized that
Page 153 of 160
KIC could not file before the RTC a motion to dismiss and
its attachments in Civil Case No. 99-93173, precisely
because KIC was neither impleaded nor served with
summons. Consequently, KIC could only assert and claim
through its affidavits, comments, and motions filed by
special appearance before the RTC that it is separate and
distinct from Kukan, Inc.
Following La Naval Drug Corporation,30 KIC cannot be
deemed to have waived its objection to the court’s lack of
jurisdiction over its person. It would defy logic to say that
KIC unequivocally submitted itself to the jurisdiction of the
RTC when it strongly asserted that it and Kukan, Inc. are
different entities. In the scheme of things obtaining, KIC
had no other option but to insist on its separate identity
and plead for relief consistent with that position.
Third Issue: Piercing the Veil of Corporate Fiction
The third and main issue in this case is whether or not the
trial and appellate courts correctly applied the principle of
piercing the veil of corporate entity––called also as
disregarding the fiction of a separate juridical personality
of a corporation––to support a conclusion that Kukan, Inc.
and KIC are but one and the same corporation with respect
to the contract award referred to at the outset. This
principle finds its context on the postulate that a
corporation is an artificial being invested with a personality
separate and distinct from those of the stockholders and
from other corporations to which it may be connected or
related.31
In Pantranco Employees Association (PEA-PTGWO) v.
National Labor Relations Commission,32 the Court revisited
the subject principle of piercing the veil of corporate
fiction and wrote:
Under the doctrine of "piercing the veil of corporate
fiction," the court looks at the corporation as a mere
collection of individuals or an aggregation of persons
undertaking business as a group, disregarding the separate
juridical personality of the corporation unifying the group.
Another formulation of this doctrine is that when two
business enterprises are owned, conducted and controlled
by the same parties, both law and equity will, when
necessary to protect the rights of third parties, disregard
the legal fiction that two corporations are distinct entities
and treat them as identical or as one and the same.
Whether the separate personality of the corporation
should be pierced hinges on obtaining facts appropriately
pleaded or proved. However, any piercing of the corporate
veil has to be done with caution, albeit the Court will not
MAYORDO, M.A
hesitate to disregard the corporate veil when it is misused
or when necessary in the interest of justice. x x x
(Emphasis supplied.)
The same principle was the subject and discussed in Rivera
v. United Laboratories, Inc.:
While a corporation may exist for any lawful purpose, the
law will regard it as an association of persons or, in case of
two corporations, merge them into one, when its corporate
legal entity is used as a cloak for fraud or illegality. This is
the doctrine of piercing the veil of corporate fiction. The
doctrine applies only when such corporate fiction is used to
defeat public convenience, justify wrong, protect fraud, or
defend crime, or when it is made as a shield to confuse the
legitimate issues, or where a corporation is the mere alter
ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs
are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.
To disregard the separate juridical personality of a
corporation, the wrongdoing must be established clearly
and convincingly. It cannot be presumed.33 (Emphasis
supplied.)
Now, as before the appellate court, petitioner KIC
maintains that the RTC violated its right to due process
when, in the execution of its November 28, 2002 Decision,
the court authorized the issuance of the writ against KIC for
Kukan, Inc.’s judgment debt, albeit KIC has never been a
party to the underlying suit. As a counterpoint, Morales
argues that KIC’s specific concern on due process and on
the validity of the writ to execute the RTC’s November 28,
2002 Decision would be mooted if it were established that
KIC and Kukan, Inc. are indeed one and the same
corporation.
Morales’ contention is untenable.
The principle of piercing the veil of corporate fiction, and
the resulting treatment of two related corporations as one
and the same juridical person with respect to a given
transaction, is basically applied only to determine
established liability;34 it is not available to confer on the
court a jurisdiction it has not acquired, in the first place,
over a party not impleaded in a case. Elsewise put, a
corporation not impleaded in a suit cannot be subject to
the court’s process of piercing the veil of its corporate
fiction. In that situation, the court has not acquired
jurisdiction over the corporation and, hence, any
CORPORATION LAW CASES
LLB 3
proceedings taken against that corporation and its property
would infringe on its right to due process. Aguedo Agbayani,
a recognized authority on Commercial Law, stated as much:
23. Piercing the veil of corporate entity applies to
determination of liability not of jurisdiction. x x x
This is so because the doctrine of piercing the veil of
corporate fiction comes to play only during the trial of the
case after the court has already acquired jurisdiction over
the corporation. Hence, before this doctrine can be
applied, based on the evidence presented, it is imperative
that the court must first have jurisdiction over the
corporation.35 x x x (Emphasis supplied.)
The implication of the above comment is twofold: (1) the
court must first acquire jurisdiction over the corporation or
corporations involved before its or their separate
personalities are disregarded; and (2) the doctrine of
piercing the veil of corporate entity can only be raised
during a full-blown trial over a cause of action duly
commenced involving parties duly brought under the
authority of the court by way of service of summons or
what passes as such service.
The issue of jurisdiction or the lack of it over KIC has
already been discussed. Anent the matter of the time and
manner of raising the principle in question, it is undisputed
that no full-blown trial involving KIC was had when the RTC
disregarded the corporate veil of KIC. The reason for this
actuality is simple and undisputed: KIC was not impleaded
in Civil Case No. 99-93173 and that the RTC did not acquire
jurisdiction over it. It was dragged to the case after it
reacted to the improper execution of its properties and
veritably hauled to court, not thru the usual process of
service of summons, but by mere motion of a party with
whom it has no privity of contract and after the decision in
the main case had already become final and executory. As
to the propriety of a plea for the application of the
principle by mere motion, the following excerpts are
instructive:
Generally, a motion is appropriate only in the absence of
remedies by regular pleadings, and is not available to settle
important questions of law, or to dispose of the merits of
the case. A motion is usually a proceeding incidental to an
action, but it may be a wholly distinct or independent
proceeding. A motion in this sense is not within this
discussion even though the relief demanded is denominated
an "order."
Page 154 of 160
A motion generally relates to procedure and is often
resorted to in order to correct errors which have crept in
along the line of the principal action’s progress. Generally,
where there is a procedural defect in a proceeding and no
method under statute or rule of court by which it may be
called to the attention of the court, a motion is an
appropriate remedy. In many jurisdictions, the motion has
replaced the common-law pleas testing the sufficiency of
the pleadings, and various common-law writs, such as writ
of error coram nobis and audita querela. In some cases, a
motion may be one of several remedies available. For
example, in some jurisdictions, a motion to vacate an order
is a remedy alternative to an appeal therefrom.
Statutes governing motions are given a liberal construction.
36 (Emphasis supplied.)
The bottom line issue of whether Morales can proceed
against KIC for the judgment debt of Kukan, Inc.––assuming
hypothetically that he can, applying the piercing the
corporate veil principle––resolves itself into the question of
whether a mere motion is the appropriate vehicle for such
purpose.
Verily, Morales espouses the application of the principle of
piercing the corporate veil to hold KIC liable on theory that
Kukan, Inc. was out to defraud him through the use of the
separate and distinct personality of another corporation,
KIC. In net effect, Morales’ adverted motion to pierce the
veil of corporate fiction dated January 3, 2007 stated a
new cause of action, i.e., for the liability of judgment
debtor Kukan, Inc. to be borne by KIC on the alleged
identity of the two corporations. This new cause of action
should be properly ventilated in another complaint and
subsequent trial where the doctrine of piercing the
corporate veil can, if appropriate, be applied, based on the
evidence adduced. Establishing the claim of Morales and
the corresponding liability of KIC for Kukan Inc.’s
indebtedness could hardly be the subject, under the
premises, of a mere motion interposed after the principal
action against Kukan, Inc. alone had peremptorily been
terminated. After all, a complaint is one where the plaintiff
alleges causes of action.
In any event, the principle of piercing the veil of corporate
fiction finds no application to the instant case.
As a general rule, courts should be wary of lifting the
corporate veil between corporations, however related.
Philippine National Bank v. Andrada Electric Engineering
Company37 explains why:
MAYORDO, M.A
A corporation is an artificial being created by operation of
law. x x x It has a personality separate and distinct from
the persons composing it, as well as from any other legal
entity to which it may be related. This is basic.
Equally well-settled is the principle that the corporate
mask may be removed or the corporate veil pierced when
the corporation is just an alter ego of a person or of
another corporation. For reasons of public policy and in the
interest of justice, the corporate veil will justifiably be
impaled only when it becomes a shield for fraud, illegality
or inequity committed against third persons.
Hence, any application of the doctrine of piercing the
corporate veil should be done with caution. A court should
be mindful of the milieu where it is to be applied. It must
be certain that the corporate fiction was misused to such
an extent that injustice, fraud, or crime was committed
against another, in disregard of its rights. The wrongdoing
must be clearly and convincingly established; it cannot be
presumed. Otherwise, an injustice that was never
unintended may result from an erroneous application.
This Court has pierced the corporate veil to ward off a
judgment credit, to avoid inclusion of corporate assets as
part of the estate of the decedent, to escape liability
arising from a debt, or to perpetuate fraud and/or confuse
legitimate issues either to promote or to shield unfair
objectives or to cover up an otherwise blatant violation of
the prohibition against forum-shopping. Only in these and
similar instances may the veil be pierced and
disregarded. (Emphasis supplied.)
In fine, to justify the piercing of the veil of corporate
fiction, it must be shown by clear and convincing proof that
the separate and distinct personality of the corporation was
purposefully employed to evade a legitimate and binding
commitment and perpetuate a fraud or like wrongdoings.
To be sure, the Court has, on numerous occasions,38 applied
the principle where a corporation is dissolved and its assets
are transferred to another to avoid a financial liability of
the first corporation with the result that the second
corporation should be considered a continuation and
successor of the first entity.
In those instances when the Court pierced the veil of
corporate fiction of two corporations, there was a
confluence of the following factors:
1. A first corporation is dissolved;
CORPORATION LAW CASES
LLB 3
2. The assets of the first corporation is transferred to a
second corporation to avoid a financial liability of the
first corporation; and
3. Both corporations are owned and controlled by the
same persons such that the second corporation should
be considered as a continuation and successor of the
first corporation.
In the instant case, however, the second and third factors
are conspicuously absent. There is, therefore, no
compelling justification for disregarding the fiction of
corporate entity separating Kukan, Inc. from KIC. In
applying the principle, both the RTC and the CA miserably
failed to identify the presence of the abovementioned
factors. Consider:
The RTC disregarded the separate corporate personalities
of Kukan, Inc. and KIC based on the following premises and
arguments:
While it is true that a corporation has a separate and
distinct personality from its stockholder, director and
officers, the law expressly provides for an exception. When
Michael Chan, the Managing Director of defendant Kukan,
Inc. (majority stockholder of the newly formed corporation
[KIC]) confirmed the award to plaintiff to supply and install
interior signages in the Enterprise Center he (Michael Chan,
Managing Director of defendant Kukan, Inc.) knew that
there was no sufficient corporate funds to pay its
obligation/account, thus implying bad faith on his part and
fraud in contracting the obligation. Michael Chan neither
returned the interior signages nor tendered payment to the
plaintiff. This circumstance may warrant the piercing of the
veil of corporation fiction. Having been guilty of bad faith
in the management of corporate matters the corporate
trustee, director or officer may be held personally liable. x
xx
Since fraud is a state of mind, it need not be proved by
direct evidence but may be inferred from the
circumstances of the case. x x x [A]nd the circumstances
are: the signature of Michael Chan, Managing Director of
Kukan, Inc. appearing in the confirmation of the award sent
to the plaintiff; signature of Chan Kai Kit, a British National
appearing in the Articles of Incorporation and signature of
Michael Chan also a British National appearing in the
Articles of Incorporation [of] Kukan International Corp. give
the impression that they are one and the same person, that
Michael Chan and Chan Kai Kit are both majority
stockholders of Kukan International Corp. and Kukan, Inc.
holding 40% of the stocks; that Kukan International Corp. is
Page 155 of 160
practically doing the same kind of business as that of
Kukan, Inc.39 (Emphasis supplied.)
As is apparent from its disquisition, the RTC brushed aside
the separate corporate existence of Kukan, Inc. and KIC on
the main argument that Michael Chan owns 40% of the
common shares of both corporations, obviously oblivious
that overlapping stock ownership is a common business
phenomenon. It must be remembered, however, that KIC’s
properties were the ones seized upon levy on execution and
not that of Kukan, Inc. or of Michael Chan for that matter.
Mere ownership by a single stockholder or by another
corporation of a substantial block of shares of a corporation
does not, standing alone, provide sufficient justification for
disregarding the separate corporate personality.40 For this
ground to hold sway in this case, there must be proof that
Chan had control or complete dominion of Kukan and KIC’s
finances, policies, and business practices; he used such
control to commit fraud; and the control was the proximate
cause of the financial loss complained of by Morales. The
absence of any of the elements prevents the piercing of the
corporate veil.41 And indeed, the records do not show the
presence of these elements.
On the other hand, the CA held:
In the present case, the facts disclose that Kukan, Inc.
entered into a contractual obligation x x x worth more than
three million pesos although it had only Php5,000.00 paid-
up capital; [KIC] was incorporated shortly before Kukan,
Inc. suddenly ceased to appear and participate in the trial;
[KIC’s] purpose is related and somewhat akin to that of
Kukan, Inc.; and in [KIC] Michael Chan, a.k.a., Chan Kai Kit,
holds forty percent of the outstanding stocks, while he
formerly held the same amount of stocks in Kukan Inc.
These would lead to the inescapable conclusion that Kukan,
Inc. committed fraudulent representation by awarding to
the private respondent the contract with full knowledge
that it was not in a position to comply with the obligation it
had assumed because of inadequate paid-up capital. It
bears stressing that shareholders should in good faith put at
the risk of the business, unencumbered capital reasonably
adequate for its prospective liabilities. The capital should
not be illusory or trifling compared with the business to be
done and the risk of loss.
Further, it is clear that [KIC] is a continuation and successor
of Kukan, Inc. Michael Chan, a.k.a. Chan Kai Kit has the
largest block of shares in both business enterprises. The
emergence of the former was cleverly timed with the hasty
withdrawal of the latter during the trial to avoid the
financial liability that was eventually suffered by the latter.
MAYORDO, M.A
The two companies have a related business purpose.
Considering these circumstances, the obvious conclusion is
that the creation of Kukan International Corporation served
as a device to evade the obligation incurred by Kukan, Inc.
and yet profit from the goodwill attained by the name
"Kukan" by continuing to engage in the same line of
business with the same list of clients.42 (Emphasis
supplied.)
Evidently, the CA found the meager paid-up capitalization
of Kukan, Inc. and the similarity of the business activities in
which both corporations are engaged as a jumping board to
its conclusion that the creation of KIC "served as a device
to evade the obligation incurred by Kukan, Inc." The
appellate court, however, left a gaping hole by failing to
demonstrate that Kukan, Inc. and its stockholders
defrauded Morales. In fine, there is no showing that the
incorporation, and the separate and distinct personality, of
KIC was used to defeat Morales’ right to recover from
Kukan, Inc. Judging from the records, no serious attempt
was made to levy on the properties of Kukan, Inc. Morales
could not, thus, validly argue that Kukan, Inc. tried to
avoid liability or had no property against which to proceed.
Morales further contends that Kukan, Inc.’s closure is
evidenced by its failure to file its 2001 General Information
Sheet (GIS) with the Securities and Exchange Commission.
However, such fact does not necessarily mean that Kukan,
Inc. had altogether ceased operations, as Morales would
have this Court believe, for it is stated on the face of the
GIS that it is only upon a failure to file the corporate GIS
for five (5) consecutive years that non-operation shall be
presumed.
The fact that Kukan, Inc. entered into a PhP 3.3 million
contract when it only had a paid-up capital of PhP 5,000 is
not an indication of the intent on the part of its
management to defraud creditors. Paid-up capital is merely
seed money to start a corporation or a business entity. As in
this case, it merely represented the capitalization upon
incorporation in 1997 of Kukan, Inc. Paid-up capitalization
of PhP 5,000 is not and should not be taken as a reflection
of the firm’s capacity to meet its recurrent and long-term
obligations. It must be borne in mind that the equity
portion cannot be equated to the viability of a business
concern, for the best test is the working capital which
consists of the liquid assets of a given business relating to
the nature of the business concern
Neither should the level of paid-up capital of Kukan, Inc.
upon its incorporation be viewed as a badge of fraud, for it
CORPORATION LAW CASES
LLB 3
is in compliance with Sec. 13 of the Corporation Code,43
which only requires a minimum paid-up capital of PhP
5,000.
The suggestion that KIC is but a continuation and successor
of Kukan, Inc., owned and controlled as they are by the
same stockholders, stands without factual basis. It is true
that Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the
outstanding capital stock of both corporations. But such
circumstance, standing alone, is insufficient to establish
identity. There must be at least a substantial identity of
stockholders for both corporations in order to consider this
factor to be constitutive of corporate identity.
It would not avail Morales any to rely44 on General Credit
Corporation v. Alsons Development and Investment
Corporation.45 General Credit Corporation is factually not
on all fours with the instant case. There, the common
stockholders of the corporations represented 90% of the
outstanding capital stock of the companies, unlike here
where Michael Chan merely represents 40% of the
outstanding capital stock of both KIC and Kukan, Inc., not
even a majority of it. In that case, moreover, evidence was
adduced to support the finding that the funds of the second
corporation came from the first. Finally, there was proof in
General Credit Corporation of complete control, such that
one corporation was a mere dummy or alter ego of the
other, which is absent in the instant case.
Evidently, the aforementioned case relied upon by Morales
cannot justify the application of the principle of piercing
the veil of corporate fiction to the instant case. As shown
by the records, the name Michael Chan, the similarity of
business activities engaged in, and incidentally the word
"Kukan" appearing in the corporate names provide the
nexus between Kukan, Inc. and KIC. As illustrated, these
circumstances are insufficient to establish the identity of
KIC as the alter ego or successor of Kukan, Inc.
It bears reiterating that piercing the veil of corporate
fiction is frowned upon. Accordingly, those who seek to
pierce the veil must clearly establish that the separate and
distinct personalities of the corporations are set up to
justify a wrong, protect fraud, or perpetrate a deception.
In the concrete and on the assumption that the RTC has
validly acquired jurisdiction over the party concerned,
Morales ought to have proved by convincing evidence that
Kukan, Inc. was collapsed and thereafter KIC purposely
formed and operated to defraud him. Morales has not to us
discharged his burden.
Page 156 of 160
WHEREFORE, the petition is hereby GRANTED. The CA’s
January 23, 2008 Decision and April 16, 2008 Resolution in
CA-G.R. SP No. 100152 are hereby REVERSED and SET ASIDE.
The levy placed upon the personal properties of Kukan
International Corporation is hereby ordered lifted and the
personal properties ordered returned to Kukan
International Corporation. The RTC of Manila, Branch 21 is
hereby directed to execute the RTC Decision dated
November 28, 2002 against Kukan, Inc. with reasonable
dispatch.
No costs. SO ORDERED.
G.R. NO. 167530 : March 13, 2013
PHILIPPINE NATIONAL BANK, Petitioner, v. HYDRO
RESOURCES CONTRACTORS CORPORATION, Respondent.
G.R. NO. 167561
ASSET PRIVATIZATION TRUST, Petitioner, v. HYDRO
RESOURCES CONTRACTORS CORPORATION, Respondent.
G.R. NO. 167603
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, v.
HYDRO RESOURCES CONTRACTORS CORPORATION,
Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
These petitions for review on certiorari1 assail the
Decision2 dated November 30, 2004 and the Resolution3
dated March 22, 2005 of the Court of Appeals in CA-G.R. CV
No. 57553. The said Decision affirmed the Decision4 dated
November 6, 1995 of the Regional Trial Court (RTC) of
Makati City, Branch 62, granting a judgment award of
P8,370,934.74, plus legal interest, in favor of respondent
Hydro Resources Contractors Corporation (HRCC) with the
modification that the Privatization and Management Office
(PMO), successor of petitioner Asset Privatization Trust
(APT),5 has been held solidarily liable with Nonoc Mining
and Industrial Corporation (NMIC) 6 and petitioners
Philippine National Bank (PNB) and Development Bank of
the Philippines (DBP), while the Resolution denied
reconsideration separately prayed for by PNB, DBP, and APT.
Sometime in 1984, petitioners DBP and PNB foreclosed on
certain mortgages made on the properties of Marinduque
Mining and Industrial Corporation (MMIC). As a result of the
foreclosure, DBP and PNB acquired substantially all the
assets of MMIC and resumed the business operations of the
defunct MMIC by organizing NMIC.7 DBP and PNB owned 57%
MAYORDO, M.A
and 43% of the shares of NMIC, respectively, except for five
qualifying shares.8 As of September 1984, the members of
the Board of Directors of NMIC, namely, Jose Tengco, Jr.,
Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino
Agbada, were either from DBP or PNB.9
Subsequently, NMIC engaged the services of Hercon, Inc.,
for NMIC's Mine Stripping and Road Construction Program in
1985 for a total contract price of P35,770,120. After
computing the payments already made by NMIC under the
program and crediting the NMIC's receivables from
Hercon, Inc., the latter found that NMIC still has an unpaid
balance of P8,370,934.74.10 Hercon, Inc. made several
demands on NMIC, including a letter of final demand dated
August 12, 1986, and when these were not heeded, a
complaint for sum of money was filed in the RTC of Makati,
Branch 136 seeking to hold petitioners NMIC, DBP, and PNB
solidarily liable for the amount owing Hercon, Inc.11 The
case was docketed as Civil Case No. 15375.
Subsequent to the filing of the complaint, Hercon, Inc. was
acquired by HRCC in a merger. This prompted the
amendment of the complaint to substitute HRCC for
Hercon, Inc.12
Thereafter, on December 8, 1986, then President Corazon
C. Aquino issued Proclamation No. 50 creating the APT for
the expeditious disposition and privatization of certain
government corporations and/or the assets thereof.
Pursuant to the said Proclamation, on February 27, 1987,
DBP and PNB executed their respective deeds of transfer in
favor of the National Government assigning, transferring
and conveying certain assets and liabilities, including their
respective stakes in NMIC.13 In turn and on even date, the
National Government transferred the said assets and
liabilities to the APT as trustee under a Trust Agreement.14
Thus, the complaint was amended for the second time to
implead and include the APT as a defendant.
In its answer,15 NMIC claimed that HRCC had no cause of
action. It also asserted that its contract with HRCC was
entered into by its then President without any authority.
Moreover, the said contract allegedly failed to comply with
laws, rules and regulations concerning government
contracts. NMIC further claimed that the contract amount
was manifestly excessive and grossly disadvantageous to
the government. NMIC made counterclaims for the amounts
already paid to Hercon, Inc. and attorney's fees, as well as
payment for equipment rental for four trucks, replacement
CORPORATION LAW CASES
LLB 3
of parts and other services, and damage to some of NMIC's
properties.16
For its part, DBP's answer17 raised the defense that HRCC
had no cause of action against it because DBP was not privy
to HRCC's contract with NMIC. Moreover, NMIC's juridical
personality is separate from that of DBP. DBP further
interposed a counterclaim for attorney's fees.18
PNB's answer19 also invoked lack of cause of action against
it. It also raised estoppel on HRCC's part and laches as
defenses, claiming that the inclusion of PNB in the
complaint was the first time a demand for payment was
made on it by HRCC. PNB also invoked the separate
juridical personality of NMIC and made counterclaims for
moral damages and attorney's fees.
APT set up the following defenses in its answer21: lack of
cause of action against it, lack of privity between Hercon,
Inc. and APT, and the National Government's preferred lien
over the assets of NMIC.22
After trial, the RTC of Makati rendered a Decision dated
November 6, 1995 in favor of HRCC. It pierced the
corporate veil of NMIC and held DBP and PNB solidarily
liable with NMIC:
On the issue of whether or not there is sufficient ground to
pierce the veil of corporate fiction, this Court likewise
finds for the plaintiff.
From the documentary evidence adduced by the plaintiff,
some of which were even adopted by defendants and DBP
and PNB as their own evidence (Exhibits "I", "I-1", "I-2",
"I-3", "I-4", "I-5", "I5-A", "I-5-B", "I-5-C", "I-5-D" and
submarkings, inclusive), it had been established that
except for five (5) qualifying shares, NMIC is owned by
defendants DBP and PNB, with the former owning 57%
thereof, and the latter 43%. As of September 24, 1984, all
the members of NMIC's Board of Directors, namely, Messrs.
Jose Tengco, Jr., Rolando M. Zosa, Ruben Ancheta, Geraldo
Agulto, and Faustino Agbada are either from DBP or PNB
(Exhibits "I-5", "I-5-C", "I-5-D").
The business of NMIC was then also being conducted and
controlled by both DBP and PNB. In fact, it was Rolando M.
Zosa, then Governor of DBP, who was signing and entering
into contracts with third persons, on behalf of NMIC.
In this jurisdiction, it is well-settled that "where it appears
that the business enterprises are owned, conducted and
Page 157 of 160
controlled by the same parties, both law and equity will,
when necessary to protect the rights of third persons,
disregard legal fiction that two (2) corporations are distinct
entities, and treat them as identical." (Phil. Veterans
Investment Development Corp. vs. CA, 181 SCRA 669).
From all indications, it appears that NMIC is a mere
adjunct, business conduit or alter ego of both DBP and PNB.
Thus, the DBP and PNB are jointly and severally liable with
NMIC for the latter's unpaid obligations to plaintiff.23
Having found DBP and PNB solidarily liable with NMIC, the
dispositive portion of the Decision of the trial court reads:
WHEREFORE, in view of the foregoing, judgment is hereby
rendered in favor of the plaintiff HYDRO RESOURCES
CONTRACTORS CORPORATION and against the defendants
N O N O C M I N I N G A N D I N D U S T R I A L C O R P O R AT I O N ,
DEVELOPMENT BANK OF THE PHILIPPINES and PHILIPPINE
NATIONAL BANK, ordering the aforenamed defendants, to
pay the plaintiff jointly and severally, the sum of
P8,370,934.74 plus legal interest thereon from date of
demand, and attorney's fees equivalent to 25% of the
judgment award.
The complaint against APT is hereby dismissed. However,
APT, as trustee of NONOC MINING AND INDUSTRIAL
CORPORATION is directed to ensure compliance with this
Decision.24
DBP and PNB filed their respective appeals in the Court of
Appeals. Both insisted that it was wrong for the RTC to
pierce the veil of NMIC's corporate personality and hold DBP
and PNB solidarily liable with NMIC.25
The Court of Appeals rendered the Decision dated
November 30, 2004, affirmed the piercing of the veil of the
corporate personality of NMIC and held DBP, PNB, and APT
solidarily liable with NMIC. In particular, the Court of
Appeals made the following findings:
In the case before Us, it is indubitable that [NMIC] was
owned by appellants DBP and PNB to the extent of 57% and
43% respectively; that said two (2) appellants are the only
stockholders, with the qualifying stockholders of five (5)
consisting of its own officers and included in its charter
merely to comply with the requirement of the law as to
number of incorporators; and that the directorates of DBP,
PNB and [NMIC] are interlocked.
xxx
MAYORDO, M.A
We find it therefore correct for the lower court to have
ruled that:
"From all indications, it appears that NMIC is a mere
adjunct, business conduit or alter ego of both DBP and PNB.
Thus, the DBP and PNB are jointly and severally liable with
NMIC for the latter's unpaid obligation to plaintiff."26
(Citation omitted.)
The Court of Appeals then concluded that, "in keeping with
the concept of justice and fair play," the corporate veil of
NMIC should be pierced, ratiocinating:
For to treat NMIC as a separate legal entity from DBP and
PNB for the purpose of securing beneficial contracts, and
then using such separate entity to evade the payment of a
just debt, would be the height of injustice and iniquity.
Surely that could not have been the intendment of the law
with respect to corporations. x x x.27
The dispositive portion of the Decision of the Court of
Appeals reads:
WHEREFORE, premises considered, the Decision appealed
from is hereby MODIFIED. The judgment in favor of
appellee Hydro Resources Contractors Corporation in the
amount of P8,370,934.74 with legal interest from date of
demand is hereby AFFIRMED, but the dismissal of the case
as against Assets Privatization Trust is REVERSED, and its
successor the Privatization and Management Office is
INCLUDED as one of those jointly and severally liable for
such indebtedness. The award of attorney's fees is
DELETED.
All other claims and counter-claims are hereby DISMISSED.
Costs against appellants.28
The respective motions for reconsideration of DBP, PNB,
and APT were denied.29
Hence, these consolidated petitions.
30chanroblesvirtualawlibrary
All three petitioners assert that NMIC is a corporate entity
with a juridical personality separate and distinct from both
PNB and DBP. They insist that the majority ownership by
DBP and PNB of NMIC is not a sufficient ground for
disregarding the separate corporate personality of NMIC
because NMIC was not a mere adjunct, business conduit or
alter ego of DBP and PNB. According to them, the
application of the doctrine of piercing the corporate veil is
CORPORATION LAW CASES
LLB 3
unwarranted as nothing in the records would show that the
ownership and control of the shareholdings of NMIC by DBP
and PNB were used to commit fraud, illegality or injustice.
In the absence of evidence that the stock control by DBP
and PNB over NMIC was used to commit some fraud or a
wrong and that said control was the proximate cause of the
injury sustained by HRCC, resort to the doctrine of
"piercing the veil of corporate entity" is misplaced.31
DBP and PNB further argue that, assuming they may be held
solidarily liable with NMIC to pay NMIC's exclusive and
separate corporate indebtedness to HRCC, such liability of
the two banks was transferred to and assumed by the
National Government through the APT, now the PMO, under
the respective deeds of transfer both dated February 27,
1997 executed by DBP and PNB pursuant to Proclamation
No. 50 dated December 8, 1986 and Administrative Order
No. 14 dated February 3, 1987.32
For its part, the APT contends that, in the absence of an
unqualified assumption by the National Government of all
liabilities incurred by NMIC, the National Government
through the APT could not be held liable for NMIC's
contractual liability. The APT asserts that HRCC had not
sufficiently shown that the APT is the successor-in-interest
of all the liabilities of NMIC, or of DBP and PNB as
transferors, and that the adjudged liability is included
among the liabilities assigned and transferred by DBP and
PNB in favor of the National Government.33
HRCC counters that both the RTC and the CA correctly
applied the doctrine of "piercing the veil of corporate
fiction." It claims that NMIC was the alter ego of DBP and
PNB which owned, conducted and controlled the business
of NMIC as shown by the following circumstances: NMIC was
owned by DBP and PNB, the officers of DBP and PNB were
also the officers of NMIC, and DBP and PNB financed the
operations of NMIC. HRCC further argues that a parent
corporation may be held liable for the contracts or
obligations of its subsidiary corporation where the latter is
a mere agency, instrumentality or adjunct of the parent
corporation.34
Moreover, HRCC asserts that the APT was properly held
solidarily liable with DBP, PNB, and NMIC because the APT
assumed the obligations of DBP and PNB as the successor-
in-interest of the said banks with respect to the assets and
liabilities of NMIC.35 As trustee of the Republic of the
Philippines, the APT also assumed the responsibility of the
Republic pursuant to the following provision of Section 2.02
Page 158 of 160
of the respective deeds of transfer executed by DBP and
PNB in favor of the Republic:
SECTION 2. TRANSFER OF BANK'S LIABILITIES
xxx
2.02 With respect to the Bank's liabilities which are
contingent and those liabilities where the Bank's creditors
consent to the transfer thereof is not obtained, said
liabilities shall remain in the books of the BANK with the
GOVERNMENT funding the payment thereof.36
After a careful review of the case, this Court finds the
petitions impressed with merit.
A corporation is an artificial entity created by operation of
law. It possesses the right of succession and such powers,
attributes, and properties expressly authorized by law or
incident to its existence.37 It has a personality separate and
distinct from that of its stockholders and from that of other
corporations to which it may be connected.38 As a
consequence of its status as a distinct legal entity and as a
result of a conscious policy decision to promote capital
formation,39 a corporation incurs its own liabilities and is
legally responsible for payment of its obligations.40 In other
words, by virtue of the separate juridical personality of a
corporation, the corporate debt or credit is not the debt or
credit of the stockholder.41 This protection from liability for
shareholders is the principle of limited liability.
42chanroblesvirtualawlibrary
Equally well-settled is the principle that the corporate
mask may be removed or the corporate veil pierced when
the corporation is just an alter ego of a person or of
another corporation. For reasons of public policy and in the
interest of justice, the corporate veil will justifiably be
impaled only when it becomes a shield for fraud, illegality
or inequity committed against third persons.43
However, the rule is that a court should be careful in
assessing the milieu where the doctrine of the corporate
veil may be applied. Otherwise an injustice, although
unintended, may result from its erroneous application.44
Thus, cutting through the corporate cover requires an
approach characterized by due care and caution:
Hence, any application of the doctrine of piercing the
corporate veil should be done with caution. A court should
be mindful of the milieu where it is to be applied. It must
be certain that the corporate fiction was misused to such
an extent that injustice, fraud, or crime was committed
against another, in disregard of its rights. The wrongdoing
MAYORDO, M.A
must be clearly and convincingly established; it cannot be
presumed. x x x.45 (Emphases supplied; citations omitted.)
Sarona v. National Labor Relations Commission46 has defined
the scope of application of the doctrine of piercing the
corporate veil:
The doctrine of piercing the corporate veil applies only in
three (3) basic areas, namely: 1) defeat of public
convenience as when the corporate fiction is used as a
vehicle for the evasion of an existing obligation; 2) fraud
cases or when the corporate entity is used to justify a
wrong, protect fraud, or defend a crime; or 3) alter ego
cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where
the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another
corporation. (Citation omitted.)
Here, HRCC has alleged from the inception of this case that
DBP and PNB (and the APT as assignee of DBP and PNB)
should be held solidarily liable for using NMIC as alter ego.47
The RTC sustained the allegation of HRCC and pierced the
corporate veil of NMIC pursuant to the alter ego theory
when it concluded that NMIC "is a mere adjunct, business
conduit or alter ego of both DBP and PNB."48 The Court of
Appeals upheld such conclusion of the trial court.49 In other
words, both the trial and appellate courts relied on the
alter ego theory when they disregarded the separate
corporate personality of NMIC.
In this connection, case law lays down a three-pronged test
to determine the application of the alter ego theory, which
is also known as the instrumentality theory, namely:
(1) Control, not mere majority or complete stock control,
but complete domination, not only of finances but of policy
and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff's legal right; and
(3) The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss complained of.
50 (Emphases omitted.)
CORPORATION LAW CASES
LLB 3
The first prong is the "instrumentality" or "control" test.
This test requires that the subsidiary be completely under
the control and domination of the parent.51 It examines the
parent corporation's relationship with the subsidiary.52 It
inquires whether a subsidiary corporation is so organized
and controlled and its affairs are so conducted as to make
it a mere instrumentality or agent of the parent
corporation such that its separate existence as a distinct
corporate entity will be ignored.53 It seeks to establish
whether the subsidiary corporation has no autonomy and
the parent corporation, though acting through the
subsidiary in form and appearance, "is operating the
business directly for itself."54
The second prong is the "fraud" test. This test requires that
the parent corporation's conduct in using the subsidiary
corporation be unjust, fraudulent or wrongful. 55 It
examines the relationship of the plaintiff to the
corporation.56 It recognizes that piercing is appropriate
only if the parent corporation uses the subsidiary in a way
that harms the plaintiff creditor.57 As such, it requires a
showing of "an element of injustice or fundamental
unfairness."58
The third prong is the "harm" test. This test requires the
plaintiff to show that the defendant's control, exerted in a
fraudulent, illegal or otherwise unfair manner toward it,
caused the harm suffered.59 A causal connection between
the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or
the damage incurred by the plaintiff should be established.
The plaintiff must prove that, unless the corporate veil is
pierced, it will have been treated unjustly by the
defendant's exercise of control and improper use of the
c o r p o r a t e f o r m a n d , t h e r e b y, s u f f e r d a m a g e s .
60chanroblesvirtualawlibrary
To summarize, piercing the corporate veil based on the
alter ego theory requires the concurrence of three
elements: control of the corporation by the stockholder or
parent corporation, fraud or fundamental unfairness
imposed on the plaintiff, and harm or damage caused to
the plaintiff by the fraudulent or unfair act of the
corporation. The absence of any of these elements prevents
piercing the corporate veil.61
This Court finds that none of the tests has been
satisfactorily met in this case.
In applying the alter ego doctrine, the courts are concerned
with reality and not form, with how the corporation
operated and the individual defendant's relationship to that
Page 159 of 160
operation.62 With respect to the control element, it refers
not to paper or formal control by majority or even
complete stock control but actual control which amounts to
"such domination of finances, policies and practices that
the controlled corporation has, so to speak, no separate
mind, will or existence of its own, and is but a conduit for
its principal."63 In addition, the control must be shown to
have been exercised at the time the acts complained of
took place.64
Both the RTC and the Court of Appeals applied the alter ego
theory and penetrated the corporate cover of NMIC based
on two factors: (1) the ownership by DBP and PNB of
effectively all the stocks of NMIC, and (2) the alleged
interlocking directorates of DBP, PNB and NMIC. 65
Unfortunately, the conclusion of the trial and appellate
courts that the DBP and PNB fit the alter ego theory with
respect to NMIC's transaction with HRCC on the premise of
complete stock ownership and interlocking directorates
involved a quantum leap in logic and law exposing a gap in
reason and fact.
While ownership by one corporation of all or a great
majority of stocks of another corporation and their
interlocking directorates may serve as indicia of control, by
t h e m s e l v e s a n d w i t h o u t m o r e , h o w e v e r, t h e s e
circumstances are insufficient to establish an alter ego
relationship or connection between DBP and PNB on the
one hand and NMIC on the other hand, that will justify the
puncturing of the latter's corporate cover. This Court has
declared that "mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock
of a corporation is not of itself sufficient ground for
disregarding the separate corporate personality."66 This
Court has likewise ruled that the "existence of interlocking
directors, corporate officers and shareholders is not enough
justification to pierce the veil of corporate fiction in the
absence of fraud or other public policy considerations."67
True, the findings of fact of the Court of Appeals are
conclusive and cannot be reviewed on appeal to this Court,
provided they are borne out of the record or are based on
substantial evidence.68 It is equally true that the question
of whether one corporation is merely an alter ego of
another is purely one of fact. So is the question of whether
a corporation is a paper company, a sham or subterfuge or
whether the requisite quantum of evidence has been
adduced warranting the piercing of the veil of corporate
personality.69 Nevertheless, it has been held in Sarona v.
National Labor Relations Commission70 that this Court has
the power to resolve a question of fact, such as whether a
corporation is a mere alter ego of another entity or
MAYORDO, M.A
whether the corporate fiction was invoked for fraudulent or
malevolent ends, if the findings in the assailed decision are
either not supported by the evidence on record or based on
a misapprehension of facts.
In this case, nothing in the records shows that the
corporate finances, policies and practices of NMIC were
dominated by DBP and PNB in such a way that NMIC could
be considered to have no separate mind, will or existence
of its own but a mere conduit for DBP and PNB. On the
contrary, the evidence establishes that HRCC knew and
acted on the knowledge that it was dealing with NMIC, not
with NMIC's stockholders. The letter proposal of Hercon,
Inc., HRCC's predecessor-in-interest, regarding the contract
for NMIC's mine stripping and road construction program
was addressed to and accepted by NMIC.71 The various
billing reports, progress reports, statements of accounts
and communications of Hercon, Inc./HRCC regarding NMIC's
mine stripping and road construction program in 1985
concerned NMIC and NMIC's officers, without any indication
of or reference to the control exercised by DBP and/or PNB
over NMIC's affairs, policies and practices.72
HRCC has presented nothing to show that DBP and PNB had
a hand in the act complained of, the alleged undue
disregard by NMIC of the demands of HRCC to satisfy the
unpaid claims for services rendered by HRCC in connection
with NMIC's mine stripping and road construction program
in 1985. On the contrary, the overall picture painted by the
evidence offered by HRCC is one where HRCC was dealing
with NMIC as a distinct juridical person acting through its
own corporate officers.73
Moreover, the finding that the respective boards of
directors of NMIC, DBP, and PNB were interlocking has no
basis. HRCC's Exhibit "I-5,"74 the initial General Information
Sheet submitted by NMIC to the Securities and Exchange
Commission, relied upon by the trial court and the Court of
Appeals may have proven that DBP and PNB owned the
stocks of NMIC to the extent of 57% and 43%, respectively.
However, nothing in it supports a finding that NMIC, DBP,
and PNB had interlocking directors as it only indicates that,
of the five members of NMIC's board of directors, four were
nominees of either DBP or PNB and only one was a nominee
of both DBP and PNB.75 Only two members of the board of
directors of NMIC, Jose Tengco, Jr. and Rolando Zosa, were
established to be members of the board of governors of DBP
and none was proved to be a member of the board of
directors of PNB.76 No director of NMIC was shown to be
also sitting simultaneously in the board of governors/
directors of both DBP and PNB.
CORPORATION LAW CASES
LLB 3
In reaching its conclusion of an alter ego relationship
between DBP and PNB on the one hand and NMIC on the
other hand, the Court of Appeals invoked Sibagat Timber
Corporation v. Garcia,77 which it described as "a case under
a similar factual milieu."78 However, in Sibagat Timber
Corporation, this Court took care to enumerate the
circumstances which led to the piercing of the corporate
veil of Sibagat Timber Corporation for being the alter ego
of Del Rosario & Sons Logging Enterprises, Inc. Those
circumstances were as follows: holding office in the same
building, practical identity of the officers and directors of
the two corporations and assumption of management and
control of Sibagat Timber Corporation by the directors/
officers of Del Rosario & Sons Logging Enterprises, Inc.
Here, DBP and PNB maintain an address different from that
of NMIC.79 As already discussed, there was insufficient proof
of interlocking directorates. There was not even an
allegation of similarity of corporate officers. Instead of
evidence that DBP and PNB assumed and controlled the
management of NMIC, HRCC's evidence shows that NMIC
operated as a distinct entity endowed with its own legal
personality. Thus, what obtains in this case is a factual
backdrop different from, not similar to, Sibagat Timber
Corporation.
In relation to the second element, to disregard the
separate juridical personality of a corporation, the
wrongdoing or unjust act in contravention of a plaintiff's
legal rights must be clearly and convincingly established; it
cannot be presumed. Without a demonstration that any of
the evils sought to be prevented by the doctrine is present,
it does not apply.80chanroblesvirtualawlibrary
In this case, the Court of Appeals declared:
We are not saying that PNB and DBP are guilty of fraud in
forming NMIC, nor are we implying that NMIC was used to
conceal fraud. x x x.81
Such a declaration clearly negates the possibility that DBP
and PNB exercised control over NMIC which DBP and PNB
used "to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of plaintiff's legal
rights." It is a recognition that, even assuming that DBP and
PNB exercised control over NMIC, there is no evidence that
the juridical personality of NMIC was used by DBP and PNB
to commit a fraud or to do a wrong against HRCC.
Page 160 of 160
MAYORDO, M.A
There being a total absence of evidence pointing to a the amount of P8,370,934.74, with legal interest thereon
fraudulent, illegal or unfair act committed against HRCC by from date of demand.
DBP and PNB under the guise of NMIC, there is no basis to
hold that NMIC was a mere alter ego of DBP and PNB. As As trustee of the. assets of NMIC, however, the APT should
this Court ruled in Ramoso v. Court of Appeals82: ensure compliance by NMIC of the judgment against it. The
APT itself acknowledges this.84chanroblesvirtualawlibrary
As a general rule, a corporation will be looked upon as a
legal entity, unless and until sufficient reason to the WHEREFORE, the petitions are hereby GRANTED.
contrary appears. When the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud, or The complaint as against Development Bank of the
defend crime, the law will regard the corporation as an Philippines, the Philippine National Bank, and the Asset
association of persons. Also, the corporate entity may be Privatization Trust, now the Privatization and Management
disregarded in the interest of justice in such cases as fraud Office, is DISMISSED for lack of merit. The Asset
that may work inequities among members of the Privatization Trust, now the Privatization and Management
corporation internally, involving no rights of the public or Office, as trustee of Nonoc Mining and Industrial
third persons. In both instances, there must have been Corporation, now the Philnico Processing Corporation, is
fraud, and proof of it. For the separate juridical personality DIRECTED to ensure compliance by the Nonoc Mining and
of a corporation to be disregarded, the wrongdoing must be Industrial Corporation, now the Philnico Processing
clearly and convincingly established. It cannot be Corporation, with this Decision.
presumed.
SO ORDERED.
As regards the third element, in the absence of both
control by DBP and PNB of NMIC and fraud or fundamental
unfairness perpetuated by DBP and PNB through the
corporate cover of NMIC, no harm could be said to have
been proximately caused by DBP and PNB on HRCC for
which HRCC could hold DBP and PNB solidarily liable with
NMIC.
Considering that, under the deeds of transfer executed by
DBP and PNB, the liability of the APT as transferee of the
rights, titles and interests of DBP and PNB in NMIC will
attach only if DBP and PNB are held liable, the APT incurs
no liability for the judgment indebtedness of NMIC. Even
HRCC recognizes that "as assignee of DBP and PNB 's loan
receivables," the APT simply "stepped into the shoes of DBP
and PNB with respect to the latter's rights and obligations"
in NMIC.83 As such assignee, therefore, the APT incurs no
liability with respect to NMIC other than whatever
liabilities may be imputable to its assignors, DBP and PNB.
Even under Section 2.02 of the respective deeds of transfer
executed by DBP and PNB which HRCC invokes, the APT
cannot be held liable. The contingent liability for which the
National Government, through the APT, may be held liable
under the said provision refers to contingent liabilities of
DBP and PNB. Since DBP and PNB may not be held solidarily
liable with NMIC, no contingent liability may be imputed to
the APT as well. Only NMIC as a distinct and separate legal
entity is liable to pay its corporate obligation to HRCC in