Merc Case

G.R. No.
205839, July 07, 2016
LAND BANK OF THE PHILIPPINES, Petitioner, v. NARCISO L. KHO, Respondent.
G.R. No. 205840
MA. LORENA FLORES AND ALEXANDER CRUZ, Petitioners, v. NARCISO L.

KHO, Respondent.
DECISION
BRION, J.:
These are consolidated petitions for review on certiorari assailing the Court of Appeals'
(CA) August 30, 2012 decision and February 14, 2013 Resolution in CA-G.R. CV No.
93881.1 The CA set aside the Regional Trial Court's (RTC) dismissal of Civil Case No. Q-06-
571542 and remanded the case for further proceedings.
Antecedents
The respondent Narciso Kho is the sole proprietor of United Oil Petroleum, a business
engaged in trading diesel fuel. Sometime in December 2006, he entered into a verbal
agreement to purchase lubricants from Red Orange International Trading (Red Orange),
represented by one Rudy Medel. Red Orange insisted that it would only accept a Land Bank
manager's check as payment.
On December 28, 2005, Kho, accompanied by Rudy Medel, opened Savings Account No.
0681-0681-80 at the Araneta Branch of petitioner Land Bank of the Philippines (Land
Bank).3 His initial P25,993,537.37 deposit4 consisted of the following manager's
checks:ChanRoblesVirtualawlibrary
UCPB Del Monte Branch
1 PHP 15,000,000
Check No. 19107
E-PCI Banawe Branch
2 PHP 2,900,000
Check No. 26200720
I.E. Bank Retiro Branch
3 PHP 8,093,537.37
Check No. 1466
These checks were scheduled for clearance on January 2, 2006.
Kho also purchased Land Bank Manager's Check No. 07410 leveraged by his newly
opened savings account. Recem Macarandan, the Acting Operations Supervisor of the
Araneta branch, and Leida Benitez, the Document Examiner, prepared and signed the
check.5chanrobleslaw
The check was postdated to January 2, 2006, and scheduled for actual delivery on the same
date after the three checks were expected to have been cleared. It was valued at
P25,000,000.00 and made payable to Red Orange. 6chanrobleslaw
Kho requested a photocopy of the manager's check to provide Red Orange with proof that
he had available funds for the transaction. The branch manager, petitioner Ma. Lorena
Flores, accommodated his request. Kho gave the photocopy of the check to Rudy
Medel.7chanrobleslaw
On January 2, 2006, Kho returned to the bank and picked up check No. 07410. Accordingly,
P25,000,000.00 was debited from his savings account.
Unfortunately, his deal with Red Orange did not push through.
On January 3, 2006, an employee of the Bank of the Philippine Islands (BPI) called Land
Bank, Araneta Branch, to inform them that Red Orange had deposited check No. 07410 for
payment. Flores confirmed with BPI that Land Bank had issued the check to
Kho.8chanrobleslaw
On January 4, 2006, the Central Clearing Department (CCD) of the Land Bank Head Office
faxed a copy of the deposited check to the Araneta branch for payment. The officers of the
Araneta branch examined the fax copy and thought that the details matched the check
purchased by Kho. Thus, Land Bank confirmed the deposited check.9chanrobleslaw
On January 5, 2006, Flores informed Kho by phone that Check No. 07410 was cleared and
paid by the BPI, Kamuning branch.10chanrobleslaw
Shocked, Kho informed Flores that he never negotiated the check because the deal did not
materialize. More importantly, the actual check was still in his possession.11chanrobleslaw
Kho immediately went to Land Bank with the check No. 07410. They discovered that what
was deposited and encashed with BPI was a spurious manager's check. 12 Kho demanded
the cancellation of his manager's check and the release of the remaining money in his
account (then P995,207.27). 13However, Flores refused his request because she had no
authority to do so at the time.
Kho returned to the Land Bank, Araneta branch on January 12, 2006, with the same
demands. He was received by petitioner Alexander Cruz who was on his second day as the
Officer in Charge (OIC) of the Araneta branch. 14 Cruz informed him that there was a
standing freeze order on his account because of the (then) ongoing investigation on the
fraudulent withdrawal of the manager's check. 15chanrobleslaw
On January 16, 2006, Kho sent Land Bank a final demand letter for the return of his
P25,000,000.00 and the release of the P995,207.27 from his account but the bank did not
comply.
Hence, on January 23, 2006, Kho filed a Complaint for Specific Performance and
Damages against Land Bank, represented by its Araneta Avenue Branch Manager Flores and
its OIC Cruz. He also impleaded Flores and Cruz in their personal capacities. The complaint
was docketed as Civil Case No. Q-06-57154.
Kho asserted that the manager's check No. 07410 was still in his possession and that he
had no obligation to inform Land Bank whether or not he had already negotiated the
On the other hand, Land Bank argued that Kho was negligent because he handed Medel a
photocopy of the manager's check and that this was the proximate cause of his
loss.17chanrobleslaw
On April 30, 2009, the RTC dismissed the complaint. 18chanrobleslaw
Citing Associated Bank v. Court of Appeals, the RTC reasoned that the failure of the
purchaser/drawer to exercise ordinary care that substantially contributed to the making of
the forged check precludes him from asserting the forgery. 19 It held that (1) Kho's act of
giving Medel a photocopy of the check and (2) his failure to inform the bank that the
transaction with Red Orange did not push through were the proximate causes of his
The RTC also found that Flores and Cruz acted in good faith in performing their duties as
officers of Land Bank when they refused to cancel the manager's check and disallowed Kho
from withdrawing from his account. 21chanrobleslaw
Kho appealed to the CA where the case was docketed as CA-G.R. CV No. 93881.
On August 30, 2012, the CA set aside the RTC's decision and remanded the case for further
proceedings.
The CA pointed out that Land Bank was conducting an investigation to determine whether
there was a fraudulent negotiation of the manager's check No. 07410. It held that the
outcome of the investigation - which was not yet available during the trial - is crucial to the
resolution of the case. It noted that the RTC's ruling on Kho's negligence in dealing with
Medel preempted the outcome of Land Bank's investigation. 22 Thus, it remanded the case to
the RTC with the directive to consider the outcome of the investigation.
Dissatisfied, Land Bank, Flores, and Cruz, filed separately petitions for review
on certiorari before this Court.
The Arguments
Land Bank asserts that neither party denied the spurious nature of the manager's check
that was deposited with BPI. Therefore, the conclusion of its investigation as to the
fraudulent negotiation of check No. 07410 is immaterial to the resolution of the
case.23chanrobleslaw
Land Bank adopts the RTC's conclusion that Kho is precluded from, asserting the forgery
of check No. 07410 because his negligence substantially contributed to his
The bank highlights the following instances of Kho's negligence:
chanRoblesvirtualLawlibrary
(1) Kho transacted with Rudy Medel, a person he barely knew, without verifying Medel's
actual relationship with Red Orange. In fact, Kho even mistook him as "Rudy Rodel" in
his complaint;
(2) Kho accorded Medel an unusual degree of trust. He brought Medel with him to the bank
and carelessly gave the latter a photocopy of the manager's check; and
(3) When he picked up check No. 07410 on January 2, 2006, Kho did not even bother to
inform Land Bank that his transaction with Red Orange did not push through. He could
have prevented or detected the duplication of the check if he had simply notified the
bank.25cralawredcralawred
Flores and Cruz maintain that they did not incur any personal liability to Kho because they
were only performing their official duties in good faith. They insist that their alleged
wrongdoing, if there was any, were corporate acts performed within the scope of their
official authority; therefore, only Land Bank should be made liable for the
consequences.26chanrobleslaw
For his part, Kho adopts the CA's arguments and reasoning in CA-G.R. CV No.
93881.27chanrobleslaw
Our Ruling
At the outset, we agree with Land Bank's contention that the result of its investigation is not
indispensable to resolving this case. After all, it was not conducted by an independent party
but by a party-litigant. We cannot expect the report to yield a completely impartial result.
At best, the investigation report will be of doubtful probative value.
More importantly, all the facts necessary to decide the case are already available. Although
they have reached different legal conclusions, both the RTC and the CA agree that:
 On December 28, 2005, Kho opened an account with Land Bank in order to leverage
a business deal with Red Orange;
 He purchased Land Bank Manager's check No. 07410 worth P25,000,000.00 payable
to Red Orange and dated January 2, 2006;
 He also gave Rudy Medel a photocopy of the check that the bank had given him;
 After his visit to the Bank, the deal with Medel and Red Orange did not push
through;
 He picked up check No. 07410 from the bank on January 2, 2006, without informing
the bank that the deal did not materialize;
 Afterwards, Red Orange presented a spurious copy of check No. 07410 to BPI,
Kamuning for payment;
 Land Bank cleared the check;
 However, Kho never negotiated the actual check. It was in his possession the whole
time.
This case can already be resolved based on these undisputed facts. Therefore, the CA erred
when it remanded the case for further proceedings.
That said, we cannot agree that the proximate causes of the loss were Kho's act of giving
Medel a photocopy of check No. 07410 and his failure to inform Land Bank that his deal
with Red Orange did not push through.
Proximate cause - which is determined by a mixed consideration of logic, common sense,

policy, and precedent — is "that cause which, in natural and continuous sequence, unbroken
by any efficient intervening cause, produces the injury, and without which the result would not
have occurred."28chanrobleslaw
We cannot understand how both the RTC and the CA overlooked the fact that Land Bank's
officers cleared the counterfeit check. We stress that the signatories of the genuine check
No. 07410 were Land Bank's officers themselves.
The business of banking is imbued with public interest; it is an industry where the general
public's trust and confidence in the system is of paramount importance. 29 Consequently,
banks are expected to exert the highest degree of, if not the utmost, diligence. They are
obligated to treat their depositors' accounts with meticulous care, always keeping in mind
the fiduciary nature of their relationship.30chanrobleslaw
Banks hold themselves out to the public as experts in determining the genuineness of
checks and corresponding signatures thereon.31 Stemming from their primordial duty of
diligence, one of a bank's prime duties is to ascertain the genuineness of the drawer's
signature on check being encashed.32 This holds especially true for manager's checks.
A manager's check is a bill of exchange drawn by a bank upon itself, and is accepted by its
issuance. It is an order of the bank to pay, drawn upon itself, committing in effect its total
resources, integrity, and honor behind its issuance. The check is signed by the manager (or
some other authorized officer) for the bank. In this case, the signatories were Macarandan
and Benitez.
The genuine check No. 07410 remained in Kho's possession the entire time and Land Bank
admits that the check it cleared was a fake. When Land Bank's CCD forwarded the deposited
check to its Araneta branch for inspection, its officers had every opportunity to recognize
the forgery of their signatures or the falsity of the check. Whether by error or neglect, the
bank failed to do so, which led to the withdrawal and eventual loss of the P25,000,000.00.
This is the proximate cause of the loss. Land Bank breached its duty of diligence and
assumed the risk of incurring a loss on account of a forged or counterfeit check. Hence, it
should suffer the resulting damage.
We cannot agree with the Land Bank and the RTC's positions that Kho is precluded from
invoking the forgery. A drawer or a depositor of the bank is precluded from asserting the
forgery if the drawee bank can prove his failure to exercise ordinary care and if this
negligence substantially contributed to the forgery or the perpetration of the fraud.
In Gempesaw v. Court of Appeals,33 Natividad Gempesaw, a businesswoman, completely

placed her trust in her bookkeeper. Gempesaw allowed her bookkeeper to prepare the
checks payable to her suppliers. She signed the checks without verifying their amounts and
their corresponding invoices. Despite receiving her banks statements, Gempesaw never
verified the correctness of the returned checks nor confirmed if the payees actually
received payment. This went on for over two years, allowing her bookkeeper to forge the
indorsements of over 82 checks.
Gempesaw failed to examine her records with reasonable diligence before signing the
checks and after receiving her bank statements. Her gross negligence allowed her
bookkeeper to benefit from the subsequent forgeries for over two years.
Gempesaw's negligence precluded her from asserting the forgery. Nevertheless, we

adjudged the drawee Bank liable to share evenly in her loss for its failure to exercise utmost
diligence, which amounted to a breach of its contractual obligations to the
depositor.34chanrobleslaw
In Associated Bank v. Court of Appeals,35 the province of Tarlac (the depositor) released 30
checks payable to the order of a government hospital to a retired administrative
officer/cashier of the hospital. The retired officer forged the hospital's indorsement and
deposited the checks into his personal account. This took place for over three years
resulting in the accumulated loss of P203,300.00. We found the province of Tarlac grossly
negligent, to the point of substantially contributing to its loss. 36chanrobleslaw
Nevertheless, we apportioned the loss evenly between the province of Tarlac and the
drawee bank because of the bank's failure to pay according to the terms of the check. Tt
violated its duty to charge the customer's account only for properly payable
items.37chanrobleslaw
Kho's negligence does not even come close to approximating those of Gempesaw or of the
province of Tarlac. While his act of giving Medel a photocopy of the check may have allowed
the latter to create a duplicate, this cannot possibly excuse Land Bank's failure to recognize
that the check itself - not just the signatures - is a fake instrument. More importantly, Land
Bank itself furnished Kho the photocopy without objecting to the latter's intention of giving
it to Medel.
Kho's failure to inform Land Bank that the deal did not push through as of January 2,
2006, does not justify Land Bank's confirmation and clearing of a fake check bearing the
forged signatures of its own officers. Whether or not the deal pushed through, the check
remained in Kho's possession. He was entitled to a reasonable expectation that the bank
would not release any funds corresponding to the check.
Lastly, we agree with the RTC's finding that neither Flores nor Cruz is liable to Kho in their
private capacities. Their refusal to honor Kho's demands was made in good faith pursuant
to the directives of the Land Bank's management.
As a pillar of economic development, the banking industry is impressed with public

interest. The general public relies on banks' sworn duty to serve with utmost diligence.
Public trust and confidence in banks is critical to a healthy, stable, and well-functioning
economy. Let this serve as a reminder for banks to always act with the highest degree of
diligence and the most meticulous attention to detail.
WHEREFORE, we PARTLY GRANT the petitions. The Court of Appeals' August 30, 2012
decision and February 14, 2013 resolution in CA-G.R. CV No. 93881 are SET ASIDE. The
Regional Trial Court's April 30, 2009 decision in Civil Case No. Q-06-57154 is REVERSED.
Petitioner Land Bank of the Philippines is ORDERED:
chanRoblesvirtualLawlibrary(1) to PAY Narciso Kho the sum of TWENTY FIVE MILLION

PESOS (P25,000,000.00), plus interest at the legal rate reckoned from the filing of the
complaint; and cralawlawlibrary
(2) to ALLOW Narciso Kho to withdraw his remaining funds from Savings Account No.
0681-0681-80.
SO ORDERED
G.R. No. 219037, October 19, 2016
RCBC SAVINGS BANK, Petitioner, v. NOEL M. ODRADA, Respondent.
DECISION
CARPIO, J.:
The Case
Before the Court is a petition for review on certiorari 1 assailing the 26 March 2014
Decision2 and the 18 June 2015 Resolution3 of the Court of Appeals in CA-G.R. CV No. 94890.
The Facts
In April 2002, respondent Noel M. Odrada (Odrada) sold a secondhand Mitsubishi Montero
(Montero) to Teodoro L. Lim (Lim) for One Million Five Hundred Ten Thousand Pesos
(P1,510,000). Of the total consideration, Six Hundred Ten Thousand Pesos (P610,000) was
initially paid by Lim and the balance of Nine Hundred Thousand Pesos (P900,000) was
financed by petitioner RCBC Savings Bank (RCBC) through a car loan obtained by Lim. 4 As a
requisite for the approval of the loan, RCBC required Lim to submit the original copies of
the Certificate of Registration (CR) and Official Receipt (OR) in his name. Unable to produce
the Montero's OR and CR, Lim requested RCBC to execute a letter addressed to Odrada
informing the latter that his application for a car loan had been approved.
On 5 April 2002, RCBC issued a letter that the balance of the loan would be delivered to
Odrada upon submission of the OR and CR. Following the letter and initial down payment,
Odrada executed a Deed of Absolute Sale on 9 April 2002 in favor of Lim and the latter took
possession of the Montero. 5chanrobleslaw
When RCBC received the documents, RCBC issued two manager's checks dated 12 April
2002 payable to Odrada for Nine Hundred Thousand Pesos (P900,000) and Thirteen
Thousand Five Hundred Pesos (P13,500). 6 After the issuance of the manager's checks and
their turnover to Odrada but prior to the checks' presentation, Lim notified Odrada in a
letter dated 15 April 2002 that there was an issue regarding the roadworthiness of the
Montero. The letter states:
April 15, 2002
Mr. Noel M. Odrada

C/o Kotse Pilipinas
Fronting Ultra, Pasig City
Thru: Shan Mendez;.
Dear Mr. Odrada,
Please be inform[ed] that I am going to cancel or exchange the (1) one unit Montero that
you sold to me thru Mr. Shan Mendez because it did not match your representations the
way Mr. Shan Mendez explained to me like:ChanRoblesVirtualawlibrary
1. You told me that the said vehicle has not experience [d] collision. However, it is hidden,
when you open its engine cover there is a trace of a head-on collision. The condenser is
smashed,; the fender support is not align[ed], both bumper supports] connecting [the]
chassis were crippled and welded, the hood support was repaired, etc.
2. The 4-wheel drive shift is not functioning. When Mr. Mendez was asked about it, he said it
would not function until you can reach the speed of 30 miles.
3. During Mr. Mendez['s] representation, he said the odometer has still an original mileage
data but found tampered.
4. You represented the vehicle as model 1998 however; it is indicated in the front left A-
pillar inscribed at the identification plate [as] model 1997.
Therefore, please show your sincerity by personally inspecting the said vehicle at RCBC,
Pacific Bldg. Pearl Drive, Ortigas Center, Pasig City. Let us meet at the said bank at 10:00
A.M., April 17, 2002.
Meanwhile, kindly hold or do not encash the manager's check[s] issued to you by RCBC
until you have clarified and satisfied my complaints.
Sincerely yours,
Teodoro L. Lim
Cc: Dario E. Santiago, RCBC loan
Legal7
Odrada did not go to the slated meeting and instead deposited the manager's checks with
International Exchange Bank (Ibank) on 16 April 2002 and redeposited them on 19 April
2002 but the checks were dishonored both times apparently upon Lim's instruction to
RCBC.8 Consequently, Odrada filed a collection suit 9 against Lim and RCBC in the Regional
Trial Court of Makati.10chanrobleslaw
In his Answer,11 Lim alleged that the cancellation of the loan was at his instance, upon
discovery of the misrepresentations by Odrada about the Montero's roadworthiness. Lim
claimed that the cancellation was not done ex parte but through a letter12 dated 15 April
2002.13 He further alleged that the letter was delivered to Odrada prior to the presentation
of the manager's checks to RCBC.14chanrobleslaw
On the other hand, RCBC contended that the manager's checks were dishonored because
Lim had cancelled the loan. RCBC claimed that the cancellation of the loan was prior to the
presentation of the manager's checks. Moreover, RCBC alleged that despite notice of the
defective condition of the Montero, which constituted a failure of consideration, Odrada still
proceeded with presenting the manager's checks.
It was later disclosed during trial that RCBC also sent a formal notice of cancellation of the
loan on 18 April 2002 to both Odrada and Lim.15chanrobleslaw
The Regional Trial Court's Ruling
In its Decision16 dated 1 October 2009, the trial court ruled in favor of Odrada. The trial
court held that Odrada was the proper party to ask for rescission. 17 The lower court
reasoned that the right of rescission is implied in reciprocal obligations where one party
fails to perform what is incumbent upon him when the other is willing and ready to comply.
The trial court ruled that it was not proper for Lim to exercise the right of rescission since
Odrada had already complied with the contract of sale by delivering the Montero while Lim
remained delinquent in payment.18 Since Lim was not ready, willing, and able to comply
with the contract of sale, he was not the proper party entitled to rescind the contract.
The trial court ruled that the defective condition of the Montero was not a supervening
event that would justify the dishonor of the manager's checks. The trial court reasoned that
a manager's check is equivalent to cash and is really the bank's own check. It may be
treated as a promissory note with the bank as maker. Hence, the check becomes the
primary obligation of the bank which issued it and constitutes a written promise to pay on
demand.19 Being the party primarily liable, the trial court ruled that RCBC was liable to
Odrada for the value of the manager's checks.
Finally, the trial court found that Odrada suffered sleepless nights, humiliation, and was
constrained to hire the services of a lawyer meriting the award of damages. 20chanrobleslaw
The dispositive portion of the Decision reads:
WHEREFORE, premises considered, judgment is hereby
rendered:ChanRoblesVirtualawlibrary
(a) Directing defendant RCBC to pay plaintiff the amount of Php 913,500.00 representing
the cash equivalent of the two (2) manager's checks, plus 12% interest from the date of
filing of the case until fully paid;
(b) Directing defendants to solidarity pay moral damages in the amount of Php 500,000.00
and exemplary damages in the amount of Php 500,000.00;
(c) Directing defendants to solidarity pay attorney's fees in the amount of Php 300,000.00.
Finally, granting the cross-claim of defendant RCBC, Teodoro L. Lim is hereby directed to
indemnify RCBC Savings Bank for the amount adjudged for it to pay plaintiff.
SO ORDERED.21
RCBC and Lim appealed from the trial court's decision.
The Court of Appeals' Ruling
In its assailed 26 March 2014 Decision, the Court of Appeals dismissed the appeal and
affirmed the trial court's 1 October 2009 Decision.
The Court of Appeals ruled that the two manager's checks, which were complete and
regular, reached the hands of Lim who deposited the same in his bank account with Ibank.
RCBC knew that the amount reflected on the manager's checks represented Lim's payment
for the remaining balance of the Montero's purchase price. The appellate court held that
when RCBC issued the manager's checks in favor of Odrada, RCBC admitted the existence of
the payee and his then capacity to endorse, and undertook that on due presentment the
checks which were negotiable instruments would be accepted or paid, or both according to
its tenor.22 The appellate court held that the effective delivery of the checks to Odrada made
RCBC liable for the checks.23chanrobleslaw
On RCBC's defense of want of consideration, the Court of Appeals affirmed the finding of the
trial court that Odrada was a holder in due course. The appellate court ruled that the
defense of want of consideration is not available against a holder in due
course.24chanrobleslaw
Lastly, the Court of Appeals found that the award of moral and exemplary damages and
attorney's fees was excessive. Hence, modification was proper.
The dispositive portion of the Decision reads:

WHEREFORE, the impugned Decision of the court a quo in Civil Case No. 02-453 is hereby
AFFIRMED with MODIFICATION insofar as the reduction of awards for moral, exemplary
damages and attorney's fees to P50,000.00, P20,000.00, and P20,000.00 respectively.
SO ORDERED.25cralawred
RCBC and Lim filed a motion for reconsideration 26 on 28 April 2014. In its 18 June 2015
Resolution, the Court of Appeals denied the motion for lack of merit. 27chanrobleslaw
RCBC alone28 filed this petition before the Court. Thus, the decision of the Court of Appeals
became final and executory as to Lim.
The Issues
RCBC presented the following, issues in this petition:
A. The court a quo gravely erred in finding that as between Odrada as seller and Lim as
buyer of the vehicle, only the former has the right to rescind the contract of sale finding
failure to perform an obligation under the contract of sale on the part of the latter only
despite the contested roadworthiness of the vehicle, subject matter of the sale.
1. Whether or not the court a quo erred in holding that Lim cannot cancel the auto loan
despite the failure in consideration due to the contested roadworthiness of the vehicle
delivered by Odrada to him.29
B. The court a quo gravely erred when it found that Odrada is a holder in due course of the
manager's checks in question despite being informed of the cancellation of the auto loan by
the borrower, Lim.
1. Whether or not Lim can validly countermand the manager's checks in the hands of a
holder who does not hold the same in due course.30
Odrada failed to file a comment 31 within the period prescribed by this

Court.32chanrobleslaw
The Ruling of this Court
We grant the petition.
Under the law on sales, a contract of sale is perfected the moment there is a meeting of the
minds upon the thing which is the object of the contract and upon the price which is the
consideration. From that moment, the parties may reciprocally demand
performance.33 Performance may be done through delivery, actual or constructive. Through
delivery, ownership is transferred to the vendee. 34 However, the obligations between the
parties do not cease upon delivery of the subject matter. The vendor and vendee remain
concurrently bound by specific obligations. The vendor, in particular, is responsible for an
implied warranty against hidden defects.
Article 1547 of the Civil Code states: "In a contract of sale, unless a contrary intention
appears, there is an implied warranty that the thing shall be free from any hidden faults or
defects."35 Article 1566 of the Civil Code provides that "the vendor is responsible to the
vendee for any hidden faults or defects in the thing sold, even though he was not aware
thereof."36 As a consequence, the law fixes the liability of the vendor for hidden defects
whether known or unknown to him at the time of the sale.
The law defines a hidden defect as one which would render the thing sold unfit for the use
for which it is intended, or would diminish its fitness for such use to such an extent that,
had the vendee been aware thereof, he would not have acquired it or would have given a
lower price for it.37chanrobleslaw
In this case, Odrada and Lim entered into a contract of sale of the Montero. Following the
initial downpayment and execution of the deed of sale, the Montero was delivered by
Odrada to Lim and the latter took possession of the Montero. Notably, under the law,
Odrada's warranties against hidden defects continued even after the Montero's delivery.
Consequently, a misrepresentation as to the Montero's roadworthiness constitutes a breach
of warranty against hidden defects.
In Supercars Management & Development Corporation v. Flores,38 we held that a breach of

warranty against hidden defects occurred when the vehicle, after it was delivered to
respondent, malfunctioned despite repairs by petitioner. 39 In the present case, when Lim
acquired possession, he discovered that the Montero was not roadworthy. The engine was
misaligned, the automatic transmission was malfunctioning, and the brake rotor disks
needed refacing.40 However, during the proceedings in the trial court, Lim's testimony was
stricken off the record because he failed to appear during cross-examination. 41 In effect, Lim
was not able to present clear preponderant evidence of the Montero's defective condition.
RCBC May Refuse to Pay Manager's Checks
We address the legal question of whether or not the drawee bank of a manager's check has
the option of refusing payment by interposing a personal defense of the purchaser of the
manager's check who delivered the check to a third party.
In resolving this legal question, this Court will examine the nature of a manager's check and
its relation to personal defenses under the Negotiable Instruments Law. 42chanrobleslaw
Jurisprudence defines a manager's check as a check drawn by the bank's manager upon the
bank itself and accepted in advance by the bank by the act of its issuance. 43 It is really the
bank's own check and may be treated as a promissory note with the bank as its
maker.44 Consequently, upon its purchase, the check becomes the primary obligation of the
bank and constitutes its written promise to pay the holder upon demand. 45 It is similar to a
cashier's check46 both as to effect and use in that the bank represents that the check is
drawn against sufficient funds.47chanrobleslaw
As a general rule, the drawee bank is not liable until it accepts. 48 Prior to a bill's acceptance,
no contractual relation exists between the holder 49 and the drawee. Acceptance, therefore,
creates a privity of contract between the holder and the drawee so much so that the latter,
once it accepts, becomes the party primarily liable on the instrument. 50 Accordingly,
acceptance is the act which triggers the operation of the liabilities of the drawee (acceptor)
under Section 6251of the Negotiable Instruments Law. Thus, once he accepts, the drawee
admits the following: (a) existence of the drawer; (b) genuineness of the drawer's
signature; (c) capacity and authority of the drawer to draw the instrument; and (d)
existence of the payee and his then capacity to endorse.
As can be gleaned in a long line of cases decided by this Court, a manager's check is
accepted by the bank upon its issuance. As compared to an ordinary bill of exchange where
acceptance occurs after the bill is presented to the drawee, the distinct feature of a
manager's check is that it is accepted in advance. Notably, the mere issuance of a manager's
check creates a privity of contract between the holder and the drawee bank, the latter
primarily binding itself to pay according to the tenor of its acceptance.
The drawee bank, as a result, has the unconditional obligation to pay a manager's check to a
holder in due course irrespective of any available personal defenses. However, while this
Court has consistently held that a manager's check is automatically accepted, a
holder other than a holder in due course is still subject to defenses. In International
Corporate Bank v. Spouses Gueco, 52 which involves a delivered manager's check, the Court
still considered whether the check had become stale:
It has been held that, if the check had become stale, it becomes imperative that the
circumstances that caused its non-presentment be determined. In the case at bar, there is
no doubt that the petitioner bank held on the check and refused to encash the same
because of the controversy surrounding the signing of the joint motion to dismiss. We see
no bad faith or negligence in this position taken by the bank.53
In International Corporate Bank, this Court considered whether the holder presented the
manager's check within a reasonable time after its issuance - a circumstance required for
holding the instrument in due course. 54chanrobleslaw
Similarly, in Rizal Commercial Banking Corporation v. Hi-Tri Development Corporation,55 the

Court observed that the mere issuance of a manager's check does not ipso facto work as an
automatic transfer of funds to the account of the payee. 56 In order for the holder to acquire
title to the instrument, there still must have been effective delivery. Accordingly, the Court,
taking exception to the manager's check automatic transfer of funds to the payee, declared
that: "the doctrine that the deposit represented by a manager's check automatically passes
to the payee is inapplicable, because the instrument - although accepted in advance remains
undelivered."57 This Court ruled that the holder did not acquire the instrument in due
course since title had not passed for lack of delivery. 58chanrobleslaw
We now address the main legal question: if the holder of a manager's check is not a holder
in due course, can the drawee bank interpose a personal defense of the purchaser?
Our rulings in Mesina v. Intermediate Appellate Court 59 and United Coconut Planters Bank v.
Intermediate Appellate Court60 shed light on the matter.
In Mesina, Jose Go purchased a manager's check from Associated Bank. As he left the bank,
Go inadvertently left the check on top of the desk of the bank manager. The bank manager
entrusted the check for safekeeping to another bank official who at the time was attending
to a customer named Alexander Lim. 61 After the bank official answered the telephone and
returned from the men's room, the manager's check could no longer be found. After
learning that his manager's check was missing, Go immediately returned to the bank to give
a stop payment order on the check. A third party named Marcelo Mesina deposited the
manager's check with Prudential Bank but the drawee bank sent back the manager's check
to the collecting bank with the words "payment stopped." When asked how he obtained the
manager's check, Mesina claimed it was paid to him by Lim in a "certain
transaction."62chanrobleslaw
While this Court acknowledged the general causes and effects of a manager's check, it noted
that other factors were needed to be considered, namely the manner by which Mesina
acquired the instrument. This Court declared:
Petitioner's allegations hold no water. Theories and examples advanced by petitioner on
causes and effects of a cashier's check such as (1) it cannot be countermanded in the hands
of a holder in due course and (2) a cashier's check is a bill of exchange drawn by the bank
against itself - are general principles which cannot be aptly applied to the case at bar,
without considering other things. Petitioner failed to substantiate his claim that he is a
holder in due course and for consideration or value as shown by the established facts of the
case. Admittedly, petitioner became the holder of the cashier's check as endorsed by
Alexander Lim who stole the check. He refused to say how and why it was passed to him. He
had therefore notice of the defect of his title over the check from the start. 63
Ultimately, the notice of defect affected Mesina's claim as a holder of the manager's
check. This Court ruled that the issuing bank could validly refuse payment because
Mesina was not a holder in due course. Unequivocally, the Court declared: "the holder of
a cashier's check who is not a holder in due course cannot enforce such check against
the issuing bank which dishonors the same." 64chanrobleslaw
In the same manner, in United Coconut Planters Bank (UCPB),65 this Court ruled that the
drawee bank was legally justified in refusing to pay the holder of a manager's check who
did not hold the check in due course. In UCPB, Altiura Investors, Inc. purchased a manager's
check from UCPB, which then issued a manager's check in the amount of Four Hundred
Ninety Four Thousand Pesos (P494,000) to Makati Bel-Air Developers, Inc. The manager's
check represented the payment of Altiura Investors, Inc. for a condominium unit it
purchased from Makati Bel-Air Developers, Inc. Subsequently, Altiura Investors, Inc.
instructed UCPB to hold payment due to material misrepresentations by Makati Bel-Air
Developers, Inc. regarding the condominium unit. 66 Pending negotiations; and while the
stop payment order was in effect, Makati Bel-Air Developers, Inc. insisted that UCPB pay the
value of the manager's check. UCPB refused to pay and filed an interpleader to allow Altiura
Investors, Inc. and Makati Bel-Air Developers, Inc. to litigate their respective claims. Makati
Bel-Air Developers, Inc. also filed a counterclaim against UCPB in the amount of Five Million
Pesos (P5,000,000) based on UCPB's violation of its warranty on its manager's
In upholding UCPB's refusal to pay the value of the manager's check, this Court reasoned
that Makati Bel-Air Developers, Inc.'s title to the instrument became defective when there
arose a partial failure of consideration.68 We held that UCPB could validly invoke a personal
defense of the purchaser against Makati Bel-Air Developers, Inc. because the latter was not
a holder in due course of the manager's check:
There are other considerations supporting the conclusion reached by this Court that
respondent appellate court had committed reversible error. Makati Bel-Air was a party to
the contract of sale of an office condominium unit to Altiura, for the payment of which the
manager's check was issued. Accordingly, Makati Bel-Air was fully aware, at the time it had
received the manager's check, that there was, or had arisen, at least partial failure of
consideration since it was unable to comply with its obligation to deliver office space
amounting to 165 square meters to Altiura. Makati Bel-Air was also aware that petitioner
Bank had been informed by Altiura of the claimed defect in Makati Bel-Air's title to the
manager's check or its right to the proceeds thereof. Vis-a-vis both Altiura and petitioner
Bank, Makati Bel-Air was not a holder in due course of the manager's check. 69
The foregoing rulings clearly establish that the drawee bank of a manager's check may
interpose personal defenses of the purchaser of the manager's check if the holder is not a
holder in due course. In short, the purchaser of a manager's check may validly
countermand payment to a holder who is not a holder in due course. Accordingly, the
drawee bank may refuse to pay the manager's check by interposing a personal defense of
the purchaser. Hence, the resolution of the present case requires a determination of the
status of Odrada as holder of the manager's checks.
In this case, the Court of Appeals gravely erred when it considered Odrada as a holder in
due course. Section 52 of the Negotiable Instruments Law defines a holder in due course as
one who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it has
been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it. (Emphasis supplied)
To be a holder in due course, the law requires that a party must have acquired the
instrument in good faith and for value.
Good faith means that the person taking the instrument has acted with due honesty with
regard to the rights of the parties liable on the instrument and that at the time he,took the
instrument, the holder has no knowledge of any defect or infirmity of the instrument. 70 To
constitute notice of an infirmity in the instrument or defect in the title of the person
negotiating the same, the person to whom it is negotiated must have had actual knowledge
of the infirmity or defect, or knowledge of such facts that his action in taking the instrument
would amount to bad faith.71chanrobleslaw
Value, on the other hand, is defined as any consideration sufficient to support a simple
contract.72chanrobleslaw
In the present case, Odrada attempted to deposit the manager's checks on 16 April 2002, a
day after Lim had informed him that there was a serious problem with the Montero. Instead
of addressing the issue, Odrada decided to deposit the manager's checks. Odrada's actions
do not amount to good faith. Clearly, Odrada failed to make an inquiry even when the
circumstances strongly indicated that there arose, at the very least, a partial failure of
consideration due to the hidden defects of the Montero. Odrada's action in depositing the
manager's checks despite knowledge of the Montero's defects amounted to bad faith.
Moreover, when Odrada redeposited the manager's checks on 19 April 2002, he was
already formally notified by RCBC the previous day of the cancellation of Lim's auto loan
transaction. Following UCPB,73RCBC may refuse payment by interposing a personal defense
of Lim - that the title of Odrada had become defective when there arose a partial failure or
lack of consideration.74chanrobleslaw
RCBC acted in good faith in following the instructions of Lim. The records show that Lim
notified RCBC of the defective condition of the Montero before Odrada presented the
manager's checks.75 Lim informed RCBC of the hidden defects of the Montero including a
misaligned engine, smashed condenser, crippled bumper support, and defective
transmission. RCBC also received a formal notice of cancellation of the auto loan from Lim
and this prompted RCBC to cancel the manager's checks since the auto loan was the
consideration for issuing the manager's checks. RCBC acted in good faith in stopping the
payment of the manager's checks.
Section 58 of the Negotiable Instruments Law provides: "In the hands of any holder other
than a holder in due course, a negotiable instrument is subject to the same defenses as if it
were non-negotiable, x x x." Since Odrada was not a holder in due course, the instrument
becomes subject to personal defenses under the Negotiable Instruments Law. Hence, RCBC
may legally act on a countermand by Lim, the purchaser of the manager's checks.
Lastly, since Lim's testimony involving the Montero's hidden defects was stricken off the
record by the trial court, Lim failed to prove the existence of the hidden defects and thus
Lim remains liable to Odrada for the purchase price of the Montero. Lim's failure to file an
appeal from the decision of the Court of Appeals made the decision of the appellate court
final and executory as to Lim. RCBC cannot be made liable because it acted in good faith in
carrying out the stop payment order of Lim who presented to RCBC the complaint letter to
Odrada when Lim issued the stop payment order.
WHEREFORE, we GRANT the petition. We REVERSE and SET ASIDE the 26 March 2014
Decision and the 18 June 2015 Resolution of the Court of Appeals in CA-G.R. CV No. 94890
only insofar as RCBC Savings Bank is concerned.
SO ORDERED.c
RCBC SAVINGS BANK v. NOEL M. ODRADA, GR No. 219037, 2016-10-19

Facts:
respondent Noel M. Odrada (Odrada) sold a secondhand Mitsubishi Montero (Montero) to
Teodoro L. Lim (Lim) for One Million Five Hundred Ten Thousand Pesos (P1,510,000)
(P610,000) was initially paid by Lim and the balance of Nine Hundred Thousand Pesos
(P900,000) was financed by petitioner RCBC Savings Bank (RCBC) through a car loan
RCBC required Lim to submit the original copies of the Certificate of Registration (CR) and
Official Receipt (OR) in his name. Unable to produce the Montero's OR and CR, Lim
requested RCBC to execute a letter addressed to Odrada informing the latter that his
application for a car loan had been approved.
Odrada executed a Deed of Absolute Sale on 9 April 2002 in favor of Lim and the latter took
possession of the Montero.
When RCBC received the documents, RCBC issued two manager's checks... for Nine
Hundred Thousand Pesos (P900,000) and Thirteen Thousand Five Hundred Pesos
(P13,500).
After the issuance of the manager's checks and their turnover to Odrada but prior to the
checks' presentation, Lim notified Odrada in a letter dated 15 April 2002 that there was an
issue regarding the roadworthiness of the Montero.
when you open its engine cover there is a trace of a head-on collision
The 4-wheel drive shift is not functioning.
the odometer has still an original mileage data but found tampered.
represented the vehicle as model 1998 however; it is indicated in the front left A-pillar
inscribed at the identification plate [as] model 1997.
please show your sincerity by personally inspecting the said vehicle at RCBC, Pacific Bldg.
Pearl Drive, Ortigas Center, Pasig City.
Odrada... drada did not go to the slated meeting and instead deposited the manager's
checks... checks were dishonored both times apparently upon Lim's instruction to RCBC.
Odrada filed a collection suit[9] against Lim and RCBC
Lim claimed that the cancellation was not done ex parte but through a letter[... the letter
was delivered to Odrada prior to the presentation of the manager's checks to RCBC.
RCBC contended that the manager's checks were dishonored because Lim had cancelled the
loan.
prior to the presentation of the manager's checks.
RCBC also sent a formal notice of cancellation of the loan on 18 April 2002 to both Odrada
and Lim.
trial court ruled in favor of Odrada.
Odrada was the proper party to ask for rescission.
the right of rescission is implied in reciprocal obligations where one party fails to perform
what is incumbent upon him when the other is willing and ready to comply.
it was not proper for Lim to exercise the right of rescission since Odrada had already
complied with the contract of sale by delivering the Montero while Lim remained
delinquent in payment.
the defective condition of the Montero was not a supervening event that would justify the
dishonor of the manager's checks.
a manager's check is equivalent to cash and is really the bank's own check. It may be
treated as a promissory note with the bank as maker.
constitutes a written promise to pay on demand.
Being the party primarily liable, the trial court ruled that RCBC was liable to Odrada for the
value of the manager's checks.
Court of Appeals dismissed the appeal... when RCBC issued the manager's checks in favor of
Odrada, RCBC admitted the existence of the payee and his then capacity to endorse, and
undertook that on due presentment the checks which were negotiable instruments would
be accepted or paid, or both according to its tenor.
RCBC alone[28] filed this petition before the Court. Thus, the decision of the Court of
Appeals became final and executory as to Lim.
Issues:
Whether or not the court a quo erred in holding that Lim cannot cancel the auto loan
despite the failure in consideration due to the contested roadworthiness of the vehicle
delivered by Odrada to him.
Whether or not Lim can validly countermand the manager's checks in the hands of a holder
who does not hold the same in due course.
Ruling:
We grant the petition.
Principles:
a contract of sale is perfected the moment there is a meeting of the minds upon the thing
which is the object of the contract and upon the price which is the consideration. From that
moment, the parties may reciprocally demand performance.
However, the obligations between the parties do not cease upon delivery of the subject
matter. The vendor and vendee remain concurrently bound by specific obligations. The
vendor, in particular, is responsible for an implied warranty against hidden defects.
Article 1547 of the Civil Code... e states: "In a contract of sale, unless a contrary intention
appears, there is an implied warranty that the thing shall be free from any hidden faults or
defects."
Article 1566 of the Civil Code provides that "the vendor is responsible to the vendee for any
hidden faults or defects in the thing sold, even though he was not aware thereof."... under
the law, Odrada's warranties against hidden defects continued even after the Montero's
delivery. Consequently, a misrepresentation as to the Montero's roadworthiness constitutes
a breach of warranty against hidden defects.
Supercars Management & Development Corporation v. Flores... a breach of warranty against
hidden defects occurred when the vehicle, after it was delivered to respondent,
malfunctioned despite repairs by petitioner.
when Lim acquired possession, he discovered that the Montero was not roadworthy.
However, during the proceedings in the trial court, Lim's testimony was stricken off the
record because he failed to appear during cross-examination.
Jurisprudence defines a manager's check as a check drawn by the bank's manager upon the
bank itself and accepted in advance by the bank by the act of its issuance.
It is really the bank's own check and may be treated as a promissory note with the bank as
its maker.
upon its purchase, the check becomes the primary obligation of the bank and constitutes its
written promise to pay the holder upon demand
As a general rule, the drawee bank is not liable until it accepts.
Prior to a bill's acceptance, no contractual relation exists between the holder... and the
drawee.
Acceptance,... creates a privity of contract between the holder and the drawee so much so
that the latter, once it accepts, becomes the party primarily liable on the instrument.
acceptance is the act which triggers the operation of the liabilities of the drawee (acceptor)
under Section 62... of the Negotiable Instruments Law... once he accepts, the drawee admits
the following: (a) existence of the drawer; (b) genuineness of the drawer's signature; (c)
capacity and authority of the drawer to draw the instrument; and (d) existence of the payee
and his then capacity to endorse.
a manager's check is accepted by the bank upon its issuance.
the distinct feature of a manager's check is that it is accepted in advance.
the mere issuance of a manager's check creates a privity of contract between the holder and
the drawee bank, the latter primarily binding itself to pay according to the tenor of its
acceptance.
The drawee bank, as a result, has the unconditional obligation to pay a manager's check to a
holder in due course irrespective of any available personal defenses.
However, while this Court has consistently held that a manager's check is automatically
accepted, a holder other than a holder in due course is still subject to defenses.
the mere issuance of a manager's check does not ipso facto work as an automatic transfer of
funds to the account of the payee.
In order for the holder to acquire title to the instrument, there still must have been effective
delivery.
the doctrine that the deposit represented by a manager's check automatically passes to the
payee is inapplicable, because the instrument - although accepted in advance remains
undelivered."[57]... if the holder of a manager's check is not a holder in due course, can the
drawee bank interpose a personal defense of the purchaser?
"the holder of a cashier's check who is not a holder in due course cannot enforce such check
against the issuing bank which dishonors the same."[64]... the purchaser of a manager's
check may validly countermand payment to a holder who is not a holder in due course.
Accordingly, the drawee bank may refuse to pay the manager's check by interposing a
personal defense of the purchaser. Hence, the resolution of the present case requires a
determination of the status of Odrada as holder of the manager's checks.
the Court of Appeals gravely erred when it considered Odrada as a holder in due course.
Section 52 of the Negotiable Instruments Law defines a holder in due course as one who
has taken the instrument under the following conditions:(a) That it is complete and regular
upon its face;(b) That he became the holder of it before it was overdue, and without notice
that it has been previously dishonored, if such was the fact;(c) That he took it in good faith
and for value;(d) That at the time it was negotiated to him, he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it.
To be a holder in due course, the law requires that a party must have acquired the
instrument in good faith and for value.
Good faith means that the person taking the instrument has acted with due honesty with
regard to the rights of the parties liable on the instrument and that at the time he,took the
instrument, the holder has no knowledge of any defect or infirmity of the instrument
To constitute notice of an infirmity in the instrument or defect in the title of the person
negotiating the same, the person to whom it is negotiated must have had actual knowledge
of the infirmity or defect, or knowledge of such facts that his action in taking the instrument
would amount to bad faith.
Value, on the other hand, is defined as any consideration sufficient to support a simple
contract.
Odrada attempted to deposit the manager's checks on 16 April 2002, a day after Lim had
informed him that there was a serious problem with the Montero. Instead of addressing the
issue, Odrada decided to deposit the manager's checks. Odrada's actions do not amount to
good faith.
Odrada's action in depositing the manager's checks despite knowledge of the Montero's
defects amounted to bad faith.
Moreover, when Odrada redeposited the manager's checks on 19 April 2002, he was
already formally notified by RCBC the previous day of the cancellation of Lim's auto loan
transaction.
CBC may refuse payment by interposing a personal defense of Lim - that the title of Odrada
had become defective when there arose a partial failure or lack of consideration.
RCBC acted in good faith in following the instructions of Lim. The records show that Lim
notified RCBC of the defective condition of the Montero before Odrada presented the
manager's checks.
RCBC also received a formal notice of cancellation of the auto loan from Lim and this
prompted RCBC to cancel the manager's checks since the auto loan was the consideration
for issuing the manager's checks. RCBC acted in good faith in stopping the payment of the
manager's checks.
Section 58 of the Negotiable Instruments Law provides: "In the hands of any holder other
than a holder in due course, a negotiable instrument is subject to the same defenses as if it
were non-negotiable, x x x." Since Odrada was not a holder in due course, the instrument
becomes subject to personal defenses under the Negotiable Instruments Law.
G.R. No. 227005, June 19, 2017

BDO UNIBANK, INC., Petitioner, v. ENGR. SELWYN LAO, DOING BUSINESS UNDER THE NAME AND
STYLE "SELWYN F. LAO CONSTRUCTION" AND "WING AN CONSTRUCTION AND DEVELOPMENT
CORPORATION" AND INTERNATIONAL EXCHANGE BANK (NOW UNION BANK OF THE
PHILIPPINES), Respondents.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari seeking to reverse and set aside the October 14, 2015 Decision 1and
the September 5, 2016 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 100351, which affirmed,
with modification, the July 9, 2012 Decision3 of the Regional Trial Court, Branch 55, Manila (RTC) in Civil
Case No. 99-93068, a case for collection of sum of money.
The Antecedents
On March 9, 1999, respondent Engineer Selwyn S. Lao (Lao) filed before the RTC a complaint for collection
of sum of money against Equitable Banking Corporation, now petitioner Banco de Oro Unibank (BDO),
Everlink Pacific Ventures, Inc. (Everlink), and Wu Hsieh a.k.a. George Wu (Wu).
In his complaint, Lao alleged that he was doing business under the name and style of "Selwyn Lao
Construction"; that he was a majority stockholder of Wing An Construction and Development Corporation
(Wing An); that he entered into a transaction with Everlink, through its authorized representative Wu, under
which, Everlink would supply him with "HCG sanitary wares"; and that for the down payment, he issued two
(2) Equitable crossed checks payable to Everlink: Check No. 0127-242249 4 and Check No. 0127-242250,5 in
the amounts of P273,300.00 and P336,500.00, respectively.
Lao further averred that when the checks were encashed, he contacted Everlink for the immediate delivery
of the sanitary wares, but the latter failed to perform its obligation. Later, Lao learned that the checks were
deposited in two different bank accounts at respondent International Exchange Bank, now respondent Union
Bank of the Philippines (Union Bank). He was later informed that the two bank accounts belonged to Wu and
a company named New Wave Plastic (New Wave), represented by a certain Willy Antiporda (Antiporda).
Consequently, Lao was prompted to file a complaint against Everlink and Wu for their failure to comply with
their obligation and against BDO for allowing the encashment of the two (2) checks. He later withdrew his
complaint against Everlink as the corporation had ceased existing.
In its answer, BDO asserted that it had no obligation to ascertain the owner of the account!s to which the
checks were deposited because the instruction to deposit the said checks to the payee's account only was
directed to the payee and the collecting bank, which in this case was Union Bank; that as the drawee bank,
its obligations consist in examining the genuineness of the signatures appearing on the checks, and paying
the same if there were sufficient funds in the account under which the checks were drawn; and that the
subject checks were properly negotiated and paid in accordance with the instruction of Lao in crossing them
as they were deposited to the account of the payee Everlink with Union Bank, which then presented them
for payment with BDO.
On August 24, 2001, Lao filed an Amended Complaint, wherein he impleaded Union Bank as additional
defendant for allowing the deposit of the crossed checks in two bank accounts other than the payee's, in
violation of its obligation to deposit the same only to the payee's account.
In its answer, Union Bank argued that Check No. 0127-242249 was deposited in the account of Everlink;
that Check No. 0127-242250 was validly negotiated by Everlink to New Wave; that Check No. 0127-242250
was presented for payment to BDO, and the proceeds thereof were credited to New Wave's account; that it
was under no obligation to deposit the checks only in the account of Everlink because there was nothing on
the checks which would indicate such restriction; and that a crossed check continues to be negotiable, the
only limitation being that it should be presented for payment by a bank.
During trial, BDO presented as its witnesses Elizabeth P. Tinimbang (Tinimbang) and Atty. Carlos
Buenaventura (Atty. Buenaventura).
Tinimbang testified that Everlink was the payee of the two (2) crossed checks issued by their client, Wing
An; that the checks were deposited with Union Bank, which presented them to BDO for payment. She
further narrated that after the checks were cleared and that the drawer's signatures on the checks were
determined to be genuine, that there was sufficient fund to cover the amounts of the checks, and that there
was no order to stop payment, the checks were paid by BDO. Tinimbang continued that sometime in July
1998, BDO received a letter from Wing An stating that the amounts of the checks were not credited to
Everlink's account. This prompted BDO to write a letter to Union Bank demanding the latter to refund the
amounts of the checks. In a letter-reply, Union Bank claimed that the checks were deposited in the account
of Everlink.
Atty. Buenaventura claimed that BDO gave credence to Union Bank's representation that the checks were
indeed credited to the account of Everlink. He stated that BDO's only obligations under the circumstances
were to ascertain the genuineness of the checks, to determine if the account was sufficiently funded and to
credit the proceeds to the collecting bank. On cross-examination, Atty. Buenaventura clarified that Union
Bank endorsed the crossed checks as could be seen on the dorsal portion of the subject checks. According to
him, such endorsement meant that the lack of prior endorsement was guaranteed by Union Bank.
For its part, Union Bank presented as its witness Jojina Lourdes C. Vega (Vega), its Branch Business
Manager. Vega testified that the transaction history of Everlink's account with Union Bank and the notation
at the back of the check indicating Everlink's Account No. (005030000925) revealed that the proceeds of
Check No. 0127-242249 were duly credited to Everlink's account on September 22, 1997. As regards Check
No. 0127-242250, Vega clarified that the proceeds of the same were credited to New Wave's account. She
explained that New Wave was a valued client of Union Bank. As a form of accommodation extended to
valued clients, Union Bank would request the signing of a second endorsement agreement because the
payee was not the same as the account holder. In this case, Antiporda executed a Deed of Undertaking
(Second Endorsed Checks) wherein he assumed the responsibilities for the correctness, genuineness, and
validity of the subject checks.
The RTC Ruling
In its Decision, dated July 9, 2012, the RTC absolved BDO from any liability, but ordered Union Bank to pay
Lao the amount of P336,500.00, representing the value of Check No. 0127-242250; P50,000.00 as moral
damages; P100,000.00 as exemplary damages; and P50,000.00 as attorney's fees.
The RTC observed that there was nothing irregular with the transaction of Check No. 0127-242249 because
the same was deposited in Everlink's account with Union Bank. It, however, found that Check No. 0127-
242250 was irregularly deposited and encashed because it was not issued for the account of Everlink, the
payee, but for the account of New Wave. The trial court noted further that Check No. 0127-242250 was not
even endorsed by Everlink to New Wave. Thus, it opined that Union Bank was negligent in allowing the
deposit and encashment of the said check without proper endorsement. The RTC wrote that considering that
the subject check was a crossed check, Union Bank failed to take reasonable steps in order to determine the
validity of the representations made by Antiporda. In the end, it adjudged that BDO could not be held liable
because of Union Bank's warranty when it stamped on the check that "all prior endorsement and/or lack of
endorsement guaranteed." The dispositive portion of the decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in FAVOR of the plaintiff Engr. Selwyn F.
Lao and AGAINST the defendant International Exchange Bank (now Union Bank) ordering the latter to pay
the former the following:chanRoblesvirtualLawlibrary
1. The amount of Three Hundred Thirty Six Thousand Five Hundred Pesos
(P336,500.00) representing the Equitable Bank Check No. 0127-242250;
2. The amount of Fifty Thousand Pesos (P50,000.00) representing moral damages;
3. The amount of One Hundred Thousand Pesos (P100,000.00) representing

exemplary damages; and,
4. The amount of Fifty Thousand Pesos (P50,000.00) as attorney's fees.
The Complaints against defendants Equitable Banking Corporation (now Banco de Oro) and Wu Shu Chien
a.k.a. George Wu are hereby ordered DISMISSED.
Costs against the defendant International and Exchange Bank (now Union Bank).
SO ORDERED.6
Aggrieved, Union Bank elevated an appeal to the CA. 7
The CA Ruling
In its assailed Decision, dated October 14, 2015, the CA affirmed, with modification, the ruling of the RTC. It
ordered BDO to pay Lao the amount of P336,500.00, with legal interest from the time of filing of the
complaint until its full satisfaction. The appellate court further directed Union Bank to reimburse BDO the
aforementioned amount. It concurred with the RTC that Union Bank was liable because of its negligence and
its guarantee on the validity of all prior endorsements or lack of it.
With regard to BDO's liability, the CA explained that it violated its duty to charge to the drawer's account
only those authorized by the latter when it paid the value of Check No. 0127-242250. Thus, it held that BDO
was liable for the amount charged to the drawer's account. The fallo reads: chanRoblesvirtualLawlibrary
FOR THESE REASONS, the appeal is PARTLY GRANTED. The July 9, 2012 Decision of the Regional Trial
Court of Manila, Branch 55 is AFFIRMED with MODIFICATIONS that Equitable Bank is ordered to pay
Selwyn Lao the amount corresponding to Check No. 0127-242250, i.e., P336,500.00, with legal interest
from the time of filing of the complaint until the amount is fully paid. International Exchange Bank (now
Union Bank of the Philippines) is ordered to reimburse Equitable Bank the abovementioned amount. The
award of damages and attorney's fees is DELETED. The rest of the Decision stands.
SO ORDERED.8
On November 5, 2012, BDO filed its Motion for Partial Reconsideration. It argued that neither Lao nor Union
Bank appealed the dismissal of the complaint against it, thus, the RTC decision had already attained finality
as far as it was concerned. It also prayed that Lao should be allowed to recover directly from Union Bank.
In its assailed Resolution, dated September 6, 2016, the CA denied BDO's Motion for Partial Reconsideration.
It ratiocinated that in Bank of America, NT & SA v. Associated Citizens Bank,9 (Bank of America) the drawee
bank was adjudged liable for the amount charged to the drawer's account, while the collecting bank was
ordered to reimburse the drawee bank whatever amount the latter was made to pay.
Hence, this petition anchored on the following: chanRoblesvirtualLawlibrary
GROUNDS
I.
ISSUES NOT RAISED BY THE PARTIES ON APPEAL CANNOT BE REVIEWED NOR RULED UPON BY
THE APPELLATE COURT.
II.
A COLLECTING BANK ASSUMES RESPONSIBILITY FOR A CROSSED CHECK AS A GENERAL

ENDORSER IN ACCORDANCE WITH SECTION 66 OF THE NEGOTIABLE INSTRUMENTS LAW.
III.
THE PARTY WHICH DID NOT EXERCISE THE REQUIRED DILIGENCE IS THE CAUSE OF THE LOSS
AND BEARS THE DAMAGES.10
BDO argued that the CA's order for it to pay Lao was erroneous as the RTC had already adjudged with
finality that it was not liable. It posited that the appellate court could not resolve issues not raised on appeal
by both parties thereto. BDO pointed out that it was not a party in the appeal before the CA. It further
stressed that neither Lao nor Union Bank assailed the RTC decision with respect to the dismissal of the
complaint against it during the appeal before the CA, and even on motion for reconsideration before the
RTC. Thus, for failure to appeal therefrom, the RTC decision had already attained finality as to BDO.
BDO further averred that Union Bank, as the collecting bank and last endorser, must suffer the loss because
it had the duty to ascertain the genuineness of all prior endorsement. It asserted that as the drawee bank, it
could not be held liable because it merely relied on Union Bank's express guarantee. It added that the
proximate cause of the loss suffered by Lao was the negligence of Union Bank when it allowed the deposit of
the crossed check intended for Everlink to New Wave's account.
In his Comment,11 dated January 26, 2017, Lao asserted that the CA did not commit any error when it
resolved the issue on the liability of BDO even if it was not raised on appeal. He was of the view that the
said issue was inextricably intertwined with the principal issue. Lao stated that the CA correctly adjudged
BDO liable, without prejudice to its right to seek reimbursement from Union Bank, as it was the correct
sequence in the enforcement of payment in cases where the collecting bank allowed a crossed check to be
deposited in the account of a person other than the payee.
Union Bank did not file any comment on BDO's petition.
The Court's Ruling
The petition is meritorious.
Ordinarily, this Court would have concurred with the CA as regards the applicability of Bank of America.
There is, however, a peculiar circumstance which would prevent the application of Bank of America in the
present case.
Sequence of Recovery in cases of unauthorized payment of checks
The Court agrees with the appellate court that in cases of unauthorized payment of checks to a person other
than the payee named therein, the drawee bank may be held liable to the drawer. The drawee bank, in turn,
may seek reimbursement from the collecting bank for the amount of the check. This rule on the sequence of
recovery in case of unauthorized check transactions had already been deeply embedded injurisprudence. 12
The liability of the drawee bank is based on its contract with the drawer and its duty to charge to the latter's
accounts only those payables authorized by him. A drawee bank is under strict liability to pay the check only
to the payee or to the payee's order. When the drawee bank pays a person other than the payee named in
the check, it does not comply with the terms of the check and violates its duty to charge the drawer's
account only for properly payable items.13
On the other hand, the liability of the collecting bank is anchored on its guarantees as the last endorser of
the check. Under Section 66 of the Negotiable Instruments Law, an endorser warrants "that the instrument
is genuine and in all respects what it purports to be; that he has good title to it; that all prior parties had
capacity to contract; and that the instrument is at the time of his endorsement valid and subsisting."
It has been repeatedly held that in check transactions, the collecting bank generally suffers the loss because
it has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting
the check for payment to the drawee is an assertion that the party making the presentment has done its
duty to ascertain the genuineness of the endorsements. If any of the warranties made by the collecting bank
turns out to be false, then the drawee bank may recover from it up to the amount of the check. 14
In the present case, BDO paid the value of Check No. 0127-242250 to Union Bank, which, in turn, credited
the amount to New Wave's account. The payment by BDO was in violation of Lao's instruction because the
same was not issued in favor of Everlink, the payee named in the check. It must be pointed out that the
subject check was not even endorsed by Everlink to New Wave. Clearly, BDO violated its duty to charge to
Lao's account only those payables authorized by him.
Nevertheless, even with such clear violation by BDO of its duty, the loss would have ultimately pertained to
Union Bank. By stamping at the back of the subject check the phrase "all prior endorsements and/or lack of
it guaranteed," Union Bank had, for all intents and purposes treated the check as a negotiable instrument
and, accordingly, assumed the warranty of an endorser. Without such warranty, BDO would not have paid
the proceeds of the check. Thus, Union Bank cannot now deny liability after the aforesaid warranty turned
out to be false.15
Union Bank was clearly negligent when it allowed the check to be presented by, and deposited in the
account of New Wave, despite knowledge that it was not the payee named therein. Further, it could not
have escaped its attention that the subject checks were crossed checks.
A crossed check is one where two parallel lines are drawn across its face or across the comer thereof. A
check may be crossed generally or specially. A check is crossed especially when the name of a particular
banker or company is written between the parallel lines drawn. It is crossed generally when only the words
"and company" are written at all between the parallellines. 16
Jurisprudence dictates that the effects of crossing a check are: (1) that the check may not be encashed but
only deposited in the bank; (2) that the check may be negotiated only once - to one who has an account
with a bank; and (3) that the act of crossing the check serves as a warning to the holder that the check has
been issued for a definite purpose so that he must inquire if he has received the check pursuant to that
purpose.17 The effects of crossing a check, thus, relate to the mode of payment, meaning that the drawer
had intended the check for deposit only by the rightful person, i.e., the payee named therein. 18
It is undisputed that Check No. 0127-242250 had been crossed generally as nothing was written between
the parallel lines appearing on the face of the instrument. This indicated that Lao, the drawer, had intended
the same for deposit only to the account of Everlink, the payee named therein. Despite this clear intention,
however, Union Bank negligently allowed the deposit of the proceeds of the said check in the account of New
Wave.
Generally, BDO must be ordered to pay Lao the value of the subject check; whereas, Union Bank would be
ordered to reimburse BDO the amount of the check. The aforesaid sequence of recovery, however, is not
applicable in the present case due to the presence of certain factual peculiarities.
Simplification of the proceedings for Recovery
Although the rule on the sequence of recovery has been deeply engrained in jurisprudence, there may be
exceptional circumstances which would justify its simplification. Stated differently, the aggrieved party may
be allowed to recover directly from the person which caused the loss when circumstances warrant.
In Associated Bank v. Court of Appeals (Associated Bank),19 the person who suffered the loss as a result of
the unauthorized encashment of crossed checks was allowed to recover the loss directly from the negligent
bank despite the latter's contention of lack of privity of contract. The Court said:
There being no evidence that the crossed checks were actually received by the private respondent, she
would have a right of action against the drawer companies, which in turn could go against their respective
drawee banks, which in turn could sue the herein petitioner as collecting bank. In a similar situation, it was
held that, to simplify proceedings, the payee of the illegally encashed checks should be allowed to recover
directly from the bank responsible for such encashment regardless of whether or not the checks were
actually delivered to the payee. We approve such direct action in the case at bar. 20
A peculiar circumstance in Associated Bank is the fact that the drawer companies, which should have been
directly liable to the aggrieved payee, were not impleaded as parties in the suit. In this regard, it is a
fundamental principle in this jurisdiction that a person cannot be prejudiced by a ruling rendered in an
action or proceeding in which he has not been made a party. This principle conforms to the constitutional
guarantee of due process of law.21 To the mind of the Court, this principle was a foremost underlying
consideration for allowing the direct recovery by the payee from the negligent collecting bank.
Finality of the RTC decision with respect to BDO justifies the simplification of the proceedings for recovery.
BDO argues that the appellate court erred in ordering it to pay the amount of the subject check to Lao
because it was no longer a party in the case, not being impleaded in the appeal, and that the issue as
regards its liability had already been settled with finality by the RTC.
The Court agrees.
It has been held that it is not the caption of the pleading, but the allegations therein that are controlling.
The non-inclusion of a party in the title of the pleading is not fatal to the case, provided there is a statement
in the body indicating that such non-included person is a party to the case. 22
BDO was not impleaded as a party in Union Bank's appeal before the CA. This is evident from the title of the
case before the CA, and the respective briefs of Union Bank and Lao, which mentioned only Lao and Union
Bank as parties thereto. Moreover, in their respective briefs before the appellate court, neither Lao 23 nor
Union Bank24 made any statement or raised any issue on BDO's liability and its inclusion as a party in the
appeal.
Consequently, because of Lao and Union Bank's failure to appeal the July 9, 2012 Decision of the RTC with
respect to BDO's lack of liability, said decision became final as to the latter.
The finality of the July 9, 2012 RTC Decision as to BDO, which absolved it from any liability, necessarily
means that it could not be prejudiced or adversely affected by the decision rendered in the appeal. It is
elementary in this jurisdiction that a person cannot be bound by a decision wherein it was not a party. 25A
contrary finding would violate BDO's constitutional right to due process. Needless to state, the appellate
court erred in ordering BDO to pay the amount of the subject check because the latter was not made a party
in the appeal, and the issue as to its liability or lack thereof, was not raised on appeal.
From the foregoing, the Court is of the considered view that the pronouncements made in Associated
Bank as regards the simplification of the recovery proceedings are applicable in the present case. The factual
milieu of this case are substantially similar with that of Associated Bank, i.e., a crossed check was presented
and deposited, without authority, in the account of a person other than the payee named therein; the
collecting bank endorsed the crossed check and warrant the validity of all prior endorsements and/or lack of
it; the warranty turned out to be false; and, a party to the check transaction, which would otherwise be held
liable to the party aggrieved, was not made a party in the proceedings in court.
To summarize, Lao, the drawer of the subject check, has a right of action against BDO for its failure to
comply with its duty as the drawee bank. BDO, in turn, would have a right of action against Union Bank
because of the falsity of its warranties as the collecting bank. Considering, however, that BDO was not made
a party in the appeal, it could no longer be held liable to Lao. Thus, following Associated Bank, the
proceedings for recovery must be simplified and Lao should be allowed to recover directly from Union Bank.
WHEREFORE, the petition is GRANTED. The October 14, 2015 Decision and the September 5, 2016
Resolution of the Court of Appeals in CA-G.R. CV No. 100351 are hereby REVERSED and SET ASIDEinsofar
as it ordered petitioner BDO Unibank, Inc. to pay Selwyn Lao the amount of Check No. 0127-242250. The
rest of the decision is AFFIRMED.
The amount shall earn interest at the rate of twelve percent (12%) per annum from August 24,2001, the
date of judicial demand, to June 30,2013. From July 1, 2013, the rate shall be six percent (6%) per
annum until full satisfaction.
SO ORDERED.
INSURANCE LAW
G.R. No. 204736, November 28, 2016

MANULIFE PHILIPPINES, INC.,1 Petitioners, v. HERMENEGILDA YBAÑEZ, Respondent.
DECISION
DEL CASTILLO, J.:
Assailed in this Petition for Review on Certiorari2 are the April 26, 2012 Decision3 of the Court of Appeals
(CA) in CA-G.R. CV No. 95561 and its December 10, 2012 Resolution 4 which affirmed the April 22, 2008
Decision5 and the June 15, 2009 Order6 of the Regional Trial Court (RTC), Branch 57, Makati City in Civil
Case No. 04-1119.
Factual Antecedents
Before the RTC of Makati City, Manulife Philippines, Inc. (Manulife) instituted a Complaint 7 for Rescission of
Insurance Contracts against Hermenegilda Ybañez (Hermenegilda) and the BPI Family Savings Bank (BPI
Family). This was docketed as Civil Case No. 04-1119.
It is alleged in the Complaint that Insurance Policy Nos. 6066517-1 8 and 6300532-69 (subject insurance
policies) which Manulife issued on October 25, 2002 and on July 25, 2003, respectively, both in favor of Dr.
Gumersindo Solidum Ybañez (insured), were void due to concealment or misrepresentation of material facts
in the latter's applications for life insurance, particularly the forms entitled Non-Medical Evidence dated
August 28, 2002 (NME),10 Medical Evidence Exam dated September 10, 2002 (MEE), 11and the Declaration of
Insurability in the Application for Life Insurance (DOI) dated July 9, 2003; 12 that Hermenegilda, wife of the
said insured, was revocably designated as beneficiary in the subject insurance policies; that on November
17, 2003, when one of the subject insurance policies had been in force for only one year and three months,
while the other for only four months, the insured died; that on December 10, 2003, Hermenegilda, now
widow to the said insured, filed a Claimant's Statement-Death Claim 13 with respect to the subject insurance
policies; that the Death Certificate dated November 17, 200314 stated that the insured had "Hepatocellular
CA., Crd Stage 4, secondary to Uric Acid Nephropathy; SAM Nephropathy recurrent malignant pleural
effusion; NASCVC"; that Manulife conducted an investigation into the circumstances leading to the said
insured's death, in view of the aforementioned entries in the said insured's Death Certificate; that Manulife
thereafter concluded that the insured misrepresented or concealed material facts at the time the subject
insurance policies were applied for; and that for this reason Manulife accordingly denied Hermenegilda's
death claims and refunded the premiums that the insured paid on the subject insurance policies. 15
Manulife also set forth in said Complaint the details of the insured's supposed misrepresentation/s or
concealment/s, to wit:
2.6. On the basis of the authority granted by [Hermenegilda] in her Claimant's Statement (Annex "H"),
[Manulife] conducted an investigation [into] the Insured's medical records and history, and discovered that
the Insured concealed material facts which the law, good faith, and fair dealing required him to reveal when
he answered the [NME] (Annex "C"), [the MEE] (Annex "D"), and [the DOI] (Annex "E"), as follows:
(1) Insured's confinement at the Cebu Doctors' Hospital [CDH] from 27 December 2000 to 31 December
2000, wherein he underwent total parotidectomy on 28 December 2000 due to the swelling of his right
parotid gland and the presence of a tumor, and was found to have had a history of being hypertensive, and
his kidneys have become atretic or shrunken. A copy of each of the Admission and Discharge Record and
PGIS' Interns' Progress Notes and Operative Record of the [CDH] is attached hereto and made an integral
part hereof as Annex "K", "K-1", and "K-2", respectively.
(2) Insured’s confinement at the CDH from 9 May 2002 to 14 May 2002, wherein he was diagnosed to have
acute pancreatitis, in addition to being hypertensive. A copy [of] each of the Insured's Admission and
Discharge Record and Doctor's History/Progress Notes is attached hereto and made an integral part hereof
as Annex "L" and "L-1", respectively.
(3) Insured's diagnosis for leptospirosis in 2000. A copy [of] each of the Insured's Admission and Discharge
Record and History Sheet is attached hereto and made an integral part hereof as Annex "M" and "M-1",
respectively.
xxxx
2.8. Due to the Insured's concealment of material facts at the time the subject insurance policies were
applied for and issued, [Manulife] exercised its right to rescind the subject insurance contracts and denied
the claims on those policies.
x x x x16
Manulife thus prayed that judgment be rendered finding its act of rescinding the subject insurance policies
proper; declaring these subject insurance policies null and void; and discharging. it from any obligation
whatsoever under these policies.17
In her Answer, Hermenegilda countered that:

6. [Manulife's own insurance agent, Ms. Elvira Monteclaros herself] assured [the insured,] that there would
be no problem regarding the application for the insurance policy. In tact, it was Monteclaros who filled up
everything in the questionnaire (Annex "C" of the [C]omplaint), so that [all that the insured needed to do
was sign it,] and it's done. [It was also Ms. Monteclaros who herself] checked in advance all the boxes in
Annex "C," [that the insured himself was required to answer or check].
xxxx
10. The four grounds for denial as enumerated in Annex "N" of the complaint are refuted as follows:
1) [The insured's] hospital confinement on 27 December 2000 at [the CDH was] due to right parotid
swelling secondary to tumor [for which he] underwent Parotidectomy on 28 December 2000. (There is an
obvious scar and disfigurement in the right side of [the insured's] face, in front, and below his ear. This
[ought to] have been easily noticed by [Manulife's company] physician, Dr. [Winifredo] Lumapas.
2) [The insured's] history of Hypertension [has been] noted 03 years prior to [the insured's] admission on
27 December 2000. (This is not something serious or fatal)
3) [The insured's] history of Leptospirosis in 2000. (This is not confirmed)
4) [The insured's] hospital confinement [at the CDH] on 09 May 2002 with findings of Agute Pancreatitis
(This is related to the gallstones of [the insured]. When the gallbladder is diseased, distention is impossible
and its pressure regulating function is lost - a fact that may explain high incidence of pancreatitis in patient
with cholecystic disease. [The insured] had cholecystitis, so his acute pancreatitis is related to the
cholecystitis and chol[e]lithiasis (gallstones).
xxxx
11. [Manulife] accepted [the insured's] application, and now that a claim for the benefits [is] made,
[Manulife now] says that [the insured] misrepresented and concealed his past illnesses[!] In the form filled
up by [Dr. Winifredo F. Lumapas,] Manulife's [company] physician, dated 9/10/02, [the insured] checked
the column which says ''yes" (to] the following questions:
 Have you had electrocardiograms, when, why, result? ([Manulife's company

physician] wrote the answer which stated that result was normal.)
 Have you seen a doctor, or had treatment operation on hospital case during the
last five years?
12. x x x It is rather strange that [the insured's] parotidectomy was not included in the report when the scar
of that operation can not be concealed because it caused a disfigurement in the right side of his face in front
and below his ear. This is just too obvious to be overlooked by [Manulife's company physician] who
examined and interviewed [the insured] before accepting the policy. x x x
13. x x x [Undoubtedly, Manulife] had the option to inquire further [into the insured's physical condition,
because the insured had given it authority to do so] based on the authority given by [the insured. And how
come that Manulife] was able to gather all [these] information now and not before [the insured] was
ensured? x x x
xxxx
16. Moreover, in the comments of [the said] Dr. Lumapas, (Annex "D" of the Complaint), he said the
physical condition of [the] then prospective insurance policy holder, [the insured, was] "below average". x x
x [Estoppel now bars Manulife from claiming the contrary.]
17. [Especially] worth noting are the [following] comments of [the said Dr. Lumapas, on the insured's
answer to the questionnaires] - (Annex "D" of the Complaint), [to wit:]
"4. d. Have you had any electrocardiograms, when, why, result. "Yes"
- on June 2002 at CDH, Cebu City
= Cardiac clearance for surgery
= Result normal
16. Have you seen a doctor, or had treatment, operation or hospital care during the last 5 years? "Yes"
admitted at [CDH,] Cebu City by Dr. Lamberto Garcia and Dr. Jorge Ang for Chronic Calculous
Chol[e]cystitis
= Cholecystectomy done [J]une 7[,] 2002 by Dr. Ang
= Biopsy: Gallbladder Chronic Calculous Cholecystitis
= CBC, Hepatitis Panel done - all negative results except hepatitis antigen(+)
18. Do you. consume alcohol beverages? If so, how much? Yes, consumes 12 shots of whisky during
socials.
25. The abdomen - Abnormality of any viscus, genitalia or evidence of hernia or operation - post
cholecystectomy scar.
26. The head and neck - vision, optic, fundi, hearing, speech, thyroid etc. Yes wears eyeglasses for reading.
(This is where [Manulife's company physician] should have written the scar of [the insured's] parotidectomy
as shown in the picture).
32. From your knowledge of this person would you consider his/ her health to be Average [ ] Below
average [/] Poor [ ]
(Underscoring ours)
18. It is interesting to note that the answers in the insurance agent's form for [the insured] (Annex "C" of
the Complaint) did not jibe with the answers [made by] Dr. Lumapas in Annex "D" of the Complaint. This
only boosts Hermenegilda's claim that x x x indeed, it was the Manulife's agent herself, (Ms. Montesclaros)
who checked all the items in the said form to speed up the insurance application and its approval, [so she
could] get her commission as soon as possible.
19. In fine, at the time when both insurance policies in question were submitted for approval to [Manulife,
the latter had had all the forewarnings that should have put it on guard or on notice that things were not
what it wanted them to be, reason enough to bestir it into exercising greater prudence and caution to
further inquire into) the health or medical history of [the insured]. In particular, Manulife ought to have
noted the fact that the insured was at that time already 65 years old, x x x that he had a previous
operation, and x x x that his health was "below average. x x x 18
On November 25, 2005, BPI Family filed a Manifestation 19 praying that either it be dropped from the case or
that the case be dismissed with respect to it (BPI Family), because it no longer had any interest in the
subject insurance policies as asssignee because the insureds obligation with it (BPI Family) had already been
settled or paid. Since no objection was interposed to this prayer by either Manulife or Hermenegilda, the
RTC granted this prayer in its Order of November 25, 2005. 20
Then in the Second Order dated November 25, 2005, 21 the RTC considered the pre-trial as terminated. Trial
then ensued.
Manulife presented its sole witness in the person of Ms. Jessiebelle Victoriano (Victoriano), the Senior
Manager of its Claims and Settlements Department.22 The oral testimony of this witness chiefly involved
identifying herself as the Senior Manager of Manulife's Claims and Settlements Department and also
identifying the following pieces of evidence;23 the subject insurance policies; NME, MEE, DOI; the
Assignment of Policy No. 6066517-1 to BPI Family as collateral, dated July 9, 2003; its Letter dated July 10,
2003 re: assignment of said Policy; death claim filed by Hermenegilda on December 10, 2003; the insured's
Death Certificate; the Marriage Contract between the insured and Hermenegilda; copies of CDH's Admission
and Discharge Records of the insured for December 2000 re: parotidectomy; copies of CDH's PGIS' Interns'
Notes and CDH Operative Record dated December 28, 2000 re: hypertension; copies of CDH's Admission
and Discharge Record of the insured for May 2002, and the Doctor's History/Progress Notes re: acute
pancreatitis and hypertension; copies of CDH's Admission and Discharge Record of the insured for October
2003 re: leptospirosis; letters dated March 24, 2004 to Hermenegilda and BPI Family; and BPI Checks
deposited on April 10, 2004 and May 14, 2004 to the bank accounts of BPI Family and Hermenegilda,
respectively, representing the premium refund.
In its Order of October 2, 2006,24 the RTC admitted all these exhibits.
Like Manulife, Hermenegilda, in an1plication of her case, also called only one witness to the witness stand:
her counsel of record, Atty. Edgardo Mayol (Atty. Mayol), whose testimony focused on his professional
engagement with Hermenegilda and the monetary expenses he incurred in attending to the hearings in this
case.25 Hermenegilda thereafter filed her Formal Offer of Evidence 26 wherein she proffered the following:
cralawred
NME, MEE, DOI, the insured's driver's license, her letter dated May 8, 2004 protesting the denial by Manulife
of her insurance claim, the contract of services between her and Atty. Mayol, the official receipts for plane
tickets, terminal fees, and boarding passes, attesting to Atty. Mayol's plane travels to and from Cebu City to
attend to this case. These were all admitted by the RTC. 27
Ruling of the Regional Trial Court
After due proceedings, the RTC dismissed Manulife's Complaint, thus:

WHEREFORE, premises duly considered, judgment is hereby rendered DISMISSING the instant case for
insufficiency of evidence.
[Manulife] is hereby ordered to pay [Hermenegilda] actual expenses in the sum of P40,050.00 and
attorney's fees in the sum of P100,000.
[Hermenegilda's] claim for moral and exemplary damages is denied for lack of evidence.
SO ORDERED.28
The RTC found no merit at all in Manulife's Complaint for rescission of the subject insurance policies because
it utterly failed to prove that the insured had committed the alleged misrepresentation/s or concealment/s.
In fact, Victoriano, the one and only witness that Manulife called to the witness stand, gave no firsthand,
direct evidence at all relative to the particulars of the alleged misrepresentation/s or concealment/s that the
insured allegedly practiced or committed against it. This witness did not testify at all in respect to the
circumstances under which these documentary exhibits were executed, nor yet about what these
documentary exhibits purported to embody. The RTC stressed that the CDH medical records that might or
could have established the insured's misrepresentation/s or concealment/s were inadmissible for being
hearsay, because Manulife did not present the physician or doctor, or any responsible official of the CDH,
who could confirm the due execution and authenticity of its medical records; that if anything, Manulife itself
admitted in its Reply29 that its very own company physician, Dr. Winifredo Lumapas, had duly noted the
insured's scar, even as the same company physician also categorized in the MEE the insured's health as
"below average"; and that in short, it is evident that Manulife thus had had ample opportunity to verify and
to inquire further into the insured's medical history commencing from the date of the MEE but opted not to
do so; and that if things did not come up to its standards or expectations, it was totally at liberty to reject
the insured's applications altogether, or it could have demanded a higher premium for the insurance
coverage.
The RTC further ruled that Hermenegilda was entitled to attorney's fees in the sum of P100,000.00 and
actual expenses in the amount of P40,050.00, because she was compelled to litigate to defend her interest
against Manulife's patently unjustified act in rejecting her clearly valid and lawful claim. The RTC also found
merit in Hermenegilda's claims relative to the expenses she paid her Cebu-based counsel.
In its Order of June 15, 2009,30 the RTC denied tor lack of merit Manulife's motion for reconsideration 31and
Hermenegilda's motion for partial reconsideration.32
From the RTC's Decision, Manulife filed a Notice of Appeal 33 which was given due course by the RTC in its
Order of June 11, 2010.34
Ruling of the Court of Appeals
In its appellate review, the CA virtually adopted en toto the findings of facts made by, and the conclusions of
law arrived at, by the RTC. Thus, the CA decreed:
WHEREFORE, the instant appeal is DENIED. TI1e assailed Decision dated April 22, 2008 and Order dated
Jtn1e 15, 2009 of the Regional Trial Court of Makati, Branch 57, are hereby AFFIRMED.
SO ORDERED.35
The CA, like the RTC, found Manulife's Complaint bereft of legal and factual bases. The CA ruled that it is
settled that misrepresentation or concealment in insurance is an affirmative defense, which the insurer must
establish by convincing evidence if it is to avoid liability; and that in this case the one and only witness
presented by Manulife utterly failed to prove the basic elements of the alleged misrepresentation/s or
concealment/s of material facts imputed by Manulife against the now deceased insured. The CA held that
there is no basis for Manulife's claim that it is exempted from the duty of proving the insured's supposed
misrepresentation/s or concealment/s, as these had allegedly been admitted already in Hermenegilda's
Answer; that in the absence of authentication by a competent witness, the purported CDH medical records
of the insured are deemed hearsay hence, inadmissible, and devoid of probative value; and that the medical
certificate, even if admitted in evidence as an exception to the hearsay rule, was still without probative
value because the physician or doctor or the hospital's official who issued it, was not called to the witness
stand to validate it or to attest to it.
Manulife moved for reconsideration36 of the CA's Decision, but this was denied by the CA in its Resolution of
December 10, 2012;37 hence, the present recourse.
Issue
Whether the CA committed any reversible error in affirming the RTC Decision dismissing Manulife's
Complaint for rescission of insurance contracts for failure to prove concealment on the part of the insured.
Our Ruling
The present recourse essentially challenges anew the findings of fact by both the RTC and the CA that the
Complaint for rescission of the insurance policies in question will not prosper because Manulife failed to
prove concealment on the part of the insured. This is not allowed. It is horn-book law that in appeal
by certiorari to this Court under Rule 45 of the Revised Rules of Court, the findings of fact by the CA
especially where such findings of fact are affirmatory or confirmatory of the findings of fact of the RTC, as in
this case, are conclusive upon this Court. The reason is simple: this Court not being a trial court, it does not
embark upon the task of dissecting, analyzing, evaluating, calibrating or weighing all over again the
evidence, testimonial or documentary, that the parties adduced during trial. Of course, there are exceptions
to this rule, such as (1) when the conclusion is grounded upon speculations, surmises or conjectures; (2)
when the inference is manifestly mistaken, absurd or impossible; (3) when there is a grave abuse of
discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of fact are
conflicting; (6) when there is no citation of specific evidence on which the factual findings are based; (7)
when the findings of absence of facts is contradicted by the presence of evidence on record; (8) when the
findings of the CA are contrary to the findings of the RTC; (9) when the CA manifestly overlooked certain
relevant and undisputed facts that, if properly considered, would justify a different conclusion; (10) when
the findings of the CA are beyond the issues of the case; and, (11) when the CA's findings are contrary to
the admission of both parties.38 We are satisfied that none of these exceptions obtains in the Petition at
bench. Thus, this Court must defer to the findings of fact of the RTC - as affirmed or confirmed by the CA -
that Manulife's Complaint for rescission of the insurance policies in question was totally bereft of factual and
legal bases because it had utterly failed to prove that the insured had committed the alleged
misrepresentation/s or concealment/s of material facts imputed against him. The RTC correctly held that the
CDH's medical records that might have established the insured's purported misrepresentation/s or
concealment/s was inadmissible for being hearsay, given the fact that Manulife failed to present the
physician or any responsible official of the CDH who could confirm or attest to the due execution and
authenticity of the alleged medical records. Manulife had utterly failed to prove by convincing evidence that
it had been beguiled, inveigled, or cajoled into selling the insurance to the insured who purportedly with
malice and deceit passed himself off as thoroughly sound and healthy, and thus a fit and proper applicant
for life insurance. Manulife's sole witness gave no evidence at all relative to the particulars of the purported
concealment or misrepresentation allegedly perpetrated by the insured. In fact, Victoriano merely
perfunctorily identified the documentary exhibits adduced by Manulife; she never testified in regard to the
circumstances attending the execution of these documentary exhibits much less in regard to its contents. Of
course, the mere mechanical act of identifying these documentary exhibits, without the testimonies of the
actual participating parties thereto, adds up to nothing. These documentary exhibits did not automatically
validate or explain themselves. "The fraudulent intent on the part of the insured must be established to
entitle the insurer to rescind the contract. Misrepresentation as a defense of the insurer to avoid liability is
an affirmative defense and the duty to establish such defense by satisfactory and convincing evidence rests
upon the insurer."39 For failure of Manulife to prove intent to defraud on the part of the insured, it cannot
validly sue for rescission of insurance contracts.
WHEREFORE, the Petition is DENIED. The assailed Decision of the Court of Appeals dated April 26, 2012 in
CA-G.R. CV No. 95561 and its December 10, 2012 Resolution, are AFFIRMED.
SO ORDERED. cralawlawlibrary
G.R. No. 192159, January 25, 2017
COMMUNICATION AND INFORMATION SYSTEMS CORPORATION, Petitioner, v. MARK SENSING

AUSTRALIA PTY. LTD., MARK SENSING PHILIPPINES, INC. AND OFELIA B. CAJIGAL, Respondent.
DECISION
JARDELEZA, J.:
This is a petition for review on certiorari1 seeking to set aside the Decision2 dated November 25, 2009 and
Resolution3 dated April 23, 2010 of the Court of Appeals (CA) in CA-G.R. SP No. 110511. The question is
whether courts may approve an attachment bond which has been reinsured as to the excess of the issuer's
statutory retention limit.
Petitioner Communication and Information Systems Corporation (CISC) and respondent Mark Sensing
Australia Pty. Ltd. (MSAPL) entered into a Memorandum of Agreement 4 (MOA) dated March 1, 2002 whereby
MSAPL appointed CISC as "the exclusive AGENT of [MSAPL] to PCSO during the [lifetime] of the recently
concluded Memorandum of Agreement entered into between [MSAPL], PCSO and other parties." The recent
agreement referred to in the MOA is the thermal paper and bet slip supply contract (the Supply Contract)
between the Philippine Charity Sweepstakes Office (PCSO), MSAPL, and three other suppliers, namely Lamco
Paper Products Company, Inc. (Lamco Paper), Consolidated Paper Products, Inc. (Consolidated Paper) and
Trojan Computer Forms Manufacturing Corporation (Trojan Computer Forms). 5As consideration for CISC's
services, MSAPL agreed to pay CISC a commission of 24.5% of future gross sales to PCSO, exclusive of
duties and taxes, for six years.6
After initially complying with its obligation under the MOA, MSAPL stopped remitting commissions to CISC
during the second quarter of 2004. MSAPL justified its action by claiming that Carolina de Jesus, President of
CISC, violated her authority when she negotiated the Supply Contract with PCSO and three of MSAPL's
competitors. According to MSAPL, it lost almost one-half of its business with PCSO because the Supply
Contract provided that MSAPL's business with PCSO shall be limited to the latter's Luzon operations, with
MSAPL supplying 70% of thermal rolls and 50% of bet slips. MSAPL pointed out that it used to have a Build
Operate Transfer (BOT) Agreement with PCSO where it undertook to build a thermal paper and bet slip
manufacturing facility to supply all requirements of PCSO. However, PCSO unilaterally cancelled the BOT
Agreement and granted supply contracts to Lamco Paper, Consolidated Paper and Trojan Computer Forms,
which ultimately resulted in litigation between the parties.7 The suit was eventually settled when PCSO,
MSAPL, and the three other suppliers entered into the Supply Contract, which was submitted and approved
by the Regional Trial Court (RTC), Branch 224 of Quezon City, as a compromise agreement. 8MSAPL felt
shortchanged by CISC's efforts and thus decided to withhold payment of commissions.
As a result of MSAPL's refusal to pay, CISC filed a complaint before the RTC in Quezon City for specific
performance against MSAPL, Mark Sensing Philippines, Inc. (MSPI), Atty. Ofelia Cajigal, and PCSO. 9 CISC
prayed that private respondents be ordered to comply with its obligations under the MOA. It also asked the
RTC to issue a writ of preliminary mandatory injunction and/or writ of attachment. 10 The RTC denied CISC's
prayer for mandatory injunctive relief but ordered the PCSO to hold the amount being contested until the
final determination of the case.11 It later reversed itself, holding that its jurisdiction is limited to the amount
stated in the complaint and therefore had no jurisdiction to order PCSO to withhold payments in excess of
such amount.12 This order of reversal became the subject of a separate petition for certiorarifiled by CISC
before the CA, docketed as CA-G.R. SP No. 96620.13 The CA later reversed the RTC and ordered that the
additional docket fees shall constitute a lien on the judgment. 14
On September 10, 2007, the RTC granted CISC's application for issuance of a writ of preliminary
attachment, stating that "the non-payment of the agreed commission constitutes fraud on the part of the
defendant MSAPL in their performance of their obligation to the plaintiff." 15 The RTC found that MSAPL is a
foreign corporation based in Australia, and its Philippine subsidiary, MSPI, has no other asset except for its
collectibles from PCSO. Thus, the RTC concluded that CISC may be left without any security if ever MSAPL is
found liable.16 But the RTC limited the attachment to P4,861,312.00, which is the amount stated in the
complaint, instead of the amount sought to be attached by CISC, i.e., P113,197,309.10.17 The RTC
explained that it "will have to await the Supreme Court judgment over the issue of whether [it] has
jurisdiction on the amounts in the excess of the amount prayed for by the plaintiff in their complaint" since
MSAPL appealed the adverse judgment in CA-G.R. SP No. 96620 to us. 18 We later denied MSAPL's petition
for review assailing the CA Decision in CA-G.R. SP No. 96620 (subsequently docketed as G.R. No. 179073)
in a Resolution dated November 12, 2007.19 It became final and executory on March 25, 2008.20
In view of this development, CISC moved to amend the order of attachment to include unpaid commissions
in excess of the amount stated in the complaint. On December 22, 2008, the RTC granted CISC's motion
and issued a new writ of preliminary attachment.21 On April 13, 2009, the RTC, acting on the partial
motions for reconsideration by both CISC and MSAPL, modified the amount covered by the writ to reflect the
correct amount prayed for by CISC in its previous motion to amend the attachment order conditioned upon
the latter's payment of additional docket fees. It also denied MSAPL's opposition to the attachment order for
lack of merit.22 On July 2, 2009, the RTC modified its order insofar as it allowed CISC to pay docket fees
within a reasonable time.23
On July 8, 2009, CISC posted a bond in the amount of P113,197,309.10 through Plaridel Surety and
Insurance Company (Plaridel) in favor ofMSAPL, which the RTC approved on the same date. 24 Two days
later, MSAPL filed a motion to determine the sufficiency of the bond because of questions regarding the
financial capacity of Plaridel.25 But before the RTC could act on this motion, MSAPL, apparently getting hold
of Plaridel's latest financial statements, moved to recall and set aside the approval of the attachment bond
on the ground that Plaridel had no capacity to underwrite the bond pursuant to Section 215 of the old
Insurance Code26 because its net worth was only P214,820,566.00 and could therefore only underwrite up to
P42,964,113.20.27 On September 4, 2009, the RTC denied MSAPL's motion, finding that although Plaridel
cannot underwrite the bond by itself, the amount covered by the attachment bond "was likewise reinsured
to sixteen other insurance companies."28 However, "for the best interest of both parties," the RTC ordered
Plaridel to submit proof that the amount of P95,819,770.91 was reinsured. Plaridel submitted its compliance
on September 11, 2009, attaching therein the reinsurance contracts. 29
On September 18, 2009, MSAPL, MSPI and Atty. Ofelia Cajigal30 filed a petition for certiorari before the
CA, docketed as CA-G.R. SP No. 110511, assailing the Orders of the RTC dated April 13, 2009, July 2, 2009,
July 8, 2009, and September 4, 2009. In its now-assailed Decision elated November 25, 2009, the CA
granted the petition.31 It concluded that the petition for certiorari was filed on time because MSAPL did not
abandon their right to impugn the evidence submitted in the application for the writ of preliminary
attachment, because they filed a motion to determine the sufficiency of the bond. On the merits, it held that
the RTC exceeded its authority when it "ordered the issuance of the writ [of preliminary attachment] despite
a dearth of evidence to clearly establish [CISC's] entitlement thereto, let alone the latter's failure to comply
with all requirements therefor."32 Noting that the posting of the attachment bond is a jurisdictional
requirement, the CA concluded that since Plaridel's capacity for single risk coverage is limited to 20% of its
net worth, or P57,866,599.80, the RTC "should have set aside the second writ outright for non-compliance
with Sections 3 and 4 of Rule 57."33
After the CA perfunctorily denied CISC's motion for reconsideration on April 23, 2010, 34 it filed this petition
for review on certiorari.
II
CISC argues that the CA erred in giving due course to the petition insofar as it challenged the Orders dated
April 13, 2009, July 2, 2009, and July 8, 2009 because the reglementary period to challenge these Orders
already lapsed by the time private respondents filed their petition for certiorari below.35 In response, MSAPL
contends that since they continued to assail the additional attachment from the time it was first issued, the
60-day period should be counted from the final denial of their challenge to the additional attachment, which
was on September 4, 2009.36
MSAPL's theory is similar to that proffered by one of the parties in the case of San Juan, Jr. v. Cruz.37 The
petitioner therein filed second and third motions for reconsideration from an interlocutory order by the trial
court. When he filed the petition for certiorari with the CA, he counted the 60-day reglementary period from
the notice of denial of his third motion for reconsideration. He argued that since there is no rule prohibiting
the filing of a second or third motion for reconsideration of an interlocutory order, the 60-day period should
be counted from the notice of denial of the last motion for reconsideration. In resolving the question of when
the reglementary period for filing a petition for certiorari shall be counted, we held that the "60-day period
shall be reckoned from the trial court's denial of his first motion for reconsideration, otherwise indefinite
delays will ensue."38
Applying the rule in San Juan, MSAPL's challenge to the order dated April 13, 2009 was clearly time-barred.
The 60-day reglementary period for challenging the RTC's issuance of the amended writ of attachment
should be counted from April 27, 2009,39 the date when MSAPL received a copy of the April 13, 2009 Order
denying MSAPL's motion for reconsideration of the December 22, 2008 Order which granted CISC's motion
to amend the writ of preliminary attachment. The CA, however, considered MSAPL's act of filing a motion to
determine the sufficiency of the bond as a definitive indication that private respondents have not
"abandoned their right to impugn the evidence submitted in the application for the second writ." 40 This is
erroneous for two reasons: first, MSAPL's motion never impugned the propriety and factual bases of the
RTC's issuance of the amended writ of attachment; and second, even if it did, the motion would be
considered as a second motion for reconsideration, which could not have stayed the reglementary period
within which to file a petition for certiorari assailing an interlocutory order. We emphasize that the provisions
on reglementary periods are strictly applied, indispensable as they are to the prevention of needless delays,
and are necessary to the orderly and speedy discharge of judicial business. The timeliness of filing a petition
for certiorari is mandatory and jurisdictional, and should not be trifled with. 41
Meanwhile, the Orders dated July 2, 2009 and July 8, 2009 resolved incidental issues with respect to the
issuance of the amended writ of attachment, namely: (1) when the additional docket fees should be paid;
and (2) the approval of the attachment bond. As regards the first incidental issue, the RTC allowed CISC to
pay the additional docket fees "within a reasonable time but in no case beyond its applicable prescriptive or
reglementary period."42 MSAPL, instead of filing a motion for reconsideration of the July 2, 2009 Order,
elected to file a motion to compel CISC to pay the required docket fees on August 14, 2009. 43 Evidently,
MSAPL already recognized the validity of the July 2, 2009 Order and sought CISC's compliance with the
Order. Notably, the motion remained pending before the RTC when MSAPL filed its petition for certiorari with
the CA. We find that the petition for certiorari, insofar as it questions the alleged non-payment of docket
fees, was prematurely filed because the RTC has yet to rule on this issue. A petition for certiorari may be
resorted to only when there is no plain, speedy, and adequate remedy in the ordinary course of law. 44 It is
not up to parties to preempt the trial court's action on their motions. Absent any showing of unreasonable
delay on the part of the RTC-and there is none here, considering the short period between the filing of the
motion and the petition for certiorari, as well as the various incidents pending a quo-MSAPL's recourse to
theCA was premature. The more appropriate remedy for MSAPL would have been to move for the RTC to
resolve its pending motion instead of precipitately raising this matter in its petition for certiorari.45
This leaves the July 8, 2009 Order which approved the attachment bond Plaridel submitted. It was directly
challenged by MSAPL when the latter tiled a motion to determine the sufficiency of the bond because of
questions regarding Plaridel's financial capacity. Before the RTC could act on the motion, however, MSAPL
filed an urgent motion to recall and set aside the approval of the attachment bond, dated July 21, 2009, 46on
the ground that the attachment bond underwritten by Plaridel exceeded its retention limit under the
Insurance Code. The RTC resolved these two motions jointly in its September 4, 2009 Order, holding that
Section 215 allows insurance companies to insure a single risk in excess of retention limits provided that the
excess amount is ceded to reinsurers, and consequently affirming its approval of the attachment bond. In
turn, the September 4, 2009 Order became the anchor of MSAPL's petition for certiorari. Although not
captioned as "motions tor reconsideration," the twin motions filed by MSAPL directly challenged the approval
of the attachment bond, and the September 4, 2009 Order was the second time the RTC passed upon the
issue concerning the sufficiency of the bond. Therefore, the petition for certiorari filed by MSAPL on
September 18, 2009, insofar as it assailed both the July 8, 2009 and September 4, 2009 Orders, was timely
filed.
III
We now resolve the sole substantive issue before us: whether the RTC committed grave abuse of discretion
when it approved the attachment bond whose face amount exceeded the retention limit of the surety.
Section 215 of the old Insurance Code,47 the law in force at the time Plaridel issued the attachment bond,
limits the amount of risk that insurance companies can retain to a maximum of 20% of its net worth.
However, in computing the retention limit, risks that have been ceded to authorized reinsurers are ipso
jure deducted.48 In mathematical terms, the amount of retained risk is computed by deducting
ceded/reinsured risk from insurable risk.49 If the resulting amount is below 20% of the insurer's net worth,
then the retention limit is not breached. In this case, both the RTC and CA determined that, based on
Plaridel's financial statement that was attached to its certificate of authority issued by the Insurance
Commission, its net worth is P289,332,999.00.50 Plaridel's retention limit is therefore P57,866,599.80, which
is below the Pl13,197,309.10 face value of the attachment bond. However, it only retained an insurable risk
of P17,377,938.19 because the remaining amount of P98,819,770.91 was ceded to 16 other insurance
companies.51 Thus, the risk retained by Plaridel is actually P40 Million below its maximum retention limit.
Therefore, the approval of the attachment bond by the RTC was in order. Contrary to MSAPL's contention
that the RTC acted with grave abuse of discretion, we find that the RTC not only correctly applied the law
but also acted judiciously when it required Plaridel to submit proof of its reinsurance contracts after MSAPL
questioned Plaridel's capacity to underwrite the attachment bond. Apparently, MSAPL failed to appreciate
that by dividing the risk through reinsurance, Plaridel's attachment bond actually became more reliable-as it
is no longer dependent on the financial stability of one company-and, therefore, more beneficial to MSAPL.
In cancelling Plaridel's insurance bond, the CA also found that because the reinsurance contracts were
issued in favor of Plaridel, and not MSAPL, these failed to comply with the requirement of Section 4, Rule 57
of the Rules of Court requiring the bond to be executed to the adverse party. 52 This led the CA to conclude
that "the bond has been improperly and insufficiently posted." 53 We reverse the CA and so hold that the
reinsurance contracts were correctly issued in favor of Plaridel. A contract of reinsurance is one by which an
insurer (the "direct insurer" or "cedant") procures a third person (the "reinsurer") to insure him against loss
or liability by reason of such original insurance.54 It is a separate and distinct arrangement from the original
contract of insurance, whose contracted risk is insured in the reinsurance agreement. 55The reinsurer's
contractual relationship is with the direct insurer, not the original insured, and the latter has no interest in
and is generally not privy to the contract of reinsurance.56 Put simply, reinsurance is the "insurance of an
insurance."57
By its nature, reinsurance contracts are issued in favor of the direct insurer because the subject of such
contracts is the direct insurer's risk-in this case, Plaridel's contingent liability to MSAPL and not the risk
assumed under the original policy.58 The requirement under Section 4, Rule 57 of the Rules of Court that the
applicant's bond be executed to the adverse party necessarily pertains only to the attachment bond itself
and not to any underlying reinsurance contract. With or without reinsurance, the obligation of the surety to
the party against whom the writ of attachment is issued remains the same.
WHEREFORE, the petition is GRANTED. The Decision dated November 25, 2009 and Resolution dated April
23, 2010 of the Court of Appeals in CA-G.R. SP No. 110511 are SET ASIDE.
SO ORDERED. chanroblesvirtuallawlibrary
G.R. No. 190702, February 27, 2017
JAIME T. GAISANO, Petitioner, v. DEVELOPMENT INSURANCE AND SURETY

CORPORATION, Respondent.
DECISION
JARDELEZA, J.:
This is a petition for review on certiorari1 seeking to nullify the Court of Appeals' (CA) September 11, 2009
Decision2 and November 24, 2009 Resolution3 in CA-G.R. CV No. 81225. The CA reversed the September 24,
2003 Decision4 of the Regional Trial Court (RTC) in Civil Case No. 97-85464. The RTC granted Jaime T.
Gaisano's (petitioner) claim on the proceeds of the comprehensive commercial vehicle policy issued by
Development Insurance and Surety Corporation (respondent), viz.: ChanRoblesVirtualawlibrary
IN VIEW OF THE FOREGOING, the decision appealed from is reversed, and the defendant-appellant ordered
to pay the plaintiff-appellee the sum of P55,620.60 with interest at 6 percent per annum from the date of
the denial of the claim on October 9, 1996 until payment.
SO ORDERED.5 chanroblesvirtuallawlibrary
The facts are undisputed. Petitioner was the registered owner of a 1992 Mitsubishi Montero with plate
number GTJ-777 (vehicle), while respondent is a domestic corporation engaged in the insurance
business.6 On September 27, 1996, respondent issued a comprehensive commercial vehicle policy 7 to
petitioner in the amount of P1,500,000.00 over the vehicle for a period of one year commencing on
September 27, 1996 up to September 27, 1997.8 Respondent also issued two other commercial vehicle
policies to petitioner covering two other motor vehicles for the same period. 9
To collect the premiums and other charges on the policies, respondent's agent, Trans-Pacific Underwriters
Agency (Trans-Pacific), issued a statement of account to petitioner's company, Noah's Ark Merchandising
(Noah's Ark).10 Noah's Ark immediately processed the payments and issued a Far East Bank check dated
September 27, 1996 payable to Trans-Pacific on the same day. 11 The check bearing the amount of
P140,893.50 represents payment for the three insurance policies, with P55,620.60 for the premium and
other charges over the vehicle.12 However, nobody from Trans-Pacific picked up the check that day
(September 27) because its president and general manager, Rolando Herradura, was celebrating his
birthday. Trans-Pacific informed Noah's Ark that its messenger would get the check the next day, September
28.13
In the evening of September 27, 1996, while under the official custody of Noah's Ark marketing manager
Achilles Pacquing (Pacquing) as a service company vehicle, the vehicle was stolen in the vicinity of SM
Megamall at Ortigas, Mandaluyong City. Pacquing reported the loss to the Philippine National Police Traffic
Management Command at Camp Crame in Quezon City.14 Despite search and retrieval efforts, the vehicle
was not recovered.15
Oblivious of the incident, Trans-Pacific picked up the check the next day, September 28. It issued an official
receipt numbered 124713 dated September 28, 1996, acknowledging the receipt of P55,620.60 for the
premium and other charges over the vehicle. 16 The check issued to Trans-Pacific for P140,893.50 was
deposited with Metrobank for encashment on October 1, 1996. 17
On October 1, 1996, Pacquing informed petitioner of the vehicle's loss. Thereafter, petitioner reported the
loss and filed a claim with respondent for the insurance proceeds of P1,500,000.00. 18 After investigation,
respondent denied petitioner's claim on the ground that there was no insurance contract. 19 Petitioner,
through counsel, sent a final demand on July 7, 1997. 20 Respondent, however, refused to pay the insurance
proceeds or return the premium paid on the vehicle.
On October 9, 1997, petitioner filed a complaint for collection of sum of money and damages 21 with the RTC
where it sought to collect the insurance proceeds from respondent. In its Answer, 22 respondent asserted that
the non-payment of the premium rendered the policy ineffective. The premium was received by the
respondent only on October 2, 1996, and there was no known loss covered by the policy to which the
payment could be applied.23
In its Decision24 dated September 24, 2003, the RTC ruled in favor of petitioner. It considered the premium
paid as of September 27, even if the check was received only on September 28 because (1) respondent's
agent, Trans-Pacific, acknowledged payment of the premium on that date, September 27, and (2) the check
that petitioner issued was honored by respondent in acknowledgment of the authority of the agent to
receive it.25 Instead of returning the premium, respondent sent a checklist of requirements to petitioner and
assigned an underwriter to investigate the claim. 26 The RTC ruled that it would be unjust and inequitable not
to allow a recovery on the policy while allowing respondent to retain the premium paid. 27 Thus, petitioner
was awarded an indemnity of P1,500,000.00 and attorney's fees of P50,000.00. 28
After respondent's motion for reconsideration was denied,29 it filed a Notice of Appeal.30 Records were
forwarded to the CA.31
The CA granted respondent's appeal.32 The CA upheld respondent's position that an insurance contract
becomes valid and binding only after the premium is paid pursuant to Section 77 of the Insurance Code
(Presidential Decree No. 612, as amended by Republic Act No. 10607). 33 It found that the premium was not
yet paid at the time of the loss on September 27, but only a day after or on September 28, 1996, when the
check was picked up by Trans-Pacific.34 It also found that none of the exceptions to Section 77 obtains in
this case.35 Nevertheless, the CA ordered respondent to return the premium it received in the amount of
P55,620.60, with interest at the rate of 6% per annum from the date of the denial of the claim on October
9, 1996 until payment.36
Hence petitioner filed this petition. He argues that there was a valid and binding insurance contract between
him and respondent.37 He submits that it comes within the exceptions to the rule in Section 77 of the
Insurance Code that no contract of insurance becomes binding unless and until the premium thereof has
been paid. The prohibitive tenor of Section 77 does not apply because the parties stipulated for the payment
of premiums.38 The parties intended the contract of insurance to be immediately effective upon issuance,
despite non-payment of the premium, because respondent trusted petitioner. 39He adds that respondent
waived its right to a pre-payment in full of the terms of the policy, and is in estoppel.40
Petitioner also argues that assuming he is not entitled to recover insurance proceeds, but only to the return
of the premiums paid, then he should be able to recover the full amount of P140,893.50, and not merely
P55,620.60.41 The insurance policy covered three vehicles yet respondent's intention was merely to
disregard the contract for only the lost vehicle.42 According to petitioner, the principle of mutuality of
contracts is violated, at his expense, if respondent is allowed to be excused from performance on the
insurance contract only for one vehicle, but not as to the two others, just because no loss is suffered as to
the two. To allow this "would be to place exclusively in the hands of one of the contracting parties the right
to decide whether the contract should stand or not x x x."43
For failure of respondent to tile its comment to the petition, we declared respondent to have waived its right
to file a comment in our June 15, 2011 Resolution.44
The lone issue here is whether there is a binding insurance contract between petitioner and respondent.
II
We deny the petition.
Insurance is a contract whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event. 45 Just like any other contract, it requires a
cause or consideration. The consideration is the premium, which must be paid at the time and in the way
and manner specified in the policy.46 If not so paid, the policy will lapse and be forfeited by its own terms. 47
The law, however, limits the parties' autonomy as to when payment of premium may be made for the
contract to take effect. The general rule in insurance laws is that unless the premium is paid, the insurance
policy is not valid and binding.48 Section 77 of the Insurance Code, applicable at the time of the issuance of
the policy, provides: ChanRoblesVirtualawlibrary
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance
issued by an insurance company is valid and binding unless and until the premium thereof has been paid,
except in the case of a life or an industrial life policy whenever the grace period provision applies.
In Tibay v. Court of Appeals,49 we emphasized the importance of this rule. We explained that in an insurance
contract, both the insured and insurer undertake risks. On one hand, there is the insured, a member of a
group exposed to a particular peril, who contributes premiums under the risk of receiving nothing in return
in case the contingency does not happen; on the other, there is the insurer, who undertakes to pay the
entire sum agreed upon in case the contingency happens. This risk-distributing mechanism operates under a
system where, by prompt payment of the premiums, the insurer is able to meet its legal obligation to
maintain a legal reserve fund needed to meet its contingent obligations to the public. The premium,
therefore, is the elixir vitae or source of life of the insurance business: ChanRoblesVirtualawlibrary
In the desire to safeguard the interest of the assured, it must not be ignored that the contract of insurance
is primarily a risk-distributing device, a mechanism by which all members of a group exposed to a particular
risk contribute premiums to an insurer. From these contributory funds are paid whatever losses occur due to
exposure to the peril insured against. Each party therefore takes a risk: the insurer, that of being compelled
upon the happening of the contingency to pay the entire sum agreed upon, and the insured, that of parting
with the amount required as premium. without receiving anything therefor in case the contingency does not
happen. To ensure payment tor these losses, the law mandates all insurance companies to maintain a legal
reserve fund in favor of those claiming under their policies. It should be understood that the integrity of this
fund cannot be secured and maintained if by judicial fiat partial offerings of premiums were to be construed
as a legal nexus between the applicant and the insurer despite an express agreement to the contrary. For
what could prevent the insurance applicant from deliberately or willfully holding back full premium payment
and wait for the risk insured against to transpire and then conveniently pass on the balance of the premium
to be deducted from the proceeds of the insurance? x x x
xxx
And so it must be. For it cannot be disputed that premium is the elixir vitae of the insurance business
because by law the insurer must maintain a legal reserve fund to meet its contingent obligations to the
public, hence, the imperative need for its prompt payment and full satisfaction. It must be emphasized here
that all actuarial calculations and various tabulations of probabilities of losses under the risks insured against
are based on the sound hypothesis of prompt payment of premiums. Upon this bedrock insurance firms are
enabled to other the assurance of security to the public at favorable rates. x x x 50(Citations omitted.)
Here, there is no dispute that the check was delivered to and was accepted by respondent's agent, Trans-
Pacific, only on September 28, 1996. No payment of premium had thus been made at the time of the loss of
the vehicle on September 27, 1996. While petitioner claims that Trans-Pacific was informed that the check
was ready for pick-up on September 27, 1996, the notice of the availability of the check, by itself, does not
produce the effect of payment of the premium. Trans-Pacific could not be considered in delay in accepting
the check because when it informed petitioner that it will only be able to pick-up the check the next day,
petitioner did not protest to this, but instead allowed Trans-Pacific to do so. Thus, at the time of loss, there
was no payment of premium yet to make the insurance policy effective.
There are, of course, exceptions to the rule that no insurance contract takes effect unless premium is paid.
In UCPB General Insurance Co., Inc. v. Masagana Telamart, Inc.,51 we said: ChanRoblesVirtualawlibrary
It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting an
agreement to extend the period to pay the premium. But are there exceptions to Section 77?
The answer is in the affirmative.
The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy
whenever the grace period provision applies.
The second is that covered by Section 78 of the Insurance Code, which provides: ChanRoblesVirtualawlibrary
SEC. 78. Any acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive
evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it
shall not be binding until premium is actually paid.
A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of Appeals, wherein
we ruled that Section 77 may not apply if the parties have agreed to the payment in installments of the
premium and partial payment has been made at the time of loss. We said therein, thus: ChanRoblesVirtualawlibrary
We hold that the subject policies are valid even if the premiums were paid on installments. The records
clearly show that the petitioners and private respondent intended subject insurance policies to be binding
and effective notwithstanding the staggered payment of the premiums. The initial insurance contract
entered into in 1982 was renewed in 1983, then in 1984. In those three years, the insurer accepted all the
installment payments. Such acceptance of payments speaks loudly of the insurer's intention to honor the
policies it issued to petitioner. Certainly, basic principles of equity and fairness would not allow the insurer to
continue collecting and accepting the premiums, although paid on installments, and later deny liability on
the lame excuse that the premiums were not prepaid in full.
Not only that. In Tuscany, we also quoted with approval the following pronouncement of the Court of
Appeals in its Resolution denying the motion for reconsideration of its decision: ChanRoblesVirtualawlibrary
While the import of Section 77 is that prepayment of premiums is strictly required as a condition to the
validity of the contract, We are not prepared to rule that the request to make installment payments duly
approved by the insurer would prevent the entire contract of insurance from going into effect despite
payment and acceptance of the initial premium or first installment. Section 78 of the Insurance Code in
effect allows waiver by the insurer of the condition of prepayment by making an acknowledgment in the
insurance policy of receipt of premium as conclusive evidence of payment so far as to make the policy
binding despite the fact that premium is actually unpaid. Section 77 merely precludes the parties from
stipulating that the policy is valid even if premiums are not paid, but docs not expressly prohibit an
agreement granting credit extension, and such an agreement is not contrary to morals, good customs,
public order or public policy (De Leon,' The Insurance Code, p. 175). So is an understanding to allow insured
to pay premiums in installments not so prescribed. At the very least, both parties should be deemed
in estoppel to question the arrangement they have voluntarily accepted.
By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has provided a
fourth exception to Section 77, namely, that the insurer may grant credit extension for the payment of the
premium. This simply means that if the insurer has granted the insured a credit term for the payment of the
premium and loss occurs before the expiration of the term, recovery on the policy should be allowed even
though the premium is paid after the loss but within the credit term.
xxx
Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be
permitted against Petitioner, which had consistently granted a 60- to 90-day credit term for the payment of
premiums despite its full awareness of Section 77. Estoppel bars it from taking refuge under said Section,
since Respondent relied in good faith on such practice. Estoppel then is the fifth exception to Section
77.52 (Citations omitted.)
In UCPB General Insurance Co., Inc., we summarized the exceptions as follows: (1) in case of life or
industrial life policy, whenever the grace period provision applies, as expressly provided by Section 77 itself;
(2) where the insurer acknowledged in the policy or contract of insurance itself the receipt of premium, even
if premium has not been actually paid, as expressly provided by Section 78 itself; (3) where the parties
agreed that premium payment shall be in installments and partial payment has been made at the time of
loss, as held in Makati Tuscany Condominium Corp. v. Court of Appeals;53 (4) where the insurer granted the
insured a credit term for the payment of the premium, and loss occurs before the expiration of the term, as
held in Makati Tuscany Condominium Corp.; and (5) where the insurer is in estoppel as when it has
consistently granted a 60 to 90-day credit term for the payment of premiums.
The insurance policy in question does not fall under the first to third exceptions laid out in UCPB General
Insurance Co., Inc.: (1) the policy is not a life or industrial life policy; (2) the policy does not contain an
acknowledgment of the receipt of premium but merely a statement of account on its face; 54 and (3) no
payment of an installment was made at the time of loss on September 27.
Petitioner argues that his case falls under the fourth and fifth exceptions because the parties intended the
contract of insurance to be immediately effective upon issuance, despite non-payment of the premium. This
waiver to a pre-payment in full of the premium places respondent in estoppel.
We do not agree with petitioner.
The fourth and fifth exceptions to Section 77 operate under the facts obtaining in Makati Tuscany
Condominium Corp. and UCPB General Insurance Co., Inc. Both contemplate situations where the insurers
have consistently granted the insured a credit extension or term for the payment of the premium. Here,
however, petitioner failed to establish the fact of a grant by respondent of a credit term in his favor, or that
the grant has been consistent. While there was mention of a credit agreement between Trans-Pacific and
respondent, such arrangement was not proven and was internal between agent and principal. 55 Under the
principle of relativity of contracts, contracts bind the parties who entered into it. It cannot favor or prejudice
a third person, even if he is aware of the contract and has acted with knowledge. 56
We cannot sustain petitioner's claim that the parties agreed that the insurance contract is immediately
effective upon issuance despite non payment of the premiums. Even if there is a waiver of pre-payment of
premiums, that in itself does not become an exception to Section 77, unless the insured clearly gave a credit
term or extension. This is the clear import of the fourth exception in the UCPB General Insurance Co.,
Inc. To rule otherwise would render nugatory the requirement in Section 77 that "[n]otwithstanding any
agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and
binding unless and until the premium thereof has been paid, x x x." Moreover, the policy itself states: ChanRoblesVirtualawlibrary
WHEREAS THE INSURED, by his corresponding proposal and declaration, and which shall be the basis of this
Contract and deemed incorporated herein, has applied to the company for the insurance hereinafter
contained, subject to the payment of the Premium as consideration for such insurance.57 (Emphasis
supplied.)
The policy states that the insured's application for the insurance is subject to the payment of the premium.
There is no waiver of pre-payment, in full or in installment, of the premiums under the policy. Consequently,
respondent cannot be placed in estoppel.
Thus, we find that petitioner is not entitled to the insurance proceeds because no insurance policy became
effective for lack of premium payment.
The consequence of this declaration is that petitioner is entitled to a return of the premium paid for the
vehicle in the amount of P55,620.60 under the principle of unjust enrichment. There is unjust enrichment
when a person unjustly retains a benefit to the loss of another, or when a person retains money or property
of another against the fundamental principles of justice, equity and good conscience. 58Petitioner cannot
claim the full amount of P140,893.50, which includes the payment of premiums for the two other vehicles.
These two policies are not affected by our ruling on the policy subject of this case because they were issued
as separate and independent contracts of insurance.59 We, however, find that the award shall earn legal
interest of 6% from the time of extrajudicial demand on July 7, 1997. 60
WHEREFORE, the petition is DENIED. The assailed Decision of the CA dated September 11, 2009 and the
Resolution dated November 24, 2009 are AFFIRMED with the MODIFICATION that respondent should
return the amount of P55,620.60 with the legal interest computed at the rate of 6% per annumreckoned
from July 7, 1997 until finality of this judgment. Thereafter, the total amount shall earn interest at the rate
of 6% per annum from the finality of this judgment until its full satisfaction.
GAISANO v. DISC
Jaime T. Gaisano Vs. Development Insurance and Surety Corporation
G.R. No. 190702
February 27, 2017
Facts:
Petitioner was the registered owner of a 1992 Mitsubishi Montero with plate number GTJ-777 (vehicle), while
respondent is a domestic corporation engaged in the insurance business. On September 27, 1996,
respondent issued a comprehensive commercial vehicle policy to petitioner in the amount of Pl,500,000.00
over the vehicle for a period of one year commencing on September 27, 1996 up to September 27, 1997.
Respondent also issued two other commercial vehicle policies to petitioner covering two other motor vehicles
for the same period. To collect the premiums and other charges on the policies, respondent's agent, Trans-
Pacific Underwriters Agency (Trans-Pacific), issued a statement of account to petitioner's company, Noah's
Ark
Merchandising (Noah's Ark). Noah's Ark immediately processed the payments and issued a Far East Bank
check dated September 27, 1996 payable to Trans-Pacific on the same day. The check bearing the amount
of Pl40,893.50 represents payment for the three insurance policies, with P55,620.60 for the premium and
other charges over the vehicle. However, nobody from Trans-Pacific picked up the check that day
(September 27) because its president and general manager, Rolando Herradura, was celebrating his
birthday. Trans-Pacific informed Noah's Ark that its messenger would get the check the next day, September
28. In the evening of September 27, 1996, while under the official custody of Noah's Ark marketing
manager Achilles Pacquing (Pacquing) as a service company vehicle, the vehicle was stolen in the vicinity of
SM Megamall at Ortigas, Mandaluyong City. Pacquing reported the loss to the Philippine National Police
Traffic Management Command at Camp Crame in Quezon City. Despite search and retrieval efforts, the
vehicle was not recovered. Oblivious of the incident, Trans-Pacific picked up the check the next day,
September 28. It issued an official receipt numbered 124713 dated September 28, 1996, acknowledging the
receipt of P55,620.60 for the premium and other charges over the vehicle. The check issued to Trans Pacific
for Pl40,893.50 was deposited with Metrobank for encashment on October 1, 1996.
Issue:
Whether there is a binding insurance contract between petitioner and respondent.
Ruling:
The court deny the petition. Insurance is a contract whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event. Just like
any other contract, it requires a cause or consideration. The consideration is the premium, which must be
paid at the time and in the way and manner specified in the policy. If not so paid, the policy will lapse and
be forfeited by its own terms. The law, however, limits the parties' autonomy as to when payment of
premium may be made for the contract to take effect. The general rule in insurance laws is that unless the
premium is paid, the insurance policy is not valid and binding.
Section 77 of the Insurance Code, applicable at the time of the issuance of the policy, provides: Sec. 77. An
insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured
against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an
insurance company is valid and binding unless and until the premium thereof has been paid, except in the
case of a life or an industrial life policy whenever the grace period provision applies.
G.R. No. 185565, April 26, 2017
LOADSTAR SHIPPING COMPANY, INCORPORATED AND LOADSTAR INTERNATIONAL SHIPPING

COMPANY, INCORPORATED, Petitioners, v. MALAYAN INSURANCE COMPANY,
INCORPORATED, Respondent.
RESOLUTION
REYES, J.:
This resolves the Motion for Reconsideration1 of the Decision2 dated November 26, 2014 of the Court in the
above-captioned case filed by respondent Malayan Insurance Company, Incorporated (Malayan). Malayan
alleges that in ruling in favor of Loadstar Shipping Company, Incorporated and Loadstar International
Shipping Company, Incorporated (petitioners), the Court disregarded the conclusion of the Court of Appeals
that the petitioners acted as a common carrier; that there was a breach of the contract of affreightment;
and that the petitioners failed to produce evidence of a calamity to be exculpated from liability. 3
In their Comment,4 the petitioners contend that the grounds raised by Malayan are no longer relevant
because as found by the Court, Malayan did not adduce proof of pecuniary loss to the insured Philippine
Associated Smelting and Refining Corporation (PASAR).5 PASAR has not established by an iota of evidence
the amount of loss or actual damage it suffered by reason of seawater wettage of the 777.29 metric tons of
copper concentrates. In spite of no proof of loss, Malayan, with seeming hastiness paid the claim of PASAR
in the amount of P33,934,948.75.6 According to the petitioners, Malayan cannot make them answerable for
its mistake in indemnifying PASAR.7
On June 10, 2015, Malayan filed a Motion to Refer the Case to the Court en banc8 alleging that the Decision
dated November 26, 2014 of the Third Division deviated from the doctrine enunciated in Delsan Transport
Lines, Inc., v. CA.9 Malayan contends that in Delsan, the Court held that upon payment by the insurance
company of the insurance claim, the insurance company should be subrogated to the rights of the insured; it
is not even necessary to present the insurance policy because subrogation is a matter of equity. 10
Ruling of the Court
The Court shall resolve the issues seriatim.
Delsan involved the sinking of a vessel which took down with it the entire cargo of fuel it was carrying.
Hence, the fact of total loss was completely and undisputedly established. The burden of proof was upon the
common carrier to prove that it was not liable for the loss, which it failed to discharge. It was only but
logical for the Court to hold the common carrier liable to the insurance company that paid the insured owner
of the lost cargo as the latter's subrogee.
In comparison with Delsan, the facts of the instant case are not as straightforward. Here, the copper
concentrates were delivered by the petitioners to the consignee PASAR although part thereof was
contaminated with seawater. To be clear, PASAR did not simply reject the contaminated goods (on the basis
that these were no longer fit for the intended purpose), claim the value thereof from Malayan and leave
things at that - it bought back the goods which it had already rejected. Meanwhile, Malayan opted to cash in
the situation by selling the contaminated copper concentrates to the very same consignee who already
rejected the goods as total loss. After denying the petitioners of opportunity to participate in the disposal or
sale of the goods,11 Malayan sought to recover the total value of the wet copper concentrates from them.
Malayan and PASAR's extraneous actuations are inconsistent with the alleged fact of total loss.
Verily, Delsan cannot be applied given the contradistinctive circumstances obtaining in this case.
Next, Malayan argues that since the petitioners and PASAR agreed in their Contract of Affreightment that
copper concentrates are easily contaminated with seawater, the contaminated parts should be considered as
totally damaged;12 and that when the petitioners failed to provide a seaworthy ship under 25 years of age as
agreed upon, they should be held liable for damages.13
Again, the Court declares that it is iniquitous to consider the value of the contaminated copper concentrates
as the amount of damages sustained by PASAR when there is no evidence to that effect. Notably, PASAR
and Malayan were even able to come up and agree on a residual value. Needless to say, the mere fact that
there was a residual value negates the verity of total loss sustained by PASAR. It is also inequitable to
consider the purchase price of US$90,000.00 as the actual residual value of the copper concentrates since
there is no showing that PASAR and Malayan objectively arrived at this amount. There is no explanation why
Article 364 of the Code of Commerce which calls for the valuation of experts was not observed by Malayan
and PASAR in fixing the residual value of the copper concentrates.
Neither can Malayan anchor its claim on the Evaluation Report presented by Elite Adjusters and Surveyors,
Inc., assessing the loss as total in the amount of P32,351,102.32. Verily, Malayan paid PASAR using the said
Evaluation Report as its basis, but ironically disputed this very same report in fixing a residual value with
PASAR. True, if the subject copper concentrates were indeed not contaminated, Malayan and PASAR would
not have fixed the residual value at only US$90,000.00. However, it does not escape the Court's notice that
this price was derived through the exclusion of the petitioners in the valuation and sale of the wet copper
concentrates, despite their manifestation of willingness to participate thereto.
At the pain of being repetitive, the Court reiterates the principle that actual damages are not presumed; it
cannot be anchored on mere surmises, speculations or conjectures. 14 As the Court discussed in the Decision
dated November 26, 2014, Malayan was not able to prove the pecuniary loss suffered by PASAR for which
the latter was indemnified. This is in line with the principle that a subrogee steps into the shoes of the
insured and can recover only if the insured likewise could have recovered. 15
Nonetheless, the Court notes that the petitioners failed to comply with some of the terms of their contract of
affreightment with PASAR. It was stipulated that the vessel to be used must not exceed 25 years of age, yet
the vessel, MV Bobcat, was more than that age when the subject copper concentrates were transported.
Additionally, the petitioners failed to keep the cargo holds and hatches of MV Bobcat clean and fully secured
as agreed upon, which resulted in the wettage of the cargo.
As common carriers, the petitioners are bound to observe extraordinary diligence in their vigilance over the
goods they transport, as required by the nature of their business and for reasons of public
policy.16"Extraordinary diligence is that extreme measure of care and caution which persons of unusual
prudence and circumspection use for securing and preserving their own property or rights." 17 When the
copper concentrates delivered were contaminated with seawater, the petitioners have failed to exercise
extraordinary diligence in the carriage thereof.
In view of the foregoing, the Court deems it proper to award nominal damages to Malayan. This is in
recognition of the breach of contract committed by the petitioners. "So long as there is a violation of the
right of the plaintiff—whether based on law, contract or other sources of obligations—an award of nominal
damages is proper."18 Articles 2221 and 2222 of the Civil Code provide:
Article 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated
or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the
plaintiff for any loss suffered by him.
Article 2222. The court may award nominal damages in every obligation arising from any source
enumerated in Article 1157, or in every case where any property right has been invaded.
"Nominal damages are recoverable where a legal right is technically violated and must be vindicated against
an invasion that has produced no actual present loss of any kind or where there has been a breach of
contract and no substantial injury or actual damages whatsoever have been or can be shown." 19 "The
amount of such damages is addressed to the sound discretion of the court, taking into account the relevant
circumstances."20 To the mind of the Court, the amount of P1,769,374.725, which is equivalent to six
percent (6%) of the sum being claimed by Malayan less the residual value of the copper concentrates, is
sufficient as damages. Thus, the amount of nominal damages is computed as follows:
P33,934,948.75 (amount claimed by Malayan)

Less P4,445,370.00 (US$90,000 residual value x 49.39321)
_____________
P29,489,578.75
x 6%
_____________
P1,769,374.725
Finally, the Court also takes the opportunity to make it clear that this disposition does not in any way
undermine the principle of subrogation; rather, the Court takes into consideration all the circumstances in
this case, inasmuch as Malayan and PASAR's dealings post-delivery of the copper concentrates were
unwarranted. While the breach of contract committed by the petitioners should not be tolerated, the undue
haste, as well as the other doubtful circumstances under which the sale of the wet copper concentrates was
made, is not lost on the Court.
WHEREFORE, the motion for reconsideration is PARTLY GRANTED. The Decision dated November 26,
2014 of the Court is hereby MODIFIED in that nominal damages in the amount of P1,769,374.725 is
awarded to Malayan Insurance Company, Incorporated, with legal interest at the rate of six percent
(6%) per annum from the finality of this Resolution until fully paid.
SO ORDERED.
CORPORATION
G.R. No. 206649, July 20, 2016
FOREST HELLS GOLF AND COUNTRY CLUB, INC., REPRESENTED BY RAINIER L. MADRID, IN A
DERIVATIVE CAPACITY AS SHAREHOLDER AND CLUB MEMBER, Petitioner, v. FIL-ESTATE
PROPERTIES, INC., AND FIL-ESTATE GOLF DEVELOPMENT, INC., Respondents.
DECISION
DEL CASTILLO, J.:
"A derivative action is a suit by a shareholder to enforce a corporate cause of action x x x on behalf of the
corporation in order to protect or vindicate [its] rights [when its] officials refuse to sue, or are the ones to
be sued, or hold control of [it]."1 Upon the enactment of Republic Act (RA) No. 8799, otherwise known as
"The Securities Regulation Code," jurisdiction over such action now lies with the special commercial courts
designated by this Court pursuant to A.M. No. 00- 11-03-SC promulgated on November 21, 2000. 2 chanrobleslaw
This Petition for Review on Certiorari3 under Rule 45 of the Rules of Court assails the Orders dated May 14,
20124 and February 1, 20135 of the Regional Trial Court (RTC), Branch 74, Antipolo City, in Civil Case No.
10-9042.
Factual Antecedents
On March 31, 1993, Kingsville Construction and Development Corporation (Kingsville) and Kings Properties
Corporation (KPC) entered into a project agreement with respondent Fil-Estate Properties, Inc. (FEPI),
whereby the latter agreed to finance and cause the development of several parcels of land owned by
Kingsville in Antipolo, Rizal, into Forest Hills Residential Estates and Golf and Country Club, a first-class
residential area/golf-course/commercial center.6 Under the agreement, respondent FEPI was tasked to
incorporate petitioner Forest Hills Golf and Country Club, Inc. (FHGCCI) with an authorized stock of 3,600
shares; and to perform the development and construction work and other undertakings as full payment of
its subscription to the authorized capital stock of the club. 7 As to the remaining shares of the club, they
agreed that these should be retained by Kingsville in exchange for the parcels of land used for the golf
course development. 8 chanrobleslaw
On July 10, 1995, respondent FEPI assigned its rights and obligations over the project to a related
corporation, respondent Fil-Estate Golf Development, Inc. (FEGDI). 9 chanrobleslaw
On July 19, 1996, Rainier L. Madrid (Madrid) purchased two Class "A" shares at the secondary price of P3
80,000.00 each, and applied for a membership to the club for P25,000.00. 10 chanrobleslaw
Due to the delayed construction of the second 18-Hole Golf Course, Madrid wrote two demand letters dated
October 29, 2009 and March 15, 2010 to the Board of Directors of petitioner FHGCCI asking them to initiate
the appropriate legal action against respondents FEPI and FEGDI. 11 The Board of Directors, however, failed
and/or refused to act on the demand letters. 12 chanrobleslaw
Thus, on April 21, 2010, Madrid, in a derivative capacity on behalf of petitioner FHGCCI, filed with the RTC
of Antipolo City a Complaint for Specific Performance with Damages, 13 docketed as Civil Case No. 10-9042,
against respondents FEPI and FEGDI.14 chanrobleslaw
In their Answer with Compulsory Counterclaim, 15 respondents FEPI and FEGDI argued that there is no cause
of action against them as petitioner FHGCCI failed to state the contractual and/or legal bases of their alleged
obligation; that no prior demand was made to them; that the action is not a proper derivative suit as
petitioner FHGCCI failed to exhaust all remedies available under the articles of incorporation and by-laws;
and that petitioner FHGCCI failed to implead its Board of Directors as indispensable parties.
Petitioner FHGCCI, in turn, filed a Reply 16 arguing that the case does not involve an intra-corporate
controversy and that the exhaustion of intra-corporate remedies was futile and useless as the Board of
Directors of petitioner FHGCCI also own respondent FEGDI.
Respondents FEPI and FEGDI filed a Rejoinder17 followed by a Motion18 to set their affirmative defenses for
preliminary hearing.
Petitioner FHGCCI filed a Motion19 for leave to amend its Complaint to implead KPC and Kingsville as
additional defendants and to include Madrid as additional plaintiff in his personal capacity. Respondents FEPI
and FEGDI opposed the Motion.20 chanrobleslaw
Ruling of the Regional Trial Court
On May 14, 2012, applying the relationship and nature of controversy tests in Reyes v. Hon. RTC of Makati,
Br. 14221 and taking into account the fact that petitioner FHGCCI denominated the Complaint as a derivative
suit, the RTC issued an Order22 dismissing the case for lack of jurisdiction, without prejudice to the re-filing
of the same with the proper special commercial court sitting at Binangonan, Rizal. Consequently, the motion
for leave to amend the Complaint was mooted.
Feeling aggrieved, petitioner FHGCCI moved for reconsideration 23 but the RTC denied the same in its
Order24 dated February 1, 2013.
Issue
Hence, petitioner FHGCCI directly filed before this Court the instant Petition for Review on Certiorari25 under cralawred
Rule 45 of the Rules of Court on a pure question of law, raising the sole issue of:
WHETHER OR NOT PETITIONER [FHGCCI'S] ORDINARY CIVIL SUIT FOR SPECIFIC PERFORMANCE WITH
DAMAGES AGAINST RESPONDENTS [FEPI AND FEGDI] VIS-A-VIS THE LATTER'S OBLIGATION UNDER THE
PROJECT AGREEMENT TO FULLY COMPLETE AND DEVELOP THE FOREST HELLS RESIDENTIAL ESTATES AND
GOLF COURSE AND COUNTRY CLUB IS COGNIZABLE BY THE LOWER COURT AS A REGULAR COURT OR BY
THE RTC-BINANGONAN, BRANCH 70, AS A SPECIAL COMMERCIAL COURT FOR INTRA-CORPORATE
CONTROVERSIES.26
Petitioner FHGCCVs Arguments
Petitioner FHGCCI admits that it filed a derivative suit. 27 However, it contends that not all derivative suits
involve intra-corporate controversies.28 In this case, it filed a derivative suit for specific performance in order
to enforce the project agreement between KPC, Kingsville, and respondents FEPI and FEGDI. 29 And although
respondent FEGDI is a stockholder of petitioner FHGCCI, it argues that this does not make the instant case
an intra-corporate controversy as the case was filed against respondents FEPI and FEGDI as developers, and
not as stockholders of petitioner FHGCCI.30 In fact, the causes of action stated in the Complaint do not
involve intra-corporate controversies, nor do these involve the intra-corporate relations between and among
the stockholders and the corporation's officials. 31 Thus, the RTC seriously erred in applying the case
of Reyes32 without clearly explaining why the instant case involves an intra-corporate controversy. 33chanrobleslaw
Respondents' Arguments
Respondents FEPI and FEGDI, on the other hand, reiterate the arguments raised in their Answer before the
RTC, to wit: that petitioner FHGCCI has no cause of action as it failed to present any contract upon which it
can base its claim; that the filing of the case is premature as no prior demand was made to respondents
FEPI and FEGDI; that the Complaint is not a proper derivative suit as petitioner FHGCCI failed to exhaust all
remedies available under the articles of incorporation and by-laws; and that petitioner FHGCCI failed to
implead its Board of Directors as indispensable parties.34 They also maintain that the instant case is an intra-
corporate controversy as the allegations in the Complaint clearly show that petitioner FHGCCI is suing
respondents FEPI and FEGDI not only as developers but also as stockholders of petitioner FHGCCI. 35 And
since the instant case involves an intra-corporate controversy, the RTC correctly dismissed the Complaint for
lack of jurisdiction, as the RTC is not a special commercial court.36
chanrobleslaw
Our Ruling
The Petition lacks merit.
The Complaint, denominated as a

derivative suit for specific performance,
falls under the jurisdiction of special
commercial courts.
Petitioner FHGCCFs main contention is that its Complaint, although denominated as a derivative suit, does
not fall under the jurisdiction of special commercial courts, as it does not involve an intra-corporate
controversy.
We do not agree.
It is a fundamental principle that jurisdiction is conferred by law and is determined by the material
allegations of the complaint, containing the concise statement of ultimate facts of a plaintifFs cause of
action.37 chanrobleslaw
In this case, petitioner FHGCCI alleged in its Complaint that:

PREFATORY
This is a derivative suit filed by Shareholder and Club Member Rainier Madrid on behalf of
[petitioner FHGCCI] to compel [respondents FEPI and FEGDI], to finish the construction and complete
development of Club's Arnold Palmer 2nd Nine-Holes Golf Course and the adjunct Country Club Premises.
Despite repeated demands on FHGCCI, which appears controlled and managed by interlocking
directors of [respondents FEPI and FEGDI] as an "OLD BOYS CLUB," and therefore guilty of grave
conflict of interest to initiate legal actions against developer [respondent] FEGDI vis-a-vis the
completion of the Club's Arnold Palmer 2ndNine-Holes Golf Course and the promised Country Club
Facilities, FHGCCI has failed, shirked, and refused to sue the [respondents FEPI and FEGDI].
This BAD FAITH inaction and refusal to sue [respondents FEPI and FEGDI] by the FHGCCI Board
of Directors is definitely prejudicial to FHGCCI and its members as they have been long deprived the
maximum use of the promised Full 36-Hole Golf Course and Country Club Amenities, thereby rendering
them in fundamental and material breach of their SEC Disclosure Statements, Marketing and Sales
Contracts.
The FHGCCI Board of Directors [are] guilty of grave conflict of interest as Founder Shareholders
Noel M. Carifio, Robert John L. Sobrepefia, Ferdinand T. Santos and Enrique Sobrepena, Jr. are
also the majority Board of Directors of [respondent] FEPI and later [respondent] FEGDI, who for
more than ten (10) years NOW has failed and refused to complete the Project for which they should
have sued [respondents] FEPI [and] FEGDI as early as 2000.
Indeed, the control, exclusive management and operations of FHGCCI, which should have been turned-over
to the General Membership, has been illegally withheld, retained and continued to be enjoyed by FHGCCI
Board of Directors via their abusive, void and illegal Founder's Shares, subject now of a separate suit to
compel turnover of the FHGCCI to its General Membership.
The patent interlocking directorship of FHGCCI and [respondents] FEPI /FEGDI sufficiently
shows the abuse, high handed and condescending strong arm posture of FHGCCI Board of
Directors in failing or refraining from suing [respondents] FEPI [and] FEGDI as the developer for
the full and total completion of [the] 36-Hole Golf Course and adjunct Country Club facilities.
HENCE, THIS DERIVATIVE SUIT.
xxxx
ALLEGATIONS COMMON TO ALL CAUSES OF ACTION
xxxx
4. On June 29, 1995, [respondent] FEPI incorporated the Golf and Country Club Company -
[FHGCCf] x x x.
Per FHGCCI's Articles of Incorporation, fifty (50%) percent of its authorized member shares appears to have
been distributed as follows:
SUBSCRIBERS NUMBER AND KIND OF

SHARES
1. Noel M. Cariño 1 Founder's Share
2. Robert John L. Sobrepeña 1 Founder's Share
3. Ferdinand T. Santos 1 Founder's Share
4. Sabrina T.Santos 1 Founder's Share
5. Enrique Sobrepeña, Jr. 1 Founder's Share
6. Johnson Ong 1 Founder's Share
7. Romeo G. Carlos 1 Founder's Share
8. Manuel Yu 1 Founder's Share
9. FEGDI 537 Class "A", 190 Class
"B", 292 Class "C", 146
Class "D"; total = 1165
10. Kings Properties Corp. 290 Class "A", 102 Class
"B", 292 Class "C", 146
Class "D"; total = 627
xxxx
10. Worse, with manifest intention of giving undue benefit, gain and/or advantage to
[respondents] FEPI/FEGDI and to retain control of FHGCCI via the Founders' Shares, the FHGCCI
Board of Directors appear to have deliberately failed, shirked and refused to sue, act and demand
that [respondents] FEPI/FEGDI complete and finish the construction and/or turn-over of the
second golf course, specifically the Arnold Palmer 2 nd Nine-Holes and the additional "Country Club"
premises and adjunct country club facilities, to enable them, as "Founder Shareholders," to hold on to,
continue their control and exclusive management of the Club, as an "OLD BOYS CLUB," to the damage and
prejudice of FHGCCI, and its members whose corporate rights remain IN LIMBO to date.
xxxx
13. To date, however, the FHGCCI Board of Directors intentionally and deliberately failed and/or
refused to heed Shareholder and Club Member Rainier L. Madrid and numerous undisclosed
members of FHGCCPs above valid and just demand, to the damage and prejudice of [petitioner]
FHGCCI and its Members.
xxxx
2.2 As shown, for more than ten (10) years now from the stipulated full completion of the 2 nd 18-Holes
Arnold Palmer Golf Course, and the country club facilities in September 2000, the FHGCCI Board of
Directors, being guilty of apparent conflict of interest prescinding from their interlocking
directorships, have deliberately and purposely failed, shirked and/or refused to demand and sue
[respondents] developer FEPI/FEGDI to fully complete the Project, especially the 36-Hole Golf
Course, and adjunct Country Club and commercial complex amenities, to the grave damage and prejudice of
[petitioner] FHGCCI and its Members. It is pure and simple, SYNDICATED ESTAFA.
2.3. Consequently, [respondents FEPI and FEGDI], jointly and severally, should be compelled, ordered and
directed to fully perform, finish, complete and turn-over the whole 36-Hole Golf Course and Country Club
Amenities soonest.
xxxx
3.2. Additionally, [respondents] FEPI and FEGDI must be ordered to render an accounting of ALL work done,
EXISTING work-in-progress, if any, and differential backlog in connection with their performance and
delivery of the Project, including the contracted 36-Hole Golf Course and Country Club
Amenities.38 (Emphasis supplied)
Based on the foregoing allegations, it is clear that Madrid filed a derivative suit on behalf of petitioner
FHGCCI to compel respondents FEPI and FEGDI to complete the golf course and country club project and to
render an accounting of all works done, existing work-in-progress and, if any, differential backlog. The fact
that petitioner FHGCCI denominated the Complaint as a derivative suit for specific performance is sufficient
reason for the RTC to dismiss it for lack of jurisdiction, as the RTC where the Complaint was raffled is not a
special commercial court. Upon the enactment of RA No. 8799, jurisdiction over intra- corporate disputes,
including derivatives suits, is now vested in the RTCs designated as special commercial courts by this Court
pursuant to A.M. No. 00- 11-03-SC promulgated on November 21, 2000. 39 chanrobleslaw
Petitioner FHGCCI's contention that the instant case does not involve an intra-corporate controversy as it
was filed against respondents FEPI and FEGDI as developers, and not as shareholders of the corporation
holds no water. Apparent in the Complaint are allegations of the interlocking directorships of the Board of
Directors of petitioner FHGCCI and respondents FEPI and FEGDI, the conflict of interest of the Board of
Directors of petitioner FHGCCI, and their bad faith in carrying out their duties. Likewise alleged is that
respondent FEPI and, later, respondent FEGDI are shareholders of petitioner FHGCCI which under the
project agreement, respondent FEPI was tasked to perform the development and construction work and
other obligations and undertakings of the project as full payment of its subscription to the authorized capital
stock of petitioner FHGCCI, which it later assigned to respondent FEGDI. Considering these allegations, we
find that, contrary to the claim of petitioner FHGCCI, there are unavoidably intra- corporate controversies
intertwined in the specific performance case.
Moreover, a derivative suit is a remedy designed by equity as a principal defense of the minority
shareholders against the abuses of the majority.40 Under the Corporation Code, the corporation's power to
sue is lodged with its board of directors or trustees.41 However, when its officials refuse to sue, or are the
ones to be sued, or hold control of the corporation, an individual stockholder may be permitted to institute a
derivative suit to enforce a corporate cause of action on behalf of a corporation in order to protect or
vindicate its rights.42 In such actions, the corporation is the real party in interest, while the stockholder suing
on behalf of the corporation is only a nominal party.43 Considering its purpose, a derivative suit, therefore,
would necessarily touch upon the internal affairs of a corporation.
It is for this reason that a derivative suit is among the cases covered by the Interim Rules of Procedure
Governing Intra-Corporate Controversies, A.M. No. 01-2-04- SC, March 13, 2001. Section l(a), Rule 1 of the
said Interim Rules states that:
RULE 1
General Provisions
SECTION 1. (a) Cases Covered— These Rules shall govern the procedure to be observed in civil cases
involving the following:
(1) Devices or schemes employed by, or any act of, the board of directors, business associates, officers
or partners, amounting to fraud or misrepresentation which may be detrimental to the interest of the public
and/or of the stockholders, partners, or members of any corporation, partnership, or association;
(2) Controversies arising out of intra-corporate, partnership, or association relations, between and among
stockholders, members, or associates; and between, any or all of them and the corporation, partnership, or
association of which they are stockholders, members, or associates, respectively;
(3) Controversies in the election or appointment of directors, trustees, officers, or managers of corporations,
partnerships, or associations;
(4) Derivative suits; and
(5) Inspection of corporate books.
In view of the foregoing, we agree with the RTC that the instant derivative suit for specific performance
against respondents FEPI and FEGDI falls under the jurisdiction of special commercial courts.
In Gonzales v. GJH Land, Inc.,44 we laid down the guidelines to be observed if a commercial case filed before
the proper RTC is wrongly raffled to its regular branch. In that case, we said that if the RTC has no internal
branch designated as a Special Commercial Court, the proper recourse is to refer the case to the nearest
RTC with a designated Special Commercial Court branch within the judicial region. Upon referral, the RTC to
which the case was referred to should redocket the case as a commercial case. And if the said RTC has only
one branch designated as a Special Commercial Court, it should assign the case to the sole special branch.
The Complaint filed by petitioner FHGCCI failed to comply with the requisites for a valid
derivative suit.
In this case, however, to refer the case to a special commercial court would be a waste of time since it is
apparent on the face of the Complaint, as pointed out by respondents FEPI and FEGDI in their Answer, that
petitioner FHGCCI failed to comply with the requisites for a valid derivative suit.
Rule 8, Section 1 of the Interim Rules of Procedure Governing Intra- Corporate Controversies provides:
SECTION 1. Derivative action. — A stockholder or member may bring an action in the name of a corporation
or association, as the case may be, provided, that: (1) He was a stockholder or member at the time the acts
or transactions subject of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all
remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit. In case of nuisance or harassment suit, the court shall
forthwith dismiss the case.
Corollarily, "[f]or a derivative suit to prosper, it is required that the minority stockholder suing for and on
behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on
behalf of the corporation and all other stockholders similarly situated who may wish to join him in the
suit."45 It is also required that the stockholder "should have exerted all reasonable efforts to exhaust all
remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires [and that such fact is alleged] with particularity in the
complaint."46 The purpose for this rule is "to make the derivative suit the final recourse of the stockholder,
after all other remedies to obtain the relief sought had failed." 47 Finally, the stockholder is also required "to
allege, explicitly or otherwise, the fact that there were no appraisal rights available for the acts complained
of, as well as a categorical statement that the suit is not a nuisance or a harassment suit." 48 chanrobleslaw
In this case, Madrid, as a shareholder of petitioner FHGCCI, failed to allege with particularity in the
Complaint, and even in the Amended Complaint, that he exerted all reasonable efforts to exhaust all
remedies available under the articles of incorporation, by-laws, or rules governing the corporation; that no
appraisal rights are available for the acts or acts complained of; and that the suit is not a nuisance or a
harassment suit. Although the Complaint alleged that demand letters were sent to the Board of Directors of
petitioner FHGCCI and that these were unheeded, these allegations will not suffice.
Thus, for failing to meet the requirements set forth in Section 1, Rule 8 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies, the Complaint, denominated as a derivative suit for specific
performance, must be dismissed.
WHEREFORE, the Petition is hereby DENIED. The assailed Orders dated May 14,2012 and February 1,
2013 of the Regional Trial Court, Branch 74, Antipolo City, in Civil Case No. 10-9042 are hereby AFFIRMED.
SO ORDERED. cralaw lawlibrary
SERENO, C.J.:
This case concerns the dismissal[1] of an action for mandamus that sought
to compel respondents Rural Bank of Cabadbaran, Inc., Demosthenes P.
Oraiz, and Ricardo D. Gonzalez to register the transfer of shares of stock
and issue the corresponding stock certificates in favor of petitioner Joseph
Omar O. Andaya. The Cabadbaran City Regional Trial Court (RTC) ifuled
that petitioner Andaya was not entitled to the remedy of mandamus, s|ince
the transfer of the subject shares of stock had not yet been recorded in the
corporation's stock and transfer book, and the registered owner,
Conception O. Chute, had not given him a special power of attorney to
makq the transfer. Andaya has filed a Rule 45 petition directly before this
Court, insisting that he has a cause of action to institute the suit.
FACTS
Andaya bought from Chute 2,200 shares of stock in the Rural Bank of
Cabadbaran for P220,000.[2] The transaction was evidenced by a
notarized document denominated as Sale of Shares of Stocks.[3] Chute duly
endorsed and delivered the certificates of stock to Andaya and,
subsequently, requested the bank to register the transfer and issue new
stock certificates in favor of the latter.[4] Andaya also separately
communicated[5] with the bank's corporate secretary, respondent Oraiz,
reiterating Chute's request for the issuance of new stock certificates in
petitioner's favor.
A few days later, the bank's corporate secretary wrote [6] Chute to inform her
that he could not register the transfer. He explained that under a previous
stockholders' Resolution, existing stockholders were given priority to buy
the shares of others in the event that the latter offered those shares for sale
(i.e., a right of first refusal). He then asked Chute if she, instead, wished to
have her shares offered to existing stockholders. He told her that if no other
stockholder would buy them, she could then proceed to sell her shares to
outsiders.
Meanwhile, the bank's legal counsel, respondent Gonzalez, informed [7]

Andaya that the latter's request had been referred to the bank's board of
directors for evaluation. Gonzalez also furnished him a copy of the bank's
previous reply to Chute concerning a similar request from her. Andaya
responded[8] by reiterating his earlier request for the registration of the
transfer and the issuance of new certificates of stock in his favor. Citing
Section 98 of the Corporation Code, he claimed that the purported
restriction on the transfer of shares of stock agreed upon during the 2001
stockholders' meeting could not deprive him of his right as a transferee. He
pointed out that the restriction did not appear in the bank's articles of
incorporation, bylaws, or certificates of stock.
The bank eventually denied the request of Andaya.[9] It reasoned that he
had a conflict of interest, as he was then president and chief executive
officer of the Green Bank of Caraga, a competitor bank. Respondent bank
concluded that the purchase of shares was not in good faith, and that the
purchase "could be the beginning of a hostile bid to take-over control of the
[Rural Bank of Cabadbaran]."[10] Citing Gokongwei v. Securities and
Exchange Commission,[11] respondent insisted that it may refuse to accept a
competitor as one of its stockholders. It also maintained that Chute should
have first offered her shares to the other stockholders, as agreed upon
during the 2001 stockholders' meeting.
Consequently, Andaya instituted an action for mandamus and

damages[12] against the Rural Bank of Cabadbaran; its corporate secretary,
Oraiz; and its legal counsel, Gonzalez. Petitioner sought to compel them to
record the transfer in the bank's stock and transfer book and to issue new
certificates of stock in his name.
The RTC issued a Decision dismissing the complaint. Citing Porice v.

Alsons Cement Corporation[13] the trial court ruled that Andaya had no
standing to compel the bank to register the transfer and issue stock
certificates in his name.[14] It explained that he had failed "[to show] that the
transfer of subject shares of stock [was] recorded in the stock and transfer
book of [the] bank or that [he was] authorized by [Chute] to make the
transfer."[15] According to the trial court, Ponce requires that a person
seeking to transfer shares must appear to have an express instruction and a
specific authority from the registered stockholder, such as a special power
of attorney, to cause the disposition of stocks registered in the stockholder's
name. It ruled that "[w]ithout the sale first registered or an authority from
the transferor, it [was] therefore unmistakably clear that [Andaya had] no
cause of action for mandamus against [the] bank."
Consequently, Andaya directly filed with this Court a Rule 45 petition for
review on certiorari assailing the RTC Decision on pure questions of law.
ISSUES
The Court culls the issues raised by petitioner as follows:

1. Whether Andaya, as a transferee of shares of stock, may initiate an
action for mandamus compelling the Rural Bank of Cabadbaran
to record the transfer of shares in its stock and transfer book, as well
as issue new stock certificates in his name
2. Whether a writ of mandamus should issue in favor of petitioner
OUR RULING
The petition is partly meritorious.
It is already settled jurisprudence[16] that the registration of a transfer of

shares of stock is a ministerial duty on the part of the corporation.
Aggrieved parties may then resort to the remedy of mandamus to compel
corporations that wrongfully or unjustifiably refuse to record the transfer or
to issue new certificates of stock. This remedy is available even upon the
instance of a bona fide transferee[17]who is able to establish a clear legal
right to the registration of the transfer.[18] This legal right inherently flows
from the transferee's established ownership of the stocks, a right that has
been recognized by this Court as early as in Price v. Martin:[19]
A person who has purchased stock, and who desires to be recognized as

a stockholder, for the purpose of voting, must secure a standing by
having the transfer recorded upon the books. If the transfer is not duly
made upon request, he has, as his remedy, to compel it to be made.
[20]
(Emphases supplied)
Thus, in Pacific Basin Securities Co., Inc., v. Oriental Petroleum and
Minerals Corp.,[21]this Court stressed that the registration of a transfer of
shares is ministerial on the part of the corporation:
Clearly, the right of a transferee/assignee to have stocks

transferred to his name is an inherent right flowing from his
ownership of the stocks. The Court had ruled in Rural Bank of Salinas,
Inc. v. Court of Appeals that the corporation's obligation to register
is ministerial, citing Fletcher, to wit:
In transferring stock, the secretary of a corporation acts in purely

ministerial capacity, and does not try to decide the question of ownership.
The duty of the corporation to transfer is a ministerial one and if it refuses

to make such transaction without good cause, it may be compelled to do so
by mandamus.
The Court further held in Rural Bank of Salinas that the only limitation
imposed by Section 63 of the Corporation Code is when the
corporation holds any unpaid claim against the shares intended
to be transferred.[22] (Emphasis supplied; citations omitted)
Consequently, transferees of shares of stock are real parties in interest
having a cause of action for mandamus to compel the registration of the
transfer and the corresponding issuance of stock certificates.
We also rule that Andaya has been able to establish that he is a bona
fide transferee of the shares of stock of Chute. In proving this fact, he
presented to the RTC the following documents evidencing the sale: (1) a
notarized Sale of Shares of Stocks[23] showing Chute's sale of 2,200 shares of
stock to petitioner; (2) a Documentary Stamp Tax
Declaration/Return[24] (3) Capital Gains Tax Return;[25] and (4) stock
certificates[26] covering the subject shares duly endorsed by Chute. The
existence, genuineness, and due execution of these documents have been
admitted[27] and remain undisputed. There is no doubt that Andaya had the
standing to initiate an action for mandamus to compel the Rural Bank of
Cabadbaran to record the transfer of shares in its stock and transfer book
and to issue new stock certificates in his name. As the transferee of the
shares, petitioner stands to be benefited or injured by the judgment in the
instant petition, a judgment that will either order the bank to recognize the
legitimacy of the transfer and petitioner's status as stockholder or to deny
the legitimacy thereof.
This Court further finds that the reliance of the RTC on Ponce in finding
that petitioner had no cause of action for mandamus against the defendant
bank was misplaced. In Ponce, the issue resolved by this Court was whether
the petitioner therein had a cause of action for mandamus to compel the
issuance of stock certificates, not the registration of the transfer. Ruling in
the negative, the Court said in that case that without any record of the
transfer of shares in the stock and transfer book of the corporation, there
would be no clear basis to compel that corporation to issue a stock
certificate. By the import of Section 63 of the Corporation Code, the stock
and transfer book would be the main reference book in ascertaining a
person's entitlement to the rights of a stockholder. Consequently, without
the registration of the transfer, the alleged transferee could not yet be
recognized as a stockholder who is entitled to be given a stock certificate.
In contrast, at the crux of this petition are the registration of the

transfer and the issuance of the corresponding stock certificates. Requiring
petitioner to register the transaction before he could institute a mandamus
suit in supposed abidance by the ruling in Ponce was a palpable error. It led
to an absurd, circuitous situation in which Andaya was prevented from
causing the registration of the transfer, ironically because the shares had
not been registered. With the logic resorted to by the RTC, transferees of
shares of stock would never be able to compel the registration of the
transfer and the issuance of new stock certificates in their favor. They
would first be required to show the registration of the transfer in their
names — the ministerial act that is the subject of the mandamus suit in the
first place. The trial court confuses the application of the dicta in Ponce,
which is pertinent only to the issuance of new stock certificates, and not to
the registration of a transfer of shares. As Ponce itself provides, these two
are entirely different events. The RTC's anomalous reasoning cannot be
given legal imprimatur by this Court.
With regard to the requisite authorization from the transferor, the Court
stresses that the concern in Ponce was rooted in whether or not the alleged
right of the petitioner therein to compel the issuance of new stock
certificates was clearly established. Reiterating the ruling in Rivera v.
FIorendo[28] and Eager v. Bryan,[29] the Court therein maintained that a
mere endorsement of stock certificates by the supposed owners of the stock
could not be the basis of an action for mandamus in the absence of express
instructions from them. According to the Court, the reason behind this
ruling was that the corporation's duty and legal obligation therein were not
so clear and indisputable as to justify the issuance of the writ. The
ambiguity of the alleged transferee's deed of undertaking with endorsement
led the Court in Ponce to rule that mandamus would have issued had the
registered owner himself requested the registration of the transfer, or had
the person requesting the registration secured a special power of attorney
from the registered owner.
In the instant case, however, the submitted documents did not merely
consist of an endorsement. Rather, petitioner presented several undisputed
documents,[30] among which was respondent Oraiz's letter to Chute denying
her request to transfer the stock standing in her name in favor of Andaya.
This letter clearly indicated that the registered owner herself had requested
the registration of the transfer of shares of stock. There was therefore no
sensible reason for the RTC to perfunctorily extract the pronouncement in
Ponce and then disregard it in the face of admitted facts in addition to the
duly endorsed stock certificates.
On whether the writ of mandamus should issue, Section 3, Rule 65 of the

Rules of Court, provides for the rules governing a petition for
mandamus, viz:
SECTION 3. Petition for mandamus. — When

any tribunal, corporation, board, officer or person unlawfully neglects
the performance of an act which the law specifically enjoins as a duty
resulting from an office, trust, or station, or unlawfully excludes another
from the use and enjoyment of a right or office to which such other is
entitled, and there is no other plain, speedy and adequate remedy in the
ordinary course of law, the person aggrieved thereby may file a verified
petition in the proper court, alleging the facts with certainty and praying
that judgment be rendered commanding the respondent, immediately or at
some other time to be specified by the court, to do the act required to be
done to protect the rights of the petitioner, and to pay the damages
sustained by the petitioner by reason of the wrongful acts of the
respondent.
The petition shall also contain a sworn certification of non-forum shopping

as provided in the third paragraph of Section 3, Rule 46. (Emphases
supplied)
Accordingly, a writ of mandamus to enforce a ministerial act may issue only
when petitioner is able to establish the presence of the following: (1) right
clearly founded in law and is not doubtful; (2) a legal duty to perform the
act; (3) unlawful neglect in performing the duty enjoined by law; (4) the
ministerial nature of the act to be performed; and (5) the absence of other
plain, speedy, and adequate remedy in the ordinary course of law. [31]
Respondents primarily challenge the mandamus suit on the grounds that

the transfer violated the bank stockholders' right of first refusal and that
petitioner was a buyer in bad faith. Both parties refer to Section 98 of the
Corporation Code to support their arguments, which reads as follows:
SECTION 98. Validity of restrictions on transfer of

shares. — Restrictions on the right to transfer shares must appear
in the articles of incorporation and in the by-laws as well as in
the certificate of stock; otherwise, the same shall not be binding
on any purchaser thereof in good faith. Said restrictions shall not be
more than onerous than granting the existing stockholders or the
corporation the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or period stated
therein. If upon the expiration of said period, the existing stockholders or
the corporation fails to exercise the option to purchase, the transferring
stockholder may sell his shares to any third person. (Emphases supplied)
It must be noted that Section 98 applies only to close corporations. Hence,
before the Court can allow the operation of this section in the case at bar,
there must first be a factual determination that respondent Rural Bank of
Cabadbaran is indeed a close corporation. There needs to be a presentation
of evidence on the relevant restrictions in the articles of incorporation j and
bylaws of the said bank. From the records or the RTC Decision, there is
apparently no such determination or even allegation that would assist this
Court in ruling on these two major factual matters. With the foregoing, the
validity of the transfer cannot yet be tested using that provision. These are
the factual matters that the parties must first thresh out before the RTC.
After finding that petitioner has legal standing to initiate an action for
mandamus, the Court now reinstates the action he filed and remands the
case to the RTC to resolve the propriety of issuing a writ of mandamus. The
resolution of the case must include the determination of all relevant factual
matters in connection with the issues at bar. The RTC must also resolve
petitioner's prayer for the payment of attorney's fees, litigation expenses,
moral damages, and exemplary damages.
WHEREFORE, premises considered, the instant petition I

is GRANTED. The Decision dated 17 April 2009 and the Order dated 15
July 2009 of the Regional Trial Court, Branch 34, Cabadbaran City, which
dismissed petitioner's action for mandamus, are SET ASIDE. The action is
hereby REINSTATED and the case REMANDED to the court of origin
for further proceedings. The trial court is further enjoined to proceed with
[the resolution of this case with dispatch.
SO ORDERED.
G.R. No. 184008, August 03, 2016
INDIAN CHAMBER OF COMMERCE PHILS., INC., Petitioner, v. FILIPINO INDIAN CHAMBER OF

COMMERCE IN THE PHILIPPINES, INC., Respondent.
DECISION
JARDELEZA, J.:
This is a Petition for Review on Certiorari1 assailing the Decision and Resolution of the Court of Appeals (CA)
dated May 15, 20082 and August 4, 2008,3 respectively, in CA-G.R. SP No. 97320. The Decision and
Resolution affirmed the Securities and Exchange Commission En Banc (SEC En Banc) Decision dated
November 30, 20064directing petitioner Indian Chamber of Commerce Phils., Inc. to modify its corporate
name.
The Facts
Filipino-Indian Chamber of Commerce of the Philippines, Inc. (defunct FICCPI) was originally registered with
the SEC as Indian Chamber of Commerce of Manila, Inc. on November 24, 1951, with SEC Registration
Number 64655 On October 7, 1959, it amended its corporate name into Indian Chamber of Commerce of the
Philippines, Inc., and further amended it into Filipino-Indian Chamber of Commerce of the Philippines, Inc.
on
March 4, 1977,.6 Pursuant to its Articles of Incorporation, and without applying for an extension of its
corporate term, the defunct FICCPI's term of existence expired on November 24, 2001. 7 chanrobleslaw
SEC Case No. 05-008
On January 20, 2005, Mr. Naresh Mansukhani (Mansukhani) reserved the corporate name "Filipino
Indian Chamber of Commerce in the Philippines, Inc." (FICCPI), for the period from January 20, 2005
to April 20, 2005, with the Company Registration and Monitoring Department (CRMD) of the SEC. 8 In an
opposition letter dated April 1, 2005, Ram Sitaldas (Sitaldas), claiming to be a representative of the defunct
FICCPI, alleged that the corporate name has been used by the defunct FICCPI since 1951, and that the
reservation by another person who is not its member or representative is illegal. 9 chanrobleslaw
The CRMD called the parties for a conference and required them to submit their position papers.
Subsequently, on May 27, 2005, the CRMD rendered a decision granting Mansukhani's reservation, holding
that he possesses the better right over the corporate name. 11 The CRMD ruled that the defunct FICCPI has
no legal personality to oppose the reservation of the corporate name by Mansukhani. After the expiration of
the defunct FICCPFs corporate existence, without any act on its part to extend its term, its right over the
name ended. Thus, the name "Filipino Indian Chamber of Commerce in the Philippines, Inc." is free for
appropriation by any party.12 chanrobleslaw
Sitaldas appealed the decision of the CRMD to the SEC En Bane, which appeal was docketed as SEC Case
No. 05-008. On December 7, 2005, the SEC En Bane denied the appeal, 13 thus: ChanRoblesVirtualawlibrary
WHEREFORE, premises considered, the instant appeal is HEREBY DISMISSED for lack of merit. Let a
copy of this decision be furnished the Company Registration and Monitoring Department of this Commission
for its appropriate action.14 (Emphasis in the original.)
Sitaldas appealed the SEC En Banc decision to the CA, docketed as CA-G.R. SP No. 92740. On September
27, 2006, the CA affirmed the decision of the SEC En Banc15. It ruled that Mansukhani, reserving the name
'Filipino Indian Chamber of Commerce in the Philippines, Inc.," has the of the better right over the corporate
name. It ruled that with the expiration corporate life of the defunct FICCPI, without an extension having
been filed and granted, it lost its legal personality as a corporation. 16 Thus, the CA affirmed the SEC En Banc
ruling that after the expiration of its term, the defunct FICCPI's rights over the name also ended. 17 The CA
also cited SEC Memorandum Circular No. 14-200018 which gives protection to corporate names for a period
of three years after the approval of the dissolution of the corporation. 19 It noted that the reservation for the
use of the corporate name "Filipino Indian Chamber of Commerce in the Philippines, Inc.," and the
opposition were filed only in January 2005, way beyond this three-year period. 20 chanrobleslaw
On March 14, 2006, pending resolution by the CA, the SEC issued the Certificate of Incorporation of
respondent FICCPI, pursuant to its ruling in SEC Case No. 05-008.
SEC Case No. 06-014
Meanwhile, on December 8, 2005,22 Mr. Pracash Dayacanl, who allegedly represented the defunct FICCPI,
filed an application with the CRMD for the reservation of the corporate name "Indian Chamber of Commerce
Phils., Inc." (ICCPI).23 Upon knowledge, Mansukhani, in a letter dated February 14, 2006, 24 formally opposed
the application. Mansukhani cited the SEC En Banc decision in SEC Case No. 05-008 recognizing him as the
one possessing the better right over the corporate name "Filipino Chamber of Commerce in the Philippines,
Inc.25
cralawredchanrobleslaw
In a letter dated April 5, 200626 the CRMD denied Mansukhani's opposition. It stated that the name "Indian
Chamber of Commerce Phils., Inc." is not deceptively or confusingly similar to "Filipino Indian Chamber of
Commerce in the Philippines, Inc." On the same date, the CRMD approved and issued the Certificate of
Incorporation27 of petitioner ICCPI.
Thus, respondent FICCPI, through Mansukhani, appealed the CRMD's decision to the SEC En Banc.28 The
appeal was docketed as SEC Case No. 06-014. On November 30, 2006, the SEC En Bane granted the appeal
filed by FICCPI,29 and reversed the CRMD's decision. Citing Section 18 of the Corporation Code, 30 the SEC En
Bane made a finding that "both from the standpoint of their [ICCPI and FICCPI] corporate names and the
purposes for which they were established, there exist[s] a similarity that could inevitably lead to
confusion."31It also ruled that "oppositor [FICCPI] has the prior right to use its corporate name to the
exclusion of the others. It was registered with the Commission on March 14, 2006 while respondent [ICCPI]
was registered on April 05, 2006. By virtue of oppositor's [FICCPI] prior appropriation and use of its name, it
is entitled to protection against the use of identical or similar name of another corporation." 32
Thus, the SEC En Banc ruled, to wit:
WHEREFORE, the appeal is hereby granted and the assailed Order dated April 05, 2006 is hereby REVERSED
and SET ASIDE and respondent is directed to change or modify its corporate name within thirty (30) days
from the date of actual receipt hereof.
SO ORDERED.33 (Emphasis in the original.)

ICCPI appealed the SEC En Banc decision in SEC Case No. 06-014 to the CA.34 The appeal, docketed as CA-
G.R. SP No. 97320, raised
the following issues:
A. The Honorable SEC En Banc committed serious error when it held that petitioner's corporate name
(ICCPI) could inevitably lead to confusion;
B. Respondent's corporate name (FICCPI) did not acquire secondary meaning; and cralawlawlibrary
C. The Honorable SEC En Bane violated the rule of equal protection when it denied petitioner (ICCPI)
the use of the descriptive generic words. 35
In a decision dated May 15, 2008,36 the CA affirmed the decision of the SEC En Banc. It held that by simply
looking at the corporate names of ICCPI and FICCPI, one may readily notice the striking similarity between
the two. Thus, an ordinary person using ordinary care and discrimination may be led to believe that the
corporate names of ICCPI and FICCPI refer to one and the same corporation. 37 The CA further ruled that
ICCPI's corporate name did not comply with the requirements of SEC Memorandum Circular No. 14-2000. It
noted that under the facts of this case, it is the registered corporate name, FICCPI, which contains the word
(Filipino) making it different from the proposed
corporate name. SEC Memorandum Circular No. 14-2000 requires, however, that it should be the proposed
corporate name which should contain one distinctive word different from the name of the corporation
already registered, and not the other way around, as In this case. 39 Finally, the CA held that the SEC En
Bane did not violate ICCPFs right to equal protection when it ordered ICCPI to change its corporate name.
The SEC En Bane merely compelled ICCPI to comply with its undertaking to change its corporate name in
case another person or firm has acquired a prior right to the use of the said name or the same is deceptively
or confusingly similar to one already registered with the SEC.40
The dispositive portion of the CA decision reads:
WHEREFORE, premises considered, the petition filed in this case is hereby DENIED and the assailed
Decision of the Securities and Exchange Commission en banc in SEC EN BANC Case No. 06-014 is
hereby AFFIRMED.
SO ORDERED.41 (Emphasis in the original.)

In its Resolution dated August 4, 2008,42 the CA denied the Motion for Reconsideration filed by ICCPI.
The Petition43
ICCPI now appeals the CA decision before this Court raisin; following arguments:
A. The Honorable Court of Appeals committed serious error when it upheld the findings of the SEC En
Banc;
B. The Honorable Court of Appeals committed serious error when it held that there is similarity
between the petitioner and the respondent (sic) corporate name that would inevitably lead to
confusion; and cralawlawlibrary
C. Respondent's corporate name did not acquire secondarymeaning. 44
The Court's Ruling
We uphold the decision of the CA.
Section 18 of the Coiporation Code expressly prohibits the use of a corporate name which is identical or
deceptively or confusingly similar to that of any existing corporation: ChanRoblesVirtualawlibrary
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 laws. When a change in
the corporate name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name. (Underscoring supplied.)
In Philips Export B. V. v. Court of Appeals,45 this Court ruled that to fall within the prohibition, two requisites
must be proven, to wit:
1. that the complainant corporation acquired a prior right over the use of such corporate name; and cralawlawlibrary
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.46
These two requisites are present in this case.
FICCPI acquired a prior right over

the use of the corporate name
In Industrial Refractories Corporation of the Philippines v. Court of Appeals, 47 the Court applied the priority
of adoption rule to determine prior right, taking into consideration the dates when the parties used their
respective corporate names. It ruled that "Refractories Corporation of the Philippines" (RCP), as opposed to
"Industrial Refractories Corporation of the Philippines" (IRCP), has acquired the right to use the word
"Refractories" as part of its corporate name, being its prior registrant on October 13, 1976. The Court noted
that IRCP only started using its corporate name when it amended its Articles of Incorporation on August 23,
1985.48 chanrobleslaw
In this case, FICCPI was incorporated on March 14, 2006. On the other hand, ICCPI was incorporated only
on April 5, 2006, or a month after FICCPI registered its corporate name. Thus, applying the principle in
the Refractories case, we hold that FICCPI, which was incorporated earlier, acquired a prior right over the
use of the corporate name.
ICCPI cannot argue that it first incorporated and held the "Filipino Indian Chamber of Commerce," in 1977;
and that it established the name's goodwill until it failed to renew its name due to oversight. 49 It is settled
that a corporation is ipso facto dissolved as soon as its term of existence expires. 50 SEC Memorandum
Circular No. 14-2000 likewise provides for the use of corporate names of dissolved corporations: ChanRoblesVirtualawlibrary
14. The name of a dissolved firm shall not be allowed to be used by other firms within three (3) years after
the approval of the dissolution of the corporation by the Commission, unless allowed by the last stockholders
representing at least majority of the outstanding capital stock of the dissolved firm.
When the term of existence of the defunct FICCPI expired on November 24, 2001, its corporate name
cannot be used by other corporations within three years from that date, until November 24, 2004. FICCPI
reserved the name "Filipino Indian Chamber of Commerce in the Philippines, Inc." on January 20, 2005, or
beyond the three-year period. Thus, the SEC was correct when it allowed FICCPI to use the reserved
corporate name.
ICCPI's name is identical and

deceptively or confusingly similar to
that of FICCPI
The second requisite in the Philips Export case likewise obtains in two respects: the proposed name is (a)
identical or (b) deceptively or confusingly similar to that of any existing corporation or to any other name
already protected by law.
On the first point, ICCPI's name is identical to that of FICCPI. ICCPFs and FICCPFs corporate names both
contain the same words "Indian Chamber of Commerce." ICCPI argues that the word "Filipino" in FICCPFs
corporate name makes it easily distinguishable from ICCPI.51 It adds that confusion and deception are
effectively precluded by appending the word "Filipino" to the phrase "Indian Chamber of
Commerce."52Further, ICCPI claims that the corporate name of FICCPI uses the words "in the Philippines"
while ICCPI uses only "Phils, Inc."53chanrobleslaw
ICCPFs arguments are without merit. These words do not effectively distinguish the corporate names. On
the one hand, the word "Filipino" is merely a description, referring to a Filipino citizen or one living in the
Philippines, to describe the corporation's members. On the other, the words "in the Philippines" and "Phils.,
Inc." are simply geographical locations of the corporations which, even if appended to both the corporate
names, will not make one distinct from the other. Under the facts of this case, these words cannot be
separated from each other such that each word can be considered to add distinction to the corporate names.
Taken together, the words in the phrase "in the Philippines" and in the phrase "Phils. Inc." are synonymous
—they both mean the location of the corporation.
The same principle was adopted by this Court in Ang mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus,
H.S.K. sa Bansang Pilipinas, Inc. v. Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan: 54
Significantly, the only difference between the corporate names of petitioner and respondent are the
words SALIGAN and SUHAY. These words are synonymous-both mean ground, foundation or support.
Hence, this case is on all fours with Universal Mills Corporation v. Universal Textile Mills, Inc., where the
Court ruled that the corporate names Universal Mills Corporation and Universal Textile Mills, Inc., are
undisputably so similar that even under the test of "reasonable care and observation" confusion may
arise.55 (Italics in the original.)
Thus, the CA is correct when it ruled, "[a]s correctly found by the SEC en bane, the word 'Filipino' in the
corporate name of the respondent [FICCPI] is merely descriptive and can hardly serve as an effective
differentiating medium necessary to avoid confusion. The other two words alluded to by petitioner [ICCPI]
that allegedly distinguishes its corporate name from that of the respondent are the words 'in' and 'the' in
the respondent's corporate name. To our mind, the presence of the words 'in' and 'the' in respondent's
corporate name does not, in any way, make an effective distinction to that of petitioner." 56 chanrobleslaw
Petitioner cannot argue that the combination of words in respondent's corporate name is merely descriptive
and generic, and consequently cannot be appropriated as a corporate name to the exclusion of the
others.57Save for the words "Filipino," "in the," and "Inc.," the corporate names of petitioner and respondent
are identical in all other respects. This issue was also discussed in the Iglesia case where this Court held,
Furthermore, the wholesale appropriation by petitioner of respondent's corporate name cannot find
justification under the generic word rule. We agree with the Court of Appeals' conclusion that a contrary
ruling would encourage other corporations to adopt verbatim and register an
existing and protected corporate name, to the detriment of the public. 58 chanrobleslaw
On the second point, ICCPI's corporate name is deceptively or confusingly similar to that of FICCPI. It is
settled that to determire 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
examine the record as well as the names themselves. 59 Proof of actual confusion need not be shown. It
suffices that confusion is probably or likely to occur.60 chanrobleslaw
In this case, the overriding consideration in determining wheiher a person, using ordinary care and
discrimination, might be misled is the circumstance that both ICCPI and FICCPI have a common primary
purpose, that is, the promotion of Filipino-Indian business in the Philippines.
The primary purposes of ICCPI as provided in its Articles of Incorporation are:
a. Develop a stronger sense of brotherhood;
b. Enhance the prestige of the Filipino-Indian business community in the Philippines;
c. Promote cordial business relations with Filipinos and other business communities in the
Philippines, and other overseas Indian business organizations;
d. Respond fully to the needs of a progressive economy and the Filipino-Indian Business community;
e. Promote and foster relations between the people and Governments of the Republics of the
Philippines and
India in areas of Industry, Trade, and Culture.61 chanroblesvirtuallawlibrary
Likewise, the primary purpose of FICCPI is "[t]o actively promote and enhance the Filipino-Indian business
relationship especially in view of [current] local and global business trends." 62 chanrobleslaw
Considering these corporate purposes, the SEC En Banc made a finding that "[i]t is apparent that both from
the standpoint of their corporate names and the purposes for which they were established, there exist a I
similarity that could inevitably lead to confusion."63 This finding of the SEC En Bane was fully concurred with
and adopted by the CA.64 chanrobleslaw
Findings of fact of quasi-judicial agencies, like the SEC, are generally accorded respect and even finality by
this Court, if supported by substantial evidence, in recognition of their expertise on the specific matters
under their consideration, and more so if the same has been upheld by the appellate court, 65 as in this case.
Petitioner cannot argue that the CA erred when it upheld the SEC En Banc's decision to cancel ICCPFs
corporate name.66 By express mandate of law, the SEC has absolute jurisdiction, supervision and control
over all corporations.67 It is the SEC's duty to prevent confusion in the use of corporate names not only for
the protection of the corporation involved, but more so for the protection of the public. It has the authority
to de-register at all times, and under all circumstances corporate names which in its estimation are likely to
generate confusion.68 chanrobleslaw
Pursuant to its mandate, the SEC En Banc correctly applied Section 18 of the Corporation Code, and Section
15 of SEC Memorandum Circular No. 14-2000: ChanRoblesVirtualawlibrary
In implementing Section 18 of the Corporation Code of the Philippines (BP 68), the following revised
guidelines in the approval of corporate and partnership names are hereby adopted for the information
and guidelines of all concerned:
xxx
15. Registrant corporations or partnership shall submit a letter undertaking to change their corporate or
partnership name in case another person or firm has acquired a prior right to the use of said firm name or
the same is deceptively or confusingly similar to one already registered unless this undertaking is already
included as one of the provisions of the articles of incorporation or partnership of the registrant.
Finding merit in respondent's claims, the SEC En Bane merely compelled petitioner to comply with its
undertaking.69 chanrobleslaw
WHEREFORE, the petition is DENIED. The Decision of the CA dated May 15, 2008 in CA-G.R. SP No. 97320
is hereby AFFIRMED.
SO ORDERED. chanRoblesvirtualLawlibrary
G.R. No. 168134, October 05, 2016
FERRO CHEMICALS, INC., Petitioner, v. ANTONIO M. GARCIA, ROLANDO NAVARRO, JAIME Y.

GONZALES AND CHEMICAL INDUSTRIES OF THE PHILIPPINES, INC., Respondents.
G.R. NO. 168183
JAIME Y. GONZALES, Petitioner, v. HON. COURT OF APPEALS AND FERRO CHEMICALS,

INC., Respondents.
G.R. NO. 168196
ANTONIO M. GARCIA, Petitioner, v. FERRO CHEMICALS, INC., Respondent.
DECISION
PEREZ, J.:
Before us are three consolidated Petitions for Review on Certiorari assailing the 3 March 2004 Decision 1and
the 17 May 2005 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 69970, which affirmed with
modification the 4 September 2000 Decision3 of the Regional Trial Court (RTC) of Makati City, Branch 61.
The RTC found Antonio M. Garcia, Jaime Y. Gonzales, Rolando Navarro and Chemical Industries of the
Philippines, Inc. solidarily liable for the amount of P256,255,537.41, representing the value of the shares of
stocks here in question. In its assailed Decision and Resolution, the CA absolved Rolando Navarro and
Chemical Industries of the Philippines, Inc. from liability, reduced the amount of attorney's fees from
P1,000,000.00 to P500,000.00, and deleted the additional 10% of the value of the shares to the amount of
attorney's fees that was awarded. The dispositive portion of theCA Decision reads:
"WHEREFORE, the appeal is hereby PARTIALLY GRANTED. The appealed Decision, dated 04 September
2000, rendered by Hon. Judge Fernando V. Gorospe, Jr., of the Regional Trial Court of Makati, Branch 61,
is MODIFIED, in that:
1. [CHEMICAL INDUSTRIES OF THE PHILIPPINES] and ROLANDO NAVARROare

hereby EXONERATED from any liability in this case.
2. ANTONIO M. GARCIA and JAIME GONZALES are hereby ORDERED, jointly and
severally, to pay FERRO CHEMICALS, INC., the following: ChanRoblesVirtualawlibrary
a.) P256,255,537.41, which is the value of the lost shares minus the balance of the
purchase price;
b.) P100,000.00, as exemplary damages.
c.) P500,000.00 as attorney's fees; and
d.) Costs of the suit.
3. The award of P12,000,000.00, which is the cost of suit and expenses of litigation in the
case against the Consortium is hereby DELETED for lack of factual basis.
SO ORDERED."4 chanroblesvirtuallawlibrary
The Facts
Ferro Chemicals Incorporated (Ferro Chemicals), is a domestic corporation duly authorized by existing law to
engage in business in the Philippines. It is represented in this action by its President, Ramon M. Garcia.
Chemical Industries of the Philippines Inc. (Chemical Industries), on the other hand, is also a domestic
corporation duly organized and existing by virtue of Philippine laws. Antonio Garcia, one of the parties in the
instant case, is the Chairman of the Board of Directors (BOD) of Chemical Industries and a brother of Ferro
Chemical's President, Ramon Garcia. Rolando Navarro is the Corporate Secretary of Chemical Industries
while Jaime Gonzales is a close financial advisor of Antonio Garcia.
The Deed of Absolute Sale and Purchase of Shares of Stock
On 15 July 1988, Antonio Garcia and Ferro Chemicals entered into a Deed of Absolute Sale and Purchase of
Shares of Stock5 over 1,717,678 shares of capital stock of Chemical Industries registered under the name of
Antonio Garcia for a consideration of P-79,207,331.28 (subject shares). Included as subjects of the sale
were Antonio Garcia's 371,697 shares of stocks in Vision Insurance Consultants, Inc., (VIC) and his
proprietary membership in Alabang Country Club and Manila Polo Club. Under the sale agreement, Antonio
Garcia warranted the following:
(1) That the subject shares are free from the liens and encumbrances except the ones under the Security
Bank and Trust Company (Security Bank) and the Insular Bank of Asia and America (Insular Bank);
(2) That the seller undertakes to defend the sale contract and defray the litigation cost should its validity be
assailed, and, to reimburse Ferro Chemicals the amount of the purchase price
(3) That in the event that the sale is invalidated, the seller will reimburse the buyer the amount of the
purchase price.
The parties also stipulated in the agreement that Ferro Chemicals will deliver a part of the purchase price to
Security Bank in satisfaction of Antonio Garcia's obligation as judgment obligor with Security Bank.
Pursuant to the sale contract, Ferro Chemicals remitted the amount of P-35,462,869.92 to Security Bank
and Trust Co. (SBTC) in the form of a check drawn against its account with Bank of America. On the ground
that the amount tendered was insufficient to satisfy Antonio Garcia's obligation, the payment was not
accepted by Security Bank, leaving the obligor with no recourse but to consign the check to the court which
adjudicated his liability. (Security Bank Case) On 19 June 1990, the CA approved the consignation effected
by Antonio Garcia and held that the amount tendered is sufficient to discharge his liability. In a Resolution
dated 21 November 1990 the Court affirmed the final settlement of Antonio Garcia's liability with the bank.
This settled the Security Bank Case with finality.
The Compromise Agreement
On 17 January 1989, Antonio Garcia entered into a Compromise Agreement6 with Philippine Investments
System Organization (PISO), Bank of the Philippine Islands (BPI), Philippine Commercial International Bank
(PCIB), Rizal Commercial Banking Corporation (RCBC) and Land Bank of the Philippines (LBP) (collectively
known as Consortium Banks). The settlement was entered in connection with the Surety Agreements
previously contracted by Antonio Garcia and Dynetics Corporation with the onsortium Banks.
The First Consortium Case
The 17 January 1989 Compromise Agreement sprang from Civil Case No. 8527, filed by Antonio Garcia and
Dynetics,. Inc. before the RTC of Makati City, seeking to enjoin the Consortium Banks from collecting the
amount of P117,800,000.00, excluding interests, penalties and attorney's fees, purportedly representing
their liability under surety contracts.
The RTC, upon application therefor by the Consortium Banks, issued a Notice of Garnishment7 dated 19 July
1985 over the 1,717,678 shares of stocks of Antonio Garcia in Chemical Industries to secure any contingent
claims that may be awarded in favor of the banks. On the ground that only absolute transfers of shares are
required to be on the corporation's stock and transfer books, the Corporate Secretary did not annotate the
banks' claims on Chemical Industries' books.
Subsequently, the RTC issued Orders dated 25 March 1988 and 20 May 1988 dismissing Civil Case No.
8527. In effect, the causes of action of the plaintiffs and the counterclaims of the defendants were all
denied. Insisting on their right to enforce the surety contracts, the Consortium Banks assailed the dismissal
of Civil Case No. 8527 before the appellate court. During the pendency of the appeal docketed as CA-G.R.
No. 20467, the parties agreed to amicably settle the case, and thus, the creditors accepted the offer of the
debtors to immediately pay the obligation in exchange for the waiver of interests, penalties and attorney's
fees. The compromise agreement, which required Antonio Garcia and Dynetics to pay the Consortium Banks
the amount of P145,000,000.00, was consequently approved by the CA in a Judgment dated 22 May 1989.
The Deed of Right to Repurchase
After the parties in the First Consortium Case forged a Compromise Agreement, Antonio Garcia and Ferro
Chemicals entered into a Deed of Right to Repurchase8 dated 3 March 1989. Under the repurchase contract,
Ferro Chemicals stipulated to sell back the subject shares to Antonio Garcia within 180 days from its
execution or until 30 August 1989 subject to the foregoing terms:
(1) That the consideration for the repurchase shall either be equivalent to the amount actually paid by the
buyer for the sale or the sum of P79,207,331.28, whichever is lesser, plus interest charges, bank charges,
broker's commission, transfer taxes and documentary stamp tax;
(2) Should the tender of the repurchase price be effected 90 days after 3 March 1989, the seller, shall, in
addition to the payment of the above stated amount, shall pay a surcharge equivalent to 5% over and
above the actual cost of the buyer in holding the shares.
Desirous to reacquire the ownership of the subject shares, Antonio Garcia, on 12 July 1989, notified Ferro
Chemicals of his intention to exercise his right, under the repurchase deed. On 31 July 1989, Antonio Garcia
reiterated his intent to reacquire the subject shares by sending another notice to Ferro Chemicals and
tendering the amount of the agreed repurchase price. On the ground that the taxes and the interests due
were not included in the consideration for repurchase price tendered by Antonio Garcia, Ferro Chemicals
refused to sell back the shares to him. Instead, Ferro Chemicals opted to cede its rights over the subject
shares to Chemphil Export and Import Corporation (Chemphil Export) by virtue of an Agreement9 dated 26
June 1989.
First and Second Repurchase Cases
The assignment. effected by Ferro Chemicals to a third party did not deter Antonio Garcia's efforts to
recover the subject shares. On 21 August 1989, he initiated an action for Specific Performance before the
RTC of Makati City. The case, which was raffled to Branch 145 and docketed as Civil Case No. 89-4837,
sought for the enforcement of the seller's right under the repurchase agreement and prayed that the buyer
be ordered to reconvey the subject shares to him. Finding that the issues raised involved an intra-corporate
dispute cognizable by the Securities and Exchange Commission (SEC), the RTC dismissed Civil Case No. 89-
4837.
Undeterred, Antonio Garcia filed a Second Repurchase Case before the SEC which was docketed as SEC
Case No. 04303. In his Complaint, the seller cited the unjustified refusal of the buyer to comply with the
terms of the agreement and reiterated his prayer in the First Repurchase Case that the buyer be enjoined to
observe its obligation under the repurchase agreement.
Enforcement o[the First Consortium Case
With Antonio Garcia and Dynetics' failure to comply with the compromise agreement, the Consortium Banks,
on 18 July 1989, filed a Motion for Execution.10 Thus, the RTC, issued a Writ of Execution11 on 11 August
1989, to enforce the court-approved compromise against Antonio Garcia and Dynetics.
Pursuant to the writ of execution, the sheriff levied the 1,717,678 shares of capital stocks in Chemical
Industries that were previously attached on the strength of the 19 July 1985 RTC Order 12 in the First
Consortium Case. After the notice and the publication requirements were complied with, a public auction
was conducted whereby the Consortium Banks were declared as the highest bidders as shown in the
Certificate of Sale.13
chanrobleslaw
The RTC, upon application of the Consortium Banks, issued an Order 14 dated 4 September 1989, directing
the Corporate Secretary of Chemical Industries to enter the sheriffs certificate of sale in the company's stock
and transfer books. In effect, the corporate secretary was enjoined to cancel the certificates of shares of
stocks under the name of Antonio Garcia and all those claiming rights under him and issue new ones in favor
of the Consortium Banks.
The Second Consortium Case
Before the corporate secretary could carry out the foregoing directive, Chemphil Export filed an Urgent
Motion15 opposing the 4 September 1989 RTC Order. Tracing back its ownership to Ferro Chemicals, which in
tum, came into ownership of the disputed shares as early as 15 July 1988, the intervenor propounded that it
has superior right as against the Consortium Banks.
On 27 September 1989, the RTC issued an Order, 16 allowing the intervention. On the belief that there is a
necessity of resolving first the question of which between Chemphil Export on the one hand, and the
Consortium Banks on the other, is rightfully entitled to the ownership of the disputed shares, the RTC
recalled its 4 September 1989 Order. For Chemphil Export, the garnishment effected by the Sheriff on 19
July 1985 is not binding on third persons because it was not recorded on the stock and transfer book of the
corporation.
The Second Consortium Case was litigated all the way up to this Court in G.R. Nos. 112438-39 and 113394.
In a Decision dated 12 December 1995, the Court ruled in favor of the Consortium Banks and declared that
the attachment lien they previously acquired is valid and effective even though it was not annotated in the
corporation's stock and transfer books. The chief purpose of the remedy of attachment is to secure a
contingent lien on the defendant's property until plaintiff can, by appropriate proceedings, obtain a
judgment and have such property applied to its satisfaction. 17 For this reason, the Court adjudged the
Consortium Banks as the rightful owners of the disputed shares. This decision settled with finality the
Second Consortium Case.18 chanrobleslaw
The Ferro Chemicals Case
After losing the disputed shares to the Consortium Banks, Chemphil Export proceeded to demand from Ferro
Chemicals the value of the lost shares in the amount of P100,000,000.00. In payment thereof, Ferro
Chemicals ceded its fights over its chrome plant in Misamis Oriental m favor of the former. 19 chanrobleslaw
In the interregnum, Consortium Banks also assigned their rights over the disputed shares to Jaime Gonzales
by executing a Deed of Assignment of Credit Without Recourse20 on 7 July 1993.
On the belief that it is aggrieved by the tum of events, Ferro Chemicals initiated several civil and criminal
cases against Chemical Industries, Antonio Garcia, Rolando Navarro, Jaime Gonzales and a certain Atty.
Virgilio Gesmundo before different courts and judicial bodies.
On 3 December 1996, Ferro Chemicals filed an action for damages before the RTC of Makati, seeking for the
recovery of the amount of the shares that was lost by Chemphil Export to the Consortium Banks in
the Second Consortium Case.
In its Complaint21 docketed as Civil Case No. 96-1964, Ferro Chemicals claimed that defendants conspired
and abetted to fraudulently induce the buyer to purchase Antonio Garcia's shares by falsely warranting that
these shares are free from liens and encumbrances. These representations were made despite their
knowledge that the subject shares were previously garnished by Consortium Banks. Relying on defendants'
warranty, Ferro Chemicals parted with the amount of P35,462,868.69 as payment for those shares only to
lose the said shares to prior lienholders after a protracted legal battle which reached all the way up to this
Court. It was alleged that the fraudulent scheme was perpetuated by Antonio Garcia, together with his co-
defendants, Jaime Gonzales and Rolando Navarro, who conspired with him in enticing Ferro Chemicals to
purchase the subject shares.
In refuting liability, defendants Chemical Industries and Antonio Garcia averred that there is no truth to the
claim of Ferro Chemicals that it was not made aware of the prior attachment of the Consortium Banks. They
insisted that, all the outstanding claims against the subject shares, were fully disclosed to Ferro Chemicals'
President, Ramon Garcia, during the negotiation of the sale which took almost a year before the parties
finally decided to sign the transfer deed. While the subject lien was not mentioned in the purchase
agreement, Ramon Garcia, however, was wholly apprised of the status of the encumbrance who went to the
extent of inserting the "reimbursement clause" and "the obligation to defend the sale clause" in the
agreement in order to protect Ferro Chemicals' rights in the event that prior lienholders will exercise their
right over the subject properties. The reason why the said lien was not expressly stated, defendants argued,
was because at the time the contract was perfected, the First Consortium Case was ordered dismissed by
the RTC.22 chanrobleslaw
To expose the frailty of the case, defendants Chemical Industries and Antonio Garcia punctuated Ferro
Chemical's unjustified refusal to sell back the shares to Antonio Garcia and the latter's unrelenting efforts to
reacquire the shares at the price stipulated in the Deed of Right to Repurchase. It was postulated that had it
been the intention of the defendants to deprive plaintiff of the subject shares, an offer to repurchase made
in good faith, coupled with the tender of the agreed consideration, would not have been made. 23 chanrobleslaw
By its obstinate refusal to divest its ownership over the shares, it was argued that plaintiff obviously chose
to profit from the shares even at the risk of losing it to third person·s. After it was finally divested of its right
to receive dividends, defendants pointed out, Ferro Chemicals turned to Antonio Garcia for the value of the
lost shares trumpeting all sorts of specious claims against him and other defendants. 24 chanrobleslaw
For his part, defendant Jaime Gonzales claimed that he is not a party to the agreement which was merely
between the brothers Ramon Garcia and Antonio Garcia and their respective corporations, Ferro Chemicals
and Chemical Industries.25 Contrary to the claim of Ferro Chemicals, Jaime Gonzales maintained that
cralawred
Ramon Garcia was well aware of the levy of Consortium Banks against the shares of Antonio Garcia as this
issue was fully discussed to him in the presence of Jaime Gonzales during the negotiation of the agreement.
He invited the attention of the trial court to the peculiar provisions in the transfer deed which stipulates "the
seller undertook to defend the validity of the sale and defray the cost of litigation and reimburse the buyer
of the payments made should the sale be invalidated' that were inserted for the precise reason that the
parties wanted to protect the interest of Ferro Chemicals from the claims of the Consortium Banks. In any
case, Jaime Gonzales claimed that there is no proof that he conspired with his co-defendants to carry out
the sinister design alleged by the plaintiff.26 chanrobleslaw
Defendant Rolando Navarro also denied liability by pointing out that he was neither a party nor a privy to
the contract in question and his participation in the transaction was limited to his signing of the deed as an
instrumental witness thereof. It was Atty. Virgilio Gesmundo who was consulted by Antonio Garcia during
the negotiation of the agreement and was the one who also prepared the draft of the contract in accordance
with the terms agreed upon by parties. Not being a party nor a privy, Rolando Navarro posited that he was
not in a position to make any representation or warranty with respect to the subject shares.
After the Pre-Trial Conference, trial on the merits ensued. During the trial, parties adduced their respective
testimonial and documentary evidence to support their case.
The RTC Decision
On 4 September 2000, the RTC rendered a Decision27 in favor of Ferro Chemicals and found Chemical
Industries, Antonio Garcia, Jaime Gonzales and Rolando Navarro solidarily liable for the total amount of
P269,355,537.41, representing the value ofthe lost shares, costs of litigation, attorney's fees and exemplary
damages.
In finding Antonio Garcia liable, the RTC harbored the belief that no reasonable businessman would assume
the risk of buying the shares for P-79,207,331.28 and then end up answering liabilities to its prior
lienholders in the amount of P145,000,000.00. To find flawed Antonio Garcia's defense, the court a quo went
on to declare that it would be an unwise business decision for Ferro Chemicals to purchase shares of stocks
that were already attached to answer for contingent claims, viz:
"Verily, Antonio Garcia has more reason not to disclose the lien/claim of the consortium since the
consummation of the sale is more to his benefit. Ramon Garcia's testimony that Antonio Garcia's [Chemical
Industries] shares which have been garnished by [Security Bank] have been the subject of attempts by the
latter to ell the same at public auction which will result in its disposal at much lower price as is always the
case in such sales, and acquisition thereof by the bank itself, an adverse party is undisputed. xxx.
xxxx
In fine, Antonio Garcia entered into an agreement with [Ferro Chemicals] for the sale and purchase of his
[Chemical Industries] shares, among others, covered by Deed of Absolute Sale and Purchase of Shares of
Stock. He falsely represented and warranted that the same is free from all liens and encumbrances except
that of [Security Bank] and [Insular Bank], despite his knowledge of the lien of the consortium. He,
therefore, concealed [the] said lien from [Ferro Chemicals]. The [Chemical Industries] shares were
subsequently lost when said shares were executed and sold at public auction to satisfy Antonio Garcia's
liability with the consortium, the ownership of the latter having been declared by the Supreme Court." 28
After having found that Antonio Garcia violated the terms of the purchase agreement by falsely representing
to Ferro Chemicals that the subject shares were free from liens and encumbrances other than the ones
mentioned in the agreement, the trial court found him liable under Article 1170 of the New Civil Code which
states that "those who in the performance of their obligations are guilty of fraud, negligence or delay, and
those who in any manner contravene the tenor thereof, are liable for damages."
With respect to acts imputed against Jaime Gonzales and Rolando Navarro, the RTC found that their conduct
prior to, during and subsequent to the execution of the contract reflected a common design to aide Antonio
Garcia to evade his contractual obligations with Ferro Chemicals. In effect, the lower court found Jaime
Gonzales and Rolando Navarro liable for tortious interference for having perpetrated acts which are akin to
the scenario wherein third persons induce a party to renege on or violate his undertaking under the contract
warranting relief therefrom. The RTC decreed that these acts of Jaime Gonzales and Rolando Navarro are
indicative of their scheme to aide Antonio Garcia unjustly deprive Ferro Chemicals of its purchased shares,
to wit:
"Defendant Navarro is now estopped from disclaiming his active participation in the transaction involving the
sale of Antonio Garcia's shares to [Ferro Chemicals]. The Court believes that he showed the stock and
transfer book of [Chemical Industries] to Ramon Garcia confident that the garnishment of the corporation
will not be revealed because as corporate secretary who had the duty to annotate the garnishment he did
not respond to the call obviously because he was protecting the interest of Antonio Garcia whom he had
been assisting regarding the former's shares and/or disposition thereof. Worse, defendant Navarro even
cancelled the certificate of shares in the name of Antonio Garcia and issued new ones to [Ferro Chemicals].
This was followed by the issuance of new certificates of shares to [Chemphil Export]. What cannot be
explained is the fact that he continuously did not record the consortium's garnishment despite being aware
that the interests of Antonio Garcia over his [Chemical Industries] shares was already being transferred to
third parties, whose interests are definitely affected.
Likewise, defendant Gonzales is also estopped from denying his participation in the transaction involving the
sale of Antonio Garcia's [Chemical Industries] shares to [Ferro Chemicals] after previously admitting
unconditionally his participation in his Affidavit of 30 May 1990. His subsequent qualification of such
participation is unavailing. In fact, defendant Gonzales' interest being intertwined with that of Antonio
Garcia personally, in business and in matters regarding the subject [Chemical Industries] shares of the latter
is an understatement- he is a financial officer and [a] business associate of Antonio Garcia; he was also [an]
attorney-in-fact of Antonio Garcia in negotiating and entering into a compromise agreement with the
consortium; and the subject [Chemical Industries] shares of Antonio Garcia were ultimately assigned [']to
his name['] by the said consortium."29
As to defendant Chemical Industries, the RTC made the corporation accountable for the acts of its Corporate
Secretary, Rolando Navarro, which were carried out to the damage and prejudice of Ferro Chemicals.
Having laid the individual participation of each defendant to defraud the plaintiff, the RTC then found them
jointly and severally liable for the purchase price of the subject shares, cost of litigation, attorney's fees and
exemplary damages, viz:
"WHEREFORE, premises above considered, and [Ferro Chemicals] having duly established its claim,
judgement is hereby rendered in favor of [Ferro Chemicals] and as against [Chemical Industries, Antonio
Garcia, Jaime Gonzales and Rolando Navarro], who are hereby ordered to pay [Ferro Chemicals], jointly and
severally, as follows:
(1) P256,255,537.41, which is the value of the lost shares minus the balance of the purchase price;
(2) P12,000,000.00, which is the cost of suit and expenses of litigation in the case against the consortium
and the instant case;
(3) P100,000.000 as exemplary damages[;]
(4) P1,000,000.00 plus additional 10% of the value of the shares as attorney's fees.
SO ORDERED."30 chanroblesvirtuallawlibrary
The Court of Appeals Decision
On 3 March 2004, the CA rendered a Decision affirming with modification the RTC Decision. Finding no
sufficient evidence on record that Rolando Navarro actively participated in the fraud perpetrated by Antonio
Garcia against Ferro Chemicals, the CA discharged him from liability. Underlying the ruling was the finding
that Rolando Navarro's participation was limited to his failure to disclose the existence of lien in favor of
Consortium Banks without any showing that he subsequently "abetted, actively participated or connived"
with Antonio Garcia in breaching the latter's obligation under the agreement. Being a corporation with a
personality separate and distinct from its officers and members, the CA held that Chemical Industries could
not be held liable for the acts of the latter. Finally, the CA struck down the grant of "attorney's fees in the
sum of P1,000,000.00 plus 10% of the value of the shares" for being reasonable and excessive and deleted
the grant for reimbursement of litigation expenses for lack of proof.
In a Resolution dated 17 May 2005, the CA denied the Motions for Partial Reconsideration separately filed by
Ferro Chemicals, Antonio Garcia and Jaime Gonzales for lack of merit.
The Petitions Before This Court
From the foregoing CA Decision and Resolution arose three separate Petitions for Review n Certiorari: (1)
G.R. No. 168134. Ferro Chemicals, Inc., v. Antonio M. Garcia, Rolando P. Navarro, Jaime Y. Gonzales and
Chemical Industries of the Philippines, Inc.; (2) G.R. No. 168183, Jaime Y. Gonzales v. Hon. Court of
Appeals and Ferro Chemicals, Inc.; and (3) G.R. No. 168196, Antonio M. Garcia v. Ferro Chemicals, Inc. For
identity of the parties and similarity of the issues involved, the Court directed the consolidation of G.R. Nos.
168196, 168134 and 168183.
G.R. No. 168134
This is a petition filed by Ferro Chemicals assailing the CA ruling which discharged Rolando Navarro and
Chemical Industries from liability. Ferro Chemicals likewise questioned in this petition the deletion of the
reimbursement for the. litigation costs expended by Chemphil Export in the Second Consortium Case in the
amount of P12,000,000.00, and, the attorney's fees in the sum of P1,000,000.00 with the additional 10% of
the value of the shares which were previously awarded by the RTC.
G.R. No. 168183
In G.R. No. 168183, Jaime Gonzales controverts the CA's finding which adjudged him liable for tortious
interference under Article 1314 of the New Civil Code on account of participation in the negotiation of sale of
the shares and his eventual acquisition of the same shares from the Consortium Banks.
G.R. No. 168196
For his part, Antonio Garcia initiated G.R. No. 168196 seeking the nullity of the CA Decision and Resolution
finding him guilty of fraud in the performance of his obligations and in failing to comply with his obligation to
defend the sale. He questions the failure of the CA to deduct the dividends earned by the subject shares in
its computation of the value of the shares lost including the value of Alabang Country Club, Inc. and Manila
Polo Club, Inc. shares which were both transferred by Antonio Garcia to Ferro Chemicals thereby allowing
Ferro Chemicals to unjustly enrich itself at his expense.
The Issues
I.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN EXONERATING RESPONDENT
ROLANDO NAVARRO FROM LIABILITY DESPITE HIS PARtiCIPATION IN THE SINISTER PLAN TO DECEIVE
[FERRO CHEMICALS]. HIS FAILURE TO COMPLY WITH HIS DUTIES AS CORPORATE SECRETARY AND
INTERFERING AND OBSTRUCTING THE FAITHFUL FULFILLMENT OF [ANTONIO GARCIA'S] OBLIGATION
UNDER THE CONTRACT BETWEEN [FERRO CHEMICALS] AND [ANTONIO GARCIA];
II.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN EXONERATING [CHEMICAL
INDUSTRIES] FROM LIABILITY DESPITE THE TORTIOUS ACTS OF ITS RESPONSIBLE OFFICERS;
III.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN RULING THAT THERE IS NO
EVIDENCE THAT [FERRO CHEMICALS] ASSUMED THE EXPENSES OF LITIGATION IN A CASE AGAINST THE
CONSORTIUM BANKS IN THE AMOUNT OF P12,000,000.00;
IV.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN DISREGARDING THE
UNCONTROVERTED EVIDENCE AND LEGAL JUSTIFICATION FOR THE AWARD OF P1,000,000.00 PLUS THE
ADDITIONAL 10% OF THE VALUE OF THE SHARES AS ATTORNEY'S FEES IN FAVOR OF THE PETITIONERS.
V.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN FINDING JAIME GONZALES
LIABLE FOR TORTIOUS INTERFERENCE FOR HIS PARTICIPATION IN THE NEGOTIATION OF THE PURCHASE
AGREEMENT AND IN EVENTUALLY ACQUIRING THE SUBJECT SHARES FROM THE CONSORTIUM BANKS;
VI.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN FINDING ANTONIO GARCIA
GUILTY OF FRAUD IN THE PERFORMANCE OF HIS OBLIGATION UNDER THE PURCHASE AGREEMENT IN
FAILING TO COMPLY WITH HIS OBLIGATION TO DEFEND THE SALE UNDER THE SAID CONTRACT;
VII.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN FAILING TO DEDUCT THE
DIVIDENDS EARNED BY THE SUBJECT SHARES INCLUDING THE VALUE OF THE ALABANG GOLF CLUB AND
MANILA POLO CLUB SHARES IN ITS COMPUTATION OF THE VALUE OF FERRO CHEMICAL'S LOSS.
The Court's Ruling
On the liability of
Antonio Garcia for fraud and
breach of obligation
Resonating the RTC, the CA arrived at the conclusion that Antonio Garcia is guilty of fraud in the
performance of his obligation, but the CA made its independent judgment pinning Antonio Garcia on the
basis of the following assumptions:
1. That Ferro Chemicals would not have entered into the sale had it known that the subject
shares were subject of the Consortium Banks' lien as to do so would be tantamount to
"committing financial suicide;"
2. That if it were true that Ferro Chemicals was apprised of the pendency of the claims in
question, that fact would have been embodied in the provisions of the contract. Under the
Best Evidence Rule, defendants cannot be permitted to present evidence aliunde;
3. That defendants cannot impute negligence to Ramon Garcia for failing to uncover the
subject attachment prior to the execution of the sale as it is the obligation of Antonio Garcia
to fully disclose in good faith all existing claims against the disputed shares.
The CA endeavored to tie all the loose ends by declaring that Antonio Garcia's liability was hinged primarily
not on his misrepresentations with respect to the sale contract, but on alleged fraudulent acts he
perpetrated in connection with the First Consortium Case. For the CA, his acts subsequent to the
consummation of the sale were not at arm's length and jeopardized the position of Ferro Chemicals in
relation to Chemical Industries' shares. All these circumstances, taken together, led the CA to its conclusion
that Antonio Garcia breached his obligation under the circumstances, to wit:
1. By recognizing his liability with the banks in the Compromise Agreement, Antonio Garcia
placed the subject shares within the reach of his obligors knowing that these shares were
previously attached to answer his obligation with them;
2. By failing to move for the lifting of the attachment effected by the Consortium Banks over
the subject shares and to offer his other properties as substitutes after he sold these shares
to Ferro Chemicals;
3. By allowing the execution on sale to proceed without opposition on his part and by refusing
to reimburse Ferro Chemicals of the amount of litigation expenses it incurred in its effort to
defend its ownership of the subject shares;
The appellate court, in other words, saw that Antonio Garcia, all throughout the First Consortium Case,
maintained a lackadaisical stance which paved the way for the Consortium Banks' enforcement of
garnishment and the consequent sale of the attached shares at the public auction to the damage and
prejudice of Ferro Chemicals.
We are not convinced.
TheCA's lament, in every tum, that Antonio Garcia was guilty of bad faith from the inception of the sale
contract until his compromise with the Consortium Banks is inexorably rebuked by the following chronology
of factual incidents that governs the relationship of Antonio Garcia and Ferro Chemicals:
(1) On 15 July 1988, Antonio Garcia and Ferro Chemicals entered into a Deed of Absolute Sale and Purchase
of Shares of Stock;31 chanrobleslaw
(2) On 17 January 1989, Antonio Garcia and Consortium Banks entered into a Compromise
Agreement32 with respect to the First Consortium Case;
(3) On 3 March 1989, Antonio Garcia and Ferro Chemicals entered into a Deed of Right to
Repurchase;33 chanrobleslaw
(4) On 12 July 1989, Antonio Garcia notified Ferro Chemicals of his intention to exercise his right
to buy back the sold shares under the repurchase deed;
(5) On 31 July 1989, Antonio Garcia reiterated his intent to reacquire the subject shares by
sending another notice to Ferro Chemicals coupled with the tender of the amount of the agreed
repurchase price;
(6) On 11 August 1989, the RTC of Makati, Branch 145, issued a Writ of Execution34 to enforce the Judgment
by Compromise in the First Consortium Case;
(7) On 22 August 1989, the Consortium Banks were declared as the highest bidders of the levied shares at
the public auction;35 chanrobleslaw
(8) On 26 September 1989, Ferro Chemicals (thru Chemphil Export) successor-in-interest, opposed the
consolidation of ownership of the subject shares in the names of the Consortium Banks; 36 chanrobleslaw
(9) From 26 September 1989 up to 12 December 1995, the Second Consortium Case was under litigation;
(10) On 1 April 1996, Ferro Chemicals lost the Second Consortium Case with finality;37 chanrobleslaw
(11) On 3 December 1996, Ferro Chemicals initiated the Ferro Chemicals Case for the payment of damages
based on fraud.38 (Emphasis supplied)
While the factual milieu of this case is seemingly mazy because of the number of cases and legal issues that
stemmed from a simple transfer of shares contract, there are two clearly crucial evidentiary matters that
were without warrant overlooked by the lower tribunals: (I) the execution by Ferro Chemicals and Antonio
Garcia of the Deed of Right to Repurchase on 3 March 1989; and (2) that on two separate
occasions, Antonio Garcia conveyed in writing his intent to buy back the shares in accordance with
the terms of the repurchase deed. These pieces of evidence, if appreciated in light of the allegation of fraud,
would overthrow the very foundation upon which the Ferro Chemicals rested its case.
Notably, Antonio Garcia's right to repurchase the subject shares, his attempts to exercise that right and
Ferro Chemicals' refusal to honor it, as well as the legal actions taken by Antonio Garcia against Ferro
Chemicals, were duly pleaded as affirmative allegations in Antonio Garcia's Answer, 39 in Civil Case No. 96-
1964 to wit:
"3.7 On 3 March 1989, [Antonio Garcia] and [Ferro Chemicals] entered into a Deed of Right to Repurchase
(the "Repurchase Deed", hereafter) covering the shares subject matter of the Deed of Sale, including the
CIP Shares, confirming earlier verbal agreement between the brothers, Ramon M. Garcia and [Antonio
Garcia], that the latter could repurchase the said shares from [Ferro Chemicals]. Under the Repurchase
Deed, defendant Garcia had until 30 August 1989 to exercise his right to repurchase the shares.
3.7.1 On July 1989, or long before the expiration of his right to repurchase the shares, Antonio Garcia
informed [Ferro Chemicals] that it was going to exercise said right. This notice was reiterated on 31 July
1989 with a tender of the repurchase price as stipulated in the Repurchase Deed;
3.7.2 [Ferro Chemicals] refused to honor [Antonio Garcia's] right under the Repurchase Deed alleging that
the amount tendered was insufficient in that interest for one day and the broker's commission were not
included in said amount. [Antonio Garcia] offered to pay the interest for one day but refused to pay the
broker's commission because the sale of the shares was not coursed through the stock exchange. [Ferro
Chemicals] still refused to honor [Antonio Garcia's] right under the Repurchase Agreement. Worse, [Ferro
Chemicals] assigned its rights over the [Chemical Industries] Shares to [Chemphil Export] supposedly on 26
June 1989;
3.7.3 Accordingly, on 21 August 1989; Antonio Garcia filed a complaint for specific performance and
annulment of transfer of shares against [Ferro Chemicals] and [Chemphil Export] entitled [']Antonio M.
Garcia v. Ferro Chemicals,,Inc., et al.,['] docketed as Civil Case No. 89-4837, with the Regional Trial Court
of Makati, which was raffled to Branch 145 (the "First Repurchase Case", hereafter). [Antonio Garcia]
sought, among other reliefs, the reconveyance of the shares, including the [Chemical Industries] Shares
from [Ferro Chemicals] and [Chemphil Export]. This case was, however, ordered dismissed by the Court of
Appeals based on its finding that the Repurchase Case involved an intra-corporate dispute over which the
Securities and Exchange Commission ("SEC") has exclusive jurisdiction;
3.7.4 Pursuant to the Court of Appeals decision, [Antonio Garcia], on 26 August 1992, filed with the SEC a
complaint for specific performance and/or rescission, with damages against Ramon M. Garcia, [Chemphil
Export] and [Ferro Chemicals]', docketed as SEC Case No. 04303 (the "Second Repurchase Case",
hereafter). In the Second Repurchase Case, [Antonio Garcia] again sought, among other relief, the
reconveyance of the [Chemical Industries] shares. As in the First Reconveyance Case, Ramon M. Garcia,
[Chemphil Export] and [Ferro Chemicals] again vigorously opposed [Antonio Garcia's] action to recover the
shares subject matter of the Deed of Sale, including the [Chemical Industries] Shares. The Second
Repurchase Case is still pending with the SEC."40
Antonio Garcia attached a copy of the Deed of Right to Repurchase as Annex 1 of his Answer and argued, as
one of his affirmative defenses, that Ferro Chemicals does not have a cause of action against him because:
"4.1.3 Despite its full knowledge of the Bank Consortium's claim on the [Chemical Industries] shares, Ferro
Chemicals refused and opposed all offers and efforts of Antonio Garcia to repurchase the [Chemical
Industries] shares."41
Harping on the infallibility of the lower tribunals' factual findings, Ferro Chemicals impresses upon this Court
that Antonio Garcia, driven by the desire to profit from the disposal of his shares and to satisfy his
obligations with his creditors at the same time, employed deceptive schemes to lure Ramon Garcia to
purchase the subject shares by concealing the lien of the Consortium Banks. The non-disclosure of the
subject lien, Ferro Chemicals claimed and the RTC and CA believed, is constitutive of an actionable fraud
warranting the award of damages. In no uncertain terms both tribunals pronounced that the non-mention of
the lien in the transfer contract was intentionally and deceptively done by Antonio Garcia in bad faith and
with intent to defraud. For the lower courts, the testimonial evidence sought to be introduced by Antonio
Garcia, which modifies the express terms of the purchase agreement to suggest that the subject lien was
purportedly contemplated by the parties in the contract, is not permissible under the Parole Evidence Rule.
We do not agree.
Fraud, in its general sense, is deemed to comprise anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed,
resulting in the damage to another, or by which an undue and unconscionable advantage is taken of
another. It is a question of fact and the circumstances constituting it must be alleged and proved in the
court below.42 chanrobleslaw
In the case of Tankeh v. DBP, et al.,43 this Court reviewed the doctrines of fraud in relation to contractual
relations and the quantum of proof necessary to prove fraud and establish liability therefor:
"Fraud is defined in Article 1338 of the Civil Code as:

ChanRoblesVirtualawlibrary
x x x fraud when, through insidious words or machinations of one of the contracting parties, the other is
induced to enter into contract which, without them, he would not have agreed to.
This is followed by the articles which provide legal examples and illustrations of fraud.
Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by
confidential relations, constitutes fraud. (n)
Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are
not in themselves fraudulent. (n)
Art. 1341. . A mere expression of an opm10n does not signify fraud, unless made by an expert and the
other party has relied on the former's special knowledge. (n)
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has
created substantial mistake and the same is mutual. '(n)
Art. 1343. Misrepresentation made in good faith 1s not fraudulent but may constitute error. (n)
"The distinction between fraud as a ground for rendering a contract voidable or as basis for an award of
damages is provided in Article 1344:
In order that fraud may make a contract voidable, it should be serious and should not have been employed
by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages. (1270)
"There are two types of fraud contemplated in the performance of contracts: dolo incidenteor incidental
fraud and dolo causante or fraud serious enough to render a contract voidable.
In Geraldez v. Court of Appeals, this Court held that: ChanRoblesVirtualawlibrary

This fraud or dolo which is present or employed at the time of birth or perfection of a contract may either
be dolo causante or dolo incidente. The first, or causal fraud referred to in Article 1338, are those deceptions
or misrepresentations of a serious character employed by one party and without which the other party
would not have entered into the contract. Dolo incidente, or incidental fraud which is referred to in Article
1344, are those which are not serious in character and without which the other party would still have
entered into the contract. Dolo causante determines or is the essential cause of the consent, while dolo
incidente refers only to some particular or accident of the obligation. The effects of dolo causante are the
nullity of the contract and the indemnification of damages, and dolo incidente also obliges the person
employing it to pay damages..
"In Solidbank Corporation v. Mindanao Ferroalloy Corporation, et al., this Court elaborated on the distinction
between dolo causante and dolo incidente:
Fraud refers to all kinds of deception -- whether through insidious machination, manipulation, concealment
or misrepresentation -- that would lead an ordinarily prudent person into error after taking the
circumstances into account. In contracts, a fraud known as dolo causante or causal fraud is basically a
deception used by one party prior to or simultaneous with the contract, in order to secure the consent of the
other. Needless to say, the deceit employed must be serious. In contradistinction, only some particular or
accident of the obligation is referred to by incidental fraud or dolo incidente, or that which is not serious in
character and without which the other party would have entered into the contract anyway.
"Under Article 1344, the fraud must be serious to annul or avoid a contract and render it voidable. This
fraud or deception must be so material that had it not been present, the defrauded party would not have
entered into the contract. In the recent case of Spouses Carmen S. Tongson and Jose C. Tongson, et al., v.
Emergency Pawnshop Bula, Inc., this Court provided some examples of what constituted dolo causante or
causal fraud:
Some of the instances where this Court found the existence of causal fraud include: (1) when the seller, who
had no intention to part with her property, was "tricked into believing" that what she signed were papers
pertinent to her application for the reconstitution of her burned certificate of title, not a deed of sale; (2)
when the signature of the authorized corporate officer was forged; or (3) when the seller was seriously ill,
and died a week after signing the deed of sale raising doubts on whether the seller could have read, or fully
understood, the contents of the documents he signed or of the consequences of his act. (Citations omitted)
"However, Article 1344 also provides that if fraud is incidental, it follows that this type of fraud is not serious
enough so as to render the original contract voidable.
"A classic example of dolo incidente is Woodhouse v. Halili. In this case, the plaintiff Charles Woodhouse
entered into a written agreement with the defendant Fortunato Halili to organize a partnership for the
bottling and distribution of soft drinks. However, the partnership did not come into fruition, and the plaintiff
filed a Complaint in order to execute the partnership. The defendant filed a Counterclaim, alleging that the
plaintiff had defrauded him because the latter was not actually the owner of the franchise of a soft drink
bottling operation. Thus, defendant sought the nullification of the contract to enter into the partnership. This
Court concluded that:
x x x from all the foregoing x x x plaintiff did actually represent to defendant that he was the holder of the
exclusive franchise. The defendant was made to believe, and he actually believed, that plaintiff had the
exclusive franchise. x x x The record abounds with circumstances indicative that the fact that the principal
consideration, the main cause that induced defendant to enter into the partnership. agreement with plaintiff,
was the ability of plaintiff to get the exclusive franchise to bottle and distribute for the defendant or for the
partnership. x x x The defendant was, therefore, led to the belief that plaintiff had the exclusive franchise,
but that the same was to be secured for or transferred to the partnership. The plaintiff no longer had the
exclusive franchise, or the option thereto, at the time the contract was perfected. But while he had already
lost his option thereto (when the contract was entered into), the principal obligation that he assumed or
undertook was to secure said franchise for the partnership, as the bottler and distributor for the Mission Dry
Corporation. We declare, therefore, that if he was guilty of a false representation, this was not the causal
consideration, or the principal inducement, that led plaintiff to enter into the partnership agreement.
But, on the other hand, this supposed ownership of an exclusive franchise was actually the consideration or
price plaintiff gave in exchange for the share of 30 percent granted him in the net profits of the partnership
business. Defendant agreed to give plaintiff 30 per cent share in the net profits because he was transferring
his exclusive franchise to the partnership. x x x.
Plaintiff had never been a bottler or a chemist; he never had experience in the production or distribution of
beverages. As a matter of fact, when the bottling plant being built, all that he suggested was about the
toilet facilities for the laborers.
We conclude from the above that while the representation that plaintiff had the exclusive franchise' did not
vitiate defendant's consent to the contract, it was used by plaintiff to get from defendant a share of 30 per
cent of the net profits; in other words, by pretending that he had the exclusive franchise and promising to
transfer it to defendant, he obtained the consent of the latter to give him (plaintiff) a big slice in the net
profits. This is the dolo incidente defined in article 1270 of the Spanish Civil Code, because it was used to
get the other party's consent to a big share in the profits, an incidental matter in the agreement.
"Thus, this Court held that the original agreement may not be declared null and void. This Court also said
that the plaintiff had been entitled to damages because of the refusal of the defendant to enter into the
partnership. However, the plaintiff was also held liable for damages to the defendant for the
misrepresentation that the former had the exclusive franchise to soft drink bottling operations.
To summarize, if there is fraud in the performance of the contract, then this fraud will give rise to damages.
If the fraud did not compel the imputing party to give his or her consent, it may not serve as the basis to
annul the contract; which exhibits dolo causante. However, the party alleging the existence of fraud may
prove the existence of dolo incidente. This may make the party against whom fraud is alleged liable for
damages."44
Applying the foregoing precepts in this case, we find it hard to believe that Antonio Garcia, in view of his
impassioned efforts to buy back the disputed shares way before the Second Consortium Case commenced
and even after the shares were assigned already to Chemphil Export, could be motivated by his fraudulent
desire to extract money and then ease out Ferro Chemicals from its ownership of the subject shares. The
flagrancy of the Deed of the Right to Repurchase ought to have caused the lower courts to delve into the
repurchase issue since this could have very well dispelled the fraud alleged to have attended the acts of
Antonio Garcia. By disregarding the repurchase contract and Antonio Garcia's intent in good faith to buy
back the shares, the lower tribunals fell prey into the skewed representations of Ferro Chemicals of the
factual incidents of this case. Indeed, both the contractual agreement on Antonio Garcia's right to
repurchase and Antonio Garcia's actual earnest attempts at repurchase were central to the cause of Antonio
Garcia in the proceedings below.
Though it fashioned itself as the vulnerable party, who was lured into buying shares of stocks that later
turned out to be overburdened by liens, the fact is that Ramon· Garcia is the President of Ferro Chemicals
and the brother of Antonio Garcia of Chemical Industries which, like Ferro Chemicals, is into initiated
business ventures. The transactions that Ramon and Antonio Garcia had with each other were between
brothers about their businesses. Ramon Garcia, both in buying the subject shares from Antonio Garcia, and
later on, in refusing to sell back the shares to Antonio Garcia did so in furtherance of his interests. It would
be rash judgment to say it was not so and hold that business dealings in multimillions were done without
conducting due diligence on the subject of the contract.
Indeed, the allegation that Antonio Garcia employed fraudulent machinations to hide the subject lien to
facilitate the disposal of his shares and to lure Ferro Chemicals to part with its money is diametrically
opposed to Antonio Garcia's subsequent offers to repurchase the shares and tender of the repurchase price.
On the other hand, Ferro Chemicals' explanation that the reason why it did not agree to the reacquisition
was because the repurchase price tendered did not include the amount of taxes and interest due, 45 is flimsy
and unacceptable under the circumstances. It must be pointed out that no negotiation in good faith
between. the parties as to the correct amount of taxes and interests should be paid took place since Ferro
Chemicals at the outset flatly refused the offer to buy. As a matter of fact, Antonio Garcia was constrained
to initiate two repurchase cases in his effort to reacquire the property.
The succession of events shows that Ferro Chemical's refusal to sell back the shares to Antonio Garcia was a
calculated move by Ramon Garcia who measured the risk of losing the subject shares to the Consortium
Banks against the visible returns on the shares during the pendency of the Consortium Bank Case. Between
the time of the initial offer of Antonio Garcia to buy back the shares on 31 July 1989' up to the finality of the
Court's decision in the Second Consortium Case on 12 December 1995, Ferro Chemicals thru Chemphil
Export, profited from the Chemical Industries' shares. It was only after it had lost the shares to the
Consortium Banks by the decision of the Court that Ferro Chemicals went back to Antonio Garcia and his co-
defendants for the enforcement of the sale contract asking for the reimbursement of the amount of the
shares that was lost. The buying and selling of stocks and the subsequent agreement on reversed activities
were in the exercise of business judgment.
Fraud has been defined to include an inducement through insidious machination. Insidious machination
refers to a deceitful scheme or plot with an evil or devious purpose. Deceit exists where the party, with
intent to deceive, conceals or omits to state material facts and, by reason of such omission or concealment,
the other party was induced to give consent that would not otherwise have been given. These are
allegations of fact that demand clear and convincing proof. They are serious accusations that can be so
conveniently and casually invoked, and that is why they are never presumed. 46 Applying the doctrines to the
case at bar, a judgment on fraud requires allegation and proof of facts and circumstances by which undue
and unconscionable advantage is taken by Antonio Garcia. Ramon Garcia failed in this regard. In contrast,
the succession of transaction between Antonio and Ramon Garcia indicated that Ramon Garcia wanted to
have a way out of his failed business decision of holding on to his shares instead of selling it back to Antonio
Garcia when he had the opportunity to do so. He saw that it was better to hold on to the shares he bought
from Antonio Garcia. The Court cannot save him from the fall that came from his own choice.
On the liability of Rolando Navarro

and Jaime Gonzales for tortious
interference
In imputing liability to Rolando Navarro, Ferro Chemicals harps on the following acts found by the trial court
to be demonstrative of his malicious intention to interfere with the contract between Antonio Garcia and
Ferro Chemicals:
(1) He facilitated in the execution of the Deed by showing the Stock and Transfer Book of [Chemical
Industries] to [Ferro Chemicals] thru [Ramon Garcia] to assure the latter that the disputed shares had no
lien other than those in the Stock and Transfer Book and in order to conceal the [Consortium Bank's] lien;
(2) He, together with Atty. Virgilio Gesmundo, also drafted in the boardroom of the [Chemical Industries]
the Deed which embodied the basic terms and conditions of the sale as agreed upon by the parties;
(3) He also signed as instrumental witness in the Deed;
(4) Upon examination of the Deed and despite knowledge of the irregularity of the sale, he, acting as
corporate secretary of [Chemical Industries], transferred the disputed shares in the name of [Ferro
Chemicals] and issued the corresponding certificates of stock;
(5) He drafted the Deed of Right to Repurchase under which [Antonio Garcia] was given the right to redeem
the shares sold to [Ferro Chemicals] within 180 days from signing of the said deed and subject to other
conditions stated therein;
(6) He, as the corporate secretary of [Chemical Industries], again made the transfer of the said shares in
the Stock and Transfer Book of [Chemical Industries] this time with respect to the 4,119,614 shares (which
included the disputed shares) assigned by [Ferro Chemicals] to [Chemphil Export].
In essence, Ferro Chemicals contends that while Rolando Navaro is not privy to the contract, his individual
acts form part of the bigger scheme to defraud the corporation.
In his Comment,47 Rolando Navarro denies liability by arguing that not being a party to the contract, he
cannot be held liable for breach thereof under Article 1311 of the New Civil Code. He underscores that Ferro
Chemical's complaint was for ·breach of contract, i.e. for failure to deliver the clean title of the subject
shares, which obligation befalls on the buyer alone. As an instrumental witness to the deed, it is absurd to
hold him liable for failure of the buyer to make good his warranty under the agreement. Invoking that only
absolute transfers of shares of stocks are required to be recorded in the corporation's stock and transfer
book, Rolando Navarro insists that he cannot be held liable for failing to record the claim of the Consortium
Banks since it is merely an attachment. Finally, he asserts that none of the conduct imputed against him
constitute tortious interference under Article 1314 of the New Civil Code because these acts, i.e., transfer
the certificate of title of the said shares and preparing a draft of contracts, were mainly part of his primary
duty as the Corporate Secretary of the Chemical Industries.
We affirm the ruling of the Court of Appeals in favor of Rolando Navarro.
The basic principle of relativity of contracts is that contracts can only bind the parties who entered into it,
and cannot favor or prejudice a third person, even if he is aware of such contract and has acted with
knowledge thereof.48 Where there is no privity of contract, there is likewise no obligation or liability to speak
about.49 Article 1311 of the New Civil Code provides:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the
rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value of the property he received from the decedent.
The obligation of contracts is limited to the parties making them and, ordinarily, only those who are parties
to contracts are liable for their breach. Parties to a contract cannot thereby impose any liability on one who,
under its terms, is a stranger to the contract, and, in any event, in order to bind a third person
contractually, an expression of assent by such person is necessary. 50 chanrobleslaw
Under Article 1314 of the New Civil Code, however, any third person who induces another to violate .his
contract shall be liable for damages to the other contracting party. The tort recognized in that provision is
known as interference with contractual relations. The interference is penalized because it violates the
property right of a party in a contract to reap the benefits that should result therefrom. 51
chanrobleslaw
The Court, in the case of So Ping Bun v. Court of Appeals, et al.,52 laid down the elements of tortious
interference with contractual relations: (1) existence of a valid contract; (2) knowledge on the part of the
third person of the existence of the contract and (3) interference on the part of the third person without
legal justification or excuse.53
chanrobleslaw
A duty which the law of torts is concerned with is respect for property of others, and cause of action ex
delicto may be predicated by an unlawful interference by any person of the enjoyment of the other of his
private property. This may pertain to a situation where a third person induces a person to renege on or
violate his undertaking under a contract.54 chanrobleslaw
A perusal of the. allegations proffered against Rolando Navarro would show that none of his conduct prior or
even subsequent to the execution of the subject deed, which was primarily done in furtherance of his duties
as corporate secretary, constitutes tortious interference. To imply that by preparing a draft of a contract,
signing as instrumental witness of the deed and recording of transfer of shares on the corporate books,
Rolando Navarro can now be held liable for tortious interference, is incredulous. Nothing from his acts as
found by the trial court, which were clearly carried out within the bounds of his office devoid of malice and
bad faith, would suggest involvement in the sinister design to deprive Ferro Chemicals of its property right
over the disputed shares. As the Corporate Secretary of Chemical Industries, Rolando Navarro is under
obligation to record in the stock and transfer book any and all alienation involving the shares of stocks of the
corporation as mandated by Section 74 of the Corporation Code which states:
Sec. 74. Books to he kept; stock transfer agent. x x x
xxxx
Stock corporations must also keep a book to be known as the "stock and transfer book," in which must be
kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid
and unpaid on all stock for which subscription has been made, and the date of payment of any installment;
a statement of every alienation, sale or transfer of stock made the date thereof, and by and to whom made;
and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the
principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection
by any director or stockholder of the corporation at reasonable hours on business days.
Clearly, the transfer of the certificates of stocks covering the subject shares in favor of Ferro Chemicals
effected on the strength of a valid deed of sale cannot be taken as an actionable tortious conduct, whether
such action is viewed in isolation or in connection with conduct of his co-defendants. The Court, in So Ping
Bun v. Court of Appeals, et al.,55 defined what constitutes an unlawful interference with contract:
"The foregoing issues involve, essentially, the correct interpretation of the applicable law on tortuous
conduct, particularly unlawful interference with contract. We have to begin, obviously, with certain
fundamental principles on torts and damages.
Damage is the loss, hurt, or harm which results from injury, and damages are the recompense or
compensation awarded for the damage suffered. One becomes liable in an action for damages for a
nontrespassory invasion of another's interest in the private use and enjoyment of asset if (a) the other has
property rights and privileges with respect to the use or enjoyment interfered with, (b) the invasion is
substantial, (c) the defendant's conduct is a legal cause of the invasion, and (d) the invasion is either
intentional and unreasonable or unintentional and actionable under general negligence rules."
For sure, Rolando Navarro has transgressed no right of Ferro Chemicals while performing his obligation as
an officer of Chemical Industries. There is absolutely no proof other than the weak indicia which, the plaintiff
contends, show the existence thereof.. Even if we lend credence to the graver allegation that Rolando
Navarro showed the stock and transfer books of the corporation to Ramon Garcia which bore no record of
the Consortium Banks' lien, still he could not be faulted in the absence of showing that he acted in bad faith
with the intention to lure the buyer to believe that the subject shares were lien-free. As the Corporate
Secretary of Chemical Industries, he is under no obligation to record the attachment of the Consortium
Banks, not being a transfer of ownership but merely a burden on the title of the owner. Only absolute
transfers of shares of stock are required to be recorded in the corporation's stock and transfer
book in order to have "force and effect as a ainst third persons."56 In Chemphil Export and Import
Corporation v. Court of Appeals, et al.,57 the Court enunciated the rule that attachments of shares are not
considered "transfer" and need not be recorded in the corporations' stock and transfer book, viz:
"'Are attachments of shares of stock included in the term "transfer" as provided in Sec. 63 of the
Corporation Code? We rule in the negative. As succinctly declared in the case of Monserrat v. Ceron,
chattel mortgage over shares of stock need not be registered in the corporation's stock and transfer book
inasmuch as chattel mortgage over shares of stock does not involve a "transfer of shares," and that only
absolute transfers of shares of stock are required to be recorded in the corporation's stock and transfer book
in order to have "force and effect as against third persons."
xxxx
"A 'transfer' is the act by which the owner of a thing delivers it to another with the intent of passing the
rights which he has in it to the latter, and a chattel mortgage is not within the meaning of such term.
xxxx
Although the Monserrat case refers to a chattel mortgage over shares of stock, the same may be
applied to the attachment of the disputed shares of stock in the present controversy since an
attachment does not constitute an absolute conveyance of property but is primarily used as a
means "to seize the debtor's property in order to secure the debt or claim of the creditor in the
event that a judgment is rendered."
Known commentators on the Corporation Code expound, thus:
chanRoblesvirtualLawlibrary xxxx
Shares of stock being personal property, may be the subject matter of pledge and chattel mortgage. Such
collateral transfers are however not covered by the registration requirement of Section 63, since our
Supreme Court has held that such provision applies only to absolute transfers thus, the registration in the
corporate books of pledges and chattel mortgages of share cannot have any legal effect.
xxxx
The requirement that the transfer shall be recorded in the books of the corporation to be valid as
against third persons has reference only to absolute transfers or absolute conveyance of the
ownership or title to a share."58[Emphasis supplied]
Veritably, the facts, statutes and jurisprudence do not support Ferro Chemical's imputation of fraud to
Rolando Navarro. The accusations of fraud directed to him upon which Ferro Chemicals rests its case are
unsubstantiated, no direct evidence of it exists; it was clutching at straws pointing out to a remote
participation of the defendant who carried out the imputed acts within the bounds of his office. Fraud cannot
be presumed but must be proved by clear and convincing evidence. 59 Whoever alleges fraud affecting a
transaction must substantiate his allegation, because a person is always presumed to take ordinary care of
his concerns, and private transactions are similarly presumed to have been fair and regular. 60 To be
remembered is that mere allegation is definitely not evidence; hence, it must be proved by sufficient
evidence.61 chanrobleslaw
Be that as it may, undisputed is the fact that Rolando Navarro derived no financial gains from the breach of
Antonio Garcias obligation to Ferro Chemicals watering down the allusion that his acts were impelled by
economic motive.
Even if Jaime ,Gonzales, on other hand, eventually became the assignee of the subject shares, he cannot,
for that reason alone, be held liable for tortious interference as the elements of this act are clearly wanting
in this case. Jaime Gonzales did nothing more than act as instrumental witness of the deed of sale and give
Antonio Garcia financial advice on the matter. None of these acts is actionable tort.
In any case, the allegations against Rolando Navarro and Jaime Gonzales have no more leg to stand on as
we have ruled that fraud never attended the transaction and that Ferro Chen1icals entered the contract
subject of this case with the full knowledge and discretion of the existence of any and all liens.
On the liability of Chemical Industries

for the acts of its responsible officers
On the premise that Chemical Industries afforded plenary powers to its officers to make certain
representations to third persons, Ferro Chemicals faults the ruling of the appellate court absolving Chemical
Industries from liability by arguing that the corporation is liable for the tortious and wrongful acts of its
corporate officers, Antonio Garcia and Rolando Navarro, under the principle of agency.
Chemical Industries, however, argues otherwise. It submits that Ferro Chemical's reliance on the doctrine of
apparent authority is misplaced. Citing the findings of the appellate court, it posits that the sale of Antonio
Garcia's shares was a purely personal transaction between him and Ferro Chemicals which requires no
"express direction or authority" from Chemical Industries.
Having settled that Rolando Navarro committed no tortious acts generative of liability, we now limit our
discussion on whether Chemical Industries can be held liable supposedly for the fraud and breach of contract
perpetrated by Antonio Garcia.
We rule in the negative.
A corporation, upon coming to existence, is invested by law with a personality separate and distinct from
those of the persons composing it. Ownership by a single or a small group of stockholders of nearly all of the
capital stock of the corporation is not, without more, sufficient to disregard the fiction of separate corporate
personality. Thus, obligations incurred by corporate officers, acting as corporate agents, are not theirs, but
direct accountabilities of the corporation they represent. Solidary liability on the part of corporate officers
may at times attach, but only under exceptional circumstances, such as when they act with malice or in bad
faith. Also, in appropriate cases, the veil of corporate fiction shall be disregarded when the separate juridical
personality of a corporation is abused or used to commit fraud and perpetrate a social injustice, or used as a
vehicle to evade obligations.62 chanrobleslaw
It must be stressed at the onset that the sale contract was entered by Antonio Garcia in his personal
capacity and not as the President of Chemical Industries. As aptly found by the CA:
"xxx. As can be gleaned from the Deed of Sale, [Antonio Garcia] sold the disputed shares in his private
capacity as owner thereof and not as responsible officer or representative of [Chemical Industries].
Moreover, the disputed shares constitute merely 20% of [Chemical Industries'] outstanding capital stocks.
As such, the corporation's consent in the disposition is not required. Neither does its conveyance require any
action on the part of the corporation, except the ministerial duty of recording the same in its stock and
transfer book.
Considering the nature of the transaction involved, whatever obligation [Antonio Garcia] incurred, it was
incurred in his personal capacity. xxx"63
Even if Antonio Garcia was selling his shares of stocks in the Chemical Industries, the corporation was
neither made a party to the contract nor did the sale redound to its benefit. As a matter of fact, the subject
of the purchase agreement was not limited to Antonio Garcia's shares in Chemical Industries, but likewise
included his shares in Vision Insurance Consultants, Inc., Alabang Country Club, Inc. and Manila Polo Club,
Inc.64 His shares of capital stocks with Chemical Industries became the subject of controversy because of the
allegation that he intentionally withheld the information from Ferro Chemicals that these shares were
subject of the Consortium Banks' claim. Notably, the purported misrepresentation was: not alleged to have
been authorized or abetted by the corporation. It was a purely personal act of the seller desirous to dispose
conveniently his shares in the corporation. It bears underscoring that a corporation has a personality
separate and distinct from that of each stockholder. It has the right ,of continuity or perpetual
succession,65 that is, its existence is not extinguished by the transfer of ownership of its shares of capital
stock from one shareholder to another.
Needless to say, the imputation of liability Chemical Industries for the acts of its corporate officer and the
consequent shedding of corporate shroud cannot rest on flimsy grounds. The application of the doctrine of
piercing the veil of corporate fiction is frowned upon.66 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.67 As explained by the Court in Philippine National Bank v. Andrada Electric &
Engineering Company:68 chanrobleslaw
"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."
In the case at bar, Ferro Chemicals failed to adduce satisfactory evidence to prove that Chemical Industries'
separate corporate personality was being used by Antonio Garcia to protect fraud or perpetrate deception
warranting the shedding of its veil and the consequent imposition of solidary liability upon it.
On Ferro Chemical's claim for

reimbursement of litigation expenses
in the amount of P12,000,000.00, as
payment of attorney's fees
The award of litigation expenses in the amount of P12,000,000.00 is not proper because Ferro Chemicals
failed to justify satisfactorily its claim, and the trial court failed to state explicitly in its decision the rationale
for the award. Likewise, We agree with the CA's finding that the award of attorney's fees in the sum of
P1,000,000.00 plus additional 10% ofthe value of the shares is unreasonable and excessive. Article 2208 of
the New Civil Code enumerates the instances where such may be awarded and, in any event, it must be
reasonable, just and equitable.69 Attorney's fees as part of damages are not meant to enrich the winning
party at the expense of the losing litigant.70 They are not awarded every time a party prevails in a suit
because of the policy that no premium should be placed on the right to litigate. The award of attorney's fees
is the exception rather than the rule.71 chanrobleslaw
As such, it is necessary for the court to make findings of fact and law that would bring the -case within the
exception and justifY the grant of such award.72 chanrobleslaw
For lack of factual basis, we cannot likewise lend credence to Antonio Garcia's claim that the dividends
earned from Alabang Country Club, Inc. and Manila Polo Club, Inc. shares should be deducted from the cost
of the lost shares.
WHEREFORE, premises considered, the petition of Ferro Chemicals, Inc. in G.R. No. 168134 is
hereby DENIED while the petitions of Jaime Y. Gonzales in G.R. No. 168183 and Antonio M. Garcia in G.R.
No. 168196 are hereby GRANTED. Consequently, the Decision of the Court of Appeals is modified to read:
1) Chemical Industries of the Philippines, Inc. and Rolando Navarro are hereby exonerated from
liabilities;
2) Antonio M. Garcia and Jaime Y. Gonzales are likewise discharged from liabilities;
3) The award of P12,000,000.00, representing the cost of the suit and expenses of litigation in the
Consortium Case is deleted.
G.R. No. 172948, October 05, 2016
PHILIPPINE ASSOCIATED SMELTING AND REFINING CORPORATION, Petitioner, v. PABLITO O.

LIM, MANUEL A. AGCAOILI, AND CONSUELO M. PADILLA, Respondents.
DECISION
LEONEN, J.:
An action for injunction filed by a corporation generally does not lie to prevent the enforcement by a
stockholder of his or her right to inspection.1
Philippine Associated Smelting and Refining Corporation filed a Petition for Review on Certiorari 2 to assail the
Court of Appeals Decision3 dated January 243 2006 and Resolution4 dated May 18, 2006, The Court of
Appeals lifted and cancelled the writ of preliminary injunction issued by the Regional Trial Court, 5which
enjoined respondents Pablito O. Lim (Lim), Manuel A. Agcaoili (Agcaoili), and Consuelo M. Padilla (Padilla),
or their representatives, from gaining access to the records of Philippine Associated Smelting and Refining
Corporation.: The records were then classified as either confidential or inexistent until further orders from
the court.6
As summarized by the Court of Appeals, the facts are as follows: chanRoblesvirtualLawlibrary
Philippine Associated Smelting and Refining Corporation (hereafter PASAR) is a corporation duly organized
and existing under the laws of the Philippines and is engaged in copper smelting and refining.
On the other hand, Pablito Lim, Manuel Agcaoili and Consuelo Padilla (collectively referred to as petitioners)
were former senior officers and presently shareholders of PASAR holding 500 shares each.
An Amended Petition for Injunction and Damages with prayer for Preliminary Injunction and/or Temporary
Restraining Order, dated February 4, 2004 was filed by PASAR seeking to restrain petitioners from
demanding inspection of its confidential and inexistent records.
On February 23, 2004, petitioners moved for the dismissal of the petition on the following grounds: 1) the
petition states no cause of action; 2) the petition should be dismissed on account of litis pendentia; 3) the
petition is a nuisance or harassment suit; and 4) the petition should be dismissed on account of improper
venue.
On April 14, 2004, the RTC issued an Order granting PASAR's prayer for a writ of preliminary injunction. The
RTC held that the right to inspect book should not be denied to the stockholders, however, the same may be
restricted. The right to inspect should be limited to the ordinary records as identified and classified by
PASAR. Thus, pending the determination of which records are confidential or inexistent, the petitioners
should be enjoined from inspecting the books. The dispositive portion of said Order states: chanRoblesvirtualLawlibrary
"WHEREFORE, let a writ of preliminary injunction be issued enjoining respondents Pablito Lim, Manuel A.
Agcaoili and Consuelo N. Padilla or their representatives from gaining access to records of Philippine
Associated Smelting and Refining Corporation which are presently classified as either confidential or
inexistent, until further orders from this Court.
Petitioner is required to execute a bond in the amount of FIVE HUNDRED THOUSAND PESOS (P500,000.00)
in favor of herein respondents to answer for all damages which the latter may sustain by reason of the
injunction should this Court, finally decide that petitioner is not entitled thereto.
SO ORDERED."
chanrobleslaw
On May 26, 2004, petitioners filed a Motion for Dissolution of the Writ of Preliminary Injunction on the
ground that the petition is insufficient. Petitioners claim that the enforcement of the right to inspect book
should be on the stockholders and not on PASAR. Petitioners further claim that no irreparable injury is
caused to PASAR which justifies the issuance of the writ of preliminary injunction.
On January 10, 2005, the RTC issued the assailed Order, denying the Motion to Dismiss filed by petitioners
on the ground that it is a prohibited pleading under Section 8, Rule 1 of the Interim Rules on Intra-
Corporate Controversies under the Securities Regulation Code (RA 8799). The Motion for Dissolution of the
Writ of Preliminary Injunction was likewise denied on the ground that the writ does not completely result in
unjust denial of petitioners' right to inspect the books of the corporation. The RTC further stated that if no
preliminary injunction is issued, petitioners may, before final judgment, do the act which PASAR is seeking
the Court to restrain which will make ineffectual the final judgment that it may afterward render. 7 (Emphasis
in the original)
chanrobleslaw
Aggrieved, Lim, Agcaoili, and Padilla filed before the Court of Appeals a Petition for Certiorari 8questioning the
propriety of the writ of preliminary injunction. The Court of Appeals held that there was no basis to issue an
injunctive writ, thus: chanRoblesvirtualLawlibrary
We agree. The act of PASAR in filing a petition for injunction with prayer for writ of preliminary injunction is
uncalled for. The petition is a pre-emptive action unjustly intended to impede and restrain the stockholders'
rights. If a stockholder demands the inspection of corporate books, the corporation could refuse to heed to
such demand. When the corporation, through its officers, denies the stockholders of such right, the latter
could then go to court and enforce their rights. It is then that the corporation could set up its defenses and
the reasons for the denial of such right. Thus, the proper remedy available for the enforcement of the right
of inspection is undoubtedly the writ of mandamus to be filed by the stockholders and not a petition for
injunction filed by the corporation.
The Order of the RTC shows that indeed there is no basis for the issuance not only of the temporary but also
of the permanent injunctive writ. The Order dated April 14, 2004 states: chanRoblesvirtualLawlibrary
"In the present case, PASAR failed to present sufficient evidence to show that respondents' (petitioners')
demand to inspect the corporate records was not made in good faith nor for a lawful purpose. . . . PASAR is
reminded that it is its burden to prove that respondents' action in seeking examination of the corporate
records was moved by unlawful or ill-motivated designs which could appropriately call for a judicial
protection against the exercise of such right[.]"9
chanrobleslaw
Hence, Philippine Associated Smelting and Refining Corporation filed this Petition praying that this Court
render judgment: chanRoblesvirtualLawlibrary
(a) reversing and setting aside the Decision dated 24 January 2006 and Resolution dated 18 May 2006
rendered by the Court of Appeals; ChanRoblesVirtualawlibrary
(b) reinstating the writ of preliminary injunction granted by the RTC in its Order dated 14 April 2004, and
consequently ordering respondents to desist from further harassing, vexing, or annoying petitioner with
threats of filing criminal complaints against its President, Bruce Anderson, and other appropriate parties, as
embodied in the letters dated 25 and 27 February 2006 and 31 March 2006; ChanRoblesVirtualawlibrary
(c) reinstating the main action for injunction and ordering the RTC to continue hearing SEC Case No. 04-
33; ChanRoblesVirtualawlibrary
(d) meanwhile, it is respectfully prayed that a temporary restraining order or status quo order be issued by
this Honorable Court to urgently restrain respondents from further committing acts which are bases for the
application of the writ of preliminary injunction.10
chanrobleslaw
In the Resolution11 dated July 19, 2006, this Court denied petitioner's prayer for the issuance of a temporary
restraining order and required respondents Lim, Agcaoili, and Padilla to comment on the Petition.
Respondents filed their Comment12 on October 16, 2006 through counsel Cayetano Sebastian Ata Dado &
Cruz. On October 20, 2006, they filed a second Comment 13 through counsel Siguion Reyna Montecillo &
Ongsiako. Petitioner filed a Motion for Leave to Admit Attached Reply, 14 together with its Reply,15 on
December 12, 2006.
In the Resolution16 dated January 24, 2007, this Court noted respondents' separate Comments and
petitioner's Reply. The parties were also directed to submit their respective memoranda within 30 days from
notice.17 Respondents filed their Memorandum18 on March 26, 2007, and petitioner filed its
Memorandum19 on April 2, 2007.
Petitioner argues that the right of a stockholder to inspect corporate books and records is limited in that any
demand must be made in good faith or for a legitimate purpose. 20 Respondents, however, have no
legitimate purpose in this case.21 If respondents gain access to petitioner's confidential records, petitioner's
trade secrets and other confidential information will be used by its former officers to give undue commercial
advantage to third parties.22 Petitioner insists that to hold that objections to the right of inspection can only
be raised in an action for mandamus brought by the stockholder, would leave a corporation helpless and
without an adequate legal remedy.23 To leave the corporation helpless negates the doctrine that where there
is a right, there is a remedy for its violation.24
Petitioner argues that it has the right to protect itself against all forms of embarrassment or harassment
against its officers, including the filing of criminal cases against them. 25 Moreover, respondents' request for
inspection of confidential corporate records and documents violates and breaches petitioner's right to
peaceful and continuous possession of its confidential records and documents. 26
Petitioner further argues that respondents' Motion for Dissolution before the Court of Appeals did not comply
with Rule 58, Section 6 of the Rules of Court. Therefore, the Motion should not have been
granted.27 Likewise, respondents' Motion to Dismiss is a prohibited pleading under Rule 1, Section 8 of the
Interim Rules of Procedure Governing Intra-Corporate Controversies28 and should not have been
granted.29 In any case, the Court of Appeals should have remanded the case to the trial court for further
disposition.30
We are asked to resolve whether injunction properly lies to prevent respondents from invoking their right to
inspect.
We deny the Petition.
The Petition asks this Court to enjoin acts beyond what was enjoined by the Regional Trial Court in its April
14, 2004 Order.31 The Regional Trial Court Order did not specify the particular acts it enjoined respondents
from doing: chanRoblesvirtualLawlibrary
The question as to what records should be deemed confidential and inexistent, however, cannot be passed
upon at this time, since neither were admissions made nor sufficient evidence presented to categorically
determine which corporate records are to be considered confidential and inexistent. In the meantime, then,
and in order to prevent grave and irreparable injury on the part of PASAR should otherwise be allowed [sic],
respondents' right to inspect is limited to the ordinary records as identified and classified by PASAR.
Subsequent hearings shall be set to determine which among the corporate records demanded to be
inspected by the respondents are indeed confidential or inexistent, and to further determine whether or not
the issuance of a writ of final injunction is in order.
WHEREFORE, let a writ of preliminary injunction be issued enjoining respondents Pablito Lim, Manuel A.
Agcaoili and Consuelo N. Padilla or their representatives from gaining access to records of Philippine
Associated Smelting & Refining Corporation which are presently classified as either confidential or inexistent,
until further orders from this Court.32 (Emphasis supplied)
chanrobleslaw
What precisely is contemplated by the phrase "gaming access to records" is not clear.
Taking advantage of this ambiguity, petitioner prays that the injunction be reinstated and that this Court
enjoin respondents from "harassing, vexing, or annoying petitioner with threats of filing criminal complaints"
and from "further committing acts which are bases for the application of the writ of preliminary
injunction": chanRoblesvirtualLawlibrary
(b) reinstating the writ of preliminary injunction granted by the RTC in its Order dated 14 April 2004, and
consequently ordering respondents to desist from further harassing, vexing, or annoying petitioner with
threats of filing criminal complaints against its President, Bruce Anderson, and other appropriate parties, as
embodied in the letters dated 25 and 27 February 2006 and 31 March 2006; ChanRoblesVirtualawlibrary
.....
(d) meanwhile, it is respectfully prayed that a temporary restraining order or status quo order be issued by
this Honorable Court to urgently restrain respondents from further committing acts which are bases for the
application of the writ of preliminary injunction.33
chanrobleslaw
Petitioner claims that respondents are materially and substantially invading its right to protect itself by
demanding to inspect petitioner's purportedly confidential records. Respondents wrote petitioner and
demanded to inspect its corporate books and records.34 They reiterated this demand in a subsequent letter.35
On at least two (2) occasions, respondents went to petitioner's office to again demand that they be allowed
to inspect.36 On one of these occasions, respondents brought members of the press, caused work disruption,
and harassed petitioner's representatives who met with them. 37 When asked the purpose of the inspection of
certain records not ordinarily inspected by stockholders, respondents answered they wished to ensure that
petitioner's business transactions were "above board" and "entered into for the best interest of the
company."38
During negotiations on the terms of confidentiality agreements to be executed before respondents are
allowed to inspect certain confidential records, respondents wrote petitioner stating that they would proceed
to inspect the corporate books and records. They warned petitioner that should petitioner fail to allow
inspection, they would initiate legal proceedings against it.39 They refused to accept the final terms and
conditions of the confidentiality agreement and wrote another letter, reiterating their demand to inspect
confidential records.40
After petitioner filed before the Regional Trial Court of Pasig City a Petition for Declaratory Relief 41seeking a
declaration of the rights and duties of the parties in relation to the inspection of the records, respondent Lim
filed a criminal Complaint42 against some of petitioner's officers for infringing on their right to inspect
petitioner's corporate books and records. 43 As a result, a criminal case was filed against Javier Herrero,
petitioner's Former President, and Jocelyn Sanchez-Salazar, its Former Corporate Secretary. 44 Respondents
caused news reports to be published on the arrest warrants issued in relation to these Informations. 45
Respondents wrote another letter dated January 30, 2004 demanding again that they be allowed to inspect,
among others, the confidential records.46 On March 31, 2006, respondents wrote another letter threatening
to file criminal charges if they were not allowed to inspect the confidential records. They stated that they
wanted to ensure that petitioner complied with environmental laws in the operations of its plant in Leyte. 47
On April 7, 2006, petitioner advised respondents that it would furnish them with records kept by the
Department of Environment and Natural Resources. These records supposedly showed that all
environmental laws were complied with.48 On June 28, 2006 and July 4, 2006, respondents Lim and Padilla
wrote to demand that they be allowed to inspect the audited financial statements for 2004 and 2005; the
interim statements for the end of May 2006; and more detailed records on finance, production, marketing,
and purchasing.49
In September 2006, after a stockholders' meeting, respondents again demanded access to certain
information and documents.50 In a letter dated September 8, 2006, respondents again asked about balance
sheet accounts, advances to suppliers, trade and other receivables, inventory, investments, current assets,
trade and other payables, related party transactions, cost of goods manufactured and sold, selling and
administrative expenses, other operating expenses, metal hedging, and staff costs, among others. 51
For an action for injunction to prosper, the applicant must show the existence of a right, as well as the
actual or threatened violation of this right.52
Specifically, for a writ of preliminary injunction to be issued, Rule 58 of the Rules of Court provides: chanRoblesvirtualLawlibrary
RULE 58
PRELIMINARY INJUNCTION
....
SEC. 3. Grounds for issuance of preliminary injunction. — A preliminary injunction may be granted when it is
established: chanRoblesvirtualLawlibrary
(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in
restraining the commission or continuance of the act or acts complained of, or in requiring the performance
of an act or acts either for a limited period or perpetually; ChanRoblesVirtualawlibrary
(b) That the commission, continuance or non- performance of the act or acts complained of during the
litigation would probably work injustice to the applicant; or
(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or
suffering to be done some act or acts probably in violation of the rights of the applicant respecting the
subject of the action or proceeding, and tending to render the judgment ineffectual.
chanrobleslaw
In Duvaz Corp. v. Export and Industry Bank:53 chanroblesvirtuallawlibrary
Anent the first issue, the requisites for preliminary injunctive relief are: (a) the invasion of the right sought
to be protected is material and substantial; (b) the right of the plaintiff is clear and unmistakable; and (c)
there is an urgent and paramount necessity for the writ to prevent serious damage. As such, a writ of
preliminary injunction may be issued only upon clear showing of an actual existing right to be protected
during the pendency of the principal action. The twin requirements of a valid injunction are the existence of
a right and its actual or threatened violation. Thus, to be entitled to an injunctive writ, the right to be
protected and the violation against that right must be shown.
In Almeida v. Court of Appeals, the Court stressed how important it is for the applicant for an injunctive writ
to establish his right thereto by competent evidence: chanRoblesvirtualLawlibrary
Thus, the petitioner, as plaintiff, was burdened to adduce testimonial and/or documentary evidence to
establish her right to the injunctive writs. It must be stressed that injunction is not designed to protect
contingent or future rights, and, as such, the possibility of irreparable damage without proof of actual
existing right is no ground for an injunction. A clear and positive right especially calling for judicial protection
must be established. Injunction is not a remedy to protect or enforce contingent, abstract, or future rights;
it will not issue to protect a right not in esse and which may never arise, or to restrain an action which did
not give rise to a cause of action. There must be an existence of an actual right. Hence, where the plaintiffs
right or title is doubtful or disputed, injunction is not proper.
....
An injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious
consequences which cannot be remedied under any standard compensation. The possibility of irreparable
damage without proof of an. actual existing right would not justify injunctive relief in his favor.
....
In the absence of a clear legal right, the issuance of the injunctive writ constitutes grave abuse of discretion.
As the Court had the occasion to state in Olalia v. Hizon . . . : chanRoblesvirtualLawlibrary
It has been consistently held that there is no power the exercise of which is more delicate, which requires
greater caution, deliberation and sound discretion, or more dangerous in a doubtful case, than the issuance
of an injunction. It is the strong arm of equity that should never be extended unless to cases of great injury,
where courts of law cannot afford an adequate or commensurate remedy in damages.
Every court should remember that an injunction is a limitation upon the freedom of action of the defendant
and should not be granted lightly or precipitately. It should be granted only when the court is fully satisfied
that the law permits it and the emergency demands it.54 (Emphasis supplied, citations omitted)
chanrobleslaw
Thus, an injunction must fail where there is no clear showing of both an actual right to be protected and its
threatened violation, which calls for the issuance of an injunction.
The Corporation Code provides that a stockholder has the right to inspect the records of all business
transactions of the corporation and the minutes of any meeting at reasonable hours on business days. The
stockholder may demand in writing for a copy of excerpts from these records or minutes, at his or her
expense: chanRoblesvirtualLawlibrary
Title VIII
Corporate Books and Records
SECTION 74. Books to be Kept; Stock Transfer Agent. — Every corporation shall, at its principal office, keep
and carefully preserve a record of all business transactions, and minutes of all meetings of stockholders or
members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of
holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special
its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand
of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or
member entered or left the meeting must be noted in the minutes; and on a similar demand,
the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The
protest of any director, trustee, stockholder or member on any action or proposed action must be recorded
in full on his demand.
The records of all business transactions of the corporation and the minutes of any meetings shall be open to
the inspection of any director, trustee, stockholder or member of the corporation at reasonable hours on
business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his
expense.
Any officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder or
member of the corporation to examine and copy excerpts from its records or minutes, in accordance with
the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages,
and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is pursuant to a resolution or order of the Board of Directors or Trustees, the
liability under this section for such action shall be imposed upon the directors or trustees who voted for such
refusal: and Provided, further, That it shall be a defense to any action under this section that the
person demanding to examine and copy excerpts from the corporation's records and minutes has improperly
used any information secured through any prior examination of the records or minutes of such corporation
or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his
demand. (Emphasis supplied)
chanrobleslaw
The right to inspect under Section 74 of the Corporation Code is subject to certain limitations. However,
these limitations are expressly provided as defenses in actions filed under Section 74. Thus, this Court has
held that a corporation's objections to the right to inspect must be raised as a defense:
2) the person demanding to examine and copy excerpts from the corporation's records and minutes has not
improperly used any information secured through any previous examination of the records of such
corporation; and 3) the demand is made in good faith or for a legitimate purpose. The latter two limitations,
however, must be set up as a defense by the corporation if it is to merit judicial cognizance. As such, and in
the absence of evidence, the PCGG cannot unilaterally deny a stockholder from exercising his statutory right
of inspection based on an unsupported and naked assertion that private respondent's motive is improper or
merely for curiosity or on the ground that the stockholder is not in friendly terms with the corporation's
officers.55
chanrobleslaw
Gokongwei, Jr. v. Securities and Exchange Commission56 stresses that "impropriety of purpose . . . must be
set up the [sic] corporation defensively":
The stockholder's right of inspection of the corporation's books and records is based upon their ownership of
the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate
property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a
quasi-ownership. This right is predicated upon the necessity of self-protection. It is generally held by
majority of the courts that where the right is granted by statute to the stockholder, it is given to him as
such and must be exercised by him with respect to his interest as a stockholder and for some purpose
germane thereto or in the interest of the corporation. In other words, the inspection has to be germane to
the petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical to
the interest of the corporation. In Grey v. Insular Lumber, this Court held that "the right to examine the
books of the corporation must be exercised in good faith, for specific and honest purpose, and not to gratify
curiosity, or for speculative or vexatious purposes." The weight of judicial opinion appears to be, that on
application for mandamus to enforce the right, it is proper for the court to inquire into and consider the
stockholder's good faith and his purpose and motives hi seeking inspection. Thus, it was held that "the right
given by statute is not absolute and may be refused when the information is not sought in good faith or is
used to the detriment of the corporation." But the "impropriety of purpose such as will defeat
enforcement must be set up the corporation defensively if the Court is to take cognizance of it as a
qualification. In other words, the specific provisions take from the stockholder the burden of showing
propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or
motive." It appears to be the "general rule that stockholders are entitled to full information as to the
management of the corporation and the manner of expenditure of its funds, and to inspection to obtain such
information, especially where it appears that the company is being mismanaged or that it is being managed
for the personal benefit of officers or directors or certain of the stockholders to the exclusion of
others."57 (Emphasis supplied, citations omitted)
chanrobleslaw
Terelay Investment and Development Corp. v. Yulo 58 has held that although the corporation may deny a
stockholder's request to inspect corporate records, the corporation must show that the purpose of the
shareholder is improper by way of defense: chanRoblesvirtualLawlibrary
The right of the shareholder to inspect the books and records of the petitioner should not be made subject
to the condition of a showing of any particular dispute or of proving any mismanagement or other occasion
rendering an examination proper, but if the right is to be denied, the burden of proof is upon the corporation
to show that the purpose of the shareholder is improper, by way of defense. According to a recognized
commentator: chanRoblesvirtualLawlibrary
By early English decisions it was formerly held that there must be something more than bare suspicion of
mismanagement or fraud. There must be some particular controversy or question in which the party
applying was interested, and inspection would be granted only so far as necessary for that particular
occasion. By the general rule in the United States, however, shareholders have a right to inspect the books
and papers of the corporation without first showing any particular dispute or proving any mismanagement or
other occasion rendering an examination proper. The privilege, however, is not absolute and the corporation
may show in defense that the applicant is acting from wrongful motives.
In Guthrie v. Harkness, there was involved the right of a shareholder hi a national bank to inspect its books
for the purpose of ascertaining whether the business affairs of the bank' had been conducted according to
law, and whether, as suspected, the bank was guilty of irregularities. The court said: "The decisive weight of
American authority recognizes the right of the shareholder, for proper purposes and under reasonable
regulations as to place and time, to inspect the books of the corporation of which he is a member. . . . In
issuing the writ of mandamus the court will exercise a sound discretion and grant the right under proper
safeguards to protect the interest of all concerned. The writ should not be granted for speculative purposes
or to gratify idle curiosity or to aid a blackmailer, but it may not be denied to the stockholder who seeks the
information for legitimate purposes."
Among the purposes held to justify a demand for inspection are the following: (1) To ascertain the financial
condition of the company or the propriety of dividends; (2) the value of the shares of stock for sale or
investment; (3) whether there has been mismanagement; (4) in anticipation of shareholders' meetings to
obtain a mailing list of shareholders to solicit proxies or influence voting; (5) to obtain information in aid of
litigation with the corporation or its officers as to corporate transactions. Among the improper purposes
which may justify denial of the right of inspection are: (1) Obtaining of information as to business secrets or
to aid a competitor; (2) to secure business "prospects" or investment or advertising lists; (3) to find
technical defects in corporate transactions in order to bring "strike suits" for purposes of blackmail or
extortion.
In general, however, officers and directors have no legal authority to close the office doors against
shareholders for whom they are only agents, and withhold from them the right to inspect the books which
furnishes the most effective method of gaining information which the law has provided, on mere doubt or
suspicion as to the motives of the shareholder. While there is some conflict of authority, when an inspection
by a shareholder is contested, the burden is usually held to be upon the corporation to establish a
probability that the applicant is attempting to gain inspection for a purpose not connected with his interests
as a shareholder, or that his purpose is otherwise improper. The burden is not upon the petitioner to show
the propriety of his examination or that the refusal by the officers or directors was wrongful, except under
statutory provisions.59 (Citations omitted)
chanrobleslaw
Among the actions that may be filed is an action for specific performance, damages, petition for mandamus,
or for violation of Section 74, in relation to Section 144 of the Corporation Code, which provides: chanRoblesvirtualLawlibrary
SECTION 144. Violations of the Code. — Violations of any of the provisions of this Code or its amendments
not otherwise specifically penalized therein shall be punished by a fine of not less than one thousand
(P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than
thirty (30) days but not more than five (5) years, or both, in the discretion of the court. If the violation is
committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate
proceedings before the Securities and Exchange Commission: Provided, That such dissolution shall not
preclude the institution of appropriate action against the director, trustee or officer of the corporation
responsible for said violation: Provided, further, That nothing in this section shall be construed to repeal the
other causes for dissolution of a corporation provided in this Code.
chanrobleslaw
In this case, petitioner invokes its right to raise the limitations provided under Section 74 of the Corporation
Code. However, petitioner provides scant legal basis to claim this right because it does not raise the
limitations as a matter of defense. As properly appreciated by the Court of Appeals: chanRoblesvirtualLawlibrary
We agree. The act of PASAR in filing a petition for injunction with prayer for writ of preliminary injunction is
uncalled for. The petition is a pre-emptive action unjustly intended to impede and restrain the stockholders'
rights. If a stockholder demands the inspection of corporate books, the corporation could refuse to heed to
such demand. When the corporation, through its officers, denies the stockholders of such right, the latter
could then go to court and enforce their rights. It is then that the corporation could set up its defenses and
the reasons for the denial of such right. Thus, the proper remedy available for the enforcement of the right
of inspection is undoubtedly the writ of mandamus to be filed by the stockholders and not a petition for
injunction filed by the corporation.60
chanrobleslaw
Petitioner insists that the Court of Appeals erred in relying on Section 74 of the Corporation Code. It claims
that jurisprudence allows the corporation to prevent a stockholder from inspecting records containing
confidential information.61 Petitioner cites W.G Philpotts v. Philippine Manufacturing Company:62 chanroblesvirtuallawlibrary
In order that the rule above stated may not be taken in too sweeping a sense, we deem it advisable to say
that there are some things which a corporation may undoubtedly keep secret, notwithstanding the right of
inspection given by law to the stockholder; as, for instance, where a corporation engaged in the business of
manufacture, has acquired a formula or process, not generally known, which has proved of utility to it in the
manufacture of its products. It is not our intention to declare that the authorities of the corporation, and
more particularly the Board of Directors, might not adopt measures for the protection of such process from
publicity.63
chanrobleslaw
However, W.G Philpotts cannot support petitioner's contention since it involved a petition for mandamus
where the stockholder prayed to be allowed to exercise its right to inspect, and the respondent's objections
were raised as a defense. Nothing in W.G. Philpotts grants a corporation a cause of action to enjoin the
exercise of the right of inspection by a stockholder.
The clear provision in Section 74 of the Corporation Code is sufficient authority to conclude that an action for
injunction and, consequently, a writ of preliminary injunction filed by a corporation is generally unavailable
to prevent stockholders from exercising their right to inspection. Specifically, stockholders cannot be
prevented from gaining access to the (a) records of all business transactions of the corporation; and (b)
minutes of any meeting of stockholders or the board of directors, including their various committees and
subcommittees.
The grant of legal personality to a corporation is conditioned on its compliance with certain obligations.
Among these are its fiduciary responsibilities to its stockholders. Providing stockholders with access to
information is a fundamental basis for their intelligent participation in the governance of the corporation as a
business organization that they partially own. The law is agnostic with respect to the amount of shares
required. Generally, each individual stockholder should be given reasonable access so that he or she can
assess or share his or her assessment of the management of the corporation with other stockholders. The
separate legal personality of a corporation is not so absolutely separate that it divorces itself from its
responsibility to its constituent owners.
The law takes into consideration the potential disparity in the financial legal resources between the
corporation and an ordinary stockholder. The phraseology of the text of the law provides that access to the
information mentioned in Section 74 of the Corporation Code is mandatory. The presumption is that the
corporation should provide access. If it has basis for denial, then the corporation shoulders the risks of being
sued and of successfully raising the proper defenses. The corporation cannot immediately deploy its
resources—part of which is owned by the requesting stockholder—to put the owner on the defensive.
Specifically, corporations may raise their objections to the right of inspection through affirmative defense in
an ordinary civil action for specific performance or damages, or through a comment (if one is required) in a
petition for mandamus.64 The corporation or defendant or respondent still carries the burden of proving (a)
that the stockholder has improperly used information before; (b) lack of good faith; or (c) lack of legitimate
purpose.65
Good faith and a legitimate purpose are presumed. It is the duty of the corporation to allege and prove with
sufficient evidence the facts that give rise to a claim of bad faith as to the existence of an illegitimate
purpose.
The confidentiality of business transactions is not a magical incantation that will defeat the request of a
stockholder to inspect the records. Although it is true that the business is entitled to the protection of its
trade secrets and other intellectual property rights, facts must be pleaded to convince the court that a
specific stockholder's request for inspection, under certain conditions, would violate the corporation's own
legal right.
Furthermore, the discomfort caused to the management of a corporation when a request for inspection is
claimed is part of the regular matters that a business wanting to ensure good governance must endure. The
range between discomfort and vexation is a broad one, which may tend to be located in the personalities of
those involved.
Certainly, by themselves, these are not sufficient factual basis to conclude bad faith on the part of the
requesting stockholder. Courts must be convinced that the scope or manner of the request and the
conditions under which it was made are so frivolous that the huge cost to the business will, in equity, be
unfair to the other stockholders. There is no iota of evidence that this happened here. chanroblesvirtuallawlibrary
II
The Court of Appeals did not commit an error of law in disregarding the procedure on dissolution of
injunctive writs. It lifted and cancelled the injunction via a petition for certiorari under Rule 65 of the Rules
of Court based on the grave abuse of discretion on the part of the Regional Trial Court in issuing the writ of
preliminary injunction.
Petitioner invokes Rule 58, Section 6 of the Rules of Court, which provides: chanRoblesvirtualLawlibrary
SEC. 6. Grounds for Objection to, or for Motion of Dissolution of, Injunction or Restraining Order. — The
application for injunction or restraining order may be denied, upon a showing of its insufficiency. The
injunction or restraining order may also be denied, or, if granted, may be dissolved, on other grounds upon
affidavits of the party or person enjoined, which may be opposed by the applicant also by affidavits. It may
further be denied, or, if granted, may be dissolved, if it appears after hearing that although the applicant is
entitled to the injunction or restraining order, the issuance or continuance thereof, as the case may be,
would cause irreparable damage to the party or person enjoined while the applicant can be fully
compensated for such damages as he may suffer, and the former files a bond in an amount fixed by the
court conditioned that he will pay all damages which the applicant may suffer by the denial or the dissolution
of the injunction or restraining order. If it appears that the extent of the preliminary injunction or restraining
order granted is too great, it may be modified.
chanrobleslaw
Petitioner assails respondents' failure to submit any affidavit or counter-bond pertaining to irreparable
damage and compensation of damages that may be suffered if the injunction is dissolved. 66
However, the injunction was lifted and cancelled via a petition for certiorari under Rule 65 of the Rules of
Court,67 not based on a motion for dissolution of the injunction. Thus, the Court of Appeals evaluated the
basis for the injunction granted by the Regional Trial Court rather than whether the injunction would cause
irreparable damage to respondents.
WHEREFORE, the Petition is DENIED.
SO ORDERED. ChanRoblesVirtualawlibrary
G.R. No. 196134, October 12, 2016
VALENTIN S. LOZADA, Petitioner, v. MAGTANGGOL MENDOZA, Respondent.
DECISION
BERSAMIN, J.:
This appeal seeks the reversal of the decision promulgated on September 28, 2010, 1 whereby the Court
Appeals (CA), in CA-G.R. SP No. 111722, set aside the decision of the National Labor Relations Commission
(NLRC) upon finding that the NLRC had gravely abused its discretion amounting to lack or excess of
jurisdiction in reversing the ruling of the Labor Arbiter dated February 24, 2009, 2 and reinstated such ruling
in favor of the respondent holding the petitioner liable for the satisfaction of the money judgment in favor of
the respondent.
Antecedents
The factual and procedural antecedents are as follows: ChanRoblesVirtualawlibrary
On October 13, 1997, the petitioner Magtanggol Mendoza was employed as a technician by VSL Service
Center, a single proprietorship owned and managed by Valentin Lozada.
Sometime in August 2003, the VSL Service Center was incorporated and changed its business name to LB&C
Services Corporation. Subsequently, the petitioner was asked by respondent Lozada to sign a new
employment contract. The petitioner did not accede because the respondent company did not consider the
number of years of service that he had rendered to VSL Service Center. From then on, the petitioner's work
schedule was reduced to one to three days a week.
In December 2003, the petitioner was given his regular working schedule by the respondent company.
However, on January 12, 2004, the petitioner was advised by the respondent company's Executive Officer,
Angeline Aguilar, not to report for work and just wait for a cal1 from the respondent company regarding his
work schedule.
The petitioner patiently waited for the respondent company's call regarding his work schedule. However, he
did not receive any call from it. Considering that his family depends on him for support, he asked his wife to
call the respondent company and inquire on when he would report back to work. Still, the petitioner was not
given any work schedule by the respondent company.
Aggrieved, the petitioner filed a complaint against the respondent company on January 21, 2004 for illegal
dismissal with a prayer for the payment of his 13th month pay, service incentive leave pay, holiday pay and
separation pay and with a claim for moral and exemplary damages, and attorney's fees. The case was
docketed as NLRC NCR Case No. 00-01-00968-2004.
A mandatory conciliation conference was conducted, but to no avail, thus, they were ordered by the Labor
Arbiter to submit their respective position papers.
In his Position paper dated March 2, 2004, the petitioner alleged that he was constructively dismissed as he
was not given any work assignment for his refusal to sign a new contract of employment. He was dismissed
from his work without any valid authorized cause. He was not given any separation pay for the services that
he rendered for almost six (6) years that he worked with VSL Service Center. He thus claimed that his
termination from employment was effected illegally, hastily, arbitrarily and capriciously.
In its Position paper, dated March 9, 2004, the respondent company vehemently denied the allegation of the
petitioner that he was dismissed from employment. The petitioner was still reporting for work with the
respondent company even after he filed a complaint with the arbitration board of the NLRC up to February
10, 2004. It also denied that the petitioner was its employee since 1997. The truth of the matter, according
to the respondent company, was that it employed the petitioner only on August 1, 2003 because the
respondent company started its corporate existence only on August 27, 2002 and started its business
operation on August 1, 2003. It further averred that respondent Valentin Lozada was not an officer or
employee of the respondent company nor (sic) its authorized representative. The respondent company
finally claimed that it was the petitioner who severed his relationship with it. 3 chanroblesvirtuallawlibrary
On February 23, 2005, the Labor Arbiter declared the dismissal of the petitioner from employment as illegal,
disposing thusly: ChanRoblesVirtualawlibrary
WHEREFORE, premises considered, judgment is rendered declaring the dismissal of complainant as illegal
and ordering his reinstatement with full backwages plus payment of his 13 th month pay (less P500.00 pesos)
and service incentive leave pay all computed three years backward, as follows:
chanRoblesvirtualLawlibrary xxxx
LB&C Services Corporation appealed, but the NLRC dismissed the appeal for non-perfection thereof due to
failure to deposit the required cash or surety bond. Thus, the Labor Arbiter's decision attained finality on
August 4, 2006, and the entry of judgment was issued by the NLRC on August 16, 2006.
The respondent moved for the issuance of the writ of execution, which the Labor Arbiter granted on
November 21, 2006.
The petitioner and LB&C Services Corporation filed a motion to quash the writ of execution, 5 alleging that
there was no employer-employee relationship between the petitioner and the respondent; and that LB&C
Services Corporation "has been closed and no longer in operation due to irreversible financiallosses." 6 chanrobleslaw
The Labor Arbiter denied the motion to quash the writ of execution on April 16, 2007. 7 In due course, the
sheriff garnished P5,767.77 in the petitioner's deposit under the account of Valor Appliances Services at the
Las Piñas Branch of the First Macro Bank.
On November 19, 2007, the Labor Arbiter directed the sheriff to proceed with further execution of the
properties of the petitioner for the satisfaction of the monetary award in favor of the respondent. 8 chanrobleslaw
On December 19, 2007, the sheriff issued to the petitioner a notice of levy upon realty. The sheriff notified
the Registry of Deeds of Las Piñas City on the levy made on the petitioner's real property with an area of
31.30 square meters covered by Transfer Certificate of Title No. T-43336 of that office.
LB&C Services Corporation moved for the lifting of the levy because the real property levied upon had been
constituted by the petitioner as the family home; 9 and that the decision of the Labor Arbiter did not adjudge
the petitioner as jointly and solidarily liable for the obligation in favor of the respondent.
After the Labor Arbiter denied its motion for the lifting of the levy on February 24, 2009, 10 LB&C Services
Corporation appealed the denial to the NLRC, which, on May 29, 2009, reversed the Labor Arbiter, as
follows:ChanRoblesVirtualawlibrary
WHEREFORE, premises considered, respondents' appeal is hereby GRANTED. Accordingly, the order of the
labor arbiter is hereby REVERSED and SET ASIDE.
As prayed for by the respondents, the levy constituted over such Las Piñas property which is covered by
Transfer Certificate of Title No. (sic) is hereby LIFTED.
The respondent assailed the reversal by motion for reconsideration, which the NLRC thereafter denied.
Thence, a petition for certiorari was filed in the CA to assail the ruling of the NLRC on the ground of grave
abuse of discretion amounting to lack or excess of jurisdiction.
As stated, the CA promulgated the assailed decision on September 28, 2010 granting the petition
for certiorari, and reinstating the Labor Arbiter's decision. It opined that the petitioner was still liable despite
the fact that the Labor Arbiter's decision had not specified his being jointly and severally liable for the
monetary awards in favor of the respondent; that LB&C Services Corporation, being an artificial being, must
have an officer who could be presumed to be the employer, being the person acting in the interest of the
corporate employer;12 that with LB&C Services Corporation having already ceased its operation, the
respondent could no longer recover the monetary benefits awarded to him, thereby rendering the entire
procedure and the award nugatory; and that the petitioner was the corporate officer liable by virtue of his
having acted on behalf of the corporation.
Hence, this appeal by the petitioner.
Issue
Was the petitioner liable for the monetary awards granted to the respondent despite the absence of a
pronouncement of his being solidarity liable with LB&C Services Corporation?
Ruling of the Court
The appeal is meritorious.
A corporation, as a juridical entity, may act only through its directors, officers and employees. Obligations
incurred as a result of the acts .of the directors and officers as the corporate agents are not their personal
liability but the direct responsibility of the corporation they represent. 13 As a general rule, corporate officers
are not held solidarily liable with the corporation for separation pay because the corporation is invested by
law with a personality separate and distinct from those of the persons composing it as well as from that of
any other legal entity to which it may be related. 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.14 chanrobleslaw
To hold a director or officer personally liable for corporate obligations, two requisites must concur, to wit:
(1) the complaint must allege that the director or officer assented to the patently unlawful acts of the
corporation, or that the director or officer was guilty of gross negligence or bad faith; and (2) there must be
proof that the director or officer acted in bad faith.15 chanrobleslaw
A perusal of the respondent's position paper and other submissions indicates that he neither ascribed gross
negligence or bad faith to the petitioner nor alleged that the petitioner had assented to patently unlawful
acts of the corporation. The respondent only maintained that the petitioner had asked him to sign a new
employment contract, but that he had refused to do the petitioner's bidding. The respondent did not thereby
clearly and convincingly prove that the petitioner had acted in bad faith. Indeed, there was no evidence
whatsoever to corroborate the petitioner's participation in the respondent's illegal dismissal. Accordingly, the
twin requisites of allegation and proof of bad faith necessary to hold the petitioner personally liable for the
monetary awards in favor of the respondent were lacking.
The CA reinstated the Labor Arbiter's decision by relying on the pronouncement in Restaurante Las Conchas
v. Llego,16 where the Court held that when the employer corporation was no longer existing and the
judgment rendered in favor of the employees could not be satisfied, the officers of the corporation should be
held liable for acting on behalf of the corporation.17 chanrobleslaw
A close scrutiny of Restaurante Las Conchas shows that the pronouncement applied the exception instead of
the general rule. The Court opined therein that, as a rule, the officers and members of the corporation were
not personally liable for acts done in the performance of their duties; 18 but that the exception instead of the
general rule should apply because of the peculiar circumstances of the case. The Court observed that if the
general rule were to be applied, the employees would end up with an empty victory inasmuch as the
restaurant had been closed for lack of venue, and there would be no one to pay its liability because the
respondents thereat claimed that the restaurant had been owned by a different entity that had not been
made a party in the case.19 chanrobleslaw
It is notable that the Court has subsequently opted not to adhere to Restaurante Las Conchas in the cases
of Mandaue Dinghow Dimsum House, Co., Inc. v. National Labor Relations Commission-Fourth
Division20 and Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations Commission.21 chanrobleslaw
In Mandaue Dinghow Dimsum House, Co., Inc., the Court declined to follow Restaurante Las
Conchasbecause there was showing that the respondent therein, Henry Uytengsu, had acted in bad faith or
in excess of his authority. It stressed that every corporation was invested by law with a personality separate
and distinct from those of the persons composing it as well as from that of any other legal entity to which it
might be related; and that the doctrine of piercing the veil of corporate fiction must be resorted to with
caution.22 The Court noted that corporate directors and officers were solidarily liable with the corporation for
the termination of employees done with malice or bad faith; and declared that bad faith did not connote bad
judgment or negligence, but a dishonest purpose or some moral obliquity and conscious doing of wrong, or
meant a breach of a known duty through some motive or interest or ill will, or partook of the nature of
fraud.
In Pantranco Employees Association, the Court rejected the invocation of Restaurante Las Conchas and
refused to pierce the veil of corporate fiction, explaining: ChanRoblesVirtualawlibrary
As between PNB and PNEI, petitioners want us to disregard their separate personalities, and insist that
because the company, PNEI, has already ceased operations and there is no other way by which the
judgment in favor of the employees can be satisfied, corporate officers can be held jointly and severally
liable with the company. Petitioners rely on the pronouncement of this Court in A.C. Ransom Labor Union-
CCLU v. NLRC and subsequent cases.
This reliance fails to persuade. We find the aforesaid decisions inapplicable to the instant case.
For one, in the said cases, the persons made liable after the company's cessation of operations were the
officers and agents of the corporation. The rationale is that, since the corporation is an artificial person, it
must have an officer who can be presumed to be the employer, being the person acting in the interest of the
employer. The corporation, only in the technical sense, is the employer. In the instant case, what is being
made liable is another corporation (PNB) which acquired the debtor corporation (PNEI).
Moreover, in the recent cases Carag v. National Labor Relations Commission and McLeod v. National Labor
Relations Commission, the Court explained the doctrine laid down in AC Ransom relative to the personal
liability of the officers and agents of the employer for the debts of the latter. In AC Ransom, the Court
imputed liability to the officers of the corporation on the strength of the definition of an employer in Article
212(c) (now Article 212[e]) of the Labor Code. Under the said provision, employer includes any person
acting in the interest of an employer, directly or indirectly, but does not include any labor organization or
any of its officers or agents except when acting as employer. It was clarified in Carag and McLeod that
Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts
of the corporation. It added that the governing law on personal liability of directors or officers for debts of
the corporation is still Section 31 of the Corporation Code.
More importantly, as aptly observed by this Court in AC Ransom, it appears that Ransom, foreseeing the
possibility or probability of payment of backwages to its employees, organized Rosario to replace Ransom,
with the latter to be eventually phased out if the strikers win their case. The execution could not be
implemented against Ransom because of the disposition posthaste of its leviable assets evidently in order to
evade its just and due obligations. Hence, the Court sustained the piercing of the corporate veil and made
the officers of Ransom personally liable for the debts of the latter.
Clearly, what can be inferred from the earlier cases is that 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. In the absence of malice, bad faith, or a specific provision of law
making a corporate officer liable, such corporate officer cannot be made personally liable for
corporate liabilities.23[Bold Emphasis supplied]
The records of this case do not warrant the application of the exception. The rule, which requires malice or
bad faith on the part of the directors or officers of the corporation, must still prevail. The petitioner might
have acted in behalf of LB&C Services Corporation but the corporation's failure to operate could not be
hastily equated to bad faith on his part. Verily, the closure of a business can be caused by a host of reasons,
including mismanagement, bankruptcy, lack of demand, negligence, or lack of business foresight. Unless the
closure is clearly demonstrated to be deliberate, malicious and in bad faith, the general rule that a
corporation has, by law, a personality separate and distinct from that of its owners should hold sway. In
view of the dearth of evidence indicating that the petitioner had acted deliberately, maliciously or in bad
faith in handling the affairs of LB&C Services Corporation, and such acts had eventually resulted in the
closure of its business, he could not be validly held to be jointly and solidarily liable with LB&C Services
Corporation.
The CA imputed bad faith to LB&C Services Corporation in respect of the cessation of its operations because
it still filed an appeal tot he NLRC, 24 which the CA construed as evincing its intent to evade liability. For that
reason, the CA deemed it mandatory to pierce the corporate fiction and then identified the petitioner as the
person responsible for the payment of the respondent's money claims. However, the CA pointed out nothing
else in the records that showed the petitioner as being responsible for the acts complained of. At the very
least, we consider it to be highly improbable that LB&C Services Corporation deliberately ceased its
operations if only to evade the payment of the monetary awards adjudged in favor of a single employee like
the respondent.
In reinstating the decision of the Labor Arbiter, the CA, although conceding that the petitioner was not
among those who should be liable for the monetary award, still went on to pierce the veil of corporate fiction
and to declare as follows: ChanRoblesVirtualawlibrary
Undoubtedly, respondent Lozada cannot be absolved from his liability as corporate officer. Although, as a
rule, the officers and members of a corporation are not personally liable for the acts done in the
performance of their duties, this rule admits of exceptions one of which is when the employer corporation is
no longer existing and is unable to satisfy the judgment in favor of the employee. The corporate officer in
such case should be held for acting on behalf of the corporation. Here, the respondent company already
ceased its business operation.
xxxx
x x x The petitioner's claim that respondent Lozada was the real owner of the LB & C Corporation is thus
correct and tenable. The conclusion is bolstered by the fact that the respondent company never revealed
who were the officers of the LB & C Corporation if only to pinpoint responsibility in the closure of the
company that resulted in the dismissal of the petitioner from employment. Respondent Lozada is, therefore,
personally liable for the payment of the monetary benefits due to the petitioner, its former employee. 25 cralawredchanroblesvirtuallawlibrary
The Labor Arbiter did not render any findings about the petitioner perpetrating the wrongful act against the
respondent, or about the petitioner being personally liable along with LB&C Services Corporation for the
monetary award. The lack of such findings was not assailed by the respondent. On its part, the NLRC did not
discuss the matter at all in its decision of May 31, 2006, which ultimately attained finality. To hold the
petitioner liable after the decision had become final and executory would surely alter the tenor of the
decision in a manner that would exceed its terms.
Moreover, by declaring that the petitioner's liability as solidary, the Labor Arbiter modified the already final
and executory February 23, 2005 decision. The modification was impermissible because the decision had
already become immutable, even if the modification was intended to correct erroneous conclusions of fact
and law. The only recognized exceptions to the immutability of the decision are the corrections of clerical
errors, the making of so-called nunc pro tunc entries that cause no prejudice to any party, and where the
judgment is void.26 None of such exceptions applied herein.
It is fully warranted, therefore, that we quash and lift the alias writ of execution as a patent nullity by virtue
of its not conforming to, or of its being different from and going beyond or varying the tenor of the
judgment that gave it life. To insist on its validity would be defying the constitutional guarantee against
depriving any person of his property without due process of law.
In sum, there was no justification for holding the petitioner jointly and solidarily liable with LB&C Services
Corporation to pay to the respondent the adjudged monetary award. To start with, the respondent had not
alleged the petitioner's act of bad faith, whether in his complaint or in his position paper, or anywhere else
in his other submissions before the Labor Arbiter, that would have justified the piercing of the veil of
corporate identity. Hence, we reverse the CA.
WHEREFORE, the Court GRANTS the petition for review on certiorari; REVERSES and SETS ASIDE the
decision promulgated by the Court of Appeals on September 28, 2010; ANNULS and SETS ASIDE the order
issued on April 16, 2007 by Labor Arbiter Antonio R. Macam; QUASHES and LIFTS the alias writ of
execution; and DIRECTS the National Labor Relations Commission Labor Arbiter to implement with utmost
dispatch the final and executory decision rendered on May 31, 2006 against the assets of LB&C Service
Corporation only.
No pronouncement on costs of suit.
LOZADA VS MAGTANGGOL (G.R. NO.

196134, OCTOBER 12, 2016)
Lozada vs Magtanggol
G.R. No. 196134, October 12, 2016
Facts: On October 13, 1997, the Magtanggol Mendoza was employed as a technician by VSL
Service Center, a single proprietorship owned and managed by Valentin Lozada. Sometime in
August 2003, the VSL Service Center was incorporated and changed its business name to LB&C
Services Corporation. Subsequently, Magtanggol was asked by respondent Lozada to sign a new
employment contract. The petitioner did not accede because the respondent company did not
consider the number of years of service that he had rendered to VSL Service Center. From then
on, the his work schedule was reduced to one to three days a week. In December 2003, He was
given his regular working schedule by the company. However, on January 12, 2004, Magtanggol
was advised by the respondent company’s Executive Officer, Angeline Aguilar, not to report for
work and just wait for a call from the respondent company regarding his work schedule. Due to
the continued failure of respondent company to give work schedule to Magtanggol, the latter
filed a complaint against the respondent company on January 21, 2004 for illegal dismissal with
a prayer for the payment of his 13th month pay, service incentive leave pay, holiday pay and
separation pay and with a claim for moral and exemplary damages, and attorney’s fees. The
case was docketed as NLRC NCR Case No. 00-01-00968-2004. On February 23, 2005, the
Labor Arbiter declared the dismissal of the petitioner from employment as illegal. LB&C Services
Corporation appealed, but the NLRC dismissed the appeal for non-perfection thereof due to
failure to deposit the required cash or surety bond. Thus, the Labor Arbiter’s decision attained
finality on August 4, 2006, and the entry of judgment was issued by the NLRC on August 16,
2006. The respondent moved for the issuance of the writ of execution, which the Labor Arbiter
granted on November 21, 2006.
Issue: Whether or not the petitioner may be held liable for the monetary awards granted to the
respondent despite the absence of a pronouncement of his being solidarily liable with LB&C
Services Corporation.
Held: No. A corporation, as a juridical entity, may act only through its directors, officers and
employees. Obligations incurred as a result of the acts of the directors and officers as the
corporate agents are not their personal liability but the direct responsibility of the corporation
they represent. As a general rule, corporate officers are not held solidarily liable with the
corporation for separation pay because the corporation is invested by law with a personality
separate and distinct from those of the persons composing it as well as from that of any other
legal entity to which it may be related. 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.
To hold a director or officer personally liable for corporate obligations, two requisites must
concur, to wit: (1) the complaint must allege that the director or officer assented to the patently
unlawful acts of the corporation, or that the director or officer was guilty of gross negligence or
bad faith; and (2) there must be proof that the director or officer acted in bad faith.
Clearly, what can be inferred from the earlier cases is that 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. In the absence of malice, bad faith, or a specific provision of law making a
corporate officer liable, such corporate officer cannot be made personally liable for corporate
liabilities.
The records of this case do not warrant the application of the exception. The rule, which
requires malice or bad faith on the part of the directors or officers of the corporation, must still
prevail. The petitioner might have acted in behalf of LB&C Services Corporation but the
corporation’s failure to operate could not be hastily equated to bad faith on his part. Verily, the
closure of a business can be caused by a host of reasons, including mismanagement,
bankruptcy, lack of demand, negligence, or lack of business foresight. Unless the closure is
clearly demonstrated to be deliberate, malicious and in bad faith, the general rule that a
corporation has, by law, a personality separate and distinct from that of its owners should hold
sway. In view of the dearth of evidence indicating that the petitioner had acted deliberately,
maliciously or in bad faith in handling the affairs of LB&C Services Corporation, and such acts
had eventually resulted in the closure of its business, he could not be validly held to be jointly
and solidarily liable with LB&C Services Corporation.
JARDELEZA, J.:
These are consolidated petitions for review on certiorari assailing the Court
of Appeals' (CA) Decision[1] and Resolution[2] dated November 24, 2008 and
June 19, 2009, respectively, in CA-G.R. SP No. 01858-MIN and CA-G.R. SP
No. 01861-MIN. The CA affirmed with modification the Decision [3] of the
Regional Trial Court (court a quo) dated July 11, 2007 which ruled in favor
of respondents.
The Parties
Petitioners are Agdao Landless Residents Association, Inc. (ALRAI), a non-
stock, non-profit corporation duly organized and existing under and by
virtue of the laws of the Republic of the Philippines,[4] and its board of
directors,[5] namely, Armando Javonillo (Javonillo), Ma. Acelita Armentano
(Armentano), Alex Josol, Salcedo de la Cruz, Jr., Claudio Lao, Antonia
Amorada, Julius Alinsub, Pompeniano Espinosa, Consorcio Delgado,
Romeo Cabillo, Benjamin Lamigo, Ricardo Bacong, Rodolfo Galenzoga, and
Asuncion Alcantara (Alcantara).[6] Respondents are allegedly ousted
members of ALRAI, namely, Rolando Maramion, Leonidas Jamisola,
Virginia Canoy (Canoy), Elizabeth Gonzales, Crispiniano Quire-Quire,
Emestino Dunlao, Ella Demandante, Ella Ria Demandante, Elgin
Demandante, Satumina Witara (Witara), Virgilio Dayondon (Dayondon),
Melencia Maramion, Angelica Penkian (Penkian), Presentacion Tan,
Hemani Gregory (Gregory), Rudy Gimarino (Gimarino), Valentin Cameros,
Radel Cameros (Cameros), Zoilo Jabonete, Luisito Tan (Tan), Joseph
Quire Quire, Emestino Dunlao, Jr., Fred Dunlao, Liza Maramion, Clarita
Robilla (Robilla), Renata Dunlao and Prudencio Juariza, Jr. (Juariza). [7]
The Antecedents
Dakudao & Sons, Inc. (Dakudao) executed six Deeds of Donation [8] in favor
of ALRAI covering 46 titled lots (donated lots).[9] One Deed of
Donation[10] prohibits ALRAI, as donee, from partitioning or distributing
individual certificates of title of the donated lots to its members, within a
period of five years from execution, unless a written authority is secured
from Dakudao.[11] A violation of the prohibition will render the donation
void, and title to and possession of the donated lot will revert to Dakudao.
[12]
The other five Deeds of Donation do not provide for the five-year
restriction.
In the board of directors and stockholders meetings held on January 5,

2000 and January 9, 2000, respectively, members of ALRAI resolved to
directly transfer 10 of the donated lots to individual members and non
members of ALRAI.[13] Transfer Certificate of Title (TCT) Nos. T-62124
(now T-322968), T-297811 (now TCT No. T-322966), T-297813 (now TCT
No. T-322967) and T-62126 (now TCT No. T-322969) were transferred to
Romeo Dela Cruz (Dela Cruz). TCT Nos. T-41374 (now TCT No. T-322963)
and T-41361 (now TCT No. T-322962) were transferred to petitioner
Javonillo, the president of ALRAI. TCT Nos. T-41365 (now TCT No. T-
322964) and T-41370 (now TCT No. T-322964) were transferred to
petitioner Armentano, the secretary of ALRAI. TCT Nos. T-41367 (now TCT
No. T-322971) and T-41366 were transferred to petitioner Alcantara, the
widow of the fanner legal counsel of ALRAI. The donated lot covered by
TCT No. T-41366 (replaced by TCT No. T-322970) was sold to Lily Loy
(Loy) and now covered by TCT No. T-338403.[14]
Respondents filed a Complaint[15] against petitioners. Respondents alleged

that petitioners expelled them as members of ALRAI, and that petitioners
are abusing their powers as officers.[16] Respondents further alleged that
petitioners were engaged in the following anomalous and illegal acts: (1)
requiring ALRAI's members to pay exorbitant arrear fees when ALRAI's By-
Laws only set membership dues at P1.00 per month;[17] (2) partially
distributing the lands donated by Dakudao to some officers of ALRAI and
to some non-members in violation of the Deeds of Donation;[18] (3) illegally
expelling them as members of ALRAI without due process;[19] and (4) being
unable to show the books of accounts of ALRAI.[20] They also alleged that
Loy (who bought one of the donated lots from Alcantara) was a buyer in
bad faith, having been aware of the status of the land when she bought it. [21]
Thus, respondents prayed for: (1) the restoration of their membership to

ALRAI; (2) petitioners to stop selling the donated lands and to annul the
titles transferred to Javonillo, Armentano, Dela Cruz, Alcantara and Loy;
(3) the production of the accounting books of ALRAI and receipts of
payments from ALRAI's members; (4) the accounting of the fees paid by
ALRAI's members; and (5) damages.[22]
In their Answer,[23] petitioners alleged that ALRAI transferred lots to

Alcantara as attorney's fees ALRAI owed to her late husband, who was the
legal counsel of ALRAI.[24] On the other hand, Javonillo and Armentano, as
president and secretary of ALRAI, respectively, made a lot of sacrifices for
ALRAI, while Dela Cruz provided financial assistance to ALRAI. [25]
Petitioners also alleged that respondents who are non-members of ALRAI

have no personality to sue. They also claimed that the members who were
removed were legally ousted due to their absences in meetings.[26]
The Ruling of the RTC

On July 11, 2007, the court a quo promulgated its Decision,[27] the decretal
portion of which reads:
After weighing the documentary and testimonial evidence presented, as

well as the arguments propounded by the counsels, this Court tilts the scale
of justice in favor of complainants and hereby grants the following:
1. Defendants are enjoined from disposing or selling further the

donated lands to the detriment of the beneficiary-members of the
Association;
2. The Complainants and/or the ousted members are hereby restored to

their membership with ALRAI, and a complete list of all bona fide
members should be made and submitted before this Court;
3. The Register of Deeds of the City of Davao is directed to annul the

Land Titles transferred to Armando Javonillo, Ma. Acelita
Armentano, Romeo dela Cruz, Asuncion Alcantara and Lily Loy with
TCT Nos. T-322962, T-322963, T-322964, T-322965, T-322966, T-
322967, T-322968, T-322969, T-322971 and T-338403 (formerly T-
322970), respectively; and to register said titles to the appropriate
donee provided in the Deeds of Donation; and
4. Defendants are further directed to produce all the Accounting Books

of the Association, receipts of the payments made by all the members,
and for an accounting of the fees paid by the members from the time
of its incorporation up to the present;
5. Moral, exemplary and attorney's fees being unsubstantiated, the same

cannot be given due course; and
6. Defendants are ordered to shoulder the costs of suit.
SO ORDERED.[28]
The court a quo treated the case as an intra-corporate dispute.[29] It found
respondents to be bona fide members of ALRAI.[30] Being bona
fide members, they are entitled to notices of meetings held for the purpose
of suspending or expelling them from ALRAI.[31] The court a quo however
found that respondents were expelled without due process.[32] It also
annulled all transfers of the donated lots because these violated the five-
year prohibition under the Deeds of Donation.[33] It also found Loy a
purchaser in bad faith.[34]
Both Loy and petitioners filed separate appeals with the CA. Loy's appeal
was docketed as CA-G.R. SP No. 01858;[35] while petitioners' appeal was
docketed as CA-G.R. SP No. 1861.[36] In its Resolution[37] dated October 19,
2007, the CA ordered the consolidation of the appeals.
The Ruling of the Court of Appeals
The CA affirmed with modification the court a quo's Decision. The decretal
portion of the CA Decision[38] dated November 24, 2008 reads:
WHEREFORE, the consolidated petitions are PARTLY GRANTED. The

assailed Decision dated July 11,2007 of the Regional Trial Court (RTC),
Eleventh (11th)Judicial Region, Branch No. 10 of Davao City in Civil Case
No. 29,047-02 is hereby AFFIRMEDwith MODIFICATION.
The following Transfer Certificates of Title are declared VALID:
1. TCT Nos. T-322966, T-322967, T-322968 and T-322969 in the

name of petitioner Romeo C. DelaCruz; and
2. TCT No. T-338403 in the name of petitioner Lily Loy.
The following Transfer Certificates of Title are declared VOID:
1. TCT Nos. T-322963 and T-322962 in the name of Petitioner

Armando Javonillo;
2. TCT Nos. T-322964 and T-322965 in the name of petitioner Ma.
Acelita Armentano; and
3. TCT No. T-322971 in the name of petitioner Asuncion A. Alcantara.
Petitioners who are members of ALRAI may inspect all the records and
books of accounts of ALRAI and demand accounting of its funds in
accordance with Section 1, Article VII and Section 6, Article V of ALRAI's
Constitution and By-Laws.
SO ORDERED.[39]
Under Section 2, Article III of ALRAI's Amended Constitution and By-Laws

(ALRAI Constitution), the corporate secretary should give written notice of
all meetings to all members at least three days before the date of the
meeting.[40] The CA found that respondents were not given notices of the
meetings held for the purpose of their termination from ALRAI at least
three days before the date of the meeting.[41] Being existing members of
ALRAI, respondents are entitled to inspect corporate books and demand
accounting of corporate funds in accordance with Section 1, Article VII and
Section 6, Article V ofthe ALRAI Constitution.[42]
The CA also noted that among the donated lots transferred, only one [under
TCT No. T-41367 (now TCT No. 322971) and transferred to Alcantara] was
covered by the five-year prohibition.[43] Although petitioners attached to
their Memorandum[44] dated November 19, 2007 a Secretary's
Certificate[45] of Dakudao resolving to remove the restriction from the land
covered by TCT No. T-41367, the CA did not take this certificate into
consideration because petitioners never mentioned its existence in any of
their pleadings before the court a quo. Thus, without the required written
authority from the donor, the CA held that the disposition of the land
covered by TCT No. T-41367 is prohibited and the land's subsequent
registration under TCT No. T-322971 is void.[46]
However, the CA nullified the transfers made to Javonillo and Armentano

because these transfers violated Section 6 of Article IV of the ALRAI
Constitution. Section 6 prohibits directors from receiving any
compensation, except for per diems, for their services to ALRAI. [47]The CA
upheld the validity of the transfers to Dela Cruz and Alcantara [48] because
the ALRAI Constitution does not prohibit the same. The CA held that as a
consequence, the subsequent transfer of the lot covered by TCT No. T-
41366 to Loy from Alcantara was also valid.[49]
Both parties filed separate motions for reconsideration with the CA but
these were denied in a Resolution[50] dated June 19, 2009.
Thus, the parties filed separate petitions for review on certiorari under
Rule 45 of the Rules of Court with this Court. In a Resolution[51]dated
September 30, 2009, we resolved to consolidate the petitions considering
they assail the same CA Decision and Resolution dated November 24, 2008
and June 19, 2009, respectively. The petitions also involve the same parties
and raise interrelated issues.
The Issues
Petitioners raise the following issues for resolution of the Court, to wit:
1. Whether respondents should be reinstated as members of ALRAI;

and
2. Whether the transfers of the donated lots are valid.
Our Ruling
We find the petition partly meritorious.
I. Legality of respondents' termination
Petitioners argue that respondents were validly dismissed for violation of

the ALRAI Constitution particularly for non-payment of membership dues
and absences in the meetings.[52]
Petitioners' argument is without merit. We agree with the CA's finding that
respondents were illegally dismissed from ALRAI.
We stress that only questions of law may be raised in a petition for review
on certiorari under Rule 45 of the Rules of Court, since "the Supreme Court
is not a trier of facts."[53] It is not our function to review, examine and
evaluate or weigh the probative value of the evidence presented.
When supported by substantial evidence, the findings of fact of the CA are

conclusive and binding on the parties and are not reviewable by this Court,
unless the case falls under any of the recognized exceptions in
Jurisprudence.[54]
The court a quo held that respondents are bona fide members of
ALRAL[55] This finding was not disturbed by the CA because it was not
raised as an issue before it and thus, is binding and conclusive on the
parties and upon this Court.[56] In addition, both the court a quoand the CA
found that respondents were illegally removed as members of ALRAI. Both
courts found that in terminating respondents from ALRAI, petitioners
deprived them of due process.[57]
Section 91[58] of the Corporation Code of the Philippines (Corporation Code)

[59]
provides that membership in a non-stock, non-profit corporation (as in
petitioner ALRAI in this case) shall be terminated in the manner and for
the cases provided in its articles of incorporation or the by-laws.
In tum, Section 5, Article II of the ALRAI Constitution [60] states:
Sec. 5. - Termination of Membership - Membership may be lost in any of

the following: a) Delinquent in the payment of monthly dues;
b) failure to [attend] any annual or special meeting of the
association for three consecutive times without justifiable cause,
and c) expulsion may be exacted by majority vote of the entire members, on
causes which herein enumerated: 1) Act and utterances which are
derogatory and harmful to the best interest of the association; 2) Failure to
attend any annual or special meeting of the association for six (6)
consecutive months, which shall be construed as lack of interest to continue
his membership, and 3) any act to conduct which are contrary to the
objectives, purpose and aims of the association as embodied in the
charter[.][61]
Petitioners allege that the membership of respondents in ALRAI was

terminated due to (a) non-payment of membership dues and (b) failure to
consecutively attend meetings.[62] However, petitioners failed to
substantiate these allegations. In fact, the court a quo found that
respondents submitted several receipts showing their compliance with the
payment of monthly dues.[63] Petitioners likewise failed to prove that
respondents' absences from meetings were without any justifiable grounds
to result in the loss of their membership in ALRAI.
Even assuming that petitioners were able to prove these allegations, the
automatic termination of respondents' membership in ALRAI is still not
warranted. As shown above, Section 5 of the ALRAI Constitution does not
state that the grounds relied upon by petitioners will cause
the automatic termination of respondents' membership. Neither can
petitioners argue that respondents' memberships in ALRAI were
terminated under letter (c) of Section 5, to wit:
x x x c) expulsion may be exacted by majority vote of the entire members,

on causes which herein enumerated: 1) Act and utterances which are
derogatory and harmful to the best interest of the association; 2) Failure to
attend any annual or special meeting of the association for six (6)
consecutive months, which shall be construed as lack of interest to continue
his membership, and 3) any act to conduct which are contrary to the
objectives, purpose and aims of the association as embodied in the charter;
x x x[64]
Although termination of membership from ALRAI may be made by a

majority of the members, the court a quo found that the "guideline
(referring to Section 2, Article III of the ALRAI Constitution) was not
followed, hence, complainants' ouster from the association was illegally
done."[65] The court a quo cited Section 2, Article III of the ALRAI
Constitution which provides, thus:
Sec. 2. -Notice- The Secretary shall give or cause to be given written notice
of all meetings, regular or special to all members of the association at least
three (3) days before the date of each meetings either by mail or personally.
Notice for special meetings shall specify the time and the purposes or
purpose for which it was called; x x x [66]
The CA concurred with the finding of the court a quo.[67] The CA noted that
the evidence presented revealed that the General Meeting for the
termination of membership was to be held on July 29, 2001, at 2 o'clock in
the afternoon; but the Notice to all officers and members of ALRAI
informing them about the General Meeting appeared to have been signed
by ALRAI's President only on July 27, 2001.[68] Thus, the CA held that the
"notice for the July 29, [2001] meeting where the general membership of
ALRAI approved the expulsion of some of the respondents was short of the
three (3)-day notice requirement. More importantly, the petitioners have
failed to adduce evidence showing that the expelled members were indeed
notified of any meeting or investigation proceeding where they are given
the opportunity to be heard prior to the termination of their
membership."[69]
The requirement of due notice becomes more essential especially so since

the ALRAI Constitution provides for the penalties to be imposed in cases
where any member is found to be in arrears in payment of contributions, or
is found to be absent from any meeting without any justifiable cause.
Section 3, Article II and Section 3, Article III of the ALRAI Constitution
provide, to wit:
Article II
xxx
Sec. 3. - Suspension of members Any member who shall be six (6) months
in arrears in the payment of monthly dues or additional contributions or
assessments shall be automatically suspended and may be reinstated only
upon payment of the corresponding dues in arrears or additional
contributions and after approval of the board of Directors.[70]
xxx
Article III
xxx
Sec. 3. - Any member who shall be absent from any meeting without
justifiable causes shall be liable to a fine of Two Pesos (P 2.00); [71]
Clearly, members proved to be in arrears in the payment of monthly dues,

contributions, or assessments shall only be automatically suspended; while
members who shall be absent from any meeting without any justifiable
cause shall only be liable for a fine. Nowhere in the ALRAI Constitution
does it say that the foregoing actions shall cause the automatic termination
of membership. Thus, the CA correctly ruled that "respondents' expulsion
constitutes an infringement of their constitutional right to due process of
law and is not in accord with the principles established in Article 19 of the
Civil Code, x x x."[72]
There being no valid termination of respondents' membership m ALRAI,

respondents remain as its existing members.[73] It follows that as members,
respondents are entitled to inspect the records and books of accounts of
ALRAI subject to Section 1, Article VII[74] of ALRAI's Constitution, and they
can demand the accounting of its funds in accordance with Section 6,
Article V of the ALRAI Constitution.[75] In addition, Sections 74[76] and
75[77] of the Corporation Code also sanction the right of respondents to
inspect the records and books of accounts of ALRAI and demand the
accounting of its funds.
II. On the validity of the donated lots
We modify the decision of the CA.
At the onset, we find that the cause of action and the reliefs sought in the
complaint pertaining to the donated lands (ALRAI's corporate property)
strictly call for the filing of a derivative suit, and not an individual suit
which respondents filed.
Individual suits are filed when the cause of action belongs to the
stockholder personally, and not to the stockholders as a group, or to the
corporation, e.g. denial of right to inspection and denial of dividends to a
stockholder. If the cause of action belongs to a group of stockholders, such
as when the rights violated belong to preferred stockholders, a class or
representative suit may be filed to protect the stockholders in the group. [78]
A derivative suit, on the other hand, is one which is instituted by a

shareholder or a member of a corporation, for and in behalf of the
corporation for its protection from acts committed by directors, trustees,
corporate officers, and even third persons.[79] The whole purpose of the law
authorizing a derivative suit is to allow the stockholders/members to
enforce rights which are derivative (secondary) in nature, i.e., to enforce a
corporate cause of action.[80]
The nature of the action, as well as which court or body has jurisdiction
over it, is determined based on the allegations contained in the complaint
of the plaintiff, irrespective of whether or not the plaintiff is entitled to
recover upon all or some of the claims asserted therein.[81]
In this case, the complaint alleged, thus:
FIRST CAUSE OF ACTION
9. Sometime in 2001, Complainants accidentally discovered that portions of

the aforementioned donated lands were partially distributed by the Officers
of said association, AMONG THEMSELVES, without knowledge of its
members.
xxx
11. Then there was illegal partial distribution of the donated lands. Not only
the President and Secretary of the Association, but also some personalities
who are not members of the association and who themselves own big tracts
of land, are the recipients of the donated lands, which acts are contrary to
the clear intents as indicated in the deed of donation. x x x[82]
In the same complaint, respondents prayed .for the following reliefs, among
others, to wit:
a) An Order for a writ of PRELIMINARY PROHIBITORY MANDATORY

INJUNCTION to stop the Defendants from disposing the donated lands to
the detriment of the beneficiary-members of the Association[.]
xxx
c) To cease and desist from selling donated lands subject of this case and to
annul the titles transferred x x x.
d) To annul the Land Titles fraudulently and directly transferred from the
Dacudao in the names of Defendants Javonillo, Armentano, Romeo de la
Cruz and Alcantara, and subsequently to defendant Lily Loy in the name of
Agdao Landless Associatidn.[83]
In a strict sense, the first cause of action, and:the reliefs sought, should
have been brought through a derivative suit. The first cause of action
pertains to the corporate right of ALRAI involving its corporate properties
which it owned by virtue of the Deeds of Donation. In derivative suits, the
real party-in-interest is the corporation, and the suing stockholder is a mere
nominal party.[84] A derivative suit, therefore, concerns "a wrong to the
corporation itself."[85]
However, we liberally treat this case (in relation to the cause of action
pertaining to ALRAI's corporate properties) as one pursued by the
corporation itself, for the following reasons.
First, the court a quo has jurisdiction to hear and decide this controversy.
Republic Act No. 8799,[86] in relation to Section 5 of Presidential Decree No.
902-A,[87] vests the court a quo with original and exclusive jurisdiction to
hear and decide cases involving:
Sec. 5. x x x
(a) Devices or schemes employed by or any acts, of the board of directors,

business associates, its officers or partnership, 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.
Second, we note that petitioners did not object to the institution of the case
(on the ground that a derivative suit should have been lodged instead of an
individual suit) in any of the proceedings before the court a quo or before
the CA.[88]
Third, a reading of the complaint (in relation to the cause of action

pertaining to ALRAI's corporate properties) shows that respondents do not
pray for reliefs for their personal benefit; but in fact, for the benefit of the
ALRAI, to wit:
c) To cease and desist from selling donated lands subject of this case and to
annul the titles transferred to Armando Javonillo, Ma. Acelita Armentano,
Romeo de Ia Cruz, Asuncion Alcantara and Lily Loy x x x.
d) To annul the Land Titles fraudulently and directly transferred from the
(sic) Dacudao in the names of Defendants Javonillo, Armentano, Romeo de
la Cruz and Alcantara, and subsequently to Defendant Lily Loy in the name
of Agdao Landless Assiociation.[89]
The reliefs sought show that the complaint was filed ultimately to curb the
alleged mismanagement of ALRAI's corporate properties. We note that the
danger sought to be avoided in Evangelista v. Santos[90] does not exist in
this case. In Santos, plaintiff stockholders sought damages against the
principal officer of the corporation, alleging that the officer's
mismanagement of the affairs and assets of the corporation brought about
the loss of the value of its stocks. In ruling against the plaintiff-
stockholders, this Court held that "[t]he stockholders may not directly
claim those damages for themselves for that would result in the
appropriation by, and the distribution among them of part of the corporate
assets before the dissolution of the corporation x x x."[91] More, in Santos, if
only the case was brought before the proper venue, this Court added, "we
note that the action stated in their complaint is susceptible of being
converted into a derivative suit for the benefit of the corporation by a mere
change in the prayer."[92]
In this case, the reliefs sought do not entail the premature distribution of
corporate assets. On the contrary, the reliefs seek to preserve them for the
corporate interest of ALRAI. Clearly then, any benefit that may be
recovered is accounted for, not in favor of respondents, but for the
corporation, who is the real party-in-interest Therefore, the occasion for the
strict application of the rule that a derivative suit should be brought in
order to protect and vindicate the interest of the corporation does not
obtain under the circumstances of this case.
Commart (Phils.), Inc. v. Securities and Exchange Commission (SEC)

[93]
upholds the same principle. In that case, the chairman and board of
directors of Commart were sued for diverting into their private accounts
amounts due to Commart as commissions. Respondents argued that the
Hearing Panel of the SEC should dismiss the case·on the ground that it has
no jurisdiction over the matter because the case is not a derivative suit The
Hearing Panel denied the motion, and was affirmed by the SEC. Upon
appeal, this Court affirmed the decision of the SEC, to wit:
The complaint in SEC Case No. 2673, particularly paragraphs 2 to 9 under
First Cause of Action, readily shows that it avers the diversion of corporate
income into the private bank accounts of petitioner x x x and his wife.
Likewise, the principal relief prayed for in the complaint is the recovery of a
sum of money in favor of the corporation. This being the case, the
complaint is definitely a derivative suit. xxx
xxx
In any case, the suit is for the benefit of Commart itself, for a judgment in
favor of the complainants will necessarily mean recovery by the corporation
of the US$2.5 million alleged to have been diverted from its coffers to the
private bank accounts of its top managers and directors. Thus, the prayer in
the Amended Complaint is for judgment ordering respondents x x x, "to
account for and to, turn over or deliver to the Corporation" the aforesaid
sum, with legal interest, and "ordering all the respondents, as members of
the Board of Directors to take such remedial steps as would protect the
corporation from further depredation of the funds and property." [94]
Fourth, based on the records, we find that there is substantial compliance

with the requirements of a derivative suit, to wit:
a) [T]he party bringing suit should be a shareholder as of the time of the act
or transaction complained of, the number of his shares not being material;
b) [H]e has tried to exhaust intra-corporate remedies, i.e., has made a

demand on the board of directors for the appropriate relief but the latter
has failed or refused to heed his plea; and
c) [T]he cause of action actually devolves on the corporation, the

wrongdoing or harm having been, or being caused to the corporation and
not to the particular stockholder bringing the suit.[95]
Here, the court a quo found that respondents are bona fide members of
ALRAI.[96] As for the second requisite, respondents also have tried to
demand appropriate relief within the corporation, but the demand was
unheeded. In their Memorandum before the CA, respondents alleged, thus:
4.18 The occurrence of the series of distressing revelation

prompted Respondents to confront Defendant Armentano on the
accounting of all payments made including the justification for the illegal
distribution of the Donated Land to four persons mentioned in preceding
paragraph (4.12) of this memorandum. Unfortunately, Petitioner
Armentano merely reasoned their (referring to the four persons) right to
claim ownership of the land as compensation for their service and
attorney's fees;
4.19 Anxious of the plan of action taken by the Respondents against the
Petitioners, the latter started harassing the unschooled Respondents by
unduly threatening them. Respondents simply wanted the land due them,
an accounting of the finances of the Association and justification of the
illegal disposition of the Donated Land which was donated for the landless
members of the Association;
4.20 As a consequence, Petitioners on their own, with grave abuse of power

and in violation of the Constitution and By-Laws of the Association
maliciously expelled the Respondents particularly those persistently
inquisitive about Petitioners' moves and acts which only emphasized their
practice of upholding the MOB RULE by presenting solicited signatures of
alleged members and non-members written on a scrap of paper signifying
confirmation of the ouster (sic) members. x x x[97]
We note that respondents' demand on Armentano substantially complies

with the second requirement. While it is true that the complaining
stockholder must show that he has exhausted all the means within his reach
to attain within the corporation the redress for his grievances, demand is
unnecessary if the exercise will result in futility.[98] Here, after respondents
demanded Armentano to justify the transfer of ALRAI's properties to the
individual petitioners, respondents were expelled from the corporation,
which termination we have already ruled as invalid. To our mind, the threat
of expulsion against respondents is sufficient to forestall any expectation of
further demand for relief from petitioners. Ultimately, to make an effort to
demand redress within the corporation will only result in futility, rendering
the exhaustion of other remedies unnecessary.
Finally, the third requirement for the institution of a derivative suit is
clearly complied with. As discussed in the previous paragraphs, the cause of
action and the reliefs sought ultimately redound to the benefit of ALRAI. In
this case, and as in a proper derivative suit, ALRAI is the party-in-interest
and respondents are merely nominal parties.
In view of the foregoing, and considering further the interest of justice, and
the length of time that this case has been pending, we liberally treat this
case as one pursued by the corporation to protect its corporate rights. As
the court a quo noted, this case "commenced [on] April 2, 2002, blossomed
in a full-blown trial and ballooned into seven (7) voluminous rollos."[99]
We now proceed to resolve the issue of the validity of the transfers of the
donated lots to Javonillo, Armentano, DelaCruz, Alcantara and Loy. We
agree with the CA in ruling that the TCTs issued in the names of Javonillo,
Armentano and Alcantara are void.[100] We modify the ruling of the CA
insofar as we rule that the TCTs issued in the names of Dela Cruz and Loy
are also void.[101]
One of the primary purposes of ALRAI is the giving of assistance in

uplifting and promoting better living conditions to all members in
particular and the public in general.[102] One of its objectives includes "to
uplift and promote better living condition, education, health and general
welfare of all members in particular and the public in general by providing
its members humble shelter and decent housing."[103] Respondents
maintain that it is pursuant to this purpose and objective that the
properties subject of this case were donated to ALRAI.[104]
Section 36, paragraphs 7 and 11 of the Corporation Code provide:
Sec. 36. Corporate powers and capacity. - Every corporation incorporated

under this Code has the power and capacity:
xxx
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,

mortgage and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution.
xxx
11. To exercise such other powers as may be essential or necessary to carry

out its purpose or purposes as stated in the articles of incorporation.[105]
The Corporation Code therefore tells us that the power of a corporation to

validly grant or convey any of its real or personal properties is
circumscribed by its primary purpose. It is therefore important to
determine whether the grant or conveyance is pursuant to a legitimate
corporate purpose, or is at least reasonable and necessary to further its
purpose.
Based on the records of this case, we find that the transfers of the corporate
properties to Javonillo, Armentano, Dela Cruz, Alcantara and Loy are bereft
of any legitimate corporate purpose, nor were they shown to be reasonably
necessary to further ALRAI's purposes. This is principally because, as
respondents argue, petitioners "personally benefitted themselves by
allocating among themselves vast track of lands at the dire expense of the
landless general membership of the Association."[106]
We take first the cases of Dela Cruz, Alcantara and Loy.
We disagree with theCA in ruling that the TCTs issued in the name of Dela
Cruz are valid. The transfer of property to him does not further the
corporate purpose of ALRAI. To justify the transfer to Dela Cruz,
petitioners merely allege that, "[o]n the other hand, the lots given by ALRAI
to Romeo de la Cruz were compensation for the financial assistance he had
been extending to ALRAI."[107] Records of this case do not bear any evidence
to show how much Dela Cruz has extended to ALRAI as financial
assistance. The want of evidence to support this allegation cannot allow a
determination whether the amount of the financial help that Dela Cruz
extended to ALRAI is commensurate to the amount of the property
transferred to him. The lack of evidence on this point is prejudicial to
ALRAI because ALRAI had parted with its property without any means by
which to determine whether the transfer is fair and reasonable under the
circumstances.
The same is true with the transfer of properties to Alcantara. Petitioners
allege that Alcantara's husband, Atty. Pedro Alcantara, "handled all the
legal work both before the Regional Trial Court in Davao City (Civil Case
No. 16192) and the Court of Appeals in Manila (CA GR No. 13744). He
agreed to render his services although he was being paid intermittently,
with just small amounts, in the hope that he will be compensated when
ALRAI triumphs in the litigation."[108] Petitioners thus claim that "[b]ecause
of the legal services of her husband, who is now deceased, petitioner
Alcantara was given by ALRAI two (2) lots x x x."[109]
Petitioners admit that Atty. Pedro Alcantara represented ALRAI as counsel

on part contingency basis.[110] In their Memorandum before the court a quo,
respondents alleged that, "[i]n fact, Complainants have duly paid Atty.
Alcantara's legal fees as evidence (sic) by corresponding receipts issued by
the receiving Officer of the Association."[111] The aforementioned
receipts[112] show that Atty. Pedro Alcantara had already been paid the total
amount of P16,845.00.
In Rayos v. Hernandez,[113] we held that a contingent fee arrangement is

valid in this jurisdiction. It is generally recognized as valid and binding, but
must be laid down in an express contract. In the same case, we have
identified the circumstances to be considered in determining the
reasonableness of a claim for attorney's fees as follows: (1) the amount and
character of the service rendered; (2) labor, time, and trouble involved; (3)
the nature and importance of the litigation or business in which the services
were rendered; (4) the responsibility imposed; (5) the amount of money or
the value of the property affected by the controversy or involved in the
employment; (6) the skill and experience called for in the performance of
the services; (7) the professional character and social standing of the
attorney; (8) the results secured; (9) whether the fee is absolute or
contingent, it being recognized that an attorney may properly charge a
much larger fee when it is contingent than when it is not; and (10) the
financial capacity and economic status of the client have to be taken into
account in fixing the reasonableness of the fee.[114]
In this case however, petitioners did not substantiate the extent of the
services that Atty. Pedro Alcantara rendered for ALRAL In fact, no
engagement or retainer contract was ever presented to prove the terms of
their agreement. Petitioners did not also present evidence as to the value of
the ALRAI properties at the time of transfer to Alcantara. There is therefore
no proof that the amount of the properties transferred to Alcantara, in
addition to the legal fees he received, is commensurate (as compensation)
to the reasonable value of his legal services. Using the guidelines set forth
in Rayos, absent proof, there is no basis to determine whether the transfer
of the property to Alcantara is reasonable under the circumstances. [115]
The importance of this doctrine in Rayos is emphasized in the Canons of

Professional Ethics[116] and the Rules of Court.[117] In both, the overriding
consideration is the reasonableness of the terms of the contingent fee
agreement, so much so that the grant of the contingent fee is subject to the
supervision of the court.[118]
Spouses Cadavedo v. Lacaya[119] further illustrates this principle. In that

case, this Court was confronted with the issue of whether the contingent
attorney's fees consisting of one-half of the property that was subject of
litigation was valid and reasonable. This Court ruled that the attorney's fee
is excessive and unconscionable, and is therefore void. The Court said that
as "matters then stood, [there] was not a sufficient reason to justify a large
fee in the absence of any showing that special skills and additional work
had been involved."[120] The Court also noted that Spouses Cadavedo and
Atty. Lacaya already made arrangements for the cost and expenses for the
cases handled.[121]
Similarly in this case, there is no proof that special skills and additional
work have been put in by Atty. Pedro Alcantara. Further, as adverted to in
previous paragraphs, receipts show that intermittent payments as legal fees
have already been paid to him. We also note that in this case, not only one-
half of a property was transferred to Alcantara as compensation; but two
whole parcels of land - one with more or less 400 square meters (TCT No.
41366), and the other with more or less 395 square meters (TCT No.
41367). [122] The amount of fee contracted for, standing alone and
unexplained would be sufficient to show that an unfair advantage had been
taken of the client, or that a legal fraud had been perpetrated on him.[123]
Consequently, we also find that Alcantara's subsequent sale to Loy is not

valid. Alcantara cannot sell the property, over which she did not have the
right to own, in the first place. More, based on the records, the court a
quo had already made a finding that Loy is guilty of bad faith as to render
her purchase of the property from Alcantara void. [124]
We likewise find that there is failure to show any legitimate corporate
purpose in the transfer of ALRAI's corporate properties to Javonillo and
Armentano.
The Board Resolution[125] confirming the transfer of ALRAI's corporate

properties to Javonillo and Armentano merely read, "[t]hat the herein
irrevocable confirmation is made in recognition of, and gratitude for the
outstanding services rendered by x x x Mr. Armando Javonillo, our tireless
President and Mrs. Acelita Armentano, our tactful, courageous, and equally
tireless Secretary, without whose efforts and sacrifices to acquire a portion
of the realty of Dacudao & Sons, Inc., would not have been attained." [126] In
their Memorandum, petitioners also alleged that "[t]he most difficult part
of their (Javonillo and Armentano) job was to raise money to meet
expenses. x x x It was very difficult for petitioners Javonillo and Armentano
when they needed to pay P300,000.00 for realty tax on the land donated by
Dakudao and Sons, Inc. to ALRAI. It became more difficult when the
Bureau of Internal Revenue was demanding P6,874,000.00 as donor's tax
on the donated lands. Luckily, they were able to make representation with
the BIR to waive the tax."[127]
These reasons cannot suffice to prove any legitimate corporate purpose in

the transfer of the properties to Javonillo and Armentano. For one,
petitioners cannot argue that the properties transferred to them will serve
as reimbursements of the amounts they advanced for ALRAL There is no
evidence to show that they indeed paid the realty tax on the donated lands.
Neither did petitioners present any proof of actual disbursements they
incurred whenever Javonillo and Armentano allegedly helped Atty. Pedro
Alcantara in handling the cases involving ALRAI.[128] Like in the cases of
Dela Cruz and Alcantara, absent proof, there was no basis by which it could
have been determined whether the transfer of properties to Javonillo and
Armentano was reasonable under the circumstances at that time. Second,
petitioners cannot argue that the properties are transferred as
compensatioh for Javonillo. It is well settled that directors of corporations
presumptively serve without compensation; so that while the directors, in
assigning themselves additional duties, act within their power, they
nonetheless act in excess of their authority by voting for themselves
compensation for such additional duties.[129] Even then, aside from the
claim of petitioners, there is no showing that Javonillo rendered
extraordinary or unusual services to ALRAI.
The lack of legitimate corporate purpose is even more emphasized when
Javonillo and Armentano, as a director and an officer of ALRAI,
respectively, violated the fiduciary nature[130] of their positions in the
corporation.
Section 32 of the Corporation Code provides, thus:
Sec. 32. Dealings of directors, trustees or officers with the corporation. —A

contract of the corporation with one or more of its directors or trustees or
officers is voidable, at the option of such corporation, unless all of the
following conditions are present:
1. That the presence of such director or trustee in the board meeting in

which the contract was approved was not necessary to constitute a quorum
for such meeting;
2. That the vote of such director or trustee was not necessary for the
approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by
the board of directors.
Where any of the first two conditions set forth in the preceding paragraph is
absent, in the case of a contract with a director or trustee, such contract
may be ratified by the vote of the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock or of at least two thirds (2/3) of
the members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees involved is
made at such meeting: Provided, however, That the contract is fair and
reasonable under the circumstances.
Being the corporation's agents and therefore, entrusted with the

management of its affairs, the directors or trustees and other officers of a
corporation occupy a fiduciary relation towards it, and cannot be allowed to
contract with the corporation, directly or indirectly, or to sell property to it,
or purchase property from it, where they act both for the corporation and
for themselves.[131] One situation where a director may gain undue
advantage over his corporation is when he enters into a contract with the
latter. [132]
Here, we note that Javonillo, as a director, signed the Board
Resolutions[133] confirming the transfer of the corporate properties to
himself, and to Armentano. Petitioners cannot argue that the transfer of the
corporate properties to them is valid by virtue of the Resolution [134] by the
general membership of ALRAI confirming the transfer for three reasons.
First, as cited, Section 32 requires that the contract should be ratified by a

vote representing at least two-thirds of the members in a meeting called for
the purpose. Records of this case do not show whether the Resolution was
indeed voted by the required percentage of membership. In fact,
respondents take exception to the credibility of the signatures of the
persons who voted in the Resolution. They argue that, "from the alleged 134
signatures, 24 of which are non-members, 4 of which were signed twice
under different numbers, and 27 of which are apparently proxies
unequipped with the proper authorization. Obviously, on such alleged
general membership meeting the majority of the entire membership was
not attained."[135]
Second, there is also no showing that there was full disclosure of the
adverse interest of the directors involved when the Resolution was
approved. Full disclosure is required under the aforecited Section 32 of the
Corporation Code.[136]
Third, Section 32 requires that the contract be fair and reasonable under
the circumstances. As previously discussed, we find that the transfer of the
corporate properties to the individual petitioners is not fair and reasonable
for (1) want of legitimate corporate purpose, and for (2) the breach of the
fiduciary nature of the positions held by Javonillo and Armentano. Lacking
any of these (full disclosure and a showing that the contract is fair and
reasonable), ratification by the two-thirds vote would be of no avail.[137]
In view of the foregoing, we rule that the transfers of ALRAI's corporate

properties to Javonillo, Armentano, Dela Cruz, Alcantara and Loy are void.
We affirm the finding of the court a quo when it ruled that "[n]o proof was
shown to justify the transfer of the titles, hence, said transfer should be
annulled."[138]
WHEREFORE, in view of the foregoing, the petitions for review

on certiorari in G.R. Nos. 188642 & 189425 and in G.R. Nos. 188888-89
are PARTIALLY GRANTED. The Decision of the CA dated November 24,
2008 and its Resolution dated June 19, 2009 ruling that respondents are
reinstated as members of ALRAI are hereby AFFIRMED. The Decision of
theCA dated November 24, 2008 and its Resolution dated June 19, 2009
are MODIFIED as follows:
The following Transfer Certificates of Title are VOID:
(1) TCT Nos. T-322962 and T-322963 in the name of Armando Javonillo;
(2) TCT Nos. T-322964 and T-322965 in the name of Ma. Acelita
Armentano;
(3) TCT Nos. T-322966, T-322967, T-322968, and T-322969 in the name of
Romeo Dela Cruz;
(4) TCT No. T-338403 in the name of Lily Loy; and
(5) TCT No. T-322971 in the name of Asuncion Alcantara.
SO ORDERED.
G.R. No. 207246, November 22, 2016
JOSE M. ROY III, Petitioner, v. CHAIRPERSON TERESITA HERBOSA,THE SECURITIES AND

EXCHANGE COMMISSION, AND PHILILIPPINE LONG DISTANCE TELEPHONE
COMPANY, Respondents.
WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN P. GABINETE, ANTONIO V.

PESINA, JR., MODESTO MARTIN Y. MAMON III, AND GERARDO C. EREBAREN, Petitioners-in-
Intervention,
PHILIPPINE STOCK EXCHANGE, INC., Respondent-in-Intervention,
SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., Respondent-in-Intervention.
DECISION
CAGUIOA, J.:
The petitions1 before the Court are special civil actions for certiorari under Rule 65 of the Rules of Court
seeking to annul Memorandum Circular No. 8, Series of 2013 ("SEC-MC No. 8") issued by the Securities and
Exchange Commission ("SEC") for allegedly being in violation of the Court's Decision 2 ("GamboaDecision")
and Resolution3 ("Gamboa Resolution") in Gamboa v. Finance Secretary Teves, G.R. No. 176579,
respectively promulgated on June 28, 2011, and October 9, 2012, which jurisprudentially established the
proper interpretation of Section 11, Article XII of the Constitution. chanroblesvirtuallawlibrary
The Antecedents
On June 28, 2011, the Court issued the Gamboa Decision, the dispositive portion of which reads: chanRoblesvirtualLawlibrary
WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section 11, Article XII of
the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in
the present case only to common shares, and not to the total outstanding capital stock (common and non-
voting preferred shares). Respondent Chairperson of the Securities and Exchange Commission
is DIRECTED to apply this definition of the term "capital" in determining the extent of allowable foreign
ownership in respondent Philippine Long Distance Telephone Company, and if there is a violation of Section
11, Article XII of the Constitution, to impose the appropriate sanctions under the law.
SO ORDERED.4
Several motions for reconsideration were filed assailing the Gamboa Decision. They were denied in
the Gamboa Resolution issued by the Court on October 9, 2012, viz: chanRoblesvirtualLawlibrary
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be
entertained.
SO ORDERED.5
The Gamboa Decision attained finality on October 18, 2012, and Entry of Judgment was thereafter issued on
December 11, 2012.6
On November 6, 2012, the SEC posted a Notice in its website inviting the public to attend a public dialogue
and to submit comments on the draft memorandum circular (attached thereto) on the guidelines to be
followed in determining compliance with the Filipino ownership requirement in public utilities under Section
11, Article XII of the Constitution pursuant to the Court's directive in the Gamboa Decision.7
On November 9, 2012, the SEC held the scheduled dialogue and more than 100 representatives from
various organizations, government agencies, the academe and the private sector attended. 8
On January 8, 2013, the SEC received a copy of the Entry of Judgment 9 from the Court certifying that
on October 18, 2012, the Gamboa Decision had become final and executory.10
On March 25, 2013, the SEC posted another Notice in its website soliciting from the public comments and
suggestions on the draft guidelines.11
On April 22, 2013, petitioner Atty. Jose M. Roy III ("Roy") submitted his written comments on the draft
guidelines.12
On May 20, 2013, the SEC, through respondent Chairperson Teresita J. Herbosa, issued SEC-MC No. 8
entitled "Guidelines on Compliance with the Filipino-Foreign Ownership Requirements Prescribed in the
Constitution and/or Existing Laws by Corporations Engaged in Nationalized and Partly Nationalized
Activities." It was published in the Philippine Daily Inquirer and the Business Mirror on May 22,
2013.13Section 2 of SEC-MC No. 8 provides: chanRoblesvirtualLawlibrary
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership
requirement. For purposes of determining compliance therewith, the required percentage of Filipino
ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in
the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to
vote in the election of directors.
Corporations covered by special laws which provide specific citizenship requirements shall comply with the
provisions of said law.14
On June 10, 2013, petitioner Roy, as a lawyer and taxpayer, filed the Petition, 15 assailing the validity of SEC-
MC No. 8 for not conforming to the letter and spirit of the Gamboa Decision and Resolution and for having
been issued by the SEC with grave abuse of discretion. Petitioner Roy seeks to apply the 60-40 Filipino
ownership requirement separately to each class of shares of a public utility corporation, whether common,
preferred nonvoting, preferred voting or any other class of shares. Petitioner Roy also questions the ruling of
the SEC that respondent Philippine Long Distance Telephone Company ("PLDT") is compliant with the
constitutional rule on foreign ownership. He prays that the Court declare SEC-MC No. 8 unconstitutional and
direct the SEC to issue new guidelines regarding the determination of compliance with Section 11, Article XII
of the Constitution in accordance with Gamboa.
Wilson C. Gamboa, Jr.,16 Daniel V. Cartagena, John Warren P. Gabinete, Antonio V. Pesina, Jr., Modesto
Martin Y. Mamon III, and Gerardo C. Erebaren ("intervenors Gamboa, et al.") filed a Motion for Leave to File
Petition-in-Intervention17 on July 30, 2013, which the Court granted. The Petition-in-Intervention 18filed by
intervenors Gamboa, et al. mirrored the issues, arguments and prayer of petitioner Roy.
On September 5, 2013, respondent PLDT filed its Comment (on the Petition dated 10 June 2013). 19 PLDT
posited that the Petition should be dismissed because it violates the doctrine of hierarchy of courts as there
are no compelling reasons to invoke the Court's original jurisdiction; it is prematurely filed because
petitioner Roy failed to exhaust administrative remedies before the SEC; the principal actions/remedies
of mandamus and declaratory relief are not within the exclusive and/or original jurisdiction of the Court; the
petition for certiorari is an inappropriate remedy since the SEC issued SEC-MC No. 8 in the exercise of
its quasi-legislative power; it deprives the necessary and indispensable parties of their constitutional right to
due process; and the SEC merely implemented the dispositive portion of the Gamboa Decision.
On September 20, 2013, respondents Chairperson Teresita Herbosa and SEC filed their Consolidated
Comment.20 They sought the dismissal of the petitions on the following grounds: (1) the petitioners do not
possess locus standi to assail the constitutionality of SEC-MC No. 8; (2) a petition for certiorari under Rule
65 is not the appropriate and proper remedy to assail the validity and constitutionality of the SEC-MC No. 8;
(3) the direct resort to the Court violates the doctrine of hierarchy of courts; (4) the SEC did not abuse its
discretion; (5) on PLDT's compliance with the capital requirement as stated in the Gamboaruling, the
petitioners' challenge is premature considering that the SEC has not yet issued a definitive ruling thereon.
On October 22, 2013, PLDT filed its Comment (on the Petition-in-Intervention dated 16 July 2013).21PLDT
adopted the position that intervenors Gamboa, et al. have no standing and are not the proper party to
question the constitutionality of SEC-MC No. 8; they are in no position to assail SEC-MC No. 8 considering
that they did not participate in the public consultations or give comments thereon; and their Petition-in-
Intervention is a disguised motion for reconsideration of the Gamboa Decision and Resolution.
On May 7, 2014, Petitioner Roy and intervenors Gamboa, et al.22 filed their Joint Consolidated Reply with
Motion for Issuance of Temporary Restraining Order.23
On May 22, 2014, PLDT filed its Rejoinder [To Petitioner and Petitioners-in-Intervention's Joint Consolidated
Reply dated 7 May 2014] and Opposition [To Petitioner and Petitioners-in-Intervention's Motion for Issuance
of a Temporary Restraining Order dated 7 May 2014].24
On June 18, 2014, the Philippine Stock Exchange, Inc. ("PSE") filed its Motion to Intervene with Leave of
Court25 and its Comment-in Intervention.26 The PSE alleged that it has standing to intervene as the primary
regulator of the stock exchange and will sustain direct injury should the petitions be granted. The PSE
argued that in the Gamboa ruling, "capital" refers only to shares entitled to vote in the election of directors,
and excludes those not so entitled; and the dispositive portion of the decision is the controlling factor that
determines and settles the questions presented in the case. The PSE further argued that adopting a new
interpretation of Section 11, Article XII of the Constitution violates the policy of conclusiveness of
judgment, stare decisis, and the State's obligation to maintain a stable and predictable legal framework for
foreign investors under international treaties; and adopting a new definition of "capital" will prove disastrous
for the Philippine stock market. The Court granted the Motion to Intervene filed by PSE. 27
PLDT filed its Consolidated Memorandum28 on February 10, 2015.
On June 1, 2016, Shareholders' Association of the Philippines, Inc. 29 ("SHAREPHIL") filed an Omnibus Motion
[1] For Leave to Intervene; and [2] To Admit Attached Comment-in-Intervention. 30 The Court granted the
Omnibus Motion of SHAREPHIL.31
On June 30, 2016, petitioner Roy filed his Opposition and Reply to Interventions of Philippine Stock
Exchange and Sharephil.32 Intervenors Gamboa, et al. then filed on September 14, 2016, their Reply (to
Interventions by Philippine Stock Exchange and Sharephil).33
The Issues
The twin issues of the Petition and the Petition-in-Intervention are: (1) whether the SEC gravely abused its
discretion in issuing SEC-MC No. 8 in light of the Gamboa Decision and Gamboa Resolution, and (2) whether
the SEC gravely abused its discretion in ruling that PLDT is compliant with the constitutional limitation on
foreign ownership. chanroblesvirtuallawlibrary
The Court's Ruling
At the outset, the Court disposes of the second issue for being without merit. In its Consolidated Comment
dated September 13, 2013,34 the SEC already clarified that it "has not yet issued a definitive ruling anent
PLDT's compliance with the limitation on foreign ownership imposed under the Constitution and relevant
laws [and i]n fact, a careful perusal of x x x SEC-MC No. 8 readily reveals that all existing covered
corporations which are non-compliant with Section 2 thereof were given a period of one (1) year from the
effectivity of the same within which to comply with said ownership requirement. x x x." 35 Thus, in the
absence of a definitive ruling by the SEC on PLDT's compliance with the capital requirement pursuant to
the Gamboa Decision and Resolution, any question relative to the inexistent ruling is premature.
Also, considering that the Court is not a trier of facts and is in no position to make a factual determination of
PLDT's compliance with the constitutional provision under review, the Court can only resolve the first issue,
which is a pure question of law. However, before the Court tackles the first issue, it has to rule on certain
procedural challenges that have been raised. chanroblesvirtuallawlibrary
The Procedural Issues
The Court may exercise its power of judicial review and take cognizance of a case when the following
specific requisites are met: (1) there is an actual case or controversy calling for the exercise of judicial
power; (2) the petitioner has standing to question the validity of the subject act or issuance, i.e., he has a
personal and substantial interest in the case that he has sustained, or will sustain, direct injury as a result of
the enforcement of the act or issuance; (3) the question of constitutionality is raised at the earliest
opportunity; and (4) the constitutional question is the very lis mota of the case.36
The first two requisites of judicial review are not met.
Petitioners' failure to sufficiently allege, much less establish, the existence of the first two requisites for the
exercise of judicial review warrants the perfunctory dismissal of the petitions.
a. No actual controversy.
Regarding the first requisite, the Court in Belgica v. Ochoa37 stressed anew that an actual case or
controversy is one which involves a conflict of legal rights, an assertion of opposite legal claims, susceptible
of judicial resolution as distinguished from a hypothetical or abstract difference or dispute since the courts
will decline to pass upon constitutional issues through advisory opinions, bereft as they are of authority to
resolve hypothetical or moot questions. Related to the requirement of an actual case or controversy is the
requirement of "ripeness", and a question is ripe for adjudication when the act being challenged has a direct
adverse effect on the individual challenging it.
Petitioners have failed to show that there IS an actual case or controversy which is ripe for adjudication.
The Petition and the Petition-in-Intervention identically allege: chanRoblesvirtualLawlibrary
3. The standing interpretation of the SEC found in MC8 practically encourages circumvention of the 60-40
ownership rule by impliedly allowing the creation of several classes of voting shares with different degrees of
beneficial ownership over the same, but at the same time, not imposing a 40% limit on foreign ownership of
the higher yielding stocks.38
4. For instance, a situation may arise where a corporation may issue several classes of shares of stock, one
of which are common shares with rights to elect directors, another are preferred shares with rights to elect
directors but with much lesser entitlement to dividends, and still another class of preferred shares with no
rights to elect the directors and even less dividends. In this situation, the corporation may issue common
shares to foreigners amounting to forty percent (40%) of the outstanding capital stock and issue preferred
shares entitled to vote the directors of the corporation to Filipinos consisting of 60% 39 percent (sic) of the
outstanding capital stock entitled to vote. Although it may appear that the 60-40 rule has been complied
with, the beneficial ownership of the corporation remains with the foreign stockholder since the Filipino
owners of the preferred shares have only a miniscule share in the dividends and profit of the corporation.
Plainly, this situation runs contrary to the Constitution and the ruling of this x x x Court. 40
Petitioners' hypothetical illustration as to how SEC-MC No. 8 "practically encourages circumvention of the
60-40 ownership rule" is evidently speculative and fraught with conjectures and assumptions. There is
clearly wanting specific facts against which the veracity of the conclusions purportedly following from the
speculations and assumptions can be validated. The lack of a specific factual milieu from which the petitions
originated renders any pronouncement from the Court as a purely advisory opinion and not a decision
binding on identified and definite parties and on a known set of facts.
Firstly, unlike in Gamboa, the identity of the public utility corporation, the capital of which is at issue, is
unknown. Its outstanding capital stock and the actual composition thereof in terms of numbers, classes,
preferences and features are all theoretical. The description "preferred shares with rights to elect directors
but with much lesser entitlement to dividends, and still another class of preferred shares with no rights to
elect the directors and even less dividends" is ambiguous. What are the specific dividend policies or
entitlements of the purported preferred shares? How are the preferred shares' dividend policies different
from those of the common shares? Why and how did the fictional public utility corporation issue those
preferred shares intended to be owned by Filipinos? What are the actual features of the foreign-owned
common shares which make them superior over those owned by Filipinos? How did it come to be that
Filipino holders of preferred shares ended up with "only a miniscule share in the dividends and profit of the
[hypothetical] corporation"? Any answer to any of these questions will, at best, be contingent, conjectural,
indefinite or anticipatory.
Secondly, preferred shares usually have preference over the common shares in the payment of dividends. If
most of the "preferred shares with rights to elect directors but with much lesser entitlement to dividends"
and the other "class of preferred shares with no rights to elect the directors and even less dividends" are
owned by Filipinos, they stand to receive their dividend entitlement ahead of the foreigners, who are
common shareholders. For the common shareholders to have "bigger dividends" as compared to the
dividends paid to the preferred shareholders, which are supposedly predominantly owned by Filipinos, there
must still be unrestricted retained earnings of the fictional corporation left after payment of the dividends
declared in favor of the preferred shareholders. The fictional illustration does not even intimate how this
situation can be possible. No permutation of unrestricted retained earnings of the hypothetical corporation is
shown that makes the present conclusion of the petitioners achievable. Also, no concrete meaning to the
petitioners' claim of the Filipinos' "miniscule share in the dividends and profit of the [fictional] corporation" is
demonstrated.
Thirdly, petitioners fail to allege or show how their hypothetical illustration will directly and adversely affect
them. That is impossible since their relationship to the fictional corporation is a matter of guesswork.
From the foregoing, it is evident that the Court can only surmise or speculate on the situation or controversy
that the petitioners contemplate to present for judicial determination. Petitioners are likewise conspicuously
silent on the direct adverse impact to them of the implementation of SEC-MC No. 8. Thus, the petitions must
fail because the Court is barred from rendering a decision based on assumptions, speculations, conjectures
and hypothetical or fictional illustrations, more so in the present case which is not even ripe for decision.
b. No locus standi.
The personal and substantial interest that enables a party to have legal standing is one that is
both material, an interest in issue and to be affected by the government action, as distinguished from mere
interest in the issue involved, or a mere incidental interest, and real, which means a present substantial
interest, as distinguished from a mere expectancy or a future, contingent, subordinate, or consequential
interest.41
cralawred
As to injury, the party must show that (1) he will personally suffer some actual or threatened injury because
of the allegedly illegal conduct of the government; (2) the injury is fairly traceable to the challenged action;
and (3) the injury is likely to be redressed by a favorable action. 42 If the asserted injury is more imagined
than real, or is merely superficial and insubstantial, an excursion into constitutional adjudication by the
courts is not warranted.43
Petitioners have no legal standing to question the constitutionality of SEC-MC No. 8.
To establish his standing, petitioner Roy merely claimed that he has standing to question SEC-MC No. 8 "as
a concerned citizen, an officer of the Court and as a taxpayer" as well as "the senior law partner of his own
law firm[, which] x x x is a subscriber of PLDT."44 On the other hand, intervenors Gamboa, et al.allege, as
basis of their locus standi, their "[b]eing lawyers and officers of the Court" and "citizens x x x and
taxpayers."45
The Court has previously emphasized that the locus standi requisite is not met by the expedient invocation
of one's citizenship or membership in the bar who has an interest in ensuring that laws and orders of the
Philippine government are legally and validly issued as these supposed interests are too general, which are
shared by other groups and by the whole citizenry. 46 Per their allegations, the personal interest invoked by
petitioners as citizens and members of the bar in the validity or invalidity of SEC-MC No. 8 is at best
equivocal, and totally insufficient.
Petitioners' status as taxpayers is also of no moment. As often reiterated by the Court, a taxpayer's suit is
allowed only when the petitioner has demonstrated the direct correlation of the act complained of and the
disbursement of public funds in contravention of law or the Constitution, or has shown that the case involves
the exercise of the spending or taxing power of Congress.47 SEC-MC No. 8 does not involve an additional
expenditure of public funds and the taxing or spending power of Congress.
The allegation that petitioner Roy's law firm is a "subscriber of PLDT" is ambiguous. It is unclear whether his
law firm is a "subscriber" of PLDT's shares of stock or of its various telecommunication services. Petitioner
Roy has not identified the specific direct and substantial injury he or his law firm stands to suffer as
"subscriber of PLDT" as a result of the issuance of SEC-MC No. 8 and its enforcement.
As correctly observed by respondent PLDT, "(w]hether or not the constitutionality of SEC-MC No. 8 is
upheld, the rights and privileges of all PLDT subscribers, as with all the rest of subscribers of other
corporations, are necessarily and equally preserved and protected. Nothing is added [to] or removed from a
PLDT subscriber in terms of the extent of his or her participation, relative to what he or she had originally
enjoyed from the beginning. In the most practical sense, a PLDT subscriber loses or gains nothing in the
event that SEC-MC No. 8 is either sustained or struck down by [the Court]." 48
More importantly, the issue regarding PLDT's compliance with Section 11, Article XII of the Constitution has
been earlier ruled as premature and beyond the Court's jurisdiction. Thus, petitioner Roy's allegation that his
law firm is a "subscriber of PLDT" is insufficient to clothe him with locus standi.
Petitioners' cursory incantation of "transcendental importance x x x of the rules on foreign ownership of

corporations or entities vested with public interest"49 does not automatically justify the brushing aside of the
strict observance of the requisites for the Court's exercise of judicial review. An indiscriminate disregard of
the requisites every time "transcendental or paramount importance or significance" is invoked would result
in an unacceptable corruption of the settled doctrine of locus standi, as every worthy cause is an interest
shared by the general public.50
In the present case, the general and equivocal allegations of petitioners on their legal standing do not justify
the relaxation of the locus standi rule. While the Court has taken an increasingly liberal approach to the rule
of locus standi, evolving from the stringent requirements of personal injury to the broader transcendental
importance doctrine, such liberality is not to be abused.51
The Rule on the Hierarchy of Courts has been violated.
The Court in Bañez, Jr. v. Concepcion52 stressed that: chanRoblesvirtualLawlibrary
The Court must enjoin the observance of the policy on the hierarchy of courts, and now affirms that the
policy is not to be ignored without serious consequences. The strictness of the policy is designed to shied the
Court from having to deal with causes that are also well within the competence of the lower courts, and thus
leave time to the Court to deal with the more fundamental and more essential tasks that the Constitution
has assigned to it. The Court may act on petitions for the extraordinary writs of certiorari, prohibition
and mandamus only when absolutely necessary or when serious and important reasons exist to justifY an
exception to the policy. x x x
x x x Where the issuance of an extraordinary writ is also within the competence of the Court of Appeals or a
Regional Trial Court, it is in either of these courts that the specific action for the writ's procurement must be
presented. This is and should continue to be the policy in this regard, a policy that courts and lawyers must
strictly observe. x x x53
Petitioners' invocation of "transcendental importance" is hollow and does not merit the relaxation of the rule
on hierarchy of courts. There being no special, important or compelling reason that justified the direct filing
of the petitions in the Court in violation of the policy on hierarchy of courts, their outright dismissal on this
ground is further warranted.54
The petitioners failed to implead indispensable parties.
The cogent submissions of the PSE in its Comment-in-Intervention dated June 16, 2014 55 and SHAREPHIL in
its Omnibus Motion [1] For Leave to Intervene; and [2] To Admit Attached Comment-in-Intervention dated
May 30, 201656 demonstrate how petitioners should have impleaded not only PLDT but all other corporations
in nationalized and partlynationalized industries because the propriety of the SEC's enforcement of the
Court's interpretation of "capital" through SEC-MC No. 8 affects them as well.
Under Section 3, Rule 7 of the Rules of Court, an indispensable party is a party-in-interest without whom
there can be no final determination of an action. Indispensable parties are those with such a material and
direct interest in the controversy that a final decree would necessarily affect their rights, so that the court
cannot proceed without their presence.57 The interests of such indispensable parties in the subject matter of
the suit and the relief are so bound with those of the other parties that their legal presence as parties to the
proceeding is an absolute necessity and a complete and efficient determination of the equities and rights of
the parties is not possible if they are not joined.58
Other than PLDT, the petitions failed to join or implead other public utility corporations subject to the same
restriction imposed by Section 11, Article XII of the Constitution. These corporations are in danger of losing
their franchise and property if they are found not compliant with the restrictive interpretation of the
constitutional provision under review which is being espoused by petitioners. They should be afforded due
notice and opportunity to be heard, lest they be deprived of their property without due process.
Not only are public utility corporations other than PLDT directly and materially affected by the outcome of
the petitions, their shareholders also stand to suffer in case they will be forced to divest their shareholdings
to ensure compliance with the said restrictive interpretation of the term "capital". As explained by
SHAREPIDL, in five corporations alone, more than Php158 Billion worth of shares must be divested by
foreign shareholders and absorbed by Filipino investors if petitioners' position is upheld. 59
Petitioners' disregard of the rights of these other corporations and numerous shareholders constitutes
another fatal procedural flaw, justifYing the dismissal of their petitions. Without giving all of them their
day in court, they will definitely be deprived of their property without due process of law.
During the deliberations, Justice Velasco stressed on the foregoing procedural objections to the granting of
the petitions; and Justice Bersamin added that the special civil action for certiorari and prohibition is not the
proper remedy to assail SEC-MC No. 8 because it was not issued under the adjudicatory or quasi-judicial
functions of the SEC.chanroblesvirtuallawlibrary
The Substantive Issue
The only substantive issue that the petitions assert is whether the SEC's issuance of SEC-MC No. 8 is tainted
with grave abuse of discretion.
The Court holds that, even if the resolution of the procedural issues were conceded in favor of petitioners,
the petitions, being anchored on Rule 65, must nonetheless fail because the SEC did notcommit grave
abuse of discretion amounting to lack or excess of jurisdiction when it issued SEC-MC No. 8. To the
contrary, the Court finds SEC-MC No. 8 to have been issued in fealty to the Gamboa Decision and
Resolution.
The ratio in the Gamboa Decision and Gamboa Resolution.
To determine what the Court directed the SEC to do - and therefore resolve whether what the SEC did
amounted to grave abuse of discretion - the Court resorts to the decretal portion of the GamboaDecision, as
this is the portion of the decision that a party relies upon to determine his or her rights and duties, 60viz:
WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section II, Article XII of the
I987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the
present case only to common shares, and not to the total outstanding capital stock (common and non-voting
preferred shares). Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to
apply this definition of the term "capital" in determining the extent of allowable foreign ownership in
respondent Philippine Long Distance Telephone Company, and if there is a violation of Section II, Article XII
of the Constitution, to impose the appropriate sanctions under the law. 61
In turn, the Gamboa Resolution stated: chanRoblesvirtualLawlibrary
In any event, the SEC has expressly manifested62 that it will abide by the Court's decision and defer to the
Court's definition of the term "capital" in Section II, Article XII of the Constitution. Further, the SEC entered
its special appearance in this case and argued during the Oral Arguments, indicating its submission to the
Court's jurisdiction. It is clear, therefore, that there exists no legal impediment against the proper and
immediate implementation of the Court's directive to the SEC.
xxxx
x x x The dispositive portion of the Court's ruling is addressed not to PLDT but solely to the SEC,
which is the administrative agency tasked to enforce the 60-40 ownership requirement in favor
of Filipino citizens in Section 11, Article XII of the Constitution. 63
To recall, the sole issue in the Gamboa case was: "whether the term 'capital' in Section 11, Article XII of the
Constitution refers to the total common shares only or to the total outstanding capital stock (combined total
of common and non-voting preferred shares) of PLDT, a public utility." 64
The Court directly answered the Issue and consistently defined the term "capital" as follows: chanRoblesvirtualLawlibrary
x x x The term "capital" in Section 11, Article XII of the Constitution refers only to shares of stock entitled to
vote in the election of directors, and thus in the present case only to common shares, and not to the total
outstanding capital stock comprising both common and non voting preferred shares.
xxxx
Considering that common shares have voting rights which translate to control, as opposed to preferred
shares which usually have no voting rights, the term "capital" in Section 11, Article XII of the Constitution
refers only to common shares. However, if the preferred shares also have the right to vote in the election of
directors, then the term "capital" shall include such preferred shares because the right to participate in the
control or management of the corporation is exercised through the right to vote in the election of
directors. In short, the term "capital" in Section 11, Article XII of the Constitution refers only to
shares of stock that can vote in the election of directors. 65
The decretal portion of the Gamboa Decision follows the definition of the term "capital" in the body of the
decision, to wit: "x x x we x x x rule that the term 'capital' in Section 11, Article XII of the 1987 Constitution
refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only
to common shares, and not to the total outstanding capital stock (common and non-voting preferred
shares)."66
The Court adopted the foregoing definition of the term "capital" in Section 11, Article XII of the 1987
Constitution in furtherance of "the intent and letter of the Constitution that the 'State shall develop a self-
reliant and independent national economy effectively controlled by Filipinos' [because a] broad definition
unjustifiably disregards who owns the all-important voting stock, which necessarily equates to control of the
public utility."67 The Court, recognizing that the provision is an express recognition of the sensitive and vital
position of public utilities both in the national economy and for national security, also pronounced that the
evident purpose of the citizenship requirement is to prevent aliens from assuming control of public utilities,
which may be inimical to the national interest.68 Further, the Court noted that the foregoing interpretation is
consistent with the intent of the framers of the Constitution to place in the hands of Filipino citizens the
control and management of public utilities; and, as revealed in the deliberations of the Constitutional
Commission, "capital" refers to the voting stock or controlling interest of a corporation.69
In this regard, it would be apropos to state that since Filipinos own at least 60% of the outstanding shares
of stock entitled to vote directors, which is what the Constitution precisely requires, then the Filipino
stockholders control the corporation, i.e., they dictate corporate actions and decisions, and they have all
the rights of ownership including, but not limited to, offering certain preferred shares that may have greater
economic interest to foreign investors - as the need for capital for corporate pursuits (such as expansion),
may be good for the corporation that they own. Surely, these "true owners" will not allow any dilution of
their ownership and control if such move will not be beneficial to them.
As owners of the corporation, the economic benefits will necessarily accrue to them. There is thus no logical
reason why Filipino shareholders will allow foreigners to have greater economic benefits than them. It is
illogical to speculate that they will create shares which have features that will give greater economic
interests or benefits than they are holding and not benefit from such offering, or that they will allow
foreigners to profit more than them from their own corporation - unless they are dummies. But,
Commonwealth Act No. 108, the Anti-Dummy Law, is NOT in issue in these petitions. Notably, even if the
shares of a particular public utility were owned 100% Filipino, that does not discount the possibility of a
dummy situation from arising. Hence, even if the 60-40 ownership in favor of Filipinos rule is applied
separately to each class of shares of a public utility corporation, as the petitioners insist, the rule can easily
be side-stepped by a dummy relationship. In other words, even applying the 60-40 Filipino foreign
ownership rule to each class of shares will not assure the lofty purpose enunciated by petitioners.
The Court observed further in the Gamboa Decision that reinforcing this interpretation of the term "capital",
as referring to interests or shares entitled to vote, is the definition of a Philippine national in the Foreign
Investments Act of 1991 ("FIA"), which is explained in the Implementing Rules and Regulations of the FIA
("FIA-IRR"). The FIA-IRR provides: chanRoblesvirtualLawlibrary
Compliance with the required Filipino ownership of a corporation shall be determined on the basis of
outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled to vote
are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate
voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to
aliens cannot be considered held by Philippine citizens or Philippine nationals. 70
Echoing the FIA-IRR, the Court stated in the Gamboa Decision that: chanRoblesvirtualLawlibrary
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the Constitution. Full
beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting
rights, is required. The legal and beneficial ownership of 60 percent of the outstanding capital stock must
rest in the hands of Filipino nationals in accordance with the constitutional mandate. Otherwise, the
corporation is "considered as non-Philippine national[s]."
xxxx
The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of
Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, is constitutionally required for the
State's grant of authority to operate a public utility. x x x71
Was the definition of the term "capital" in Section 11, Article XII of the 1987 Constitution declared for the
first time by the Court in the Gamboa Decision modified in the Gamboa Resolution?
The Court is convinced that it was not. The Gamboa Resolution consists of 51 pages (excluding the
dissenting opinions of Associate Justices Velasco and Abad). For the most part of the Gamboa Resolution,
the Court, after reviewing SEC and DOJ72 Opinions as well as the provisions of the FIA and its predecessor
statutes,73 reiterated that both the Voting Control Test and the Beneficial Ownership Test must be applied to
determine whether a corporation is a "Philippine national"74 and that a "Philippine national," as defined in the
FIA and all its predecessor statutes, is "a Filipino citizen, or a domestic corporation "at least sixty
percent (60%) of the capital stock outstanding and entitled to vote," is owned by Filipino citizens. A
domestic corporation is a "Philippine national" only if at least 60% of its voting stock is owned by Filipino
citizens."75 The Court also reiterated that, from the deliberations of the Constitutional Commission, it is
evident that the term "capital" refers to controlling interest of a corporation,76 and the framers of the
Constitution intended public utilities to be majority Filipino-owned and controlled.
The "Final Word" of the Gamboa Resolution put to rest the Court's interpretation of the term "capital", and
this is quoted verbatim, to wit:chanRoblesvirtualLawlibrary
XII.
Final Word
The Constitution expressly declares as State policy the development of an economy "effectively
controlled" by Filipinos. Consistent with such State policy, the Constitution explicitly reserves the
ownership and operation of public utilities to Philippine nationals, who are defined in the Foreign
Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60 percent of whose
capital with voting rights belongs to Filipinos. The FIA's implementing rules explain that "[f]or stocks to be
deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet
the required Filipino equity. Full beneficial ownership of stocks, coupled with appropriate voting
rights is essential." In effect, the FIA clarifies, reiterates and confirms the interpretation that the term
"capital" in Section 11, Article XII of the 1987 Constitution refers to shares with voting rights, as well as
with full beneficial ownership. This is precisely because the right to vote in the election of directors,
coupled with full beneficial ownership of stocks, translates to effective control of a corporation. 77
Everything told, the Court, in both the Gamboa Decision and Gamboa Resolution, finally settled with the
PIA's definition of "Philippine national" as expounded in the FIA-IRR in construing the term "capital" in
Section 11, Article XII of the 1987 Constitution.
The assailed SEC-MC No. 8.
The relevant provision in the assailed SEC-MC No. 8 IS Section 2, which provides: chanRoblesvirtualLawlibrary
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership
requirement. For purposes of determining compliance therewith, the required percentage of Filipino
ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in
the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to
vote in the election of directors.78
Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test or the controlling interest
requirement. In fact, Section 2 goes beyond requiring a 60-40 ratio in favor of Filipino nationals in
the voting stocks; it moreover requires the 60-40 percentage ownership in the total number of
outstanding shares of stock, whether voting or not. The SEC formulated SEC-MC No. 8 to adhere to
the Court's unambiguous pronouncement that "[f]ull beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights is required." 79 Clearly, SEC-MC No. 8 cannot be
said to have been issued with grave abuse of discretion.
A simple illustration involving Company X with three kinds of shares of stock, easily shows how compliance
with the requirements of SEC-MC No. 8 will necessarily result to full and faithful compliance with
the Gamboa Decision as well as the Gamboa Resolution.
The following is the composition of the outstanding capital stock of Company X: chanRoblesvirtualLawlibrary
100 common shares

100 Class A preferred shares (with right to elect directors)
100 Class B preferred shares (without right to elect directors)
SEC-MC No. 8 GAMBOA DECISION

(1) 60% (required percentage of "shares of stock entitled to vote in the
Filipino) applied to the total number of election of directors"80 (60% of the
outstanding shares of stock entitled to voting rights)
vote in the election of directors
If at least a total of 120 of common shares and Class A preferred shares (in any combination) are owned
and controlled by Filipinos, Company X is compliant with the 60% of the voting rights in favor of Filipinos
requirement of both SEC-MC No. 8 and the Gamboa Decision.
SEC-MC No. 8 GAMBOA DECISION/RESOLUTION

(2) 60% (required percentage of "Full beneficial ownership of 60
Filipino) applied to BOTH (a) the total percent of the outstanding capital
number of outstanding shares of stock, coupled with 60 percent of the
stock, entitled to vote in the election voting rights"81 or "Full beneficial
of directors; AND (b) the total number ownership of the stocks, coupled with
of outstanding shares of stock, appropriate voting rights x x x shares
whether or not entitled to vote in the with voting rights, as well as with full
election of directors. beneficial ownership"82
If at least a total of 180 shares of all the outstanding capital stock of Company X are owned and controlled
by Filipinos, provided that among those 180 shares a total of 120 of the common shares and Class A
preferred shares (in any combination) are owned and controlled by Filipinos, then Company X is compliant
with both requirements of voting rights and beneficial ownership under SEC-MC No. 8 and
the Gamboa Decision and Resolution.
From the foregoing illustration, SEC-MC No. 8 simply implemented, and is fully in accordance with,
While SEC-MC No. 8 does not expressly mention the Beneficial Ownership Test or full beneficial ownership of
stocks requirement in the FIA, this will not, as it does not, render it invalid meaning, it does not follow that
the SEC will not apply this test in determining whether the shares claimed to be owned by Philippine
nationals are Filipino, i.e., are held by them by mere title or in full beneficial ownership. To be sure, the SEC
takes its guiding lights also from the FIA and its implementing rules, the Securities Regulation Code
(Republic Act No. 8799; "SRC") and its implementing rules. 83
The full beneficial ownership test.
The minority justifies the application of the 60-40 Filipino-foreign ownership rule separately to each class of
shares of a public utility corporation in this fashion: chanRoblesvirtualLawlibrary
x x x The words "own and control," used to qualify the minimum Filipino participation in Section 11, Article
XII of the Constitution, reflects the importance of Filipinos having both the ability to influence the
corporation through voting rights and economic benefits. In other words, full ownership up to 60% of a
public utility encompasses both controland economic rights, both of which must stay in Filipino hands.
Filipinos, who own 60% of the controlling interest, must also own 60% of the economic interest in a
public utility.
x x x In mixed class or dual structured corporations, however, there is variance in the proportion of
stockholders' controlling interest visa-vis their economic ownership rights. This resulting variation is
recognized by the Implementing Rules and Regulations (IRR) of the Securities Regulation Code, which
defined beneficial ownership as that may exist either through voting power and/or through investment
returns. By using and/or in defining beneficial ownership, the IRR, in effect, recognizes a possible situation
where voting power is not commensurate to investment power.
The definition of "beneficial owner" or "beneficial ownership" in the Implementing Rules and Regulations of
the Securities Regulation Code ("SRC-IRR") is consistent with the concept of"full beneficial ownership" in the
FIA-IRR.
As defined in the SRC-IRR, "[b]eneficial owner or beneficial ownership means any person who, directly
or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares
voting power (which includes the power to vote or direct the voting of such security) and/or investment
returns or power (which includes the power to dispose of, or direct the disposition of such security) x x x." 84
While it is correct to state that beneficial ownership is that which may exist either through voting power
and/or investment returns, it does not follow, as espoused by the minority opinion, that the SRC-IRR, in
effect, recognizes a possible situation where voting power is not commensurate to investment power. That is
a wrong syllogism. The fallacy arises from a misunderstanding on what the definition is for. The "beneficial
ownership" referred to in the definition, while it may ultimately and indirectly refer to the overall ownership
of the corporation, more pertinently refers to the ownership of the share subject of the question: is it
Filipino-owned or not?
As noted earlier, the FIA-IRR states:chanRoblesvirtualLawlibrary
Compliance with the required Filipino ownership of a corporation shall be determined on the basis of
outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled to vote
are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal
title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or
transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals. 85
The emphasized portions in the foregoing provision is the equivalent of the so-called "beneficial ownership
test". That is all.
The term "full beneficial ownership" found in the FIA-IRR is to be understood in the context of the entire
paragraph defining the term "Philippine national". Mere legal title is not enough to meet the required Filipino
equity, which means that it is not sufficient that a share is registered in the name of a Filipino citizen or
national, i.e., he should also have full beneficial ownership of the share. If the voting right of a share held in
the name of a Filipino citizen or national is assigned or transferred to an alien, that share is not to be
counted in the determination of the required Filipino equity. In the same vein, if the dividends and other
fruits and accessions of the share do not accrue to a Filipino citizen or national, then that share is also to be
excluded or not counted.
In this regard, it is worth reiterating the Court's pronouncement in the Gamboa Decision, which is consistent
with the FIA-IRR, viz: chanRoblesvirtualLawlibrary
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights, is required. x x x
xxxx
The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of
Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, is constitutionally
required (or the State's grant of authority to operate a public utility. x x x.86
And the "Final Word" of the Gamboa Resolution is in full accord with the foregoing pronouncement of the
Court, to wit:chanRoblesvirtualLawlibrary
XII.
Final Word
x x x The FIA's implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with appropriate voting rights is essential."87
Given that beneficial ownership of the outstanding capital stock of the public utility corporation has to be
determined for purposes of compliance with the 60% Filipino ownership requirement, the definition in the
SRC-IRR can now be applied to resolve only the question of who is the beneficial owner or who has
beneficial ownership of each "specific stock" of the said corporation. Thus, if a "specific stock" is owned by a
Filipino in the books of the corporation, but the stock's voting power or disposing power belongs to a
foreigner, then that "specific stock" will not be deemed as "beneficially owned" by a Filipino.
Stated inversely, if the Filipino has the "specific stock's" voting power (he can vote the stock or direct
another to vote for him), or the Filipino has the investment power over the "specific stock" (he can dispose
of the stock or direct another to dispose it for him), or he has both (he can vote and dispose of the "specific
stock" or direct another to vote or dispose it for him), then such Filipino is the "beneficial owner" of that
"specific stock" and that "specific stock" is considered (or counted) as part of the 60% Filipino ownership of
the corporation. In the end, all those "specific stocks" that are determined to be Filipino (per definition of
"beneficial owner" or "beneficial ownership") will be added together and their sum must be equivalent to at
least 60% of the total outstanding shares of stock entitled to vote in the election of directors and at least
60% of the total number of outstanding shares of stock, whether or not entitled to vote in the election of
directors.
To reiterate, the "beneficial owner or beneficial ownership" definition in the SRC-IRR is understood only in
determining the respective nationalities of the outstanding capital stock of a public utility corporation in
order to determine its compliance with the percentage of Filipino ownership required by the Constitution.
The restrictive re-interpretation of "capital" as insisted by the petitioners is unwarranted.

Petitioners' insistence that the 60% Filipino equity requirement must be applied to each class of shares is
simply beyond the literal text and contemplation of Section 11, Article XII of the 1987 Constitution, viz: chanRoblesvirtualLawlibrary
Sec. 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall
be granted except to citizens of the Philippines or to corporations or associations organized under the laws
of the Philippines at least sixty per centum or whose capital is owned by such citizens, nor shall such
franchise, certificate or authorization be exclusive in character or for a longer period than fifty years. Neither
shall any such franchise or right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general public. The participation of foreign investors
in the governing body of any public utility enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such corporation or association must be citizens of
the Philippines.
As worded, effective control by Filipino citizens of a public utility is already assured in the provision. With
respect to a stock corporation engaged in the business of a public utility, the constitutional provision
mandates three safeguards: (1) 60% of its capital must be owned by Filipino citizens; (2) participation of
foreign investors in its board of directors is limited to their proportionate share in its capital; and (3) all its
executive and managing officers must be citizens of the Philippines.
In the exhaustive review made by the Court in the Gamboa Resolution of the deliberations of the
Constitutional Commission, the opinions of the framers of the 1987 Constitution, the opinions of the SEC
and the DOJ as well as the provisions of the FIA, its implementing rules and its predecessor statutes, the
intention to apply the voting control test and the beneficial ownership test was not mentioned in reference
to "each class of shares." Even the Gamboa Decision was silent on this point.
To be sure, the application of the 60-40 Filipino-foreign ownership requirement separately to each class of
shares, whether common, preferred non-voting, preferred voting or any other class of shares fails to
understand and appreciate the nature and features of stocks as financial instruments. 88
There are basically only two types of shares or stocks, i.e., common stock and preferred stock. However, the
classes and variety of shares that a corporation may issue are dictated by the confluence of the
corporation's financial position and needs, business opportunities, short-term and long term targets, risks
involved, to name a few; and they can be classified and re-classified from time to time. With respect to
preferred shares, there are cumulative preferred shares, non-cumulative preferred shares, convertible
preferred shares, participating preferred shares.
Because of the different features of preferred shares, it is required that the presentation and disclosure of
these financial instruments in financial statements should be in accordance with the substance of the
contractual arrangement and the definitions of a financial liability, a financial asset and an equity
instrument.89
Under IAS90 32.16, a financial instrument is an equity instrument only if (a) the instrument includes no
contractual obligation to deliver cash or another financial asset to another entity, and (b) if the instrument
will or may be settled in the issuer's own equity instruments, it is either: (i) a non derivative that includes
no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or (ii) a
derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial
asset for a fixed number of its own equity instruments. 91
The following are illustrations of how preferred shares should be presented and disclosed: chanRoblesvirtualLawlibrary
Illustration - preference shares
If an entity issues preference (preferred) shares that pay a fixed rate of dividend and that have a mandatory
redemption feature at a future date, the substance is that they are a contractual obligation to deliver cash
and, therefore, should be recognized as a liability. [IAS 32.18(a)] In contrast, preference shares that do not
have a fixed maturity, and where the issuer does not have a contractual obligation to make any payment
are equity. In this example even though both instruments are legally termed preference shares they have
different contractual terms and one is a financial liability while the other is equity.
Illustration - issuance of fixed monetary amount of equity instruments
A contractual right or obligation to receive or deliver a number of its own shares or other equity instruments
that varies so that the fair value of the entity's own equity instruments to be received or delivered equals
the fixed monetary amount of the contractual right or obligation is a financial liability. [IAS 32.20]
Illustration - one party bas a choice over bow an instrument is settled
When a derivative financial instrument gives one party a choice over how it is settled (for instance, the
issuer or the holder can choose settlement net in cash or by exchanging shares for cash), it is a financial
asset or a financial liability unless all of the settlement alternatives would result in it being an equity
instrument. [IAS 32.26]92
The fact that from an accounting standpoint, the substance or essence of the financial instrument is the key
determinant whether it should be categorized as a financial liability or an equity instrument, there is no
compelling reason why the same treatment may not be recognized from a legal perspective. Thus, to require
Filipino shareholders to acquire preferred shares that are substantially debts, in order to meet the
"restrictive" Filipino ownership requirement that petitioners espouse, may not bode well for the Philippine
corporation and its Filipino shareholders.
Parenthetically, given the innumerable permutations that the types and classes of stocks may take,
requiring the SEC and other government agencies to keep track of the ever-changing capital classes of
corporations will be impracticable, if not downright impossible. And the law does not require the impossible.
(Lex non cogit ad impossibilia.)93
That stock corporations are allowed to create shares of different classes with varying features is a flexibility
that is granted, among others, for the corporation to attract and generate capital (funds) from both local
and foreign capital markets. This access to capital - which a stock corporation may need for expansion, debt
relief/repayment, working capital requirement and other corporate pursuits - will be greatly eroded with
further unwarranted limitations that are not articulated in the Constitution. The intricacies and delicate
balance between debt instruments (liabilities) and equity (capital) that stock corporations need to calibrate
to fund their business requirements and achieve their financial targets are better left to the judgment of
their boards and officers, whose bounden duty is to steer their companies to financial stability and
profitability and who are ultimately answerable to their shareholders.
Going back to the illustration above, the restrictive meaning of the term "capital" espoused by petitioners
will definitely be complied with if 60% of each of the three classes of shares of Company X, consisting of 100
common shares, 100 Class A preferred shares (with right to elect directors) and 100 Class B preferred
shares (without right to elect directors), is owned by Filipinos. However, what if the 60% Filipino ownership
in each class of preferred shares, i.e., 60 Class A preferred shares and 60 Class B preferred shares, is not
fully subscribed or achieved because there are not enough Filipino takers? Company X will be deprived of
capital that would otherwise be accessible to it were it not for this unwarranted "restrictive" meaning of
"capital".
The fact that all shares have the right to vote in 8 specific corporate actions as provided in Section 6 of the
Corporation Code does not per se justify the favorable adoption of the restrictive re-interpretation of
"capital" as the petitioners espouse. As observed in the Gamboa Decision, viz: chanRoblesvirtualLawlibrary
The Corporation Code of the Philippines classifies shares as common or preferred, thus: chanRoblesvirtualLawlibrary
Sec. 6. Classification of shares. The shares of stock of stock corporations may be divided into classes or
series of shares, or both, any of which classes or series of shares may have such rights, privileges or
restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as "preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares
which have complete voting rights. Any or all of the shares or series of shares may have a par value or have
no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and building and loan associations shall not be permitted to
issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets
of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as
may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided,
That preferred shares of stock may be issued only with a stated par value. The Board of Directors, where
authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or
any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate
thereof with the Securities and Exchange Commission.
xxxx
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional
or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share
shall be equal in all respects to every other share.
Where the articles of incorporation provide for non voting shares in the cases allowed by this Code, the
holders of such shares shall nevertheless be entitled to vote on the following matters: cralawlawlibrary
1. Amendment of the articles of incorporation; ChanRoblesVirtualawlibrary
2. Adoption and amendment of by-laws; ChanRoblesVirtualawlibrary
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
property;ChanRoblesVirtualawlibrary
4. Incurring, creating or increasing bonded indebtedness; ChanRoblesVirtualawlibrary
5. Increase or decrease of capital stock; ChanRoblesVirtualawlibrary
6. Merger or consolidation of the corporation with another corporation or other corporations; ChanRoblesVirtualawlibrary
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular
corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.
Indisputably, one of the rights of a stockholder is the right to participate in the control or management of
the corporation. This is exercised through his vote in the election of directors because it is the board of
directors that controls or manages the corporation. In the absence of provisions in the articles of
incorporation denying voting rights to preferred shares, preferred shares have the same voting rights as
common shares. However, preferred shareholders are often excluded from any control, that is, deprived of
the right to vote in the election of directors and on other matters, on the theory that the preferred
shareholders are merely investors in the corporation for income in the same manner as bondholders. In fact,
under the Corporation Code only preferred or redeemable shares can be deprived of the right to vote.
Common shares cannot be deprived of the right to vote in any corporate meeting, and any provision in the
articles of incorporation restricting the right of common shareholders to vote is invalid.
Considering that common shares have voting rights which translate to control, as opposed to preferred
shares which usually have no voting rights, the term "capital" in Section 11, Article XII of the Constitution
refers only to common shares. However, if the preferred shares also have the right to vote in the election of
directors, then the term "capital" shall include such preferred shares because the right to participate in the
control or management of the corporation is exercised through the right to vote in the election of
directors. In short, the term "capital" in Section 11, Article XII of the Constitution refers only to
shares of stock that can vote in the election of directors.
This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of
Filipino citizens the control and management of public utilities. As revealed in the deliberations of the
Constitutional Commission, "capital" refers to the voting stock or controlling interest of a corporation x x
x.94
The Gamboa Decision held that preferred shares are to be factored in only if they are entitled to vote in the
election of directors. If preferred shares have no voting rights, then they cannot elect members of the board
of directors, which wields control of the corporation. As to the right of non voting preferred shares to vote in
the 8 instances enumerated in Section 6 of the Corporation Code, the Gamboa Decision considered them
but, in the end, did not find them significant in resolving the issue of the proper interpretation of the word
"capital" in Section 11, Article XII of the Constitution.
Therefore, to now insist in the present case that preferred shares be regarded differently from their
unambiguous treatment in the Gamboa Decision is enough proof that the Gamboa Decision, which had
attained finality more than 4 years ago, is being drastically changed or expanded.
In this regard, it should be noted that the 8 corporate matters enumerated in Section 6 of the Corporation
Code require, at the outset, a favorable recommendation by the management to the board. As mandated by
Section 11, Article XII of the Constitution, all the executive and managing officers of a public utility company
must be Filipinos. Thus, the all-Filipino management team must first be convinced that any of the 8
corporate actions in Section 6 will be to the best interest of the company. Then, when the all-Filipino
management team recommends this to the board, a majority of the board has to approve the
recommendation and, as required by the Constitution, foreign participation in the board cannot exceed 40%
of the total number of board seats. Since the Filipino directors comprise the majority, they, if united, do not
even need the vote of the foreign directors to approve the intended corporate act. After approval by the
board, all the shareholders (with and without voting rights) will vote on the corporate action. The required
vote in the shareholders' meeting is 2/3 of the outstanding capital stock. 95 Given the super majority vote
requirement, foreign shareholders cannot dictate upon their Filipino counterpart. However, foreigners (if
owning at least a third of the outstanding capital stock) must agree with Filipino shareholders for the
corporate action to be approved. The 2/3 voting requirement applies to all corporations, given the
significance of the 8 corporate actions contemplated in Section 6 of the Corporation Code.
In short, if the Filipino officers, directors and shareholders will not approve of the corporate act, the
foreigners are helpless.
Allowing stockholders holding preferred shares without voting rights to vote in the 8 corporate matters
enumerated in Section 6 is an acknowledgment of their right of ownership. If the owners of preferred shares
without right to vote/elect directors are not allowed to vote in any of those 8 corporate actions, then they
will not be entitled to the appraisal right provided under Section 81 96 of the Corporation Code in the event
that they dissent in the corporate act. As required in Section 82, the appraisal right can only be exercised by
any stockholder who voted against the proposed action. Thus, without recognizing the right of every
stockholder to vote in the 8 instances enumerated in Section 6, the stockholder cannot exercise his appraisal
right in case he votes against the corporate action. In simple terms, the right to vote in the 8 instances
enumerated in Section 6 is more in furtherance of the stockholder's right of ownership rather than as a
mode of control.
As to financial interest, giving short-lived preferred or superior terms to certain classes or series of shares
may be a welcome option to expand capital, without the Filipino shareholders putting up additional
substantial capital and/or losing ownership and control of the company. For shareholders who are not keen
on the creation of those shares, they may opt to avail themselves of their appraisal right. As acknowledged
in the Gamboa Decision, preferred shareholders are merely investors in the company for income in the same
manner as bondholders. Without a lucrative package, including an attractive return of investment, preferred
shares will not be subscribed and the much-needed additional capital will be elusive. A too restrictive
definition of "capital", one which was never contemplated in the GamboaDecision, will surely have a
dampening effect on the business milieu by eroding the flexibility inherent in the issuance of preferred
shares with varying terms and conditions. Consequently, the rights and prerogatives of the owners of the
corporation will be unwarrantedly stymied.
Moreover, the restrictive interpretation of the term "capital" would have a tremendous impact on the country
as a whole and to all Filipinos.
The PSE's Comment-in-Intervention dated June 16, 201497 warns that: chanRoblesvirtualLawlibrary
80. [R]edefining "capital" as used in Section 11, Article XII of the 1987 Constitution and adopting the
supposed "Effective Control Test" will lead to disastrous consequences to the Philippine stock market.
81. Current data of the PSE show that, if the "Effective Control Test" were applied, the total value of shares
that would be deemed in excess of the foreign-ownership limits based on stock prices as of 30 April 2014
is One Hundred Fifty Nine Billion Six Hundred Thirty Eight Million Eight Hundred Forty Five
Thousand Two Hundred Six Pesos and Eighty Nine Cents (Php159,638,845,206.89).
82. The aforementioned value of investments would have to be discharged by foreign holders, and
consequently must be absorbed by Filipino investors. Needless to state, the lack of investments may lead to
shutdown of the affected enterprises and to immeasurable consequences to the Philippine economy. 98
In its Omnibus Motion [1] For Leave to Intervene; and [2] To Admit Attached Comment-in-Intervention
dated May 30, 2016,99 SHAREPHIL further warns that "[t]he restrictive re-interpretation of the term "capital"
will result in massive forced divestment of foreign stockholdings in Philippine corporations." 100SHAREPHIL
explains:chanRoblesvirtualLawlibrary
4.51. On 16 October 2012, Deutsche Bank released a Market Research Study, which analyzed the
implications of the ruling in Gamboa. The Market Research Study stated that: chanRoblesvirtualLawlibrary
"If this thinking is applied and becomes established precedent, it would significantly expand on the rules for
determining nationality in partially nationalized industries. If that were to happen, not only will PLDT's move
to issue the 150m voting prefs be inadequate to address the issue, a large number of listed companies with
similar capital structures could also be affected."
4.52. In five (5) companies alone, One Hundred Fifty Eight Billion Pesos (PhP158,000,000,000.00) worth of
shares will have to be sold by foreign shareholders in a forced divestment, if the obiter in Gamboa were to
be implemented. Foreign shareholders of PLDT will have to divest One Hundred Three Billion Eight Hundred
Sixty Million Pesos (PhP103,860,000,000.00) worth of shares.
a. Foreign shareholders of Globe Telecom will have to divest Thirty Eight Billion Two Hundred
Fifty Million Pesos (PhP38,250,000,000.00) worth of shares.
b. Foreign shareholders of Ayala Land will have to divest Seventeen Billion Five Hundred Fifty
Million Pesos (PhP17,550,000,000.00) worth of shares.
c. Foreign shareholders of ICTSI will have to divest Six Billion Four Hundred Ninety Million
Pesos (PhP6,490,000,000.00) worth of shares.
d. Foreign shareholders of MWC will have to divest Seven Billion Seven Hundred Fourteen
Million Pesos (PhP7,714,000,000.00) worth of shares.
4.53. Clearly, the local stock market which has an average value turn-over of Seven Billion Pesos cannot
adequately absorb the influx of shares caused by the forced divestment. As a result, foreign stockholders
will have to sell these shares at bargain prices just to comply with the Obiter.
4.54. These shares being part of the Philippine index, their forced divestment vis-a-vis the inability of the
local stock market to absorb these shares will necessarily bring immense downward pressure on the index. A
domino-effect implosion of the Philippine stock market and the Philippine economy, in general is not remote.
x x x.101
Petitioners have failed to counter or refute these submissions of the PSE and SHAREPHIL. These unrefuted
observations indicate to the Court that a restrictive interpretation - or rather, re-interpretation, of "capital",
as already defined with finality in the Gamboa Decision and Resolution - directly affects the well-being of the
country and cannot be labelled as "irrelevant and impertinent concerns x x x add[ing] burden [to] the
Court."102 These observations by the PSE103 and SHAREPHIL,104 unless refuted, must be considered by the
Court to be valid and sound.
The Court in Abacus Securities Corp. v. Ampil105 observed that: "[s]tock market transactions affect the
general public and the national economy. The rise and fall of stock market indices reflect to a considerable
degree the state of the economy. Trends in stock prices tend to herald changes in business conditions.
Consequently, securities transactions are impressed with public interest x x x." 106 The importance of the
stock market in the economy cannot simply be glossed over.
In view of the foregoing, the pronouncement of the Court in the Gamboa Resolution - the constitutional
requirement to apply uniformly and across the board to all classes of shares, regardless of nomenclature
and category, comprising the capital of a corporation107 - is clearly an obiter dictum that cannot override the
Court's unequivocal definition of the term "capital" in both the Gamboa Decision and Resolution.
Nowhere in the discussion of the definition of the term "capital" in Section 11, Article XII of the 1987
Constitution in the Gamboa Decision did the Court mention the 60% Filipino equity requirement to be
applied to each class of shares. The definition of "Philippine national" in the FIA and expounded in its IRR,
which the Court adopted in its interpretation of the term "capital", does not support such application. In fact,
even the Final Word of the Gamboa Resolution does not even intimate or suggest the need for a
clarification or re-interpretation.
To revisit or even clarify the unequivocal definition of the term "capital" as referring "only to shares of stock
entitled to vote in the election of directors" and apply the 60% Filipino ownership requirement to each class
of share is effectively and unwarrantedly amending or changing the Gamboa Decision and Resolution.
The Gamboa Decision and Resolution Doctrine did NOT make any definitive ruling that the 60% Filipino
ownership requirement was intended to apply to each class of share.
In Malayang Manggagawa ng Stayfast Phils., Inc. v. NLRC,108 the Court stated: chanRoblesvirtualLawlibrary
Where a petition for certiorari under Rule 65 of the Rules of Court alleges grave abuse of discretion,
the petitioner should establish that the respondent court or tribunal acted in a capricious,
whimsical, arbitrary or despotic manner in the exercise of its jurisdiction as to be equivalent to
lack of jurisdiction. This is so because "grave abuse of discretion" is well-defined and not an amorphous
concept that may easily be manipulated to suit one's purpose. In this connection, Yu v. Judge Reyes-Carpio,
is instructive:
The term "grave abuse of discretion" has a specific meaning. An act of a court or tribunal can only be
considered as with grave abuse of discretion when such act is done in a "capricious or whimsical exercise of
judgment as is equivalent to lack of jurisdiction." The abuse of discretion must be so patent and gross as to
amount to an "evasion of a positive duty or to a virtual refusal to perform a duty enjoined by law, or to act
at all in contemplation of law, as where the power is exercised in an arbitrary and despotic manner by
reason of passion and hostility." Furthermore, the use of a petition for certiorari is restricted only to "truly
extraordinary cases wherein the act of the lower court or quasi-judicial body is wholly void." From the
foregoing definition, it is clear that the special civil action of certiorari under Rule 65 can only strike an act
down for having been done with grave abuse of discretion if the petitioner could manifestly show that
such act was patent and gross. x x x.
The onus rests on petitioners to clearly and sufficiently establish that the SEC, in issuing SEC-MC No. 8,
acted in a capricious, whimsical, arbitrary or despotic manner in the exercise of its jurisdiction as to be
equivalent to lack of jurisdiction or that the SEC's abuse of discretion is so patent and gross as to amount to
an evasion of a positive duty or to a virtual refusal to perform a duty enjoined by law, or to act at all in
contemplation of law and the Gamboa Decision and Resolution. Petitioners miserably failed in this
respect.
The clear and unequivocal definition of "capital" in Gamboa has attained finality.
It is an elementary principle in procedure that the resolution of the court in a given issue as embodied in the
dispositive portion or fallo of a decision controls the settlement of rights of the parties and the questions,
notwithstanding statement in the body of the decision which may be somewhat confusing, inasmuch as the
dispositive part of a final decision is definite, clear and unequivocal and can be wholly given effect without
need of interpretation or construction.109
As explained above, the fallo or decretal/dispositive portions of both the Gamboa Decision and Resolution
are definite, clear and unequivocaL While there is a passage in the body of the Gamboa Resolution that
might have appeared contrary to the fallo of the Gamboa Decision - capitalized upon by petitioners to
espouse a restrictive re-interpretation of "capital" - the definiteness and clarity of the fallo of
the GamboaDecision must control over the obiter dictum in the Gamboa Resolution regarding the application
of the 60-40 Filipino-foreign ownership requirement to "each class of shares, regardless of differences in
voting rights, privileges and restrictions."
The final judgment as rendered is the judgment of the court irrespective of all seemingly contrary
statements in the decision because at the root of the doctrine that the premises must yield to the conclusion
is, side by side with the need of writing finis to litigations, the recognition of the truth that "the trained
intuition of the judge continually leads him to right results for which he is puzzled to give unimpeachable
legal reasons."110
Petitioners cannot, after Gamboa has attained finality, seek a belated correction or reconsideration of the
Court's unequivocal definition of the term "capital". At the core of the doctrine of finality of judgments is that
public policy and sound practice demand that, at the risk of occasional errors, judgments of courts should
become final at some definite date fixed by law and the very objects for which courts were instituted was to
put an end to controversies.111 Indeed, the definition of the term "capital" in the fallo of
the Gamboa Decision has acquired finality.
Because the SEC acted pursuant to the Court's pronouncements in both the Gamboa Decision
and Gamboa Resolution, then it could not have gravely abused its discretion. That portion found in the body
of the Gamboa Resolution which the petitioners rely upon is nothing more than an obiter dictum and the
SEC could not be expected to apply it as it was not - is not - a binding pronouncement of the Court.112
Furthermore, as opined by Justice Bersamin during the deliberations, the doctrine of immutability of
judgment precludes the Court from re examining the definition of "capital" under Section 11, Article XII of
the Constitution. Under the doctrine of finality and immutability of judgment, a decision that has acquired
finality becomes immutable and unalterable, and may no longer be modified in any respect, even if the
modification is meant to correct erroneous conclusions of fact and law, and even if the modification is made
by the court that rendered it or by the Highest Court of the land. Any act that violates the principle must be
immediately stricken down.113 The petitions have not succeeded in pointing to any exceptions to the doctrine
of finality of judgments, under which the present case falls, to wit: (1) the correction of clerical errors; (2)
the so-called nunc pro tunc entries which cause no prejudice to any party; (3) void judgments; and (4)
whenever circumstances transpire after the finality of the decision rendering its execution unjust and
inequitable.114
With the foregoing disquisition, the Court rules that SEC-MC No. 8 is not contrary to the Court's definition
and interpretation of the term "capital". Accordingly, the petitions must be denied for failing to show grave
abuse of discretion in the issuance of SEC-MC No. 8.
The petitions are second motions for Reconsideration, which are proscribed.
As Justice Bersamin further noted during the deliberations, the petitions are in reality second motions for
reconsideration prohibited by the Internal Rules of the Supreme Court.115 The parties, particularly
intervenors Gamboa, et al., could have filed a motion for clarification in Gamboa in order to fill in the
perceived shortcoming occasioned by the non-inclusion in the dispositive portion of the GamboaResolution of
what was discussed in the body.116 The statement in the fallo of the Gamboa Resolution to the effect that
"[n]o further pleadings shall be entertained" could not be a hindrance to a motion for clarification that
sought an unadulterated inquiry arising upon an ambiguity in the decision. 117
Closing
Ultimately, the key to nationalism is in the individual. Particularly for a public utility corporation or
association, whether stock or non-stock, it starts with the Filipino shareholder or member who, together with
other Filipino shareholders or members wielding 60% voting power, elects the Filipino director who, in turn,
together with other Filipino directors comprising a majority of the board of directors or trustees, appoints
and employs the all-Filipino management team. This is what is envisioned by the Constitution to
assure effective control by Filipinos. If the safeguards, which are already stringent, fail, i.e., a public utility
corporation whose voting stocks are beneficially owned by Filipinos, the majority of its directors are Filipinos,
and all its managing officers are Filipinos, is proalien (or worse, dummies), then that is not the fault or
failure of the Constitution. It is the breakdown of nationalism in each of the Filipino shareholders, Filipino
directors and Filipino officers of that corporation. No Constitution, no decision of the Court, no legislation, no
matter how ultranationalistic they are, can guarantee nationalism.
WHEREFORE, premises considered, the Court DENIES the Petition and Petition-in-Intervention.
SO ORDERED. ChanRoblesVirtualawlibrary
ROY III v. HERBOSA
Jose M. Roy III Vs Chairperson Teresita Herbosa, The Securities and Exchange Commission
and Philippine Long Distance Company
G.R. No. 207246
April 18, 2017
Facts:
Before the Court is the Motion for Reconsideration dated January 19, 2017 (the Motion)
filed by petitioner Jose M. Roy III (movant) seeking the reversal and setting aside of the
Decision dated November 22, 2016 (the Decision) which denied the movant's petition, and
declared that the Securities and Exchange Commission (SEC) did not commit grave abuse of
discretion in issuing Memorandum Circular No. 8, Series of 2013 (SEC-MC No. 8) as the
same was in compliance with, and in fealty to, the decision of the Court in Gamboa v.
Finance Secretary Teves (Gamboa Decision) and the resolution denying the Motion for
Reconsideration therein (Gamboa Resolution).
The Motion presents no compelling and new arguments to justify the reconsideration of the
Decision.
The Decision has already exhaustively discussed and directly passed upon these grounds.
Movant's petition was dismissed based on both procedural and substantive grounds.
Issue:
Whether or not SEC committed grave abuse of discretion amounting to lack or excess of
jurisdiction when it issued SEC-MC No. 8.
Held:
SEC did not commit grave abuse of discretion amounting to lack or excess of jurisdiction
when it issued SEC-MC No. 8. The Court finds SEC-MC No. 8 to have been issued in fealty to
Pursuant to the Court's constitutional duty to exercise judicial review, the Court has
conclusively found no grave abuse of discretion on the part of SEC in issuing SEC-MC No. 8.
The Decision has painstakingly explained why it considered as obiter dictum that
pronouncement in the Gamboa Resolution that the constitutional requirement on Filipino
ownership should "apply uniformly and across the board to all classes of shares, regardless
of nomenclature and category, comprising the capital of a corporation." The Court stated
that:
The fallo or decretal/dispositive portions of both the Gamboa Decision and Resolution are
definite, clear and unequivocal. While there is a passage in the body of the Gamboa
Resolution that might have appeared contrary to the fallo of the Gamboa Decision, the
definiteness and clarity of the fallo of the Gamboa Decision must control over the obiter
dictum in the Gamboa Resolution regarding the application of the 60-40 Filipino-foreign
ownership requirement to "each class of shares, regardless of differences in voting rights,
privileges and restrictions."
To the Court's mind and, as exhaustively demonstrated in the Decision, the dispositive
portion of the Gamboa Decision was in no way modified by the Gamboa Resolution.
The heart of the controversy is the interpretation of Section 11, Article XII of the
Constitution, which provides: "No franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except to citizens of the Philippines or
to corporations or associations organized under the laws of the Philippines at least sixty
per centum of whose capital is owned by such citizens."
The Gamboa Decision already held, in no uncertain terms, that what the Constitution
requires is full and legal beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights must rest in the hands of Filipino nationals.
And, precisely that is what SEC-MC No. 8 provides; For purposes of determining compliance
with the constitutional or statutory ownership, the required percentage of Filipino
ownership shall be applied to both the total number of outstanding shares of stock entitled
to vote in the election of directors; and (b) the total number of outstanding shares of stock,
whether or not entitled to vote.
In conclusion, the basic issues raised in the Motion having been duly considered and passed
upon by the Court in the Decision and no substantial argument having been adduced to
warrant the reconsideration sought, the Court resolves to deny the Motion with finality.
PERALTA, J.:
Before the Court is a petition for review on certiorari seeking to annul and
set aside the Decision[1] and Resolution[2] of the Court of Appeals (CA),
dated June 7, 2013 and November 28, 2013, respectively, in CA-G.R. SP No.
125482. The assailed CA Decision annulled and set aside the Cease and
Desist Order (CDO) issued by the Securities and Exchange Commission
(SEC) En Banc on June 7, 2012, and dismissed SEC-CDO Case No. 05-12-
006, while the CA Resolution denied petitioners' Motion for
Reconsideration.
The facts of the case are as follows:
Herein respondent CJH Development Corporation (CJHDC) is a duly

organized domestic corporation which is engaged in the acquisition,
development, sale, lease and management of real estate and any
improvements thereon or any interest and right therein.[3] Respondent CJH
Suites Corporation (CJHSC), on the other hand, is a wholly-owned
subsidiary of CJHDC which was formed primarily for the purpose of
acquiring, maintaining, operating and managing hotels, inns, lodging
houses, restaurants and other allied businesses.[4]
On October 19, 1996, CJHDC entered into a Lease Agreement (Agreement)

with the Bases Conversion and Development Authority (BCDA) for the
development into a public tourism complex, multiple-use forest watershed
and human resource development center, of a 247-hectare property within
the John Hay Special Economic Zone in Baguio City. The fixed annual
rental for the property for the first five years was pegged at
P425,001,378.00 or five percent of Gross Revenues, whichever is higher.
Thereafter, for the duration of the lease period, the fixed annual rental shall
not be more than P150,000,000.00 or five percent of Gross Revenues,
whichever is higher. Among other provisions, the Agreement authorized
CJHDC to sub-lease, develop and manage the abovementioned property for
a period of fifty (50) years, or until 2046. It was also provided that, upon
expiration of the Agreement, the leased property shall revert back to the
BCDA and all the improvements thereon shall become its property.
Subsequently, CJHDC came up with a development plan and put it into
effect. Part of such development plan was the construction of two (2)
condominium-hotels (condotels) which it named as "The Manor" and "The
Suites". Subject to CJHDC's leasehold rights under the Agreement, the
residential units in these condotels were then offered for sale to the general
public by means of two schemes. The first is a straight purchase and sale
contract where the buyer pays the purchase price for the unit bought, either
in lump sum or on installment basis and, thereafter, enjoys the benefits of
full ownership, subject to payment of maintenance dues and utility fees.
The second scheme involved the sale of the unit with an added option to
avail of a "leaseback" or a "money-back" arrangement. Under this added
option, the buyer pays for the unit bought and, subsequently, surrenders its
possession to the management of CJHDC or CJHSC. These corporations
would then create a pool of these units and, in tum, will offer them for
billeting under the management of the hotel operated by the Camp John
Hay Leisure, Inc. (CJHLI). This arrangement lasts for a period of fifteen
(15) years with a renewal option for the same period until 2046. The buyers
who opt for the "leaseback" arrangement will receive either a proportionate
share in seventy percent (70%) of the annual income derived from the hotel
operation of the pooled rooms or a guaranteed eight percent (8%) return on
their investment. On the other hand, those who choose to avail of the
"money-back" arrangement are entitled to a return of the purchase price
they paid for the units by expiration of the Lease Agreement in 2046. The
buyers are given the right to use their units for thirty (30) days within a
year and they are exempted from paying the monthly dues and utility fees.
Sometime in May 2010, the BCDA and the CJHDC entered into an
agreement for the restructuring of the latter's rental payments and other
financial obligations to the former. Thus, pursuant to this agreement,
CJHDC transferred ownership of, among others, sixteen (16) units from
"The Manor" and ten (10) units from "The Suites" to the BCDA via dacion
en pago. These units were covered by Limited Warranty Deeds and were
subject to a "leaseback" arrangement.
Subsequently, the BCDA acquired information regarding CJHDC and

CJHSC's scheme of selling "The Manor" and "The Suites" units through
"leaseback" or "money-back" terms. Hence, in a letter dated November 18,
2011, the BCDA requested the SEC to conduct an investigation into the
operations of CJHDC and CJHSC on the belief that the "leaseback" or
"money-back" arrangements they are offering to the public is, in essence,
investment contracts which are considered as securities under Republic Act
No. 8799, otherwise known as the Securities Regulation Code (SRC).
Acting on such a request, the Enforcement and Prosecution Department

(EPD) of the SEC conducted its own investigation of the operations of
CJHDC and CJHSC with respect to the sale of the subject condotel units
and, thereafter, submitted a Field Investigation Report, [5] dated February 1,
2012, to the Chairperson of the SEC, providing details of their findings
during such investigation. The EPD was also able to confer with several
buyers of the condotel units who gave information with respect to the terms
of the contracts they entered into with respondents.
Subsequently, on April 23, 2012, the SEC's Corporation Finance

Department (CFD) issued a Memorandum[6] indicating its opinion that the
"leaseback" arrangements offered by respondents to the public are
investment contracts.
On May 16, 2012, the EPD filed a Motion for Issuance of Cease and Desist
Order[7] with the SEC En Banc praying that CJHDC and CJHSC, their
respective officers, directors, representatives, salesmen, agents, and any
and all persons claiming and acting for and in their behalf be directed to
immediately cease and desist "from further engaging in activities of selling
and/or offering for sale investment contracts covering the condotel units on
"leaseback" and/or "money-back" arrangements until the requisite
registration statement is duly filed with and approved by the Commission
and the corresponding permit to offer/sell securities is issued." [8] The case
was docketed as SEC-CDO Case No. 05-12-006.
On June 7, 2012, the SEC En Banc issued an Order,[9] disposing as follows:
WHEREFORE, premises considered, there being a prima facie evidence

that respondents CJH DEVELOPMENT CORPORATION and its wholly-
owned subsidiary CJH SUITES CORPORATION, are engaged in the
business of selling securities without the proper registration issued by this
Commission in violation [of] Section 8 of the SRC, the respondents, their
respective officers, directors, representatives, salesmen, agents and any and
all persons claiming and acting for and in their behalf, are hereby ordered
to immediately CEASE and DESIST from further engaging in the business
of selling securities until they have complied with the requirements of law
and its implementing rules and regulations.
xxxx
SO ORDERED.[10]
CJHDC and CJHSC then filed a Petition for Review[11] with prayer for the
issuance of a temporary restraining order and/or writ of preliminary
injunction before the CA questioning the above CDO and praying that the
same be reversed and set aside.
On September 25, 2012, the CA issued a temporary restraining order which

enjoins the SEC from enforcing its questioned CDO for a period of sixty
(60) days.[12] Thereafter, on November 8, 2012, the CA issued a writ of
preliminary injunction which was made effective pending the decision of
the petition on the merits.[13]
In its presently assailed Decision, the CA ruled in favor of CJHDC and

CJHSC and disposed as follows:
WHEREFORE, the instant petition is GRANTED. The Cease and Desist

Order dated June 7, 2012 issued by the SEC En Banc is [ANNULLED] and
SET ASIDE, and SEC-CDO Case No. 05-12-006 is DISMISSED. The writ of
preliminary injunction per Resolution dated November 8, 2012, enjoining
respondents from enforcing the June 7, 2012 Cease and Desist Order, is
MADE PERMANENT.
SO ORDERED.[14]
CJHDC and CJHSC filed a Motion for Reconsideration, but the CA denied it
in its Resolution[15] dated November 28, 2013.
Hence, the instant petition for review on certiorari based on the following
grounds:
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN NOT

OUTRIGHTLY DISMISSING THE APPEAL FILED BY RESPONDENTS
AGAINST AN INTERLOCUTORY OR PROVISIONAL ORDER OF THE
SEC.
II
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND

ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION IN FAILING TO DISMISS THE
PETITION FOR REVIEW CONSIDERING THAT THE SEC HAS THE
PRIMARY JURISDICTION OVER THE CASE AND RESPONDENTS
FAILED TO EXHAUST ALL THE ADMINISTRATIVE REMEDIES UNDER
THE LAW TO CHALLENGE THE PROVISIONAL ORDER.
III
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND

ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION IN NULLIFYING THE CDO AND
DISMISSING SEC-CDO CASE NO. 05-12-006.[16]
The petition is meritorious.
First, the Court agrees with petitioners that the challenged CDO is an
interlocutory order. The word interlocutory refers to something intervening
between the commencement and the end of the suit which decides some
point or matter but is not a final decision of the whole controversy.[17] An
interlocutory order merely resolves incidental matters and leaves
something more to be done to resolve the merits of the case.[18] Stated
differently, an interlocutory order is one which leaves substantial
proceedings yet to be had in connection with the controversy. [19] It does not
end the task of the court in adjudicating the parties' contentions and
determining their rights and liabilities as against each other. [20] In this
sense, it is basically provisional in its application.[21]
It is a settled rule in this jurisdiction that an appeal may only be taken from
a judgment or final order that completely disposes of the case and that an
interlocutory order is not appealable until after the rendition of the
judgment on the merits for a contrary rule would delay the administration
of justice and unduly burden the courts.[22]
In the present case, it is clear from the dispositive portion of the CDO that
its issuance is based on the findings of the SEC that there exists prima
facie evidence that respondents are engaged in the business of selling
securities without the proper registration issued by the Commission. Prima
facie means a fact presumed to be true unless disproved by some evidence
to the contrary.[23] Applied to the instant case, it means that the findings of
the SEC, as contained in the assailed CDO, can still be refuted and
disproved by contrary evidence. This only means that the CDO is not final,
is just provisional, and that the prohibition thereunder is merely
temporary, subject to the determination of the parties' respective evidence
in a subsequent hearing. It is, therefore, clear that the subject CDO, being
interlocutory, may not be the subject of an appeal.
In fact, the non-appealability of a CDO issued by the SEC is provided for

under the 2006 Rules of Procedure of the Commission. Thus, Section 10-8
of the Rules provides:
SEC. 10-8. Prohibitions. - No pleading, motion or submission in any form

that may prevent the resolution of an application for a CDO by the
Commission shall be entertained except under Rule XII herein. A CDO
when issued, shall not be the subject of an appeal and no appeal
from it will be entertained; Provided, however, that an order by the
Director of the Operating Department denying the motion to lift a CDO
may be appealed to the Commission En Banc through the O[ffice of the]
G[eneral] C[ounsel]. (Emphasis supplied)
In addition, the temporary character, thus interlocutory nature, of a CDO is
recognized under Section 10-5 of the same Rules, as it provides for the
procedure on how a CDO can be made permanent, to wit:
SEC. 10-5. Failure to File Motion to Lift. - (a) If the respondent fails to file a
motion to lift CDO within the prescribed period, the Director of the
C[ompliance and] E[nforcement] D[epartment] may file with the
Commission a motion to make the CDO permanent. The Order shall
contain the following:
i. a brief and procedural history of the case;

ii. a statement declaring the CDO as permanent;
iii. a statement ordering the respondent to appear before the Commission
within fifteen (15) days to file its Comment and to show cause why the
stated penalty should not be imposed.
(b) The Commission may conduct hearing within fifteen (15) business days
from the filing of the motion to make the CDO permanent. After the
termination of the hearing, the Commission shall resolve the motion within
ten (10) business days.
Thus, pursuant to the above provision, the EPD of the SEC filed a Motion
for Issuance of Permanent Cease and Desist Order on July 9, 2012 [24] which,
however, was subsequently overtaken by the CA's issuance of a temporary
restraining order and preliminary injunction enjoining the SEC from
enforcing its assailed CDO.
Nonetheless, contrary to respondents' contention in their petition filed with

the CA, they are not left without recourse in the administrative level.
Section 64.3 of the SRC provides, thus:
64.3 Any person against whom a cease and desist order was issued may,
within five (5) days from receipt of the order, file a formal request for a
lifting thereof. Said request shall be set for hearing by the Commission not
later than fifteen (15) days from its filing and the resolution thereof shall be
made not later than ten (10) days from the termination of the hearing. If
the Commission fails to resolve the request within the time herein
prescribed, the cease and desist order shall automatically be lifted.
In the same manner Section 10-3 of the 2006 Rules of Procedure of the SEC
states:
SEC. 10-3. Lifting of CDO. - A party against whom a CDO was issued may,
within a non-extendible period of five (5) business days from receipt of the
order, file a formal request or motion for the lifting thereof with the OGC.
Said motion or request shall be set for hearing by the OGC not later than
fifteen (15) days from its filing and the resolution thereof not later than ten
(10) days from the termination of the hearing.
Hence, as cited above, instead of filing an appeal with the CA, respondents
should have filed a motion to lift the assailed CDO. Since the law and the
SEC Rules require that this motion be heard by the SEC, it is during this
hearing that respondents could have presented evidence in support of their
contentions. However, they chose not to file the said motion.
Thus, the second reason for the denial of the instant petition is
respondents' failure to exhaust all administrative remedies available to
them. Settled is the rule that:
Under the doctrine of exhaustion of administrative remedies, before a party

is allowed to seek the intervention of the court, he or she should have
availed himself or herself of all the means of administrative processes
afforded him or her. Hence, if resort to a remedy within the administrative
machinery can still be made by giving the administrative officer concerned
every opportunity to decide on a matter that comes within his or her
jurisdiction, then such remedy should be exhausted first before the court's
judicial power can be sought. The premature invocation of the intervention
of the court is fatal to one's cause of action. The doctrine of exhaustion of
administrative remedies is based on practical and legal reasons. The
availment of administrative remedy entails lesser expenses and provides for
a speedier disposition of controversies. Furthermore, the courts of justice,
for reasons of comity and convenience, will shy away from a dispute until
the system of administrative redress has been completed and complied
with, so as to give the administrative agency concerned every opportunity
to correct its error and dispose of the case.[25]
It is true that there are exceptions to the above doctrine, to wit:
(1) when there is a violation of due process; (2) when the issue involved is
purely a legal question; (3) when the administrative action is patently
illegal amounting to lack or excess of jurisdiction; (4) when there is
estoppel on the part of the administrative agency concerned; (5) when there
is irreparable injury; (6) when the respondent is a department secretary
who acts as an alter ego of the President bears the implied and assumed
approval of the latter; (7) when to require exhaustion of administrative
remedies would be unreasonable; (8) when it would amount to a
nullification of a claim; (9) when the subject matter is a private land in land
case proceedings; (10) when the rule does not provide a plain, speedy and
adequate remedy, (11) when there are circumstances indicating the urgency
of judicial intervention, and unreasonable delay would greatly prejudice the
complainant; (12) where no administrative review is provided by law; (13)
where the rule of qualified political agency applies and (14) where the issue
of non-exhaustion of administrative remedies has been rendered moot. [26]
However, the Court does not agree with the CA in its ruling that the present
case falls under the first and second exceptions for reasons to be discussed
hereunder.
Corollary to the principle of exhaustion of administrative remedies is the
third reason for denying the instant petition. The main issue, as to whether
or not the sale of "The Manor" or "The Suites" units to the general public
under the "leaseback" or "money-back" scheme is a form of investment
contract or sale of securities, is not a pure question of law. On the contrary,
it involves a question of fact that falls under the primary jurisdiction of the
SEC. Under the doctrine of primary administrative jurisdiction, courts will
not determine a controversy where the issues for resolution demand the
exercise of sound administrative discretion requiring the special
knowledge, experience, and services of the administrative tribunal to
determine technical and intricate matters of fact, which under a regulatory
scheme have been placed within the special competence of such tribunal or
agency.[27]
In other words, if a case is such that its determination requires the

expertise, specialized training, and knowledge of an administrative body,
relief must first be obtained in an administrative proceeding before resort
to the court is had even if the matter may well be within the latter's proper
jurisdiction.[28] The objective of the doctrine of primary jurisdiction is to
guide the court in determining whether it should refrain from exercising its
jurisdiction until after an administrative agency has determined some
question or some aspect of some question arising in the proceeding before
the court.[29]
In the instant case, the resolution of the issue as to whether respondents'

scheme of selling the subject condotel units is tantamount to an investment
contract and/or sale of securities, as defined under the SRC, requires the
expertise and technical knowledge of the SEC being the government agency
which is tasked to enforce and implement the provisions of the said Code as
well as its implementing rules and regulations. In fact, after the issuance of
the CDO, the SEC is yet to hear from respondents and receive evidence
from them regarding this issue. Nonetheless, respondents prematurely filed
an appeal with the CA, which erroneously gave due course to it in disregard
of the doctrines of exhaustion of administrative remedies and primary
jurisdiction.
Furthermore, the present case does not fall under the exceptions to the
doctrine of exhaustion of administrative remedies as there is no violation of
respondents' right to due process. The Court does not agree with the CA in
sustaining petitioners' contention that the investigation conducted by the
EPD necessitated the participation of petitioners and that they should have
been given opportunity to explain their side prior to the issuance of the
questioned CDO. In this regard, Sections 64.1 and 64.2 of the SRC provide
as follows:
64.1. The Commission, after proper investigation or verification, motu

proprio, or upon verified complaint by any aggrieved party, may issue a
cease and desist order without the necessity of a prior hearing if in its
judgment the act or practice, unless restrained, will operate as a fraud on
investors or is otherwise likely to cause grave or irreparable injury or
prejudice to the investing public.
64.2. Until the Commission issues a cease and desist order, the fact that an
investigation has been initiated or that a complaint has been filed,
including the contents of the complaint, shall be confidential. Upon
issuance of a cease and desist order, the Commission shall make public
such order and a copy thereof shall immediately be furnished to each
person subject to the order.
64.3. Any person against whom a cease and desist order was issued may,
within five (5) days from receipt of the order, file a formal request for lifting
thereof. Said request shall be set for hearing by the Commission not later
than fifteen (15) days from its filing and the resolution thereof shall be
made not later than ten (10) days from the termination of the hearing. If
the Commission fails to resolve the request within the time herein
prescribed, the cease and desist order shall automatically be lifted.
Explaining the import of these provisions, this Court, in the case
of Primanila Plans, Inc. v. Securities and Exchange Commission,[30]held,
thus:
The law is clear on the point that a cease and desist order may be
issued by the SEC motu proprio, it being unnecessary that it
results from a verified complaint from an aggrieved party. A
prior hearing is also not required whenever the Commission
finds it appropriate to issue a cease and desist order that aims to
curtail fraud or grave or irreparable injury to investors. There is
good reason for this provision, as any delay in the restraint of acts that yield
such results can only generate further injury to the public that the SEC is
obliged to protect.
To equally protect individuals and corporations from baseless and
improvident issuances, the authority of the SEC under this rule is
nonetheless with defined limits. A cease and desist order may only be
issued by the Commission after proper investigation or verification, and
upon showing that the acts sought to be restrained could result in injury or
fraud to the investing public. Without doubt, these requisites were duly
satisfied by the SEC prior to its issuance of the subject cease and desist
order.
Records indicate the prior conduct of a proper investigation on Primanila's

activities by the Commission's CED. Investigators of the CED personally
conducted an ocular inspection of Primanila's declared office, only to
confirm reports that it had closed even without the prior approval of the
SEC. Members of CED also visited the company website of Primanila, and
discovered the company's offer for sale thereon of the pension plan product
called Primasa Plan, with instructions on how interested applicants and
planholders could pay their premium payments for the plan. One of the
payment options was through bank deposit to Primanila's given Metrobank
account which, following an actual deposit made by the CED was confirmed
to be active.
As part of their investigation, the SEC also looked into records relevant to
Primanila's business. Records with the SEC's Non-Traditional Securities
and Instruments Department (NTD) disclosed Primanila's failure to renew
its dealer's license for 2008, or to apply for a secondary license as dealer or
general agent for pre-need pension plans for the same year. SEC records
also confirmed Primanila's failure to file a registration statement for
Primasa Plan, to fully remit premium collections from plan holders, and to
declare truthfully its premium collections from January to September 2007.
The SEC was not mandated to allow Primanila to participate in

the investigation conducted by the Commission prior to the
cease and desist order's issuance. Given the circumstances, it was
sufficient for the satisfaction of the demands of due process that the
company was amply apprised of the results of the SEC investigation, and
then given the reasonable opportunity to present its defense. Primanila was
able to do this via its motion to reconsider and lift the cease and desist
order. After the CED filed its comment on the motion, Primanila was
further given the chance to explain its side to the SEC through the filing of
its reply. "Trite to state, a formal trial or hearing is not necessary to comply
with the requirements of due process. Its essence is simply the opportunity
to explain one's position." x x x[31]
In the present case, as mentioned above, the SEC through its EPD,
conducted an investigation upon request of the BCDA. The EPD dispatched
a team of SEC employees, who posed as representatives of interested
buyers, to the John Hay Special Economic Zone in Baguio City. There, the
team members were able to talk to CJHDC's Director of Sales, who, not
only explained to them the straight and leaseback agreements, but also gave
the team copies of marketing material, as well as sample contracts,
indicating that respondents are indeed selling the subject units either on a
straight purchase or leaseback agreement.
Subsequently, on three different occasions, the EPD invited several buyers

of the subject condotels and met with them in separate conferences wherein
these buyers shed light on the transactions they entered into with
respondents and informed the EPD that they bought condotel units on a
leaseback arrangement. These buyers provided the EPD copies of document
relating to their purchase of condotel units on such terms.
Upon issuance of the CDO, nothing prevented respondents from filing a

motion to lift the said Order wherein they could have amply explained their
position. However, they chose not to avail of this remedy and, instead, went
directly, albeit erroneously, to the CA via a petition for review.
Lastly, the Court neither agrees with the ruling of the CA that there is
nothing in the assailed CDO which shows that the acts sought to be
restrained therein operate as a fraud on investors. The SEC arrived at a
preliminary finding that respondents are engaged in the business of selling
securities without the proper registration issued by the Commission. Based
on this initial finding, respondents' act of selling unregistered securities
would necessarily operate as a fraud on investors as it deceives the
investing public by making it appear that respondents have authority to
deal on such securities. As correctly cited by the SEC, Section 8.1 of the SRC
clearly states that securities shall not be sold or offered for sale or
distribution within the Philippines without a registration statement duly
filed with and approved by the SEC and that prior to such sale, information
on the securities, in such form and with such substance as the SEC may
prescribe, shall be made available to each prospective buyer. The Court
agrees with the SEC that the purpose of this provision is to afford the public
protection from investing in worthless securities.
WHEREFORE, the petition is GRANTED. The Decision of the Court of
Appeals, dated June 7, 2013, and its Resolution dated November 28, 2013,
in CA-G.R. SP No. 125482 are REVERSED and SET ASIDE. The Writ of
Preliminary Injunction, per CA Resolution dated November 8, 2012, which
was made permanent by its June 7, 2013 Decision, is hereby LIFTED.
SEC-CDO Case No. 05-12-006 and the June 7, 2012 Cease and Desist Order
of the Securities and Exchange Commission are REINSTATED.
SO ORDERED.
People's Security, Inc. and Nestor Racho vs. Flores and

Tapiru Case Digest
People's Security, Inc. and Nestor Racho vs. Julius S. Flores and Esteban S. Tapiru
G.R. No. 211312. December 5, 2016
Facts
Julius S. Flores and Esteban S. Tapiru (respondents) were security guards previously employed by
People's Security, Inc. (PSI). The respondents were assigned at the varfous facilities of Philippine Long
Distance Telephone Company (PLDT) pursuant to a security services agreement between PSI and PLDT.
On October 1, 2001, however, PSI's security services agreement with PLDT was terminated and,
accordingly, PSI recalled its security guards assigned to PLDT including the respondents. On October 8,
2001, the respondents, together with several other security guards employed by PSI, filed a complaint for
illegal dismissal with the National Labor Relations Commission (NLRC) against PLDT and PSI, claiming
that they are PLDT employees.
Thereafter, PSI assigned the respondents to the facilities of its other clients such as the warehouse of a
certain Marivic Yulo in Sta. Ana, Manila and Trinity College's Elementary Department in Quezon City.
Meanwhile, on January 13, 2003, the respondents were relieved from their respective assignments
pursuant to Special Order No. 200310108 dated January 10, 2003 issued by Col. Leonardo L. Aquino, the
Operations Manager of PSI.9 Accordingly, Flores and Tapiru, on September 6 and 27, 2005, respectively,
filed with the Regional Arbitration Branch of the NLRC in Quezon City a complaint for illegal dismissal and
non-payment of service incentive leave pay and cash bond, with prayer for separation pay, against PSI
and its President Nestor Racho (Racho) (collectively, the petitioners).
In their position paper, the respondents claimed that, after they were relieved from their assignment in the
warehouse in Sta. Ana, Manila on January 13, 2003, they repeatedly reported to PSI's office for possible
assignment, but the latter refused to give them any assignment. On the other hand, the petitioners, in
their position paper, claimed that the respondents were merely relieved from their assignment in the
warehouse in Sta. Ana, Manila and that the same was on account of their performance evaluation, which
indicated that they were ill-suited for the said assignment.
On January 30, 2009, the LA rendered a Decision finding that the respondents were illegally from their
employment and, thus, directing the petitioners jointly and severally liable to pay the former separation
pay and backwages.
On appeal, the NLRC, in its Decision dated April 14, 2010, reversed the LA Decision dated January 30,
2009. On April 25, 2013, the CA rendered the herein assailed Decision, reversing the NLRC's Decision
dated April 14, 2010 and Resolution dated June 15, 2010. In finding that the respondents were illegally
dismissed, the CA found that the petitioners failed to prove that the respondents had abandoned their
work and that their defense of abandonment was negated by the filing of a case for illegal dismissal.
In this petition for review on certiorari, the petitioners claim that the CA committed reversible error in ruling
that the respondents were illegally dismissed from their employment. They maintain that PSI never
terminated the respondents' employment. On the contrary, they claim that the respondents freely and
voluntarily resigned from their employment. They also claim that the CA erred when it ruled that they
should be held jointly and solidarily liable to pay the respondents separation pay and backwages
considering that there was absolutely no allegation or proof of participation, bad faith, or malice on the
part of Racho in dealing with the respondents.
Issues:
1. Whether respondents were illegally dismissed.
2. Whether Racho is jointly and solidarily liable with PSI for the payment of the monetary
awards to the respondents.
Rulings
1. Yes. a As rule, employment cannot be terminated by an employer without any just or authorized cause.
No less than the 1987 Constitution in Section 3, Article 13 guarantees security of tenure for workers and
because of this, an employee may only be terminated for just or authorized causes that must comply with
the due process requirements mandated by law. Hence, employers are barred from arbitrarily removing
their workers whenever and however they want.
There is no merit to the petitioners' claim that the respondents were not dismissed, but merely relieved
from their respective assignments. While it is true that Special Order No. 20031010, which the petitioners
issued to the respondents on January 13, 2003, indicated that the latter were merely relieved from the
warehouse in Sta. Ana, Manila, such fact alone would not negate the respondents' claim of illegal
dismissal. Indeed, the respondents pointed out that after they were relieved from their previous
assignment, the petitioners refused to provide them with new assignment.
Further, as aptly ruled by the CA, the petitioners miserably failed to prove that the respondents
abandoned their work. Abandonment is a matter of intention and cannot lightly be inferred or legally
presumed from certain equivocal acts. For abandonment to exist, two requisites must concur: first, the
employee must have failed to report for work or must have been absent without valid or justifiable reason;
and second, there must have been a clear intention on the part of the employee to sever the employer-
employee relationship as manifested by some overt acts. The Court is not convinced that the respondents
failed to report for work or have been absent without valid or justifiable cause. After the petitioners
relieved them from their previous assignment in Sta. Ana, Manila, the respondents were no longer given
any assignment.
What is more, PSI did not afford the respondents due process. The validity of the dismissal of an
employee hinges not only on the fact that the dismissal was for a just or authorized cause, but also on the
very manner of the dismissal itself. It is elementary that the termination of an employee must be effected
in accordance with law. It is required that the employer furnish the employee with two written notices: (1) a
written notice served on the employee specifying the ground or grounds for termination, and giving to said
employee reasonable opportunity within which to explain his side; and (2) a written notice of termination
served on the employee indicating that upon due consideration of all the circumstances, grounds have
been established to justify his termination.
Beyond dispute is the fact that no written notice was sent by PSI informing the respondents that they had
been terminated due to abandonment of work. This failure on the part of PSI to comply with the twin-
notice requirement, indeed, placed the legality of the dismissal in question, at the very least, doubtful,
rendering the dismissal illegal.
2. No. Anent, the propriety of holding Racho, PSI's President, jointly and solidarily liable with PSI for the
payment of the money awards in favor of the respondents, the Court finds for the petitioners. The doctrine
of piercing the corporate veil applies only when the corporate fiction is used to defeat public convenience,
justify wrong, protect fraud, or defend crime. In the absence of malice, bad faith, or a specific provision of
law making a corporate officer liable, such corporate officer cannot be made personally liable for
corporate liabilities. The respondents failed to adduce any evidence to prove that Racho, as President
and General Manager of PSI, is hiding behind the veil of corporate fiction to defeat public convenience,
justify wrong, protect fraud, or defend crime. Thus, it is only PSI who is responsible for the respondents'
illegal dismissal.
WHEREFORE, in view of the foregoing disquisitions, the petition for review on certiorari is
hereby DENIED. The Decision dated April 25, 2013 and Resolution dated February 7, 2014 of the Court
of Appeals in CA-G.R. SP No. 115464 and the Decision dated January 30, 2009 of the Labor Arbiter
are AFFIRMED with MODIFICATION in that petitioner Nestor Racho is held not solidarily liable with
petitioner People's Security, Inc. for the payment of the monetary awards in favor of respondents Julius S.
Flores and Esteban S. Tapiru.
JAMES IENT v. TULLETT PREBON, GR No. 189158, 2017-01-11
Facts:
Petitioner Ient is a British national and the Chief Financial Officer of

Tradition Asia Pacific Pte. Ltd. (Tradition Asia) in Singapore.[4] Petitioner
Schulze is a Filipino/German who does Application Support for Tradition
Financial Services Ltd. in London (Tradition London).
Tradition Group and Tullett are competitors in the inter-dealer broking

business.
Sometime in August 2008, in line with Tradition Group's motive of

expansion and diversification in Asia, petitioners Ient and Schulze were
tasked with the establishment of a Philippine subsidiary of Tradition Asia
to be known as Tradition Financial Services Philippines, Inc. (Tradition
Philippines).[9] Tradition Philippines was registered with the Securities
and Exchange Commission (SEC) on September 19, 2008
Jaime Villalon (Villalon), who was formerly President and Managing

Director of Tullett
Mercedes Chuidian (Chuidian)... formerly a member of Tullett's Board of

Directors
John and Jane Does
Issues:
On October 15, 2008, Tullett, through one of its directors, Gordon Buchan,
filed a Complaint-Affidavit... against the officers/employees of the
Tradition Group for violation of the Corporation Code.
Villalon and Chuidian were charged with using their former positions in
Tullett to sabotage said company by orchestrating the mass resignation
of its entire brokering staff in order for them to join Tradition Philippines.
With respect to Villalon, Tullett claimed that the former held several
meetings between August 22 to 25, 2008 with members of Tullett's Spot
Desk and brokering staff in order to convince them to leave the company.
Villalon likewise supposedly intentionally failed to renew the contracts of
some of the brokers. On August 25, 2008, a meeting was also allegedly
held in Howzat Bar in Makati City where petitioners and a lawyer of
Tradition Philippines were present. At said meeting, the brokers of
complainant Tullett were purportedly induced, en masse, to sign
employment contracts with Tradition Philippines and were allegedly
instructed by Tradition Philippines' lawyer as to how they should file their
resignation letters.
On August 26, 2008, Villalon allegedly informed Mr. Barry Dennahy, Chief
Operating Officer of Tullett Prebon in the Asia-Pacific, through electronic
mail that all of Tullett's brokers had resigned.
Subsequently, on September 1, 2008, in another meeting with Ient and

Tradition Philippines' counsel, indemnity contracts in favor of the
resigning employees were purportedly distributed by Tradition Philippines.
According to Tullett, respondents Villalon and Chuidian... violated

Sections 31 and 34 of the Corporation Code which made them criminally
liable under Section 144. As for petitioners Ient and Schulze, Tullett
asserted that they conspired with Villalon and Chuidian in the latter's
acts of disloyalty against the company.
Villalon and Chuidian filed their respective Counter-Affivadits.
Villalon claimed that the DOJ had previously proclaimed that Section 31
is not a penal provision of law but only the basis of a cause of action for
civil liability. Thus, he concluded that there was no probable cause that
he violated the Corporation Code nor was the charge of conspiracy
properly substantiated.
Chuidian claimed that she left Tullett simply to seek greener pastures.
She argued that Section 144 as a penal provision should be strictly

construed against the State and liberally in favor of the accused and
Tullett has failed to substantiate its charge of bad faith on her part.
In her Counter-Affidavit,[17] petitioner Schulze denied the charges leveled

against her.
she concluded that a charge of conspiracy which has for its basis Article
8 of the Revised Penal Code cannot be made applicable to the provisions
of the Corporation Code.
Ient alleged in his Counter-Affidavit that the charges against him were
merely filed to harass Tradition Philippines and prevent it from
penetrating the Philippine market.
Tullett filed a petition for review with the Secretary of Justice to assail
the foregoing resolution of the Acting City Prosecutor of Makati City.
Ient and Schulze moved for reconsideration of the foregoing Resolution by

the Secretary of Justice.
Ient and Schulze brought the matter to the Court of Appeals via a petition
for certiorari under Rule 65
The main bone of disagreement among the parties in this case is the
applicability of Section 144 of the Corporation Code to Sections 31 and 34
of the same statute such that criminal liability attaches to violations of
Sections 31 and 34.
Ruling:
In a Resolution... dated February 17, 2009, State Prosecutor Cresencio F.

Delos Trinos, Jr. (Prosecutor Delos Trinos), Acting City Prosecutor of
Makati City, dismissed the criminal complaints.
On the issue of conspiracy, Prosecutor Delos Trinos found that since

Villalon and Chuidian did not commit any acts in violation of Sections 31
and 34 of the Corporation Code, the charge of conspiracy against Schulze
and Ient had no basis.
d... ated April 23, 2009, then Secretary of Justice Raul M. Gonzalez
reversed and set aside Prosecutor Delos Trinos's resolution and directed
the latter to file the information for violation of Sections 31 and 34 in
relation to Section 144 of the Corporation Code against Villalon, Chuidian,
Harvey, Schulze, and Ient before the proper court.
Undeniably, respondents Villalon, Chuidian and Harvey occupied positions

of high responsibility and great trust as they were members of the board
of directors and corporate officers of complainant.
the consolidated petitions are GRANTED
Principles:
The provision of Section 144 of the Corporation Code is also applicable in

the case at bar as the penal provision provided therein is made applicable
to all violations of the Corporation Code, not otherwise specifically
penalized.
After a meticulous consideration of the arguments presented by both

sides, the Court comes to the conclusion that there is textual ambiguity
in Section 144; moreover, such ambiguity remains even after an
examination of its legislativ... e history and the use of other aids to
statutory construction, necessitating the application of the rule of lenity
in the case at bar.
There is no provision in the Corporation Code using similarly emphatic

language that evinces a categorical legislative intent to treat as a
criminal offense each and every violation of that law. Consequently, there
is no compelling reason for the Court to construe Section 144 as similarly
employing the term "penalized" or "penalty" solely in terms of criminal
liability.
The Corporation Code was intended as a regulatory measure, not

primarily as a penal statute. Sections 31 to 34 in particular were intended
to impose exacting standards of fidelity on corporate officers and
directors but without unduly impeding them in the discharge of their work
with concerns of litigation.
G.R. No. 212774, January 23, 2017
WESLEYAN UNIVERSITY-PHILIPPINES, Petitioner, v. GUILLERMO T. MAGLAYA, SR., Respondent.
DECISION
PERALTA, J.:
For this Court's resolution is a petition for review on certiorari filed by petitioner Wesleyan University-
Philippines (WUP) assailing the Resolution1 dated January 20, 2014 of the Court of Appeals (CA) which
denied its petition for certiorari.
The facts are as follows: chanRoblesvirtualLawlibrary
WUP is a non-stock, non-profit, non-sectarian educational corporation duly organized and existing under the
Philippine laws on April 28, 1948.2
Respondent Atty. Guillenno T. Maglaya, Sr. (Maglaya) was appointed as a corporate member on January 1,
2004, and was elected as a member of the Board of Trustees (Board) on January 9, 2004 both for a period
of five (5) years. On May 25, 2005, he was elected as President of the University for a five-year term. He
was re-elected as a trustee on May 25, 2007.3
In a Memorandum dated November 28, 2008, the incumbent Bishops of the United Methodist
Church (Bishops) apprised all the corporate members of the expiration of their terms on December 31,
2008, unless renewed by the former.4 The said members, including Maglaya, sought the renewal of their
membership in the WUP's Board, and signified their willingness to serve the corporation. 5
On January 10, 2009, Dr. Dominador Cabasal, Chairman of the Board, informed the Bishops of the cessation
of corporate terms of some of the members and/or trustees since the by-laws provided that the vacancy
shall only be filled by the Bishops upon the recommendation of the Board. 6
On March 25, 2009, Maglaya learned that the Bishops created an Ad Hoc Committee to plan the efficient and
orderly turnover of the administration of the WUP in view of the alleged "gentleman's agreement" reached in
December 2008, and that the Bishops have appointed the incoming corporate members and trustees. 7 He
clarified that there was no agreement and any discussion of the turnover because the corporate members
still have valid and existing corporate terms.8
On April 24, 2009, the Bishops, through a formal notice to all the officers, deans, staff, and employees of
WUP, introduced the new corporate members, trustees, and officers. In the said notice, it was indicated that
the new Board met, organized, and elected the new set of officers on April 20, 2009. 9 Manuel
Palomo (Palomo), the new Chairman of the Board, informed Maglaya of the termination of his services and
authority as the President of the University on April 27, 2009. 10
Thereafter, Maglaya and other fonner members of the Board (Plaintiffs) filed a Complaint for Injunction and
Damages before the Regional Trial Court (RTC) of Cabanatuan City, Branch 28.11 In a Resolution12dated
August 19, 2009, the RTC dismissed the case declaring the same as a nuisance or harassment suit
prohibited under Section 1(b),13 Rule 1 of the Interim Rules for Intra-Corporate Controversies. 14 The RTC
observed that it is clear from the by-laws of WUP that insofar as membership in the corporation is
concerned, which can only be given by the College of Bishops of the United Methodist Church, it is a
precondition to a seat in the WUP Board.15 Consequently, the expiration of the terms of the plaintiffs,
including Maglaya, as corporate members carried with it their termination as members of the
Board.16Moreover, their continued stay in their office beyond their terms was only in hold-over capacities,
which ceased when the Bishops appointed new members of the corporation and the Board. 17
The CA, in a Decision18 dated March 15, 2011, affirmed the decision of the RTC, and dismissed the petition
for certiorari filed by the plaintiffs for being the improper remedy. The CA held that their status as corporate
members of WUP which expired on December 31, 2008 was undisputed. The CA agreed with the RTC that
the plaintiffs had no legal standing to question the Bishops' alleged irregular appointment of the new
members in their Complaint on May 18, 2009 as the termination of their membership in the corporation
necessarily resulted in the conclusion of their positions as members of the Board pursuant to the WUP by-
laws.19
Thereafter, Maglaya filed on March 22, 2011 the present illegal dismissal case against WUP, Palomo, Bishop
Lito C. Tangonan (Tangonan), and Bishop Leo A. Soriano (Soriano).20 Maglaya claimed that he was
unceremoniously dismissed in a wanton, reckless, oppressive and malevolent manner on the eve of April 27,
2009.21 Tangonan and Soriano acted in evident bad faith when they disregarded his five-year term of office
and delegated their protege Palomo as the new university president. 22 Maglaya alleged that he faithfully
discharged his necessary and desirable functions as President, and received P175,000.00 as basic salary,
P10,000.00 as cost of living allowance, and P10,000.00 as representation allowance. He was also entitled to
other benefits such as: the use of university vehicles; the use of a post paid mobile cellular phone in his
official transactions; the residence in the University Executive House located at Inday Street, Magsaysay
Sur, Cabanatuan City, with free water, electricity, and services of a household helper; and receipt of
13th month pay, vacation leave pay, retirement pay, and shares in related learning experience. 23 On May 31,
2006, his basic salary was increased to P95,000.00 due to his additional duty in overseeing the operations of
the WUP Cardiovascular and Medical Center.
Maglaya presented the following pieces of evidence: copies of his appointment as President, his
Identification Card, the WUP Administration and Personnel Policy Manual which specified the retirement of
the university president, and the check disbursement in his favor evidencing his salary, to substantiate his
claim that he was a mere employee.24
WUP, on the other hand, asseverated that the dismissal or removal of Maglaya, being a corporate officer and
not a regular employee, is a corporate act or intra-corporate controversy under the jurisdiction of the
RTC.25 WUP also maintained that since Maglaya's appointment was not renewed, he ceased to be a member
of the corporation and of the Board; thus, his term for presidency has also been terminated. 26
Meanwhile, this Court, in a Resolution dated June 13, 2011, denied the petition for review on certiorarifiled
by Maglaya and the other former members of the Board for failure to show any reversible error in the
decision of the CA. The same became final and executory on August 24, 2011. 27
In a Decision28 dated September 20, 2011, the Labor Arbiter (LA) ruled in favor of WUP. The LA held that
the action between employers and employees where the employer-employee relationship is merely
incidental is within the exclusive and original jurisdiction of the regular courts. 29 Since he was appointed as
President of the University by the Board, Maglaya was a corporate officer and not a mere employee. The
instant case involves intra-corporate dispute which was definitely beyond the jurisdiction of the labor
tribunal.30 The dispositive portion of the decision reads:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the instant complaint is hereby dismissed for lack of jurisdiction.
SO ORDERED.31
In a Decision32 dated April 25, 2012, the National Labor Relations Commission (NLRC) in NLRC-LAC No. 01-
000470-12, reversed and set aside the Decision of the LA ruling that the illegal dismissal case falls within
the jurisdiction of the labor tribunals. Since the reasons for his termination cited by WUP were not among
the just causes provided under Article 28233 (now Article 297) of the Labor Code, Maglaya was illegally
dismissed. The NLRC observed that the Board did not elect Maglaya, but merely appointed him. Maglaya
was appointed for a fixed period of five (5) years from May 7, 2005 to May 6, 2010, while the period of his
appointment as member of the corporation was five (5) years from January 2004. 34 The decretal portion of
the decision reads:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the appealed decision is hereby REVERSED and SET ASIDE,
declaring:chanRoblesvirtualLawlibrary
(a) jurisdiction over this case by virtue of the

employer-employee relation of the parties
(b) the illegality of the dismissal of [respondent] by
[petitioner]
[Petitioner] therefore [is] hereby ordered to pay
[respondent]:
1. separation pay - [P] 375,000.00

2. full backwages - 1,252,462.50
3. retirement pay - 500,000.00
4. moral damages - 100,000.00
5. exemplary damages - 50,000.00
6. 10% of the above as attorney's fees - 227,746.25
TOTAL AWARDS - [P]2,505,208.75
based on the attached computation of this Commission's Computation Unit.
SO ORDERED.35
Ruling in favor of Maglaya, the NLRC explicated that although the position of the President of the University
is a corporate office, the manner of Maglaya's appointment, and his duties, salaries, and allowances point to
his being an employee and subordinate.36 The control test is the most important indicator of the presence of
employer-employee relationship. Such was present in the instant case as Maglaya had the duty to report to
the Board, and it was the Board which terminated or dismissed him even before his term ends. 37
Thereafter, the NLRC denied the motion for reconsideration filed by WUP in a Resolution 38 dated February
11, 2013.
In a Resolution, the CA dismissed the petition for certiorari filed by WUP. The CA noted that the decision and
resolution of the NLRC became final and executory on March 16, 2013. 39 WUP's attempt to resurrect its lost
remedy through filing the petition would not prosper since final and executory judgment becomes
unalterable and may no longer be modified in any respect. 40 Thus: chanRoblesvirtualLawlibrary
WHEREFORE, the petition is DENIED for lack of merit.
SO ORDERED.41
Upon denial of his Motion for Reconsideration, WUP elevated the case before this Court raising the issue: chanRoblesvirtualLawlibrary
The Court of Appeals committed an error of law when it summarily dismissed the special civil action
for certiorari raising lack of jurisdiction of the NLRC filed by [WUP] where it was very clear that the NLRC
had no jurisdiction over the case involving a corporate officer and where the nature of the controversy is an
intra-corporate dispute.
We find the instant petition impressed with merit.
WUP alleges that while the NLRC decision became final and executory on March 16, 2013, it did not mean
that the said decision had become immutable and unalterable as the CA ruled. WUP maintains that the
remedy of the aggrieved party against a final and executory decision of the NLRC is the filing of the petition
for certiorari under Rule 65 of the Rules of Court. As such, it was able to meet the conditions set forth in
filing the said remedy before the CA.
Settled is the rule that while the decision of the NLRC becomes final and executory after the lapse of ten
calendar days from receipt thereof by the parties under Article 223 42 (now Article 229) of the Labor Code,
the adverse party is not precluded from assailing it via Petition for Certiorari under Rule 65 before the CA
and then to this Court via a Petition for Review under Rule 45.43
This Court has explained and clarified the power of the CA to review NLRC decisions, viz.:
The power of the Court of Appeals to review NLRC decisions via Rule 65 or Petition for Certiorari has been
settled as early as in our decision in St. Martin Funeral Home v. National Labor Relations Commission. This
Court held that the proper vehicle for such review was a Special Civil Action for Certiorari under Rule 65 of
the Rules of Court, and that this action should be filed in the Court of Appeals in strict observance of the
doctrine of the hierarchy of courts. Moreover, it is already settled that under Section 9 of Batas
Pambansa Blg. 129, as amended by Republic Act No. 7902[10] (An Act Expanding the Jurisdiction of the
Court of Appeals, amending for the purpose of Section Nine of Batas Pambansa Blg. 129 as amended,
known as the Judiciary Reorganization Act of 1980), the Court of Appeals — pursuant to the exercise of its
original jurisdiction over Petitions for Certiorari - is specifically given the power to pass upon the evidence, if
and when necessary, to resolve factual issues.44
Consequently, the remedy of the aggrieved party is to timely file a motion for reconsideration as a
precondition for any further or subsequent remedy, and then seasonably avail of the special civil
action of certiorari under Rule 65, for a period of sixty (60) days from notice of the decision. 45
Records reveal that WOP received the decision of the NLRC on May 12, 2012, and filed its motion for
reconsideration on May 24, 2012.46 WUP received the Resolution dated February 11, 2013 denying its
motion on March 12, 2013.47 Thereafter, it filed its petition for certiorari before the CA on March 26, 2013.48
We find that the application of the doctrine of immutability of judgment in the case at bar is misplaced. To
reiterate, although the 10-day period for finality of the decision of the NLRC may already have lapsed as
contemplated in the Labor Code, this Court may still take cognizance of the petition for certiorari on
jurisdictional and due process considerations if filed within the reglementary period under Rule 65. 49 From
the abovementioned, WUP was able to discharge the necessary conditions in availing its remedy against the
final and executory decision of the NLRC.
There is an underlying power of the courts to scrutinize the acts of such agencies on questions of law and
jurisdiction even though no right of review is given by statute. 50 Furthermore, the purpose of judicial review
is to keep the administrative agency within its jurisdiction and protect the substantial rights of the parties. 51
Now on the issue of whether or not the NLRC has jurisdiction over the illegal dismissal case filed by Maglaya.
The said issue revolves around the question on whether Maglaya is a corporate officer or a mere employee.
For purposes of identifying an intra-corporate controversy, We have defined corporate officers, thus: chanRoblesvirtualLawlibrary
"Corporate officers" in the context of Presidential Decree No. 902-A are those officers of the corporation who
are given that character by the Corporation Code or by the corporation's by-laws. There are three
specific officers whom a corporation must have under Section 25 of the Corporation Code. These are the
president, secretary and the treasurer. The number of officers is not limited to these three. A corporation
may have such other officers as may be provided for by its by-laws like, but not limited to, the vice-
president, cashier, auditor or general manager. The number of corporate officers is thus limited by law and
by the corporation's by-laws.52
The president, vice-president, secretary and treasurer are commonly regarded as the principal or executive
officers of a corporation, and they are usually designated as the officers of the corporation. However, other
officers are sometimes created by the charter or by-laws of a corporation, or the board of directors
may be empowered under the by-laws of a corporation to create additional offices as may be necessary.
This Court expounded that an "office" is created by the charter of the corporation and the officer is elected
by the directors or stockholders, while an "employee" usually occupies no office and generally is employed
not by action of the directors or stockholders but by the managing officer of the corporation who also
determines the compensation to be paid to such employee. 53
From the foregoing, that the creation of the position is under the corporation's charter or by-laws, and that
the election of the officer is by the directors or stockholders must concur in order for an individual to be
considered a corporate officer, as against an ordinary employee or officer. It is only when the officer
claiming to have been illegally dismissed is classified as such corporate officer that the issue is deemed an
intra-corporate dispute which falls within the jurisdiction of the trial courts. 54
In its position paper before the LA, WUP presented its amended By-Laws 55 dated November 28, 1988
submitted to the SEC to prove that Maglaya, as the University President, was a corporate officer whose
rights do not fall within the jurisdiction of the labor tribunal. It also presented the Resolution dated August
19, 2009 of the RTC, and the Decision dated March 15, 20 11 of the CA to show that the earlier case was
filed by Maglaya and others, as members of the Board, questioning the Bishops' appointment of the new
members without their recommendation.
The relevant portions of the amended By-Laws provide: chanRoblesvirtualLawlibrary
ARTICLE VI. BOARD OF TRUSTEES
xxxx
Section 2. Membership – (a) The Board of Trustees shall be composed of Ten (10) members of the
corporation from among themselves provided, that six (6) shall come from the Ministry and Laity of the
United Methodist [C]hurch in the Philippines, three (3) shall be non-Methodist, friends and sympathizers of
the Wesleyan University-Philippines and of the United Methodist Church, and one (1) representative of the
Wesleyan Alumni Association, as provided in section 1 (c), Article IV hereof, and (b) provided further that
the incumbent area bishop and the President of the Wesleyan University-Philippines shall be honorary
members of the Board.
x x x x56
ARTICLE VIII. OFFICERS
Section 1. Officers – The officers of the Board of Trustees shall be: chanRoblesvirtualLawlibrary
(a) Chairman
(b) Vice-Chairman
(c) Secretary
(d) Treasurer
xxxx
Section 6. The President of Wesleyan University-Philippines – The President of the University, who must be
an active member of the United Methodist Church in the Philippines at the time of his election shall be in-
charge of and be responsible for the administration of the University and other institutions of learning that
[m]ay hereafter be established by the corporation, and
(a) May, with the Board of Trustees; chanrobleslaw
(1) Organize and/or reorganize the administrative set up of the Wesleyan University-Philippines to effect
efficiency and upgrade institutional administration and supervision; chanrobleslaw
(2) Employ, suspend, dismiss, transfer or replace personnel and prescribe and enforce rules and regulations
for their proper conduct in the discharge of their duties; chanrobleslaw
(3) Shall make reports during the different rumual conference of the United Methodist Church ru1d to such
agencies as may be deemed necessary on the operations of the university and related matters; chanrobleslaw
(4) Shall prescribe and enforce rules and regulations for the promotion and maintenance of discipline in the
proper conduct and discharge of the functions and duties of subordinate administrative officers, professors,
teachers, employees and students and other personnel.
(b) Shall make reports and recommendations to the Board of Trustees or to the Chairman of the Board of
Trustees on matters pertaining to the institution as he may find necessary; chanrobleslaw
(c) Shall countersign all checks drawn by the Treasurer from the depository of the University, and
(d) Shall exercise, perform and discharge all such other powers, functions and duties as are interest in the
office of the President.
x x x57
It is apparent from the By-laws of WUP that the president was one of the officers of the corporation, and
was an honorary member of the Board. He was appointed by the Board and not by a managing officer of the
corporation. We held that one who is included in the by-laws of a corporation in its roster of corporate
officers is an officer of said corporation and not a mere employee. 58
The alleged "appointment" of Maglaya instead of "election" as provided by the by-laws neither convert the
president of university as a mere employee, nor amend its nature as a corporate officer. With the office
specifically mentioned in the by-laws, the NLRC erred in taking cognizance of the case, and in concluding
that Maglaya was a mere employee and subordinate official because of the manner of his appointment, his
duties and responsibilities, salaries and allowances, and considering the Identification Card, the
Administration and Personnel Policy Manual which specified the retirement of the university president, and
the check disbursement as pieces of evidence supporting such finding.
A corporate officer's dismissal is always a corporate act, or an intra-corporate controversy which arises
between a stockholder and a corporation, and the nature is not altered by the reason or wisdom with which
the Board of Directors may have in taking such action.59 The issue of the alleged termination involving a
corporate officer, not a mere employee, is not a simple labor problem but a matter that comes within the
area of corporate affairs and management and is a corporate controversy in contemplation of the
Corporation Code.60
The long-established rule is that the jurisdiction over a subject matter is conferred by law. 61 Perforce,
Section 5 (c) of PD 902-A, as amended by Subsection 5.2, Section 5 of Republic Act No. 8799, which
provides that the regional trial courts exercise exclusive jurisdiction over all controversies in the election or
appointment of directors, trustees, officers or managers of corporations, partnerships or associations,
applies in the case at bar.62
To emphasize, the determination of the rights of a corporate officer dismissed from his employment, as well
as the corresponding liability of a corporation, if any, is an intra-corporate dispute subject to the jurisdiction
of the regular courts.63
As held in Leonor v. Court of Appeals,64 a void judgment for want of jurisdiction is no judgment at all. It
cannot be the source of any right nor the creator of any obligation. All acts performed pursuant to it and all
claims emanating from it have no legal effect. Hence, it can never become final and any writ of execution
based on it is void.65
Since this Court is now reversing the challenged decision of the CA and affirming the decision of the LA in
dismissing the case for want of jurisdiction, Maglaya is not entitled to collect the amount of P2,505,208.75
awarded from the time the NLRC decision became final and executory up to the time theCA dismissed WUP's
petition for certiorari.
In sum, this Court finds that the NLRC erred in assuming jurisdiction over, and thereafter in failing to
dismiss, Maglaya's complaint for illegal dismissal against WUP, since the subject matter of the instant case is
an intra-corporate controversy which the NLRC has no jurisdiction.
WHEREFORE, the petition for review on certiorari filed by petitioner Wesleyan University-Philippines is
hereby GRANTED. The assailed Resolution dated January 20, 2014 of the Court of Appeals in CA-G.R. SP
No. 129196 is hereby REVERSED and SET ASIDE. Respondent Atty. Guillermo T. Maglaya, Sr. is
hereby ORDERED to REIMBURSE the petitioner the amount of P2,505,208.75 awarded by the National
Labor Relations Commission.
WUP vs. MAGLAYA, SR.
WESLEYAN UNIVERSITY-PHILIPPINES vs. GUILLERMO T. MAGLAYA, SR.
G.R. No. 212774
January 23, 2017
“For this Court's resolution is a petition for review on certiorari filed by petitioner Wesleyan University-
Philippines (WUP) assailing the Resolution1 dated January 20, 2014 of the Court of Appeals (CA) which
denied its petition for certiorari.”
FACTS:
WUP is a non-stock, non-profit, non-sectarian educational corporation duly organized and existing under
the Philippine laws. Respondent Atty. Guillermo T. Maglaya, Sr. was appointed as a corporate member
and was elected as a member of the Board of Trustees, both for a period of five (5) years. He was elected
as President of the University for a five-year term. He was re-elected as a trustee.
In a Memorandum, the incumbent Bishops of the United Methodist Church apprised all the corporate
members of the expiration of their tenns on December 31, 2008, unless renewed by the former. The said
members, including Maglaya, sought the renewal of their membership in the WUP's Board, and signified
their willingness to serve the corporation.
Dr. Dominador Cabasal, Chairman of the Board, informed the Bishops of the cessation of corporate
terms of some of the members and/or trustees since the by-laws provided that the vacancy shall only be
filled by the Bishops upon the recommendation of the Board. Maglaya learned that the Bishops created
an Ad Hoc Committee to plan the efficient and orderly turnover of the administration of the WUP in view
of the alleged "gentleman's agreement", and that the Bishops have appointed the incoming corporate
members and trustees. He clarified that there was no agreement and any discussion of the turnover
because the corporate members still have valid and existing corporate terms.
In this case, the Bishops, through a formal notice to all the officers, deans, staff, and employees of WUP,
introduced the new corporate members, trustees, and officers. In the said notice, it was indicated that
the new Board met, organized, and elected the new set of officers. Manuel Palomo, the new Chairman of
the Board, informed Maglaya of the termination of his services and authority as the President of the
University.
Thereafter, Maglaya and other fonner members of the Board filed a Complaint for Injunction and
Damages before the Regional Trial Court of Cabanatuan City.The RTC dismissed the case declaring the
same as a nuisance or harassment suit prohibited under Section l(b), Rule 1 of the Interim Rules for
Intra-Corporate Controversies. The RTC observed that it is clear from the by-laws of WUP that insofar as
membership in the corporation is concerned, which can only be given by the College of Bishops of the
United Methodist Church, it is a precondition to a seat in the WUP Board. Consequently, the expiration
of the terms of the plaintiffs, including Maglaya, as corporate members carried with it their termination
as members of the Board. Moreover, their continued stay in their office beyond their terms was only in
hold-over capacities, which ceased when the Bishops appointed new members of the corporation and
the Board.
The CA affirmed the decision of the RTC, and dismissed the petition for certiorari filed by the plaintiffs for
being the improper remedy.
Thereafter, Maglaya filed the present illegal dismissal case against WUP, Palomo, Bishop Lito C. Tangonan
and Bishop Leo A. Soriano. He claimed that he was unceremoniously dismissed in a wanton, reckless,
oppressive and malevolent manner.
The Labor Arbiter ruled in favor of WUP. The LA held that the action between employers and employees
where the employer-employee relationship is merely incidental is within the exclusive and original
jurisdiction of the regular courts.
The National Labor Relations Commission reversed and set aside the Decision of the LA ruling that the
illegal dismissal case falls within the jurisdiction of the labor tribunals. Since the reasons for his
termination cited by WUP were not among the just causes provided under Article 282 (now Article 297)
of the Labor Code, Maglaya was illegally dismissed.
Thereafter, the NLRC denied the motion for reconsideration filed by WUP and the CA dismissed the
petition for certiorari filed by WUP. The CA noted that the decision and resolution of the NLRC became
final and executor.
ISSUE:
The Court of Appeals committed an error of law when it summarily dismissed the special civil action for
certiorari raising lack of jurisdiction of the NLRC filed by [WUP] where it was very clear that the NLRC had
no jurisdiction over the case involving a corporate officer and where the nature of the controversy is an
intra-corporate dispute.
RULING:
The Court find the instant petition impressed with merit.
WUP alleges that while the NLRC decision became final and executory, it did not mean that the said
decision had become immutable and unalterable as the CA ruled. WUP maintains that the remedy of the
aggrieved party against a final and executory decision of the NLRC is the filing of the petition for
certiorari under Rule 65 of the Rules of Court. As such, it was able to meet the conditions set forth in
filing the said remedy before the CA.
"Corporate officers" in the context of Presidential Decree No. 902- A are those officers of the corporation
who are given that character by the Corporation Code or by the corporation's by-laws. There are three
specific officers whom a corporation must have under Section 25 of the Corporation Code. These are the
president, secretary and the treasurer. The number of officers is not limited to these three. A corporation
may have such other officers as may be provided for by its by-laws like, but not limited to, the vice-
president, cashier, auditor or general manager. The number of corporate officers is thus limited by law
and by the corporation's by-laws.
Since this Court is now reversing the challenged decision of the CA and affirming the decision of the LA in
dismissing the case for want of jurisdiction, Maglaya is not entitled to collect the amount of
₱2,505,208.75 awarded from the time the NLRC decision became final and executory up to the time the
CA dismissed WUP's petition for certiorari.
In sum, this Court finds that the NLRC erred in assuming jurisdiction over, and thereafter in failing to
dismiss, Maglaya's complaint for illegal dismissal against WUP, since the subject matter of the instant
case is an intra-corporate controversy which the NLRC has no jurisdiction.
LIM v. MOLDEX
Mary E. Lim Vs. Moldex Land, Inc., et al.
G.R. No. 206038
January 25, 2017
FACTS:
On July 21, 2012 Condocor (Condominium Corporation) a non-stock, non-profit corporation, which is the
registered condominium corporation for the Golden Empire Tower held its annual general membership
meeting. Moldex became a member of Condocor on the basis of its ownership of the 220 unsold units in
the Golden Empire Tower.
During the meeting, an existence of a quorum was declared even though only 29 of the 108 unit buyers
were present. The declaration was based on the presence of the majority of the voting rights, including
those pertaining to the 220 unsold units held by Moldex through its representatives. Lim, through her
attorney-in-fact, objected to the validity of the meeting. The objection was denied. Thus, Lim and all the
other unit owners present, except for one, walked out and left the meeting.
Despite the walkout, the individual respondents and the other unit owner proceeded with the meeting
and elected the new members of the Board of Directors for 2012-2013. All four (4) individual
respondents (JAMINOLA, MACALINTAL, MILANES, and ROMAN) were voted as members of the board,
together with other 3 members.
Consequently, Lim filed an election protest before the RTC. Lim claimed that herein respondents are not
entitled to be members of the Board of Directors because they are non-unit buyers. However, said court
ruled in favor for the respondents. Not in conformity, Lim filed the present petition.
ISSUES:
1) Whether or not the July 21, 2012 membership meeting was valid.
2) Whether or not Moldex can be deemed a member of Condocor.
3) Whether or not representatives of Moldex who are non-members can be elected as a member of the
Board of Directors of Condocor.
HELD:
No. The July 21, 2012 membership meeting was not valid.
A stockholders' or members' meeting must comply with the following requisites to be
valid:
1. The meeting must be held on the date fixed in the ByLaws or in accordance with law;
2. Prior written notice of such meeting must be sent to all stockholders/members of record;
3. It must be called by the proper party;
4. It must be held at the proper place; and
5. Quorum and voting requirements must be met.
Of these five ( 5) requirements, the existence of a quorum is crucial. Any act or transaction made during
a meeting without quorum is rendered of no force and effect, thus,
not binding on the corporation or parties concerned. In relation thereto, Section 52 of the
Corporation Code of the Philippines (Corporation Code) provides:
Section 52. Quorum in meetings. - Unless otherwise provided for in this Code or in the by-laws, a
quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a
majority of the members in the case of non-stock corporations.
Thus, for stock corporations, the quorum is based on the number of outstanding voting stocks while for
non-stock corporations, only those who are actual, living members with voting rights shall be counted in
determining the existence of a quorum.
The By-Laws of Condocor has no rule different from that provided in the Corporation Code with respect
the determination of the existence of a quorum. The quorum during the July 21, 2012 meeting should
have been majority of Condocor's members in good standing. Accordingly, there was no quorum during
the July 21, 2012 meeting considering that only 29 of the 108 unit buyers were present. As there was no
quorum, any resolution passed during the July 21,2012 annual membership meeting was null and void
and, therefore, notbinding upon the corporation or its members. The meeting being null andvoid, the
resolution and disposition of other legal issues emanating from the null and void July 21, 2012
membership meeting has been rendered unnecessary.
II
Yes. Moldex can be deemed a member of Condocor.

Lim asserted that only unit buyers are entitled to become members of Condocor. Respondents, for their
part, countered that a registered owner of a unit in a condominium project or the holders of duly issued
condominium certificate of title (CCT), automatically becomes a member of the condominium
corporation, relying on Sections 2 and 10 of the Condominium Act, the Master Deed and Declaration of
Restrictions, as well as the By-Laws of Condocor. For said reason, respondents averred that as Moldex is
the owner of 220 unsold units and the parking slots and storage areas attached thereto, it automatically
became a member of Condocor upon the latter's creation.
On this point, respondents are correct. Section 2 of the Condominium Act states:
Sec. 2. A condominium is an interest in real property consisting of separate interest in a unit in a

residential, industrial or commercial building and an undivided interest in common, directly or indirectly,
in the land on which it is located and in other common areas of the building. A condominium may
include, in addition, a separate interest in other portions of such real property. Title to the common
areas, including the land, or the appurtenant interests in such areas, may be held by a corporation
specially formed for the purpose (hereinafter known as the "condominium corporation") in which the
holders of separate interest shall automatically be members or shareholders, to the exclusion of others,
in proportion to the appurtenant interest of their respective units in the common areas
It is erroneous to argue that the ownership must result from a sale transaction between the owner-
developer and the purchaser. Such interpretation would mean that persons who inherited a unit, or have
been donated one, and properly transferred title in their names cannot become members of a
condominium corporation.
III
No. Representatives of Moldex who are non-members cannot be elected as a member of the Board of
Directors of Condocor.
A corporation can act only through natural persons duly authorized for the purpose or by a specific act of
its board of directors.45 Thus, in order for
Moldex to exercise its membership rights and privileges, it necessarily has to appoint its representatives.
However, individual respondents who are non-members cannot be elected as directors and officers of
the Condocor.
While Moldex may rightfully designate proxies or representatives, the latter, however, cannot be elected
as directors or trustees of Condocor. First, the Corporation Code clearly provides that a director or
trustee must be a member of record of the corporation. Further, the power of the proxy is merely to
vote. If said proxy is not a member in his own right, he cannot be elected as a director or
proxyndominium corporation.
G.R. No. 184317, January 25, 2017
METROPOLITAN BANK AND TRUST COMPANY, Petitioner, v. LIBERTY CORRUGATED BOXES

MANUFACTURING CORPORATION, Respondent.
DECISION
LEONEN, J.:
A corporation with debts that have already matured may still file a petition for rehabilitation under the
Interim Rules of Procedure on Corporation Rehabilitation.
This resolves a Petition for Review1 on certiorari assailing the Court of Appeal's June 13, 2008 Decision 2and
August 20, 2008 Resolution.3 The Court of Appeals affirmed the Regional Trial Court's December 21, 2007
Order4 approving Liberty Corrugated Boxes Manufacturing Corp.'s rehabilitation plan.
Respondent Liberty Corrugated Boxes Manufacturing Corp. (Liberty) is a domestic corporation that produces
corrugated packaging boxes.5 It obtained various credit accommodations and loan facilities from petitioner
Metropolitan Bank and Trust Company (Metrobank)amounting to P19,940,000.00. To secure its loans,
Liberty mortgaged to Metrobank 12 lots in Valenzuela City.6
Liberty defualted on the loans.7
On June 21, 2007, Liberty filed a Petition8 for corporate rehabilitation before Branch 74 of the Regional Trial
Court of Malabon City. Liberty claimed that it could not meet its obligations to Metrobank because of the
Asian Financial Crisis, which resulted in a drastic decline in demand for its goods, and the serious sickness of
its Founder and President, Ki Kiao Koc.9
Liberty's rehabilitation plan consisted of: (a) a debt moratorium; (b) renewal of marketing efforts; (c)
resumption of operations; and (d) entry into condominium development, a new business. 10
On June 27, 2007, the Regional Trial Court, finding the Petition sufficient in form and substance, issued a
Stay Order11 and set an initial hearing for the Petition. On August 6, 2007, Metrobank filed its
Comment/Opposition. It argued that Liberty was not qualified for corporate rehabilitation; that Liberty's
Petition for rehabilitation and rehabilitation plan were defective; and that rehabilitation was not feasible. It
also claimed that Liberty filed the Petition solely to avoid its obligations to the bank.
In its September 20, 2007 Order,12 the Regional Trial Court gave due course to the Petition and referred the
rehabilitation plan to the Rehabilitation Receiver.
Rehabilitation Receiver Rafael Chris F. Teston recommended the approval of the plan, provided that Liberty
would initiate construction on the property in Valenzuela within 12 months from approval. 13
In its December 21, 2007 Order,14 the Regional Trial Court approved the rehabilitation plan. The trial court
found that Liberty was capable of being rehabilitated and that the rehabilitation plan was feasible and
viable.15
Metrobank appealed to the Court of Appeals. On June 13, 2008, the Court of Appeals issued the
Decision16 denying the Petition and affirming the Regional Trial Court's December 21, 2007 Order.
The Court of Appeals affirmed the Regional Trial Court's finding that debtor corporations could still avail
themselves of the remedy of rehabilitation under the Interim Rules of Procedure on Corporate Rehabilitation
(Interim Rules) even if they were already in default. 17 It held that even insolvent corporations could still file
a petition for rehabilitation.18
The Court of Appeals also found that the trial court correctly approved the rehabilitation plan over
Metrobank's Opposition upon the recommendation of the Rehabilitation Receiver, who had carefully
considered and addressed Metrobank's criticism on the plan's viability. 19
The Court of Appeals stressed that the purpose of rehabilitation proceedings is to enable the distressed
company to gain a new lease on life and to allow the creditors to be paid their claims. It held that the
approval of the Regional Trial Court was precisely "'to effect a feasible and viable rehabilitation' of ailing
corporations[,]"20 as required by Presidential Decree No. 902-A.
Metrobank moved for reconsideration, but the Motion was denied 21 on August 20, 2008.
Hence, this Petition was filed.
This Court required respondent Liberty Corrugated Boxes Manufacturing Corp. to file its comment on the
Petition within 10 days from notice.22 On March 23, 2009, respondent filed its Comments to the
Petitioner,23 noted by this Court in its April 20, 2009 Resolution.24 Petitioner Metropolitan Bank and Trust
Company filed its Reply25 dated May 26, 2009, which this Court noted in its July 20, 2009 Resolution. 26This
Court also gave due course to the Petition and required the parties to submit their respective memoranda
within 30 days from notice.
The parties filed their Memoranda on September 24, 200927 and November 3, 2009.28
Petitioner argues that respondent can no longer file a petition for corporate rehabilitation. It claims that Rule
4, Section 1 of the Interim Rules restricts the kind of debtor who can file petitions for corporate
rehabilitation.29 Petitioner insists that the phrase "who foresees the impossibility of meeting its debts when
they respectively fall due" must be construed plainly to mean that an element of foresight is
required.30 Because foresight is required, the debts of the corporation should not have matured. 31
Petitioner also argues that the Regional Trial Court's approval of the rehabilitation plan is contrary to Rule 4,
Section 23 of the Interim Rules.32 Under the provision, the court may approve the rehabilitation plan over
the opposition of the creditors only when two (2) elements concur: (a) when the court finds that the
rehabilitation of the debtor is feasible; and (b) when the opposition of the creditors is "manifestly
unreasonable."33 Petitioner claims that the Regional Trial Court did not declare the manifest
unreasonableness of petitioner's opposition.34
Petitioner likewise argues that respondent's Petition for rehabilitation and the attached inventory of accounts
receivable failed to disclose the maturity dates of the accounts.35 This failure renders the Petition defective
under Rule 4, Section 2(d) of the Interim Rules.36
Petitioner further claims that the rehabilitation plan lacked material financial commitments required under
Rule 4, Section 5 of the Interim Rules.37 The rehabilitation plan did not claim that new money would be
invested in the corporation.38
On the other hand, respondent insists on its qualification to seek rehabilitation. 39 It argues that petitioner's
reading of Rule 4, Section 1 of the Interim Rules is restrictive, merely indicating the minimum conditions for
a debtor to be able to file a petition for rehabilitation.40
In support of its claim that the remedy of corporate rehabilitation covers defaulting debtors, respondent
cites Rule 4, Sections 441 and 642 of the Interim Rules.43 Under Section 6, a stay order, which may assume
that cases have been filed to collect on matured debts, may be granted.
Respondent argues that the Court of Appeals' finding that the rehabilitation plan is feasible is well-grounded
and in keeping with Rule 4, Section 23 of the Interim Rules. 44 The Rehabilitation Receiver deemed the
rehabilitation plan viable45 The Petition also listed the receivables, clearly due for collection, in its annexes. 46
Respondent further contends that contrary to petitioner's arguments, the rehabilitation plan contains
material financial commitments.47 When the Interim Rules speak of "material financial commitments to
support the rehabilitation plan,"48 it does not mean that the commitment must come from outside sources.
The corporation's showing that the rehabilitation plan can find sufficient funding should be sufficient. 49
The issues for resolution are:
First, whether respondent, as a debtor in default, is qualified to file a petition for rehabilitation under
Presidential Decree No. 902-A and Rule 4, Section 1 of the Interim Rules; and
Second, whether respondent's Petition for rehabilitation is sufficient in form and substance and respondent's
rehabilitation plan, feasible.
I.A
A corporation that may seek corporate rehabilitation is characterized not by its debt but by its capacity to
pay this debt.
Rule 4, Section 1 of the Interim Rules provides:
RULE 4
Debtor-Initiated Rehabilitation
SECTION 1. Who May Petition. — Any debtor who foresees the impossibility of meeting its debts when they
respectively fall due, or any creditor or creditors holding at least twenty-five percent (25%) of the debtor's
total liabilities, may petition the proper Regional Trial Court to have the debtor placed under rehabilitation.
Petitioner insists that the words of the Interim Rules are clear and must be given their plain and literal
meaning. A better interpretation requires scrutiny of the purpose behind the enactment of the Interim Rules
and its provisions.
Philippine Bank of Communications v. Basic Polyprinters and Packaging Corporation 50 reiterates the purpose
of rehabilitation, which is to provide meritorious corporations an opportunity for recovery:
Under the Interim Rules, rehabilitation is the process of restoring "the debtor to a position of successful
operation and solvency, if it is shown that its continuance of operation is economically feasible and its
creditors can recover by way of the present value of payments projected in the plan more if the corporation
continues as a going concern that if it is immediately liquidated." It contemplates a continuance of corporate
life and activities in an effort to restore and reinstate the corporation to its former position of successful
operation and solvency.51 (Citations omitted)
As stated by the Court of Appeals in Philippine Bank of Communications, rehabilitation is in line with the
State's objective to promote a wider and more meaningful equitable distribution of wealth. 52
In line with this objective, the Interim Rules provide for a liberal construction of its provisions:
RULE 2
Definition of Terms and Construction
....
SECTION 2. Construction. — These Rules shall be liberally construed to carry out the objectives of Sections
5(d), 6(c) and 6(d) of Presidential Decree No. 902-A, as amended, and to assist the parties in obtaining a
just, expeditious, and inexpensive determination of cases. Where applicable, the Rules of Court shall apply
suppletorily to proceedings under these Rules.
To adopt petitioner's interpretation would undermine the purpose of the Interim Rules. There is no reason
why corporations with debts that may have already matured should not be given the opportunity to recover
and pay their debtors in an orderly fashion. The opportunity to rehabilitate the affairs of an economic entity,
regardless of the status of its debts, redounds to the benefit of its creditors, owners, and to the economy in
general. Rehabilitation, rather than collection of debts from a company already near bankruptcy, is a better
use of judicial rewards.
A.M. No. 08-8-10-SC53 further describes the remedy intitiated by a petition for rehabilitation:
[A] petition for rehabilitation, the procedure for which is provided in the Interim Rules of Procedure on
Corporate Recovery, should be considered as a special proceeding. It is one that seeks to establish the
status of a party or a particular fact. As provided in section 1, Rule 4 of the Interim Rules on Corporate
Recovery, the status or fact sought to be established is the inability of the corporate debtor to pay its
debts when they fall due so that a rehabilitation plan, containing the formula for the successful recovery of
the corporation, may be approved in the end. It does not seek a relief from an injury caused by another
party. (Emphasis supplied)
Thus, the condition that triggers rehabilitation proceedings is not the maturation of a corporation's debts but
the inability of the debtor to pay these.
I.B.
Where the law does not distinguish, neither should this Court. 54 Because the definition under the Interim
Rules is encompassing,55 there should be no distinction whether a claim has matured or otherwise.
Petitioner's proposed interpretation contradicts provisions of the Interim Rules, which contemplate situations
where a debtor corporation may already be in default. As correctly pointed out by respondent, a creditor
may possibly petition for the debtor's rehabilitation for default on debts already owed. 56
Rule 4, Section 1 of the Interim Rules does not specify what kind of debtor may seek rehabilitation. The
provision allows creditors holding 25% of the debtor corporation's total liabilities to petition for the
corporation's rehabilitation.
Further, Rule 4, Section 6 of the Interim Rules provides for a stay order "staying enforcement of all claims,
whether for money or otherwise and whether such enforcement is by court action or otherwise." 57 A stay
order, however, only applies to the suspension of the enforcement of claims. Hence, claims, if proper, can
still be instituted in other proceedings. There may already be pending claims against a debtor corporation for
debts already matured.
In Spouses Sobrejuanite v. ASB Development,58 the purpose of the stay order is to preserve the rights of
both the debtor corporation and its creditors:
The purpose for the suspension of the proceedings is to prevent a creditor from obtaining an advantage or
preference over another and to protect and preserve the rights of party litigants as well as the interest of
the investing public or creditors. Such suspension is intended to give enough breathing space for the
management committee or rehabilitation receiver to make the business viable again, without having to
divert attention and resources to litigations in various fora. 59 (Emphasis supplied, citations omitted)
The stay order prevents preference or advantage of creditors over others, including the advantage that a
creditor with matured money claims may have over one whose claims are not in yet in default.
Rule 2, Section 1 of the Interim Rules defines the term "claim":
RULE 2
....
"Claim" shall include all claims or demands of whatever nature or character against a debtor or its property,
whether for money or otherwise.
The term "claim," " which includes "all claims or demands of whatever nature or character," is not limited to
claims which have not yet defaulted.
This does not mean that those with secured claims against corporations undergoing rehabilitation are
deprived of the preference given them by law. Negros Navigation Co., Inc. v. Court of Appeals 60enumerated
the guidelines in the treatment of claims against corporations undergoing rehabilitation:
1. All claims against corporations, partnerships, or associations that are pending before any court, tribunal,
or board, without distinction as to whether or not a creditor is secured or unsecured, shall be suspended
effective upon the appointment of a management committee, rehabilitation receiver, board, or body in
accordance with the provisions of Presidential Decree No. 902-A.
2. Secured creditors retain their preference over unsecured creditors, but enforcement of such preference is
equally suspended upon the appointment of a management committee, rehabilitation receiver, board, or
body. In the event that the assets of the corporation, partnership, or association are finally liquidated,
however, secured and preferred credits under the applicable provisions of the Civil Code will definitely have
preference over unsecured ones.61 While the corporation is undergoing rehabilitation, all claims, regardless
of nature, are suspended from enforcement. However, once the corporation has successfully rehabilitated or
finally liquidated, the enforcement of these secured claims takes precedence. 61
In Negros Navigation Co., Tsuneishi Heavy Industries (Tsuneishi) filed a collection case against Negros
Navigation Co, Inc. (Negros Navigation) for repairman's lien, or the unpaid services for the repair of its
vessels.62 The Regional Trial Court of Cebu issued a writ of preliminary attachment against Negros
Navigation's properties and held that Tsuneishi's repairman's lien constituted a superior maritime
lien.63Negros Navigation then filed before the Regional Trial Court of Manila a petition for corporate
rehabilitation with prayer for suspension of payments, which the trial court, in issuing a stay order,
granted.64 On appeal, Tsuneishi argued before this Court that uits maritime liens were not covered by the
stay order.65
This Court held that the admiralty proceeding was appropriately suspended under Rule 4, Section 6 of the
Interim Rules, there being no exemptions or distinctions in the law on what kinds of claims are covered by
suspension:
The justification for the suspension of actions or claims, without distinction, pending rehabilitation
proceedings is to enable the management committee or rehabilitation receiver to effectively exercise its/his
powers free from any judicial or extra-judicial interference that might unduly hinder or prevent the "rescue"
of the debtor company. To allow such other actions to continue would only add to the burden of the
management committee or rehabilitation receiver, whose time, effort and resources would be wasted in
defending claims against the corporation instead of being directed toward its restructuring and
rehabilitation.66 (Citations omitted)
Likewise, in Abrera v. Hon. Barza,67 College Assurance Plan Philippines, Inc. (CAP) sold pre-need educational
plans, which guaranteed the payment of tuition and other standard school fees. 68 CAP suffered financial
difficulties and failed to meet its obligations under the plans.69 The CAP planholders then filed an action for
specific performance and/or annulment of contract against CAP, its directors, and its officers. 70
CAP filed a petition for rehabilitation, which the trial court deemed sufficient in form and substance. 71 The
trial court also issued a stay order.72
Questioning the stay order and the petition for rehabilitation, the CAP planholders argued that CAP was a
pre-need corporation and that a trust relationship existed between the corporation and the
planholders.73They argued that because they did not have a debtor-creditor relationship with CAP, CAP could
not apply for rehabilitation, and the stay order could not apply to the action for specific performance. 74
This Court held that CAP, a pre-need corporation already in default of its obligations to the planholders,
could file for rehabilitation:
Under the Interim rules, "debtor" shall mean "any corporation, partnership, or association, whether
supervised or regulated by the Securities and Exchange Commission or other government
agencies, on whose behalf a petition for rehabilitation has been filed under these Rules."
The Interim Rules does not distinguish whether a pre-need corporation like CAP cannot file a petition for
rehabilitation before the RTC. Courts are not authorized to distinguish where the Interim Rules makes no
distinction.
Moreover, under the Interim Rules, "claim" shall include "all claims or demands of whatever nature or
character against a debtor or its property, whether for money or otherwise." "Creditor" shall mean "any
holder of a claim."
Hence, the claim of petitioners for payment of tuition fees from CAP is included in the definition of "claims"
under the Interim Rules.75 (Emphasis in the original, citations omitted)
In Express Investments III Private Ltd. and Export Development Canada v. Bayan Telecommunications,
Inc.,76 Bayan Telecommunications, Inc. (Bayantel) defaulted on its obligations to its creditors and reached a
total of P35.928 billion in unpaid principal and interest.77 One of its bank creditors filed a petition for
rehabilitation.78 The trial court gave due course to the petition.79
This Court allowed Bayantel to undergo rehabilitation proceedings despite Bayantel's status as a debtor
corporation already in default.80
The definition of "claim" and the nature of stay orders contemplate situations where debtor corporations
already in default may be under rehabilitation. Rule 4, Section 1 does not limit who may file a petition for
rehabilitation.
I.C.
The plain meaning doctrine cannot apply to Rule 4, Section 1 of the Interim Rules. In Social Weather
Stations, Inc. and Pulse Asia v. Commission on Elections:81
First, verba legis or the so-called plain-meaning rule applies only when the law is completely clear, such that
there is absolutely no room for interpretation. Its application is premised on a situation where the words of
the legislature are clear that its intention, insofar as the facts of a case demand from the point of view of a
contemporary interpretative community, is neither vague nor ambiguous. This is a matter of judicial
appreciation. It cannot apply merely on a party's contention of supposed clarity and lack of room for
interpretation.
....
Second, statutory construction cannot lend itself to pedantic rigor that foments absurdity. The dangers of
inordinate insistence on literal interpretation are commonsensical and need not be belabored. These dangers
are by no means endemic to legal interpretation. Even in everyday conversations, misplaced literal
interpretations are fodder for humor. A fixation on technical rules of grammar is no less innocuous. A
pompously doctrinaire approach to text can stifle, rather than facilitate, the legislative wisdom that
unbridled textualism purports to bolster.
Third, the assumption that there is, in all cases, a universal plain language is erroneous. In reality,
universality and uniformity of meaning is a rarity. A contrary belief wrongly assumes that language is
static.82 (Citations omitted)
The context of the words of the statute should be considered to clarify inherent ambiguities. Thus, in Chavez
v. Judicial and Bar Council:83
Under the maxim noscitur a sociis, where a particular word or phrase is ambiguous in itself or is equally
susceptible of various meanings, its correct construction may be made clear and specific by considering the
company of words in which it is founded or which it is associated. This is because a word or phrase in a
statute is always used in association with other words or phrases, and its meaning may, thus, be modified or
restricted by the latter. The particular words, clauses and phrases should not be studied as detached and
isolated expressions, but the whole and every part of the statute must be considered in fixing the meaning
of any of its parts and in order to produce a harmonious whole. A statute must be so construed as to
harmonize and give effect to all its provisions whenever possible. In short, every meaning to be given to
each word or phrase must be ascertained from the context of the body of the statute since a word or phrase
in a statute is always used in association with other words or phrases and its meaning may be modified or
restricted by the latter.84 (Emphasis supplied, citations omitted)
Where a literal meaning would lead to absurdity, 85 contradiction, or injustice,86 or otherwise defeat the clear
purpose of the lawmakers,87 the spirit and reason of the statute may be examined to determine the true
intention of the provision.88
In this case, the phrase "any debtor who foresees the impossibility of meeting its debts when they
respectively fall due" in Rule 4, Section 1 of the Interim Rules need not refer to a specific period or point in
time when the debts mature. It may refer to the debtor corporation's general realization that it will not be
able to fulfill its obligations— a realization that may come before default.
Construing the phrase "when they respectively fall due" to mean that the debtor must already be in default
defeats the clear purpose of the lawmakers. It unjustly limits rehabilitation to corporations with matured
obligations.
II
This Court is not a trier of facts.89 The factual findings of the lower courts are accorded great weight and
respect.90 This is especially so in corporate rehabilitation proceedings, to which commercial courts are
designated on account of their expertise and specialized knowledge. 91
The Court of Appeals affirmed the Regional Trial Court's findings that the Petition for rehabilitation was
sufficient and that the rehabilitation plan was reasonable. Petitioner seeks to overturn these findings. It
argues that the Petition was insufficient for its failure to include maturity dates in the attached inventory;
that the Regional Trial Court failed to determine whether petitioner's opposition was manifestly
unreasonable; and that the rehabilitation plan was not feasible as it lacked materially significant financial
commitments.92
These are questions of fact. The resolution of these issues entails a review of the sufficiency and weight of
the evidence presented by the parties, including the inventory attached to the Petition, as well as the other
financial documents for the rehabilitation.
Pascual v. Burgos93 reiterates that only questions of law should be raised in petitions for certiorari under
Rule 45:
The Rules of Court require that only questions of law should be raised in petitions filed under Rule 45. This
court is not a trier of facts. It will not entertain questions of fact as the factual findings of the appellate
courts are "final, binding[,] or conclusive on the parties and upon this [c]ourt" when supported by
substantial evidence. Factual findings of the appellate courts will not be reviewed nor disturbed on appeal to
this court.
However, these rules do admit exceptions. Over time, the exceptions to these rules have expanded. At
present, there are 10 recognized exceptions that were first listed in Medina v. Mayor Asistio, Jr.:
(1) When the conclusion is a finding grounded entirely on speculation, surmises or conjectures; (2) When
the inference made is manifestly mistaken, absurd or impossible; (3) Where there is a grave abuse of
discretion; (4) When the judgment is based on a misapprehension of facts; (5) When the findings of fact are
conflicting; (6) When the Court of Appeals, in making its findings, went beyond the issues of the case and
the same is contrary to the admissions of both appellant and appellee; (7) The findings of the Court of
Appeals are contrary to those of the trial court; (8) When the findings of fact are conclusions without citation
of specific evidence on which they are based; (9) When the facts set forth in the petition as well as in the
petitioner's main and reply briefs are not disputed by the respondents; and (10) The finding of fact of the
Court of Appeals is premised on the supposed absence of evidence and is contradicted by the evidence on
record.
These exceptions similarly apply in petitions for review filed before this court involving civil, labor, tax, or
criminal cases.
A question of fact requires this court to review the truthfulness or falsity of the allegations of the parties.
This review includes assessment of the "probative value of the evidence presented." There is also a question
of fact when the issue presented before this court is the correctness of the lower courts' appreciation of the
evidence presented by the parties. 94(Citations omitted)
Absent any of the exceptions enumerated in Pascual, this Court will neither review nor disturb the lower
courts' findings of fact on appeal.
Petitioner contends that the Court of Appeals' findings are misapprehensions of the facts of the case, and
that these findings are conclusions without citations of their specific factual bases. It claims that the Court of
Appeals ignored respondent's failure to attach the maturity dates 95 and merely relied on respondent's self-
serving assertions.96 It also argues that the Court of Appeals failed to refute petitioner's observations on the
defects of respondent's rehabilitation plan.97
Petitioner fails to convince. The Court of Appeals had legal and factual bases for approving the Petition for
rehabilitation.
The Interim Rules does not specify that courts must make a written declaration that a creditor's opposition is
manifestly unreasonable. The Regional Trial Court Orders gave petitioner every opportunity to make its
opposition and stance clear. In issuing the December 21, 2007 Order and approving the rehabilitation plan,
the Regional Trial Court found the opposition unreasonable.
Rule 4, Section 5 of the Interim Rules outlines the requisites of a rehabilitation plan:
RULE 4
....
SECTION 5. Rehabilitation Plan — The rehabilitation plan shall include (a) the desired business targets or
goals and the duration and coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation
which shall include the manner of its implementation, giving due regard to the interests of secured
creditors; (c) the material financial commitments to support the rehabilitation plan; (d) the means for the
execution of the rehabilitation plan, which may include conversion of the debts or any portion thereof to
equity, restructuring of the debts, dacion en pago, or sale of assets or of the controlling interest; (e) a
liquidation analysis that estimates the proportion of the claims that the creditors and shareholders would
receive if the debtor's properties were liquidated; and (f) such other relevant information to enable a
reasonable investor to make an informed decision on the feasibility of the rehabilitation plan.
The Regional Trial Court, as affirmed by the Court of Appeals, deemed the Petition for rehabilitation
sufficient. In its June 27, 2007 Order, it found that all the documents required under Rule 4, Section 2 of the
Interim Rules were attached to the Petition.98
The Court of Appeals did not disregard the maturity dates. The Petition annexed a table of accounts
receivable showing obligations that had already matured. Respondent likewise admitted in the Petition 99that
it could not comply with its obligations to petitioner.
Petitioner argues that the Regional Trial Court failed to rule on its Opposition and declare it manifestly
unreasonable. It claims that this failure renders respondent's Petition for rehabilitation insufficient. This
argument lacks credence.
Both the Court of Appeals and the Regional Trial Court found that the Rehabilitation Receiver carefully
considered the feasibility of the rehabilitation plan, and that no serious objection and counter proposal were
presented by petitioner.100
Philippine Bank of Communications illustrates what may be deemed as insufficient financial commitments:
The commitment to add P10,000,000.00 working capital appeared to be doubtful considering that the
insurance claim from which said working capital would be sourced had already been written off by Basic
Polyprinters's affiliate, Wonder Book Corporation. A claim that has been written off is considered a bad debt
or a worthless asset, and cannot be deemed a material financial commitment for purposes of
rehabilitation. ..
We also declared in Wonder Book Corporation v. Philippine Bank of Communications (Wonder Book) that the
conversion of all deposits for future subscriptions to common stock and the treatment of all payables to
officers and stockholders as trade payables was hardly constituting material financial commitments. Such
"conversion" of cash advances to trade payables was, in fact, a mere re-classification of the liability entry
and had no effect on the shareholders' deficit....
....
We observe, too, that Basic Polyprinters's proposal to enter into the dacion en pago to create a source of
"fresh capital" was not feasible because the object thereof would not be its own property but one belonging
to its affiliate, TOL Realty and Development Corporation, a corporation also undergoing rehabilitation.
Moreover, the negotiations (for the return of books and magazines from Basic Polyprinters's trade creditors)
did not partake of a voluntary undertaking because no actual financial commitments had been made
thereon.
....
Due to the rehabilitation plan being an indispensable requirement in the corporate rehabilitation
proceedings, Basic Polyprinters was expected to exert a conscious effort in formulating the same, for such
plan would spell the future not only for itself but also for its creditors and the public in general. The contents
and execution of the rehabilitation plan could not be taken lightly. 101 (Emphasis supplied, citations omitted)
Petitioner's contention hinges on the sufficiency of respondent's material financial commitments, which
becomes significant in determining its resolve, earnestness, and good faith. 102
Respondent intends to source its funds from internal operations. That the funds are internally generated
does not render the funds insufficient. This arrangement is still a material, voluntary, and significant
financial commitment, in line with respondent's rehabilitation plan.
Both the Court of Appeals and the Regional Trial Court found the Rehabilitation Receiver's assurance that
the cashflow from respondent's committed sources to be sufficient, thus:
From the foregoing, the undersigned deems the expected sources of cashflow to support the proposed
Rehabilitation Plan of the Petitioner as realistic. The funds requirement to jumpstart the Rehabilitation Plan
is minimal and easily obtained by the Petitioner's management; while the income to be realized from the
development of a condominium project is also feasible. Finally, the present management of the Petitioner
appears to be capable of revitalizing and operating the Company and to generate the expected cashflow to
support its repayment program.103
Based on his assessment, the Rehabilitation Receiver noted that the funds required to finance the first year
of the rehabilitation plan would be much less than that the amount stated in the Petition. 104Respondent put
forth in detail its financial commitments.
Respondent, as a debtor corporation, may file for rehabilitation despite having defaulted on its obligations to
petitioner. As its Petition for rehabilitation was sufficient and its rehabilitation plan was feasible,
respondent's rehabilitation should proceed.
WHEREFORE, the Petition is DENIED. The June 13, 2008 Decision and August 20, 2008 Resolution of the
Court of Appeals in CA-G.R. SP No. 102147 are AFFIRMED.
SO ORDERED.
METROBANK v. LIBERTY CORRUGATED
METROPOLITAN BANK AND TRUST COMPANY VS. LIBERTY CORRUGATED BOXES MANUFACTURING
CORPORATION
G.R. No. 184317
January 25, 2017
Facts:
The Court of Appeals affirmed the Regional Trial Court's December 21, 2007
Order approving Liberty Corrugated Boxes Manufacturing Corp.'s rehabilitation plan.

Respondent Liberty Corrugated Boxes Manufacturing Corp. is a domestic corporation that produces
corrugated packaging boxes. It obtained various credit accommodations and loan facilities from
petitioner Metropolitan Bank and Trust Company (Metrobank) amounting to Pl 9,940,000.00. To secure
its loans, Liberty mortgaged to Metrobank 12 lots in Valenzuela City.
On June 21, 2007, Liberty filed a Petition8 for corporate rehabilitation before Branch 7 4 of the Regional
Trial Court of Malabon City. Liberty claimed that it could not meet its obligations to Metrobank because
of the Asian Financial Crisis, which resulted in a drastic decline in demand for its goods, and the serious
sickness of its Founder and President, Ki Kiao Koc.
Liberty's rehabilitation plan consisted of: (a) a debt moratorium; (b) renewal of marketing efforts; (c)
resumption of operations; and ( d) entry into condominium development, a new business.
On August 6, 2007, Metro bank filed its comment/opposition. It argued that Liberty was not qualified for
corporate rehabilitation; that Liberty's Petition for rehabilitation and rehabilitation plan were defective;
and that rehabilitation was not feasible. It also claimed that Liberty filed the Petition solely to avoid its
obligations to the bank.
Rehabilitation Receiver Rafael Chris F. Teston recommended the approval of the plan, provided that
Liberty would initiate construction on the property in Valenzuela within 12 months from approval.
In its December 21, 2007 Order, the Regional Trial Court approved the rehabilitation plan. Metrobank
appealed to the Court of Appeals. On June 13, 2008, the Court of Appeals issued the Decision16 denying
the Petition and affirming the Regional Trial Court's December 21, 2007 Order.
The Court of Appeals also found that the trial court correctly approved the rehabilitation plan over
Metrobank's Opposition upon the recommendation of the Rehabilitation Receiver, who had carefully
considered and addressed Metrobank's criticism on the plan's viability.
The Court of Appeals stressed that the purpose of rehabilitation proceedings is to enable the distressed
company to gain a new lease on life and to allow the creditors to be paid their claims. It held that the
approval of the Regional Trial Court was precisely "'to effect a feasible and viable rehabilitation' of ailing
corporations” as required by Presidential Decree No. 902-A.
Issues:
Whether respondent, as a debtor in default, is qualified to file a petition for rehabilitation under
Presidential Decree No. 902-A and Rule 4, Section 1 of the Interim Rules; and
Whether respondent's Petition for rehabilitation is sufficient in form and substance and respondent's
rehabilitation plan, feasible.
Held:
1) Rule 4, Section 1 of the Interim Rules provides:
RULE4
SECTION 1. Who May Petition. - Any debtor who foresees the impossibility of meeting its debts when
they respectively fall due, or any creditor or creditors holding at least twenty-five percent (25%) of the
debtor's total liabilities, may petition the proper Regional Trial Court to • have the debtor placed under
rehabilitation.
Philippine Bank of Communications v. Basic Polyprinters and Packaging Corporation50 reiterates the
purpose of rehabilitation, which is to provide meritorious corporations an opportunity for recovery:
Under the Interim Rules, rehabilitation is the process of restoring "the debtor to a position of successful
operation and solvency, if it is shown that its continuance of operation is economically feasible and its
creditors can recover by way of the present value of payments projected in the plan more if the
corporation continues as a going concern that if it is immediately liquidated." It contemplates a
continuance of corporate life and activities in an effort to restore and reinstate the corporation to its
former position of successful operation and solvency.
2) The Interim Rules provide for a liberal construction of its provisions:
RULE2
SECTION 2. Construction. - These Rules shall be liberally construed to carry out the objectives of Sections
5(d), 6(c) and 6(d) of Presidential Decree No. 902-A, as amended, and to assist the parties in obtaining a
just, expeditious, and inexpensive determination of cases. Where applicable, the Rules of Court shall
apply suppletorily to proceedings under these Rules.
To adopt petitioner's interpretation would undermine the purpose of the Interim Rules. There is no
reason why corporations with debts that may have already matured should not be given the opportunity
to recover and pay their debtors in an orderly fashion. The opportunity to rehabilitate the affairs of an
economic entity, regardless of the status of its debts, redounds to the benefit of its creditors, owners,
and to the economy in general. Rehabilitation, rather than collection of debts from a company already
near bankruptcy, is a better use of judicial rewards.
A.M. No. 08-8-1 O-SC further describes the remedy initiated by a petition for rehabilitation: A petition
for rehabilitation, the procedure for which is provided in the Interim Rules of Procedure on Corporate
Recovery, should be considered as a special proceeding. It is one that seeks to establish the status of a
party or a particular fact. As provided in section 1, Rule 4 of the Interim Rules on Corporate Recovery, the
status or fact sought to be established is the inability of the corporate debtor to pay its debts when they
fall due so that a rehabilitation plan, containing the formula for the successful recovery of the
corporation, may be approved in the end. It does not seek a relief from an injury caused by another
party.
PNAS v. AQUINO
Philippine Numismatic and Antiquarian Society (Plaintiff-Appellee) vs. Genesis Aquino

(Accused-Appellant)
G.R. No. 206617
January 30, 2017
Facts:
Petitioner Philippine Numismatic and Antiquarian Society, Inc. (PNAS) is a non-stock, non-
profit domestic corporation duly organized in accordance with Philippine Laws. On October
29, 2009, petitioner filed a complaint with the RTC, Branch 24, Manila docketed as Civil
Case No. 09-1223885 praying for the issuance of a writ of a preliminary injunction against
respondent Angelo Bernardo, Jr. The complaint was verified by respondents Eduardo M.
Chua, Catalino M. Silangil and Percival M. Manuel who claimed to be the attorneys-in-fact of
petitioner as per Secretary's Certificate attached to the complaint. Petitioner was
represented by Atty. Faustino S. Tugade as counsel.
On December 22, 2009, another complaint was filed by petitioner against respondents
Genesis Aquino, Angelo Bernardo, Jr., Eduardo M. Chua, Fernando Francisco, Jr., Fermin S.
Carino, Percival M. Manuel, Fernando M. Gaite, Jr., Jose Choa, Tomas De Guzman, Jr., Li Vi Ju,
Catalino M. Silangil, Raymundo Santos, Peter Sy, and Wilson Yuloque docketed as Civil Case
No. 09-122709 praying that the Membership Meeting conducted by defendants on
November 25, 2008 be declared null and void. It is, likewise prayed that a temporary
restraining order or a writ of preliminary injunction be issued for the defendants to desist
from acting as the true members, officers and directors of petitioner. The verification was
signed by Atty. William L. Villareal. The petitioner was represented by Siguion Reyna
Montecillo and Ongsiako Law Office.
On January 26, 2010, considering that there were two different payees claiming to be the
representative of petitioner, the RTC issued a Joint Order directing the parties to submit
within fifteen ( 15) days from notice the appropriate pleadings as to who are the true
officers of PNAS and to submit all the documentary exhibits in support of their respective
positions.
Issue:
Whether or not Atty. William L. Villareal who claimed to be the President of PNAS in 2009,
was indeed authorized through a Board Resolution to represent PNAS in filing Civil Case No.
09-122709.
Ruling:
Respondents Genesis Aquino, Angelo Bernardo, Jr., Li Vi Ju, and Raymundo Santos aver that
Atty. Villareal was President in 2007 and was never re-elected from then on. They
presented the notarized Certificate of Elections dated November 25, 2008 which shows that
respondent Angelo Bernardo, Jr. was the one elected as President, while respondent
Francisco Fernando, Jr. was elected as Secretary for the year 2009 during the election. Held
on November 25, 2008. Though the election of officers on November 25, 2008 was the
subject of the complaint that was dismissed, Atty. Villareal did not present any proof that
indeed he was President in 2009 when he filed the complaint.
There was no proof submitted that Atty. Villareal was duly authorized by petitioner to file
the complaint and sign the verification and certification against forum shopping dated
December 21, 2009. Where the plaintiff is not the real party-in-interest, the ground for the
motion to dismiss is lack of cause of action. The reason for this is that the courts ought not
to pass upon questions not derived from any actual controversy. Truly, a person having no
material interest to protect cannot invoke the jurisdiction of the court as the plaintiff in an
action. Nor does a court acquire jurisdiction over a case where the real party- in- interest is
not present or impleaded. Under our procedural rules, "a case is dismissible for lack of
personality to sue upon proof that the plaintiff is not the real party-in interest, hence,
grounded on failure to state a cause of action.
SHELL v. ROYAL FERRY
Pilipinas Shell Petroleum Corporation, Petitioner, - versus - Royal Ferry Services, Inc.
G.R. No. 188146
February 1, 2017
Facts :
On August 28, 2005, Royal Ferry Services Inc. filed a petition for Voluntary Insolvency
before the Regional Trial Court of Manila. In its Petition stated therein , in the year 2000,
the company suffered business losses. Efforts were made to revive its financial condition
but failed. The business ceased its operations. A special board meeting was held and was
approved and authorized by the members of the board to allow the company to file a
Petition for insolvency.
In retrospect of the company, it is a corporation duly organized and existing under the
Philippine Laws and was holding its principal business office address in Bangkal Street,
Makati City but holds its Office at Room 203 at Bf condominium Building , Intramuros ,
Manila at the time the Petition was filed.
On December 19, 2005, the Regional Trial Court of Manila issued an order, granting the
petition declaring the Royal Ferry Services insolvent.
The Court orders :

The Branch Sheriff to take possession of, and safely keep until the appointment, of an
Assignee all the deeds, vouchers, books of accounts, papers, notes, bills and securities of the
petitioner and all its real and personal properties, estates and effects not exempt from
execution;
All persons and entities owing money to petitioner are hereby forbidden to make payment
for its accounts or to deliver or transfer any property to petitioner except to the duly
elected Assignee;
All civil proceedings against petitioner are deemed stayed;
For purposes of electing an Assignee, a meeting of all creditors of the petitioner is hereby
set on February 24, 2006 at 8:30 a.m. before this Court, at Room 435, Fourth Floor, Manila
City Hall Building.
The said order was published in a newspaper of general circulation for three
consecutive weeks furnishing copies to all creditors of the company in the schedule of
creditors.
On December 23, 2005, Pilipinas Shell Petroleum filed before the Regional Trial Court of
Manila a Formal Notice of Claim and a Motion to Dismiss claiming that the respondent
Royal Ferry Services Inc owes them the amount of P 2,769,387.67 and the Petition for
Insolvency was filed erroneously filed in a wrong venue. The petitioners argued that in
Insolvency Law, a petition for Insolvency should be filed before he Court with territorial
jurisdiction over the company's residence. In its Article of Incorporation, respondent's
principal business address is situated in Makati City would it be the Petition for Insolvency
should be filed before the Court of Makati.
The petitioners Motion was denied by the Court on January 30, 2006 for lack of merit.
Thereafter, Pilipinas Shell moved for a reconsideration on February 24, 2006.
On June 15, 2006, Regional Trial Court reconsidered the denial of Pilipinas Shell Motion
to Dismiss and reconsider its order dated January 30, 2006. The Petition for Voluntary
Insolvency was ordered DISMISSED.
The respondent filed a Notice of Appeal on October 26, 2006 and the records was
forwarded to the Court of Appeals.
The Appellate Court ruled reinstating the Insolvency proceedings setting aside the Trial
Court order dated June 15, 2006.
ISSUES :
Whether or not the Petition for Voluntary Insolvency was filed in a proper venue where
the company's residence is situated.
RULING:
The Supreme Court ruled, AFFIRMED the decision of the Court of Appeals reinstating
the Petition for Voluntary Insolvency filed by the respondent before the Regional Trial
Court of Manila.
The Petition for certiorari filed by Pilipinas Shell was ordered Denied.
The respondent Royal Ferry Services is a resident of Manila in its actual operations of its
business when the Petition for Insolvency was filed. It was not opposed as stated in the
Articles of Incorporation of the respondent that its principal business address is situated in
Makati is no longer accurate and existing.
Facts has been proven that the actual use and venue of the respondent's business
operations is in Manila when the Court Sheriff implemented the order of the Court dated
December 19, 2005.
SHELL v. DUQUE
Pilipinas Shell Petroleum Corporation Vs. Carlos Duque & Teresa Duque
G.R. No. 216467
February 15, 2017
FACTS:
The instant petition arose from an Information for violation of Batas Pambansa Big. 22 (BP
22) filed with the Metropolitan Trial Court (MeTC) of Makati City against herein
respondents.
Pilipinas Shell Petroleum Corporation (PSPC) is a lessee of a building known as Shell House
at 156 Valero Street, Salcedo Village, Makati City. On August 23, 2000, PSPC subleased a
500-meter portion of the 2nd Floor of the Shell Building to the The Fitness Center (TFC).
Thereafter, TFC encountered problems in its business operations. Thus, with the conformity
of PSPC, TFC assigned to Fitness Consultants, Inc, (FCI) all its rights and obligations under
the contract of sublease executed by PSPC in its favor. Respondent Carlos Duque is the
proprietor, while respondent Teresa Duque is the corporate secretary of FCI. Subsequently,
FCI failed to pay its rentals to PSPC. FCI subsequently issued a check, with respondents as
signatories, which would supposedly cover FCI's obligations to PSPC. However, the check
was dishonored, thus, leading to the filing of a criminal complaint against respondents for
their alleged violation of BP 22. The parties then went to trial, which subsequently resulted
in a verdict finding herein respondents guilty as charged. A Fine and civil indemnity to the
private complainant was imposed. Respondents appealed the MeTC Decision with the RTC
of Makati. On March 16, 2011, the RTC of Makati City, Branch 143, rendered judgment
acquitting respondents. However the Court maintains the civil liability to be indemnified to
the complainant. Respondents filed a Motion for Partial Reconsideration of the RTC
Decision contending that they could not be held civilly liable because their acquittal was
due to the failure of the prosecution to establish the elements of the offense charged. In
addition, they assert that they, being corporate officers, may not be held personally and
civilly liable for the debts of the corporation they represent, considering that they had been
acquitted of criminal liability. In an Order dated September 2, 2011, the RTC found merit in
respondents' Motion for Partial Reconsideration. On March 23, 2012, the RTC issued an
Order granting PSPC's motion for reconsideration, thus, reviving the RTC Decision of March
16, 2011. Respondents filed a petition for review with the CA. The CA basically held that,
upon acquittal, the civil liability of a corporate officer in a BP 22 case is extinguished with
the criminal liability, without prejudice to an independent civil action which may be
pursued against the corporation. Petitioner filed a motion for reconsideration, but the CA
denied it in its Resolution dated January 14, 2015.
ISSUE:
Whether or not the respondents, as corporate officers, may still be held civilly liable despite
their acquittal from the criminal charge of violation of BP 22.
HELD:
No. The Court rules in the negative.
In the case of Gosiaco v. Ching, this Court enunciated the rule that a corporate officer who
issues a bouncing corporate check can only be held civilly liable when he is convicted. When
a corporate officer issues a worthless check in the corporate name he may be held
personally liable for violating a penal statute. The statute imposes criminal penalties on
anyone who with intent to defraud another of money or property, draws or issues a check
on any bank with knowledge that he has no sufficient funds in such bank to meet the check
on presentment. Moreover, the personal liability of the corporate officer is predicated on
the principle that he cannot shield himself from liability from his own acts on the ground
that it was a corporate act and not his personal act.
It is clear that the civil liability of the corporate officer for the issuance of a bouncing
corporate check attaches only if he is convicted. Conversely, therefore, it will follow that
once acquitted of the offense of violating BP 22; a corporate officer is discharged from any
civil liability arising from the issuance of the worthless check in the name of the
corporation he represents. This is without regard as to whether his acquittal was based on
reasonable doubt or that there was a pronouncement by the trial court that the act or
omission from which the civil liability might arise did not exist.
Moreover, in the present case, nothing in the records at hand would show that respondents
made themselves personally nor solidarily liable for corporate obligations either as
accommodation parties or sureties. On the contrary, there is no dispute that respondents
signed the subject check in their capacity as corporate officers and that the check was
drawn in the name of FCI as payment for the obligation of the corporation and not for the
personal indebtedness of respondents. Neither is there allegation nor proof that the veil of
corporate fiction is being used by respondents for fraudulent purposes. The rule is that
juridical entities have personalities separate and distinct from its officers and the persons
composing it. Generally, the stockholders and officers are not personally liable for the
obligations of the corporation except only when the veil of corporate fiction is being used as
a cloak or cover for fraud or illegality, or to work injustice, which is not the case here.
Hence, respondents cannot be held liable for the value of the checks issued in payment for
FCI's obligation.
19.
ROY III v. HERBOSA
Jose M. Roy III Vs Chairperson Teresita Herbosa, The Securities and Exchange Commission
and Philippine Long Distance Company
G.R. No. 207246
April 18, 2017
Facts:
Before the Court is the Motion for Reconsideration dated January 19, 2017 (the Motion)
filed by petitioner Jose M. Roy III (movant) seeking the reversal and setting aside of the
Decision dated November 22, 2016 (the Decision) which denied the movant's petition, and
declared that the Securities and Exchange Commission (SEC) did not commit grave abuse of
discretion in issuing Memorandum Circular No. 8, Series of 2013 (SEC-MC No. 8) as the
same was in compliance with, and in fealty to, the decision of the Court in Gamboa v.
Finance Secretary Teves (Gamboa Decision) and the resolution denying the Motion for
Reconsideration therein (Gamboa Resolution).
The Motion presents no compelling and new arguments to justify the reconsideration of the
Decision.
The Decision has already exhaustively discussed and directly passed upon these grounds.
Movant's petition was dismissed based on both procedural and substantive grounds.
Issue:
Whether or not SEC committed grave abuse of discretion amounting to lack or excess of
jurisdiction when it issued SEC-MC No. 8.
Held:
SEC did not commit grave abuse of discretion amounting to lack or excess of jurisdiction
when it issued SEC-MC No. 8. The Court finds SEC-MC No. 8 to have been issued in fealty to
Pursuant to the Court's constitutional duty to exercise judicial review, the Court has
conclusively found no grave abuse of discretion on the part of SEC in issuing SEC-MC No. 8.
The Decision has painstakingly explained why it considered as obiter dictum that
pronouncement in the Gamboa Resolution that the constitutional requirement on Filipino
ownership should "apply uniformly and across the board to all classes of shares, regardless
of nomenclature and category, comprising the capital of a corporation." The Court stated
that:
The fallo or decretal/dispositive portions of both the Gamboa Decision and Resolution are
definite, clear and unequivocal. While there is a passage in the body of the Gamboa
Resolution that might have appeared contrary to the fallo of the Gamboa Decision, the
definiteness and clarity of the fallo of the Gamboa Decision must control over the obiter
dictum in the Gamboa Resolution regarding the application of the 60-40 Filipino-foreign
ownership requirement to "each class of shares, regardless of differences in voting rights,
privileges and restrictions."
To the Court's mind and, as exhaustively demonstrated in the Decision, the dispositive
portion of the Gamboa Decision was in no way modified by the Gamboa Resolution.
The heart of the controversy is the interpretation of Section 11, Article XII of the
Constitution, which provides: "No franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except to citizens of the Philippines or
to corporations or associations organized under the laws of the Philippines at least sixty
per centum of whose capital is owned by such citizens."
The Gamboa Decision already held, in no uncertain terms, that what the Constitution
requires is full and legal beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights must rest in the hands of Filipino nationals.
And, precisely that is what SEC-MC No. 8 provides; For purposes of determining compliance
with the constitutional or statutory ownership, the required percentage of Filipino
ownership shall be applied to both the total number of outstanding shares of stock entitled
to vote in the election of directors; and (b) the total number of outstanding shares of stock,
whether or not entitled to vote.
In conclusion, the basic issues raised in the Motion having been duly considered and passed
upon by the Court in the Decision and no substantial argument having been adduced to
warrant the reconsideration sought, the Court resolves to deny the Motion with finality.
BUSTOS v. MILLIANS SHOE, INC.
JOSELITO HERNAND M. BUSTOS, Petitioners VS. MILLIANS SHOE, INC., SPOUSES

FERNANDO AND AMELIA CRUZ, and the REGISTER OF DEEDS OF MARIKINA CITY,
Respondents
G.R. No. 185024
April 4, 2017
FACTS:
Spouses Fernando and Amelia Cruz owned a 464-square-meter lot covered by Transfer
Certificate of Title (TCT) No. N-126668. On 6 January 2004, the City Government of
Marikina levied the property for non-payment of real estate taxes. Petitioner then applied
for the cancellation of TCT of the property. Marikina City RTC, rendered a final and
executory Decision ordering the cancellation of the previous title and the issuance of a new
one under the name of petitioner.
On 26 September 2006, petitioner moved for the exclusion of the subject property from the
Stay Order. He claimed that the lot belonged to Spouses Cruz who were mere stockholders
and officers of MSL He further argued that since he had won the bidding of the property
before the annotation of the title, the auctioned property could no longer be part of the Stay
Order. The RTC denied the entreaty of petitioner. It ruled that because the period of
redemption hadnot yet lapsed at the time of the issuance of the Stay Order, the ownership
thereof had not yet been transferred to petitioner.
Petitioner moved for reconsideration, but to no avail. He then filed an action for certiorari
before the CA. He asserted that the Stay Order undermined the taxing powers of the local
government unit. He also reiterated his arguments that Spouses Cruz owned the property,
and that the lot had already been auctioned to him.
The said parcel of land which secured several mortgage liens for the account of MSI remains
to be an asset of the Cruz Spouses, who are the stockholders and officers of MSI, a close
corporation. Incidentally, as an exception to the general rule, in a close corporation, the
stockholders and/or officers usually manage the business of the corporation and are
subject to all liabilities of directors, i.e. personally liable for corporate debts and obligations.
Thus, the Cruz Spouses being stockholders of MSI are personally liable for the latter's debt
and obligations. Petitioner unsuccessfully moved for reconsideration. The CA maintained its
ruling and even held that his prayer to exclude the property was time-barred by the 10-day
reglementary period to oppose rehabilitation petitions under Rule 4, Section 6 of the
Interim Rules of Procedure on Corporate Rehabilitation Before this Court, petitioner
maintains three points: (1) the Spouses Cruz are not liable for the debts of MSI; (2) the Stay
Order undermines the taxing power of Marikina City; and (3) the time bar rule does not
apply to him, because he is not a creditor of MSI. 12 In their Comment, 13 respondents do
not contest that Spouses Cruz own the subject property. Rather, respondents assert that as
stockholders and officers of a close corporation, they are personally liable for its debts and
obligations. Furthermore, they argue that since the Rehabilitation Plan of MSI has been
approved, petitioner can no longer assail the same.
ISSUE:
Whether or not the CA correctly considered the properties of Spouses Cruz answerable for
the obligations of MSI.
HELD:
Yes.In finding the subject property answerable for the obligations of MSI, the CA
characterized respondent spouses as stockholders of a close corporation who, as such, are
liable for its debts.To be considered a close corporation, an entity must abide by the
requirements laid out in Section 96 of the Corporation Code, which reads: Sec. 96.
Definition and applicability of Title. - A close corporation, within the meaning of this Code,
is one whose articles of incorporation provide that: (1) All the corporation's issued stock of
all classes, exclusive of treasury shares, shall be held of record by not more than a specified
number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be
subject to one or more specified restrictions on transfer permitted by this Title; and (3) The
corporation shall not list in any stock exchange or make any public offering of any of its
stock ofany class. Notwithstanding the foregoing, a corporation shall not be deemed a close
corporation when at least twothirds (2/3) of its voting stock or voting rights is owned or
controlled by another corporation which is not a close corporation within the meaning of
this Code.
Furthermore, we find that the CA seriously erred in portraying the import of Section 97 of
the Corporation Code. Citing that provision, the CA concluded that "in a close corporation,
the stockholders and/or officers usually manage the business of the corporation and are
subject to all liabilities of directors, i.e. personally liable for corporate debts and
obligations."
However, Section 97 of the Corporation Code only specifies that "the stockholders of the
corporation shall be subject to all liabilities of directors." Nowhere in that provision do we
find any inference that stockholders of a close corporation are automatically liable for
corporate debts and obligations.
G.R. No. 202454
CALIFORNIA MANUFACTURING COMPANY, INC., Petitioner,

vs.
ADVANCED TECHNOLOGY SYSTEM, INC., Respondent.
DECISION
SERENO, J.:
Before us is a Petition for Review on Certiorari assailing the Decision of the Court of Appeals (CA)
1
in CA-G.R. CV No. 94409, which denied the appeal filed by California Manufacturing Company, Inc.
(CMCI) from the Decision of Regional Trial Court (RTC) of Pasig City, Branch 268, in the Complaint
2
for Sum of Money filed by Advanced Technology Systems, Inc. (ATSI) against the former.
3
The RTC ordered CMCI to pay ATSI the amount of ₱443,729.39 for the unpaid rentals for a
Prodopak machine, plus legal interest from the date of extra-judicial demand until full payment; 30%
of the judgment award as attorney's fees; and the costs of litigation. The CA affirmed the trial court's
decision, but it deleted the award of attorney's fees for lack of factual and legal basis and ordered
CMCI to pay the costs of litigation.
THE ANTECEDENT FACTS
Petitioner CMCI is a domestic corporation engaged in the food and beverage manufacturing
business. Respondent ATSI is also a domestic corporation that fabricates and distributes food
processing machinery and equipment, spare parts, and its allied products. 4
In August 200 I, CMCI leased from ATSI a Prodopak machine which was used to pack products in
20-ml. pouches. The parties agreed to a monthly rental of ₱98,000 exclusive of tax. Upon receipt of
5
an open purchase order on 6 August 2001, ATSI delivered the machine to CMCI's plant at Gateway
Industrial Park, General Trias, Cavite on 8 August 2001.
In November 2003, ATSI filed a Complaint for Sum of Money against CMCI to collect unpaid rentals
for the months of June, July, August, and September 2003. ATSI alleged that CMCI was consistently
paying the rents until June 2003 when the latter defaulted on its obligation without just cause. ATSI
also claimed that CMCI ignored all the billing statements and its demand letter. Hence, in addition to
the unpaid rents A TSI sought payment for the contingent attorney's fee equivalent to 30% of the
judgment award.
CMCI moved for the dismissal of the complaint on the ground of extinguishment of obligation
through legal compensation. The RTC, however, ruled that the conflicting claims of the parties
required trial on the merits. It therefore dismissed the motion to dismiss and directed CMCI to file an
Answer. 7
In its Answer, CMCI averred that ATSI was one and the same with Processing Partners and
8
Packaging Corporation (PPPC), which was a toll packer of CMCI products. To support its allegation,
CMCI submitted copies of the Articles of Incorporation and General Information Sheets (GIS) of the 9
two corporations. CMCI pointed out that ATSI was even a stockholder of PPPC as shown in the
latter's GIS. 10
CMCI alleged that in 2000, PPPC agreed to transfer the processing of CMCI's product line from its
factory in Meycauayan to Malolos, Bulacan. Upon the request of PPPC, through its Executive Vice
President Felicisima Celones, CMCI advanced ₱4 million as mobilization fund. PPPC President and
Chief Executive Officer Francis Celones allegedly committed to pay the amount in 12 equal
instalments deductible from PPPC's monthly invoice to CMCI beginning in October 2000. 11 CMCI
likewise claims that in a letter dated 30 July 2001, Felicisima proposed to set off PPPC's obligation
12
to pay the mobilization fund with the rentals for the Prodopak machine.
CMCI argued that the proposal was binding on both PPPC and A TSI because Felicisima was an
officer and a majority stockholder of the two corporations. Moreover, in a letter dated 16 September
2003, she allegedly represented to the new management of CMCI that she was authorized to
13
request the offsetting of PPPC's obligation with ATSI's receivable from CMCI. When ATSI filed suit in
November 2003, PPPC's debt arising from the mobilization fund allegedly amounted to
₱10,766.272.24.
Based on the above, CMCl argued that legal compensation had set in and that ATSI was even liable
for the balance of PPPC's unpaid obligation after deducting the rentals for the Prodopak machine.
After trial, the RTC rendered a Decision in favor of ATSI with the following dispositive portion:
WHEREFORE, foregoing premises considered, judgment is hereby rendered in favor of plaintiff and
against the defendant, ordering the latter to pay the former, the following sums:
1. Php443,729.39 representing the unpaid rental for the prodopak machine

plus legal interest from the date of extra judicial demand (October 13, 2003 -
Exh. "E") until satisfaction of this judgment;
2. 30% of the judgment award as and by way of attorney's fees; and
3. Cost of litigation. 14
The trial court ruled that legal compensation did not apply because PPPC had a separate legal
personality from its individual stockholders, the Spouses Celones, and ATSI. Moreover, there was no
board resolution or any other proof showing that Felicisima's proposal to set-off the unpaid
mobilization fund with CMCI 's rentals to A TSI for the Prodopak Machine had been authorized by the
two corporations. Consequently, the RTC ruled that CMCI's financial obligation to pay the rentals for
the Prodopak machine stood and that its claim against PPPC could be properly ventilated in the
proper proceeding upon payment of the required docket fees. 15
On appeal by CMCI, the CA affirmed the trial court's ruling that legal compensation had not set in
because the element of mutuality of parties was lacking. Likewise, the appellate court sustained the
trial court's refusal to pierce the corporate veil. It ruled that there must be clear and convincing proof
that the Spouses Celones had used the separate personalities of ATSI or PPPC as a shield to
commit fraud or any wrong against CMCI, which was not existing in this case. 16
Aside from the absence of a board resolution issued by ATSI, the CA observed that the letter dated
30 July 2001 clearly showed that Felicisima's proposal to effect the offsetting of debts was limited to
the obligation of PPPC. The appellate court thus sustained the trial court's finding that ATSI was not
17
bound by Felicisima's conduct.
Moreover, the CA rejected CMCI's argument that ATSI is barred by estoppel as it found no indication
that ATSI had created any appearance of false fact. CA also held that estoppel did not apply to
18
PPPC because the latter was not even a party to this case.
The CA, however, deleted the trial court's award of attorney's fees and costs of litigation in favor of
ATSI as it found no discussion in the body of the decision of the factual and legal justification for the
award.
CMCI filed a Motion for Reconsideration of the CA Decision, but the appellate court denied the
motion for lack of merit. Hence, this petition.
19 20
THE ISSUE
The assignment of errors raised by CMCI all boil down to the question of whether the CA erred in
affirming the ruling of the RTC that legal compensation between ATSI's claim against CMCI on the
one hand, and the latter's claim against PPPC on the other hand, has not set in.
OUR RULING
We affirm the CA Decision in toto.

CMCI argues that both the RTC and the CA overlooked the circumstances that it has proven to
justify the piercing of corporate veil in this case, i.e., (1) the interlocking board of directors,
incorporators, and majority stockholder of PPPC and ATSI; (2) control of the two corporations by the
Spouses Celones; and (3) the two corporations were mere alter egos or business conduits of each
other. CMCI now asks us to disregard the separate corporate personalities of A TSI and PPPC
based on those circumstances and to enter judgment in favor of the application of legal
compensation.
Whether one corporation is merely an alter ego of another, a sham or subterfuge, and whether the
requisite quantum of evidence has been adduced to warrant the puncturing of the corporate veil are
questions of fact. Relevant to this point is the settled rule that in a petition for review
21
on certiorari like this case, this Court's jurisdiction is limited to reviewing errors of law in the absence
of any showing that the factual findings complained of are devoid of support in the records or are
glaringly erroneous. This rule alone wan-ants the denial of the petition, which essentially asks us to
22
reevaluate the evidence adduced by the pm1ies and the credibility of the witnesses presented.
We have reviewed the evidence on record and have found no cogent reason to disturb the findings
of the co mis a quo that A TSI is distinct and separate from PPPC, or from the Spouses Celones.
Any piercing of the corporate veil must be done with caution. As the CA had correctly observed, it
23
must be ce11ain that the corporate fiction was misused to such an extent that injustice, fraud, or
crime was committed against another, in disregard of rights. Moreover, the wrongdoing must be
clearly and convincingly established. Sarona v. NLRC instructs, thus:
24
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.
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. 25
CMCI 's alter ego theory rests on the alleged interlocking boards of directors and stock ownership of
the two corporations. The CA, however, rejected this theory based on the settled rule that mere
ownership by a single stockholder of even all or nearly all of the capital stocks of a corporation, by
itself, is not sufficient ground to disregard the corporate veil. We can only sustain the CA's ruling.
The instrumentality or control test of the alter ego doctrine requires not mere majority or complete
stock control, but complete domination of finances, policy and business practice with respect to the
transaction in question. The corporate entity must be shown to have no separate mind, will, or
existence of its own at the time of the transaction. 26
Without question, the Spouses Celones are incorporators, directors, and majority stockholders of the
ATSI and PPPC. But that is all that CMCI has proven. There is no proof that PPPC controlled the
financial policies and business practices of ATSI either in July 2001 when Felicisima proposed to set
off the unpaid ₱3.2 million mobilization fund with CMCI's rental of Prodopak machines; or in August
2001 when the lease agreement between CMCI and ATSI commenced. Assuming arguendo that
Felicisima was sufficiently clothed with authority to propose the offsetting of obligations, her proposal
cannot bind ATSI because at that time the latter had no transaction yet with CMCI. Besides, CMCI
had leased only one Prodopak machine. Felicisima's reference to the Prodopak machines in its letter
in July 2001 could only mean that those were different from the Prodopak machine that CMCI had
leased from A TSI.
Contrary to the claim of CMCI, none of the letters from the Spouses Celones tend to show that ATSI
was even remotely involved in the proposed offsetting of the outstanding debts of CMCI and PPPC.
Even Felicisima's letter to the new management of CMCI in 2003 contains nothing to support CMCI's
argument that Felicisima represented herself to be clothed with authority to propose the offsetting.
For clarity, we quote below the relevant portions of her letter:
Gentlemen:
I apologize for writing this letter. But kindly spare me your time and allow to ventilate my grievances
against California Manufacturing Corporation x x x.
DUTCH MOVERS, INC. v. LEQUIN
DUTCH MOVERS, INC. ET AL VS EDILBERTO LEQUIN, ET AL
G.R No. 210032
April 25, 2017
FACTS:
This case is an offshoot of the illegal dismissal Complaint filed by Edilberto Lequin
(Lequin), Christopher Salvador, Reynaldo Singsing, and Raffy Mascardo (respondents)
against Dutch Movers, Inc. (DMI), and/or spouses Cesar Lee and Yolanda Lee (petitioners),
its alleged President/Owner, and Manager respectively. Respondents stated that DMI,
employed Lequin as truck and the rest of respondents as helpers. Cesar Lee, through the
Supervisor Nazario Furio, informed them that DMI would cease its hauling operation for no
reason; as such, they requested DMI to issue a formal notice regarding the matter but to no
avail. Later, upon respondents' request, the DOLE NCR issued a certification revealing that
DMI did not file any notice of business closure. Thus, respondents argued that they were
illegally dismissed as their termination was without cause and only on the pretext of
closure.
Labor Arbiter dismissed the case for lack of cause of action. NLRC reversed and set aside
the LA decision and ruled that respondents were illegally dismissed because DMI simply
placed them on standby, and no longer provide them with work which said decision
become final and executory.
Respondents filed a Motion for Writ of Execution. Pending resolution of the motions,
respondents filed a Manifestation and Motion to Implead stating that upon investigation,
they discovered that DMI no longer operates. They, nonetheless, insisted that petitioners
who managed and operated DMI, and consistently represented to respondents that they
were the owners of DMI continue to work at Toyota Alabang, which they (petitioners) also
own and operate. They further averred that the Articles of Incorporation (AOI) of DMI
ironically did not include petitioners as its directors or officers; and those named directors
and officers were persons unknown to them. They likewise claimed that per inquiry with
the SEC and the DOLE, they learned that DMI did not file any notice of business closure; and
the creation and operation of DMI was attended with fraud making it convenient for
petitioners to evade their legal obligations to them. Respondents prayed that petitioners,
and the officers named in DMI’s AOI, which included Edgar Smith and Millicent Smith be
impleaded and be held solidarily liable with DMI in paying the judgment awards.
ISSUE:
Whether or not petitioners should be held solidarily liable for the judgement award?
Whether or not there is legal basis to pierce the veil of corporate fiction of Dutch Movers,
Inc?
RULINGS:
Applying the cases of Valderrama v. National Labor Relations Commission, and David v.
Court of Appeals, the Court held that the principle of immutability of judgment, or the rule
that once a judgment has become final and executory, the same can no longer be altered or
modified and the court's duty is only to order its execution, is not absolute. One of its
exceptions is when there is a supervening event occurring after the judgment becomes final
and executory, which renders the decision unenforceable. Supervening events transpired in
this case after the NLRC Decision became final and executory, which rendered its execution
impossible and unjust. Like in Valderrama, during the execution stage, ceased its operation,
and the same did not file any formal notice regarding it. Added to this, in their Opposition to
the Motion to Implead, spouses Smith revealed that they only lent their names to
petitioners, and they were included as incorporators just to assist the latter in forming DMI;
after such undertaking, spouses Smith immediately transferred their rights in DMI to
petitioners, which proved that petitioners were the ones in control of DMI, and used the
same in furthering their business interests.
The Court is not unmindful of the basic tenet that a corporation has a separate and distinct
personality from its stockholders, and from other corporations it may be connected with.
However, such personality may be disregarded, or the veil of corporate fiction may be
pierced attaching personal liability against responsible person if the corporation's
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 x x x. Here, the veil of corporate fiction
must be pierced and accordingly, petitioners should be held personally liable for judgment
awards because the peculiarity of the situation shows that they controlled DMI; they
actively participated in its operation such that DMI existed not as a separate entities but
only as business conduit of petitioners.
ROQUE v PEOPLE
Alejandro D.C. Roque Vs. People of the Philippines
G.R. No. 211108
June 7, 2017
Facts
Roque assails the Decision[1] dated August 31, 2012 and the Resolution[2] dated January
22, 2014 of the Court of Appeals[3] (CA), which set aside and annulled the Order[4] dated
November 12, 2008 of the Regional Trial Court (RTC)[5], Third Judicial Region, Branch 11,
Malolos City, Bulacan in Criminal Case No. 1011-M- 2005. Said Order granted the motion for
leave of court to file demurrer to evidence filed by Rosalyn Singson (Singson), herein
petitioner's co-accused.
November 17, 1993, Barangay Mulawin Tricycle Operators and Drivers Association, Inc.
(BMTODA) became a corporation duly registered with the Securities and Exchange
Commission (SEC). Sometime in August 2003, Oscar Ongjoco (Ongjoco), a member of
BMTODA, learned that BMTODA's funds were missing. In a letter, Ongjoco requested copies
of the Association's documents pursuant to his right to examine records under Section 74 of
the Corporation Code of the Philippines (Corporation Code).
However, Singson, the Secretary of BMTODA, denied his request. Ongjoco also learned that
the incumbent officers were holding office for three years already, in violation of the one-
year period provided for in BMTODA's by-laws. He then requested from Roque, the
President of BMTODA, a copy of the list of its members with the corresponding franchise
numbers of their respective tricycle fees and the franchise fees paid by each member, but
Roque denied Ongjoco's request. Ongjoco filed an Affidavit-Complaint against Roque and
Singson for violation of Section 74 in relation to Section 144 of the Corporation Code
because of their refusal to furnish him copies of records pertaining to BMTODA.
After the prosecution rested its case, Roque and Singson filed a Motion for Leave of Court
to File Demurrer to Evidence with Motion to Dismiss by way of Demurrer to Evidence. The
prosecution failed to file any comment thereon. In an Order dated November 12, 2008, the
RTC granted the motion and gave due course to Roque and Singson's demurrer to evidence.
The RTC ruled that said association failed to prove its existence as a corporation.
Hence, a violation under the Corporation Code cannot be made applicable against its
officers. The fallo thereof reads: On appeal, the CA reversed and set aside the Order dated
November 12, 2008 of the RTC. The CA ruled that BMTODA is a duly registered corporation.
The CA stated that a Petition to Lift Order of Revocation and the SEC Order Lifting the
Revocation were presented in evidence; and that logic dictates that such documentary
evidence presupposes a duly registered and existing entity. Petitioner contends that there is
want of evidence to prove that BMTODA is a corporation duly established and organized
under the Corporation Code; thus, he cannot be prosecuted under the penal provisions of
the said code.
The appeal lacks merit.
Issue:
Has the CA erred the declaring the annulment of the RTC’s decision for the dismissal of the
case?
Held:
Section 74 of the Corporation Code provides for the liability for damages of any officer or
agent of the corporation for refusing to allow any director, trustee, stockholder or member
of the corporation to examine and copy excerpts from its records or minutes. Section 144 of
the same Code further provides for other applicable penalties in case of violation of any
provision of the Corporation Code. Clearly, Ongjoco, as a member of BMTODA, had a right to
examine documents and records pertaining to said association. To recall, Ongjoco made a
prior demand in writing for copy of pertinent records of BMTODA from Roque and Singson.
Ongjoco sent his letters dated December 13, 2003 and August 29, 2004 to Roque and
Singson, respectively.
However, both of them refused to furnish Ongjoco copies of such pertinent records. Roque
argues that when the letters were received by him and Singson, BMTODA's registration was
already revoked. Hence, BMTODA ceased to exist as a corporation. While it appears that the
registration of BMTODA as a corporation with the SEC was revoked on September 30, 2003,
the letter-request of Ongjoco to Singson, which was dated while BMTODA's registration was
revoked, was actually received by Singson after the revocation was lifted. In a Letter dated
October 11, 2004, the General Counsel of the SEC made it clear that the SEC lifted the
revocation of BMTODA's registration on August 30, 2004.
As the CA correctly observed, the letter-request was received by Singson on September 23,
2004 when BMTODA had regained its active status. A reading of this present Petition
reveals that Roque admitted his denial of Ongjoco's request, i.e., to furnish him a copy of
BMTODA's list of its members with the corresponding franchise body numbers of their
respective tricycles and franchise fees paid by each member. Also, what was requested from
Singson pertains to an entirely different document. Thus, Singson's denial is immaterial,
and does not detract from Roque's denial of Ongjoco's request to access the above-
mentioned document. For his individual and separate act, Roque should be held
accountable. Hence, Roque's denial is unquestionably considered as a violation under the
Corporation Code.

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G.R. No.

205839, July 07, 2016

LAND BANK OF THE PHILIPPINES, Petitioner, v. NARCISO L. KHO, Respondent.

G.R. No. 205840

MA. LORENA FLORES AND ALEXANDER CRUZ, Petitioners, v. NARCISO L.

On April 30, 2009, the RTC dismissed the complaint. 18chanrobleslaw

The bank highlights the following instances of Kho's negligence:

 Land Bank cleared the check;

Proximate cause - which is determined by a mixed consideration of logic, common sense,

In Gempesaw v. Court of Appeals,33 Natividad Gempesaw, a businesswoman, completely

Gempesaw's negligence precluded her from asserting the forgery. Nevertheless, we

As a pillar of economic development, the banking industry is impressed with public

Petitioner Land Bank of the Philippines is ORDERED:

chanRoblesvirtualLawlibrary(1) to PAY Narciso Kho the sum of TWENTY FIVE MILLION

RCBC SAVINGS BANK, Petitioner, v. NOEL M. ODRADA, Respondent.

Mr. Noel M. Odrada

Thru: Shan Mendez;.

Dear Mr. Odrada,

The Regional Trial Court's Ruling

RCBC and Lim appealed from the trial court's decision.

The Court of Appeals' Ruling

The dispositive portion of the Decision reads:

RCBC presented the following, issues in this petition:

Odrada failed to file a comment 31 within the period prescribed by this

The Ruling of this Court

We grant the petition.

In Supercars Management & Development Corporation v. Flores,38 we held that a breach of

RCBC May Refuse to Pay Manager's Checks

Similarly, in Rizal Commercial Banking Corporation v. Hi-Tri Development Corporation,55 the

(c) That he took it in good faith and for value;

RCBC SAVINGS BANK v. NOEL M. ODRADA, GR No. 219037, 2016-10-19

G.R. No. 227005, June 19, 2017

The RTC Ruling

2. The amount of Fifty Thousand Pesos (P50,000.00) representing moral damages;

3. The amount of One Hundred Thousand Pesos (P100,000.00) representing

4. The amount of Fifty Thousand Pesos (P50,000.00) as attorney's fees.

Hence, this petition anchored on the following: chanRoblesvirtualLawlibrary

A COLLECTING BANK ASSUMES RESPONSIBILITY FOR A CROSSED CHECK AS A GENERAL

Union Bank did not file any comment on BDO's petition.

The Court's Ruling

The petition is meritorious.

Sequence of Recovery in cases of unauthorized payment of checks

Simplification of the proceedings for Recovery

The Court agrees.

G.R. No. 204736, November 28, 2016

DEL CASTILLO, J.:

In her Answer, Hermenegilda countered that:

3) [The insured's] history of Leptospirosis in 2000. (This is not confirmed)

 Have you had electrocardiograms, when, why, result? ([Manulife's company

- on June 2002 at CDH, Cebu City

= Cardiac clearance for surgery

= Cholecystectomy done [J]une 7[,] 2002 by Dr. Ang

= Biopsy: Gallbladder Chronic Calculous Cholecystitis

Ruling of the Regional Trial Court

After due proceedings, the RTC dismissed Manulife's Complaint, thus:

Ruling of the Court of Appeals

G.R. No. 192159, January 25, 2017

COMMUNICATION AND INFORMATION SYSTEMS CORPORATION, Petitioner, v. MARK SENSING

G.R. No. 190702, February 27, 2017

JAIME T. GAISANO, Petitioner, v. DEVELOPMENT INSURANCE AND SURETY

We deny the petition.

The answer is in the affirmative.

We do not agree with petitioner.

Whether there is a binding insurance contract between petitioner and respondent.