FIRST DIVISION

[ G.R. No. 191525, December 13, 2017 ]

INTERNATIONAL ACADEMY OF MANAGEMENT AND ECONOMICS (I/AME), PETITIONER, V. LITTON AND

COMPANY, INC., RESPONDENT.

DECISION

SERENO, C.J.:

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the Court of
Appeals (CA) Decision[1] and Resolution[2] in CA-G.R. SP No. 107727.

The CA affirmed the Judgment[3] and Order[4] of the Regional Trial Court (RTC) of Manila in Special Civil
Action No. 06-115547 reinstating the Order[5] of the Metropolitan Trial Court (MeTC) of Manila in favor
of Litton and Company, Inc. (Litton).

THE FACTS

The facts, as culled from the records, are as follows:

Atty. Emmanuel T. Santos (Santos), a lessee to two (2) buildings owned by Litton, owed the latter rental
arrears as well as his share of the payment of realty taxes. [6]

Consequently, Litton filed a complaint for unlawful detainer against Santos before the MeTC of Manila.
The MeTC ruled in Litton's favor and ordered Santos to vacate A.I.D. Building and Litton Apartments and
to pay various sums of money representing unpaid arrears, realty taxes, penalty, and attorney's fees. [7]

It appears however that the judgment was not executed. Litton subsequently filed an action for revival
of judgment, which was granted by the RTC. [8] Santos then appealed the RTC decision to the CA, which
nevertheless affirmed the RTC.[9] The said CA decision became final and executory on 22 March 1994. [10]

On 11 November 1996, the sheriff of the MeTC of Manila levied on a piece of real property covered by
Transfer Certificate of Title (TCT) No. 187565 and registered in the name of International Academy of
Management and Economics Incorporated (I/AME), in order to execute the judgment against Santos.
[11]
 The annotations on TCT No. 187565 indicated that such was "only up to the extent of the share of
Emmanuel T. Santos."[12]

I/AME filed with MeTC a "Motion to Lift or Remove Annotations Inscribed in TCT No. 187565 of the
Register of Deeds of Makati City."[13] I/AME claimed that it has a separate and distinct personality from
Santos; hence, its properties should not be made to answer for the latter's liabilities. The motion was
denied in an Order dated 29 October 2004.

Upon motion for reconsideration of I/AME, the MeTC reversed its earlier ruling and ordered the
cancellation of the annotations of levy as well as the writ of execution. Litton then elevated the case to
the RTC, which in turn reversed the Order granting I/AME's motion for reconsideration and reinstated
the original Order dated 29 October 2004.

I/AME then filed a petition with the CA to contest the judgment of the RTC, which was eventually denied
by the appellate court.

THE CA RULING

The CA upheld the Judgment and Order of the RTC and held that no grave abuse of discretion was
committed when the trial court pierced the corporate veil of I/AME. [14]

It took note of how Santos had utilized I/AME to insulate the Makati real property covered by TCT No.
187565 from the execution of the judgment rendered against him, for the following reasons:

First, the Deed of Absolute Sale dated 31 August 1979 indicated that Santos, being the .President, was
representing I/AME as the vendee.[15] However, records show that it was only in 1985 that I/AME was
organized as a juridical entity.[16] Obviously, Santos could not have been President of a non-existent
corporation at that time.[17]

Second, the CA noted that the subject real property was transferred to I/AME during the pendency of
the appeal for the revival of the judgment in the ejectment case in the CA. [18]

Finally, the CA observed that the Register of Deeds of Makati City issued TCT No. 187565 only on 17
November 1993, fourteen (14) years after the execution of the Deed of Absolute Sale and more than
eight (8) years after I/AME was incorporated. [19]

Thus, the CA concluded that Santos merely used I/AME as a shield to protect his property from the
coverage of the writ of execution; therefore, piercing the veil of corporate fiction is proper. [20]

THE ISSUES

The issues boil down to the alleged denial of due process when the court pierced the corporate veil of
I/AME and its property was made to answer for the liability of Santos.

OUR RULING

We deny the petition.

There was no violation of due process against

I/AME

Petitioner avers that its right to due process was violated when it was dragged into the case and its real
property made an object of a writ of execution in a judgment against Santos. It argues that since it was
not impleaded in the main case, the court a quo never acquired jurisdiction over it. Indeed, compliance
with the recognized modes of acquisition of jurisdiction cannot be dispensed with even in piercing the
veil of corporation.[21]
In a petition for review on certiorari under Rule 45, only questions of law shall be entertained. This Court
considers the determination of the existence of any of the circumstances that would warrant the
piercing of the veil of corporate fiction as a question of fact which ordinarily cannot be the subject of a
petition for review on certiorari under Rule 45. We will only take cognizance of factual issues if the
findings of the lower court are not supported by the evidence on record or are based on a
misapprehension of facts.[22] Once the CA affirms the factual findings of the trial court, such findings are
deemed final and conclusive and thus, may not be reviewed on appeal, unless the judgment of the CA
depends on a misapprehension of facts, which if properly considered, would justify a different
conclusion.[23] Such exception however, is not applicable in this case.

The 29 October 2004 MeTC judgment, the RTC judgment, and the CA decision are one in accord on the
matters presented before this Court.

In general, corporations, whether stock or non-stock, are treated as separate and distinct legal entities
from the natural persons composing them. The privilege of being considered a distinct and separate
entity is confined to legitimate uses, and is subject to equitable limitations to prevent its being exercised
for fraudulent, unfair or illegal purposes. [24] However, once equitable limitations are breached using the
coverture of the corporate veil, courts may step in to pierce the same.

As we held in Lanuza, Jr. v. BF Corporation:[25]

Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used as a
means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues." It is also warranted in 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."

When [the] corporate veil is pierced, the corporation and persons who are normally treated as distinct
from the corporation are treated as one person, such that when the corporation is adjudged liable,
these persons, too, become liable as if they were the corporation.

The piercing of the corporate veil is premised on the fact that the corporation concerned must have
been properly served with summons or properly subjected to the jurisdiction of the court a quo.
Corollary thereto, it cannot be subjected to a writ of execution meant for another in violation of its right
to due process.[26]

There exists, however, an exception to this rule: if it is shown "by clear and convincing proof that the
separate and distinct personality of the corporation was purposefully employed to evade a legitimate
and binding commitment and perpetuate a fraud or like wrongdoings." [27]

The resistance of the Court to offend the right to due process of a corporation that is a nonparty in a
main case, may disintegrate not only when its director, officer, shareholder, trustee or member is a
party to the main case, but when it finds facts which show that piercing of the corporate veil is merited.
[28]

Thus, as the Court has already ruled, a party whose corporation is vulnerable to piercing of its corporate
veil cannot argue violation of due process. [29]

In this case, the Court confirms the lower courts' findings that Santos had an existing obligation based on
a court judgment that he owed monthly rentals and unpaid realty taxes under a lease contract he
entered into as lessee with the Littons as lessor. He was not able to comply with this particular
obligation, and in fact, refused to comply therewith.

This Court agrees with the CA that Santos used I/AME as a means to defeat judicial processes and to
evade his obligation to Litton.[30] Thus, even while I/AME was not impleaded in the main case and yet
was so named in a writ of execution to satisfy a court judgment against Santos, it is vulnerable to the
piercing of its corporate veil. We will further expound on this matter.

Piercing the Corporate Veil may Apply to Non-

stock Corporations

Petitioner I/AME argues that the doctrine of piercing the corporate veil applies only to stock
corporations, and not to non-stock, nonprofit corporations such as I/AME since there are no
stockholders to hold liable in such a situation but instead only members. Hence, they do not have
investments or shares of stock or assets to answer for possible liabilities. Thus, no one in a non-stock
corporation can be held liable in case the corporate veil is disregarded or pierced. [31]

The CA disagreed. It ruled that since the law does not make a distinction between a stock and non-stock
corporation, neither should there be a distinction in case the doctrine of piercing the veil of corporate
fiction has to be applied. While I/AME is an educational institution, the CA further ruled, it still is a
registered corporation conducting its affairs as such. [32]

This Court agrees with the CA.

In determining the propriety of applicability of piercing the veil of corporate fiction, this Court, in a
number of cases, did not put in issue whether a corporation is a stock or non-stock corporation. In Sulo
ng Bayan, Inc. v. Gregorio Araneta, Inc.,[33] we considered but ultimately refused to pierce the corporate
veil of a non-stock non-profit corporation which sought to institute an action for reconveyance of real
property on behalf of its members. This Court held that the non-stock corporation had no personality to
institute a class suit on behalf of its members, considering that the non-stock corporation was not an
assignee or transferee of the real property in question, and did not have an identity that was one and
the same as its members.

In another case, this Court did not put in issue whether the corporation is a non-stock, non-profit, non-
governmental corporation in considering the application of the doctrine of piercing of corporate veil.
In Republic of the Philippines v. Institute for Social Concern,[34] while we did not allow the piercing of the
corporate veil, this Court affirmed the finding of the CA that the Chairman of the Institute for Social
Concern cannot be held jointly and severally liable with the aforesaid non-governmental organization
(NGO) at the time the Memorandum of Agreement was entered into with the Philippine Government.
We found no fraud in that case committed by the Chairman that would have justified the piercing of the
corporate veil of the NGO.[35]

In the United States, from which we have adopted our law on corporations, non-profit corporations are
not immune from the doctrine of piercing the corporate veil. Their courts view piercing of the
corporation as an equitable remedy, which justifies said courts to scrutinize any organization however
organized and in whatever manner it operates. Moreover, control of ownership does not hinge on stock
ownership.

As held in  Barineau v. Barineau:[36]

[t]he mere fact that the corporation involved is a nonprofit corporation does not by itself preclude a
court from applying the equitable remedy of piercing the corporate veil. The equitable character of the
remedy permits a court to look to the substance of the organization, and its decision is not controlled by
the statutory framework under which the corporation was formed and operated. While it may appear to
be impossible for a person to exercise ownership control over a nonstock, not-for-profit corporation, a
person can be held personally liable under the alter ego theory if the evidence shows that the person
controlling the corporation did in fact exercise control, even though there was no stock ownership.

In another U.S. case, Public Interest Bounty Hunters v. Board of Governors of Federal Reserve System,
[37]
 the U.S. Court allowed the piercing of the corporate veil of the Foundation headed by the plaintiff, in
order to avoid inequitable results. Plaintiff was found to be the sole trustee, the sole member of the
board, and the sole financial contributor to the Foundation. In the end, the Court found that the plaintiff
used the Foundation to avoid paying attorneys' fees.

The concept of equitable ownership, for stock or non-stock corporations, in piercing of the corporate
veil scenarios, may also be considered. An equitable owner is an individual who is a non-shareholder
defendant, who exercises sufficient control or considerable authority over the corporation to the point
of completely disregarding the corporate form and acting as though its assets are his or her alone to
manage and distribute.[38]

Given the foregoing, this Court sees no reason why a non-stock corporation such as I/AME, may not be
scrutinized for purposes of piercing the corporate veil or fiction.

Piercing the Corporate Veil may Apply to Natural

Persons

The petitioner also insists that the piercing of the corporate veil cannot be applied to a natural person -
in this case, Santos - simply because as a human being, he has no corporate veil shrouding or covering
his person.[39]

a) When the Corporation is the Alter Ego of a Natural Person

As cited in Sulo ng Bayan, Inc. v. Araneta, Inc.,[40] "[t]he doctrine of alter ego is based upon the misuse of
a corporation by an individual for wrongful or inequitable purposes, and in such case the court merely
disregards the corporate entity and holds the individual responsible for acts knowingly and intentionally
done in the name of the corporation." This, Santos has done in this case. Santos formed I/AME, using
the non-stock corporation, to evade paying his judgment creditor, Litton.

The piercing of the corporate veil may apply to corporations as well as natural persons involved with
corporations. This Court has held that the "corporate mask may be lifted and the corporate veil may be
pierced when a corporation is just but the alter ego of a person or of another corporation.”[41]

We have considered a deceased natural person as one and the same with his corporation to protect the
succession rights of his legal heirs to his estate. In Cease v. Court of Appeals,[42] the predecessor-in-
interest organized a close corporation which acquired properties during its existence. When he died
intestate, trouble ensued amongst his children on whether or not to consider his company one and the
same with his person. The Court agreed with the trial court when it pierced the corporate veil of the
decedent's corporation. It found that said corporation was his business conduit and alter ego. Thus, the
acquired properties were actually properties of the decedent and as such, should be divided among the
decedent's legitimate children in the partition of his estate. [43]

In another instance, this Court allowed the piercing of the corporate veil against another natural person,
in Arcilla v. Court of Appeals.[44] The case stemmed from a complaint for sum of money against Arcilla for
his failure to pay his loan from the private respondent. Arcilla, in his defense, alleged that the loan was
in the name of his family corporation, CSAR Marine Resources, Inc. He further argued that the CA erred
in holding CSAR Marine Resources liable to the private respondent since the latter was not impleaded as
a party in the case. This Court allowed the piercing of the corporate veil and held that Arcilla used "his
capacity as President, x x x [as] a sanctuary for a defense x x x to avoid complying with the liability
adjudged against him x x x.''[45] We held that his liability remained attached even if he was impleaded as
a party, and not the corporation, to the collection case and even if he ceased to be corporate president.
[46]
 Indeed, even if Arcilla had ceased to be corporate president, he remained personally liable for the
judgment debt to pay his personal loan, for we treated him and the corporation as one and the same.
CSAR Marine was deemed his alter ego.

We find similarities with  Arcilla and the instant case. Like Arcilla, Santos: (1) was adjudged liable to pay
on a judgment against him; (2) he became President of a corporation; (3) he formed a corporation to
conceal assets which were supposed to pay for the judgment against his favor; (4) the corporation which
has Santos as its President, is being asked by the court to pay on the judgment; and (5) he may not use
as a defense that he is no longer President of I/AME (although a visit to the website of the school shows
he is the current President).[47]

This Court agrees with the CA that I/AME is the alter ego of Santos and Santos - the natural person - is
the alter ego of I/AME. Santos falsely represented himself as President of I/AME in the Deed of Absolute
Sale when he bought the Makati real property, at a time when I/AME had not yet existed.
Uncontroverted facts in this case also reveal the findings of MeTC showing Santos and I/AME as being
one and the same person:

(1) Santos is the conceptualizer and implementor of I/AME;

(2) Santos' contribution is P1,200,000.00 (One Million Two Hundred Thousand Pesos) out of the
P1,500,000.00 (One Million Five Hundred Thousand Pesos), making him the majority contributor of
I/AME; and,

(3) The building being occupied by I/AME is named after Santos using his known nickname (to date it is
called, the "Noli Santos International Tower"). [48]

This Court deems I/AME and Santos as alter egos of each other based on the former's own admission in
its pleadings before the trial court. In its Answer (to Amended Petition) with the RTC  entitled Litton and
Company, Inc. v. Hon. Hernandez-Calledo, Civil Case No. 06-115547, I/AME admitted the allegations
found in paragraphs 2, 4 and 5 of the amended petition of Litton, particularly paragraph number 4 which
states:

4. Respondent, International Academy of Management and Economics Inc. (hereinafter referred to as

Respondent I/AME), is a corporation organized and existing under Philippine laws with address at 1061
Metropolitan Avenue, San Antonio Village, Makati City, where it may be served with summons and
other judicial processes. It is the corporate entity used by Respondent Santos as his alter ego for the
purpose of shielding his assets from the reach of his creditors, one of which is herein Petitioner.
[49]
 (Emphases ours)

Hence, I/AME is the alter ego of the natural person, Santos, which the latter used to evade the execution
on the Makati property, thus frustrating the satisfaction of the judgment won by Litton.

b) Reverse Piercing of the Corporate Veil

This Court in  Arcilla pierced the corporate veil of CSAR Marine Resources to satisfy a money judgment
against its erstwhile President, Arcilla.

We borrow from American parlance what is called reverse piercing or reverse corporate piercing or
piercing the corporate veil "in reverse."

As held in the U.S. Case, C.F. Trust, Inc., v. First Flight Limited Partnership,[50] "in a traditional veil-piercing
action, a court disregards the existence of the corporate entity so a claimant can reach the assets of a
corporate insider. In a reverse piercing action, however, the plaintiff seeks to reach the assets of a
corporation to satisfy claims against a corporate insider."

"Reverse-piercing flows in the opposite direction (of traditional corporate veil-piercing) and makes the
corporation liable for the debt of the shareholders." [51]

It has two (2) types: outsider reverse piercing and insider reverse piercing. Outsider reverse piercing
occurs when a party with a claim against an individual or corporation attempts to be repaid with assets
of a corporation owned or substantially controlled by the defendant. [52] In contrast, in insider reverse
piercing, the controlling members will attempt to ignore the corporate fiction in order to take advantage
of a benefit available to the corporation, such as an interest in a lawsuit or protection of personal assets.
[53]

Outsider reverse veil-piercing is applicable in the instant case. Litton, as judgment creditor, seeks the
Court's intervention to pierce the corporate veil of I/AME in order to make its Makati real property
answer for a judgment against Santos, who formerly owned and still substantially controls I/AME.

In the U.S. case Acree v. McMahan,[54] the American court held that "[o]utsider reverse veil-piercing
extends the traditional veil-piercing doctrine to permit a third-party creditor to pierce the veil to satisfy
the debts of an individual out of the corporation's assets."

The Court has pierced the corporate veil in a reverse manner in the instances when the scheme was to
avoid corporate assets to be included in the estate of a decedent as in the Cease case and when the
corporation was used to escape a judgment to pay a debt as in the Arcilla case.

In a 1962 Philippine case, this Court also employed what we now call reverse-piercing of the corporate
veil. In  Palacio v. Fely Transportation Co.,[55] we found that the president and general manager of the
private respondent company formed the corporation to evade his subsidiary civil liability resulting from
the conviction of his driver who ran over the child of the petitioner, causing injuries and medical
expenses. The Court agreed with the plaintiffs that the president and general manager, and Fely
Transportation, may be regarded as one and the same person. Thus, even if the president and general
manager was not a party to the case, we reversed the lower court and declared both him and the
private respondent company, jointly and severally liable to the plaintiffs. Thus, this Court allowed the
outsider-plaintiffs to pierce the corporate veil of Fely Transportation to run after its corporate assets and
pay the subsidiary civil liability of the company's president and general manager.

This notwithstanding, the equitable remedy of reverse corporate piercing or reverse piercing was not
meant to encourage a creditor's failure to undertake such remedies that could have otherwise been
available, to the detriment of other creditors. [56]

Reverse corporate piercing is an equitable remedy which if utilized cavalierly, may lead to disastrous
consequences for both stock and non-stock corporations. We are aware that ordinary judgment
collection procedures or other legal remedies are preferred over that which would risk damage to third
parties (for instance, innocent stockholders or voluntary creditors) with unprotected interests in the
assets of the beleaguered corporation.[57]

Thus, this Court would recommend the application of the current 1997 Rules on Civil Procedure on
Enforcement of Judgments. Under the current Rules of Court on Civil Procedure, when it comes to
satisfaction by levy, a judgment obligor is given the option to immediately choose which property or
part thereof may be levied upon to satisfy the judgment. If the judgment obligor does not exercise the
option, personal properties, if any, shall be first levied and then on real properties if the personal
properties are deemed insufficient to answer for the judgment. [58]
In the instant case, it may be possible for this Court to recommend that Litton run after the other
properties of Santos that could satisfy the money judgment - first personal, then other real properties
other than that of the school. However, if we allow this, we frustrate the decades-old yet valid MeTC
judgment which levied on the real property now titled under the name of the school. Moreover, this
Court will unwittingly condone the action of Santos in hiding all these years behind the corporate form
to evade paying his obligation under the judgment in the court a quo. This we cannot countenance
without being a party to the injustice.

Thus, the reverse piercing of the corporate veil of I/AME to enforce the levy on execution of the Makati
real property where the school now stands is applied.

WHEREFORE, in view of the foregoing, the instant petition is DENIED. The CA Decision in CA-G.R. SP No.
107727 dated 30 October 2009 and its Resolution on 12 March 2010 are hereby AFFIRMED. The MeTC
Order dated 29 October 2004 is hereby REINSTATED.

Accordingly, the MeTC of Manila, Branch 2, is hereby DIRECTED to execute with dispatch the MeTC
Order dated 29 October 2004 against Santos.

SO ORDERED.

Leonardo-De Castro, Del Castillo, Jardeleza, and Tijam, JJ., concur.

SECOND DIVISION

[ G.R. No. 225125, June 06, 2018 ]

MARLON L. ARCILLA, PETITIONER, VS. ZULISIBS, INC., PIANDRE SALON, AND ROSALINDA FRANCISCO,
RESPONDENTS.

RESOLUTION

CARPIO, J.:

The Case

This is a petition for review to set aside the 10 February 2016  Decision[1] of the Court of Appeals in CA-
G.R. SP No. 141953 which affirmed with modifications the Resolutions dated 30 April 2015 [2] and 26 June
2015[3] of the National Labor Relations Commission (NLRC), Third Division, in NLRC LAC No. 04-001028-
15/NLRC NCR No. 10-12582-14.
The Facts

Respondent Zulisibs, Inc. (Zulisibs) is a corporation organized and existing under Philippine laws with
respondent Rosalinda Francisco (Francisco) as its President and Chief Executive Officer. Zulisibs operates
respondent Piandre Salon (Piandre), an establishment engaged in the operation of beauty salons.

Petitioner Marlon L. Arcilla (Marlon) was hired by Piandre on 8 February 2000 and was assigned to the
Alabang, Muntinlupa City branch. Maricel Arcilla (Maricel), Marlon's wife, was hired on 12 November
2000 and was assigned to the Salcedo Village, Makati City branch. After several years, both Marlon and
Maricel were promoted as senior hair stylists earning a monthly salary of P11,672.00 plus commissions
from customers and sale of products.

Sometime in September 2014, Zulisibs, through its officers, received information that Marlon was
establishing a beauty salon somewhere in Daang Hari, Alabang, Muntinlupa City, near the Piandre Salon
where Marlon was working.

On 6 September 2014, Marlon received a notice from Piandre and Francisco placing Marlon under
preventive suspension from 6 to 14 September 2014 and requiring him to appear on 12 September 2014
at Francisco's office in Sta. Ana, Manila.

During the 12 September 2014 investigative hearing, Marlon was accused of, among other things, being
involved in the opening of a salon near Piandre Alabang. Marlon denied that he had an agreement or
contract with the owner of the salon along Daang Hari, Alabang. However, he admitted the following: (1)
that he extended help to the salon owner who happens to be his brother-in-law; (2) that he called up
two former employees of Piandre and recommended them to his brother-in-law; and (3) that he gave
P50,000.00 to the salon owner which amount was a portion of the P250,000.00 loan he borrowed from
the employees' cooperative of Piandre.[4]

Further investigation revealed that Marlon was often absent from work and whenever he was working,
he would entertain phone calls, thus, disrupting his work. He would be absent on days when he would
be the only stylist available. Francisco and other supervisors of Piandre verified the existence of a new
salon along Daang Hari, Alabang and alleged that "the interiors of said salon, already with equipment,
mirrors and chairs, [sic] all set to operate, with towels folded and presented the 'Piandre' way." [5] They
also learned from neighboring establishments that the salon was set to open on 8 September 2014.

On 11 September 2014, Maricel received a notice from Piandre and Francisco, asking her to explain her
alleged involvement with her husband, Marlon, in setting up a salon along Daang Hari, Alabang and
requiring her to appear on 13 September 2014 at the Sta. Ana office. On 14 September 2014, Maricel
received a notice placing her under preventive suspension from 14 September to 13 October 2014.
Marlon received a copy of his notice of termination on 14 September 2014. Maricel received her notice
of termination on 26 September 2014. Both were found guilty of violating Piandre's Code of Discipline
3F No. 2: Pagkawala ng tiwala dahil sa ginawang masama.

Subsequently, Marlon and Maricel filed two separate complaints [6] for illegal dismissal, underpayment of
wages, non-payment of overtime pay, service incentive leave, 13 th month pay, Emergency Cost of Living
Allowance, and separation pay, and illegal suspension, with prayer for moral and exemplary damages,
and attorney's fees.

The Ruling of the Labor Arbiter

On 9 March 2015, the Labor Arbiter rendered a Decision [7] dismissing Marlon and Maricel's complaints
for lack of merit. The Labor Arbiter held that:

WHEREFORE, the complaint[s] for illegal dismissal and x x x money claims [are] DISMISSED for lack of
merit.[8]

The Ruling of the NLRC

On 30 April 2015, the NLRC denied Marlon and Maricel's appeal and affirmed the Labor Arbiter's
decision. The NLRC held that:

WHEREFORE, premises considered, Complainants-Appellants' appeal is hereby DENIED. The March 9,

2015 Decision of Labor Arbiter Gaudencio P. Demaisip, Jr. is hereby AFFIRMED. [9]

On 26 June 2015, Marlon and Maricel's Motion for Reconsideration [10] was denied by the NLRC for lack of
merit, holding that "The resolution of [the] Commission dated April 30, 2015 STANDS undisturbed." [11]

The Ruling of the Court of Appeals

On 10 February 2016, Marlon and Maricel's petition for certiorari under Rule 65 was partially granted.
Marlon's termination was held to be valid. As to Maricel, the Court of Appeals held that the NLRC and
the Labor Arbiter erred in upholding the legality of her dismissal. The dispositive portion of the
Decision[12] reads:
WHEREFORE, the petition is PARTIALLY GRANTED. The Resolutions dated April 30, 2015 and June 26,
2015 of public respondent National Labor Relations Commission, Third Division, in NLRC LAC No. 04-
001028-15/NLRC NCR No. 10-12582-14 are hereby AFFIRMED with MODIFICATIONS, in that the private
respondents are ORDERED to pay MARICEL ARCILLA the following:

1) Backwages and all other benefits from September 26, 2014 until finality of this Decision;

2) Separation pay equivalent to one (1) month salary for every year of service;

3) Moral and exemplary damages in the amount of Php 50,000.00

4) Attorney's fees equivalent to ten percent (10%) of the total monetary award; and

5) Legal interest of six percent (6%) per annum  on the total monetary awards from the finality of this
Decision until full payment thereof.

The appropriate Computation Division of the National Labor Relations Commission is hereby ordered to
COMPUTE and UPDATE the award as herein determined WITH DISPATCH.

All other aspects of the assailed Resolutions STAND.

SO ORDERED.[13]

The Issues

Marlon presents the following issues:

1. Whether the Court of Appeals erred in upholding the two resolutions of the NLRC, finding Marlon's
dismissal to be valid and for just cause, and effected after due notice and hearing; and

2. Whether the Court of Appeals gravely erred in upholding the two resolutions of the NLRC, finding that
Marlon was not entitled to his money claims.

The Ruling of this Court

We deny the petition.

Dismissals under the Labor Code have two facets: the legality of the act of dismissal, which constitutes
substantive due process; and the legality of the manner of dismissal, which constitutes procedural due
process.[14]

In this case, we do not dispute the findings of the Labor Arbiter, the NLRC, and the Court of Appeals that
the manner of Marlon's dismissal was legal and in accordance with law. [15] The requirement of
procedural due process was met when Marlon was served with a first written notice containing the
specific causes or grounds for his termination, when Marlon was called to attend an investigative
hearing to explain his side, and when Marlon was served with a second written notice containing the
justification for his termination.

Thus, the only issue to be resolved is the legality of the act of dismissal by re-examining the facts and
evidence on record. Given that this Court is not a trier of facts, and the scope of its authority under Rule
45 of the Rules of Court is confined only to errors of law and does not extend to questions of fact, which
are for labor tribunals to resolve, one of the recognized exceptions to the rule is when the factual
findings and conclusion of the labor tribunals are contradictory or inconsistent with those of the Court
of Appeals.[16] In this case, however, the factual findings and conclusion of the labor tribunals and the
Court of Appeals regarding Marlon's dismissal are consistent and one. As to Maricel, the decision in her
favor was not appealed to us anymore. Thus, the decision of the Court of Appeals insofar as Maricel is
concerned is final and executory.

Respondents Zulisibs, Francisco, and Piandre alleged that Marlon committed serious misconduct or
willful disobedience of the company's lawful orders, and of fraud or willful breach of the trust reposed in
him by the company when he helped his brother-in-law open a salon along Daang Hari, Alabang. They
justified Marlon's dismissal by citing paragraphs (a) and (c), Article 297 of the Labor Code. [17] The
provision reads:

Article 297. TERMINATION BY EMPLOYER.  An employer may terminate an employee for any of the
following causes:

(a) Serious misconduct or willful disobedience by the employee of the lawful orders of his employer or
representative in connection with his work.

(c) Fraud or willful breach by the employee of the trust reposed in him by his employer or duly
authorized representative.

The Labor Arbiter, the NLRC, and the Court of Appeals all held that the respondents presented
substantial evidence to justify Marlon's dismissal. We affirm all the rulings. We adopt in toto the Court of
Appeals' decision with regard to Marlon's dismissal. It held:

From the facts and circumstances obtaining with respect to petitioner Marlon Arcilla, there exists a valid
cause in terminating his employment. It was clearly stated in paragraph 8 of the Agreement
or "Kasunduan"  signed by petitioners that they are prohibited from setting up or being involved in a
business similar to that of private respondents' during the course of their employment. Considering that
the petitioners have neither controverted nor denied the existence of the Kasunduan,  they are
therefore bound by the terms and conditions thereof. Petitioners cannot likewise deny the existence of
the Code of Discipline and feign ignorance of the offense they committed and its corresponding penalty
by holding that the private respondents did not present a copy of said Code in the proceedings below.
They are deemed to have acknowledged the existence of said Code and presumed to have understood
the provisions contained therein when they signed the Kasunduan  and agreed to abide by the Code of
Discipline and the rules and regulations of the company in paragraph 2 of their agreement. As private
respondents' trusted Senior Hairstylists for quite a number of years, it is incumbent upon them to
have read and understood its provisions and be fully aware of the prohibitions and penalties imposed
upon erring employees.

Collorarily, as briefly summed up by the public respondent, petitioners were later discovered to be
involved in setting up another salon near the private respondents' salon in Alabang, albeit the
involvement was only indirect by means of extending a Php50,000.00 financial assistance to the owner
of the new salon who happens to be the brother-in-law of Marlon or his wife Maricel's brother. We
agree with public respondent that it is immaterial whether the new salon was under the petitioners'
name or not, or that they established a salon of their own. The important fact remains that petitioner
Marlon made an admission that he gave funds to his brother-in-law for the new salon in Alabang
which directly competes with the business of his employer. It is not disputed that the new beauty
salon is located less than a kilometer away from Piandre Salon in Alabang.

Furthermore, Marlon's admission susbtantially proves two things: 1) that a new salon has indeed been
established; and 2) that he willfully disobeyed his contract of employment with the private
respondents. His involvement in setting up a competing salon, which albeit indirect, constitutes
serious misconduct because of his blatant disregard [of] the terms and conditions of his
contract/agreement with the private respondents. His act of allowing himself to be involved with his
brother-in-law's business displays an act of disloyalty to the company which is likewise sufficient to
warrant his dismissal for loss of trust and confidence. To our mind, his apology in his written letter to
private respondent Francisco [was] a mere afterthought after realizing the gravity of his offense after he
became the subject of an investigation by the private respondents. Substantial proof, and not clear and
convincing evidence or proof beyond reasonable doubt, is a sufficient basis for the imposition of any
disciplinary action upon the employee. The standard of substantial evidence is satisfied where the
employer has reasonable ground to believe that the employee is responsible for the misconduct that
renders the latter unworthy of the trust and confidence demanded by his or her position. [18] (Emphasis
supplied)

All told, there is sufficient basis to dismiss Marlon on the grounds of serious misconduct or willful
disobedience of the company's lawful orders, and of fraud or willful breach of the trust reposed in him
by the company when he helped his brother-in-law open a salon along Daang Hari, Alabang. The Court
of Appeals acted in accordance with the evidence on record and case law when it affirmed and upheld
the resolutions of the NLRC.

WHEREFORE, the petition is DENIED for lack of merit.

SO ORDERED.

Peralta, Perlas-Bernabe, Caguioa, and Reyes, Jr., JJ., concur

FIRST DIVISION

G.R. No. L-33172 October 18, 1979

ERNESTO CEASE, CECILIA CEASE, MARION CEASE, TERESA CEASE-LACEBAL and the F.L. CEASE
PLANTATION CO., INC. as Trustee of properties of the defunct TIAONG MILLING & PLANTATION
CO., petitioners,
vs.
HONORABLE COURT OF APPEALS, (Special Seventh Division), HON. MANOLO L. MADDELA, Presiding
Judge, Court of First Instance of Quezon, BENJAMIN CEASE and FLORENCE CEASE, respondents.

GUERRERO, J:

Appeal by certiorari from the decision of the Court of Appeals in CA-G.R. No. 45474, entitled "Ernesto
Cease, et al. vs. Hon. Manolo L. Maddela, Judge of the Court of First Instance of Quezon, et al." 1 which
dismissed the petition for certiorari, mandamus, and prohibition instituted by the petitioners against the
respondent judge and the private respondents.

The antecedents of the case, as found by the appellate court, are as follows:

IT RESULTING: That the antecedents are not difficult to understand; sometime in June 1908, one Forrest
L. Cease common predecessor in interest of the parties together with five (5) other American citizens
organized the Tiaong Milling and Plantation Company and in the course of its corporate existence the
company acquired various properties but at the same time all the other original incorporators were
bought out by Forrest L. Cease together with his children namely Ernest, Cecilia, Teresita, Benjamin,
Florence and one Bonifacia Tirante also considered a member of the family; the charter of the company
lapsed in June 1958; but whether there were steps to liquidate it, the record is silent; on 13 August
1959, Forrest L. Cease died and by extrajudicial partition of his shares, among the children, this was
disposed of on 19 October 1959; it was here where the trouble among them came to arise because it
would appear that Benjamin and Florence wanted an actual division while the other children wanted
reincorporation; and proceeding on that, these other children Ernesto, Teresita and Cecilia and
aforementioned other stockholder Bonifacia Tirante proceeded to incorporate themselves into the F.L.
Cease Plantation Company and registered it with the Securities and Exchange Commission on 9
December, 1959; apparently in view of that, Benjamin and Florence for their part initiated a Special
Proceeding No. 3893 of the Court of First Instance of Tayabas for the settlement of the estate of Forest
L. Cease on 21 April, 1960 and one month afterwards on 19 May 1960 they filed Civil Case No. 6326
against Ernesto, Teresita and Cecilia Cease together with Bonifacia Tirante asking that the Tiaong Milling
and Plantation Corporation be declared Identical to F.L. Cease and that its properties be divided among
his children as his intestate heirs; this Civil Case was resisted by aforestated defendants and
notwithstanding efforts of the plaintiffs to have the properties placed under receivership, they were not
able to succeed because defendants filed a bond to remain as they have remained in possession; after
that and already, during the pendency of Civil Case No. 6326 specifically on 21 May, 1961 apparently on
the eve of the expiry of the three (3) year period provided by the law for the liquidation of corporations,
the board of liquidators of Tiaong Milling executed an assignment and conveyance of properties and
trust agreement in favor of F.L. Cease Plantation Co. Inc. as trustee of the Tiaong Milling and Plantation
Co. so Chat upon motion of the plaintiffs trial Judge ordered that this alleged trustee be also included as
party defendant; now this being the situation, it will be remembered that there were thus two (2)
proceedings pending in the Court of First Instance of Quezon namely Civil Case No. 6326 and Special
Proceeding No. 3893 but both of these were assigned to the Honorable Respondent Judge Manolo L.
Maddela p. 43 and the case was finally heard and submitted upon stipulation of facts pp, 34-110, rollo;
and trial Judge by decision dated 27 December 1969 held for the plaintiffs Benjamin and Florence, the
decision containing the following dispositive part:

VIEWED IN THE LIGHT OF ALL THE FOREGOING, judgment is hereby rendered in favor of plaintiffs and
against the defendants declaring that:

1) The assets or properties of the defunct Tiaong Milling and Plantation Company now appearing under
the name of F.L. Cease Plantation Company as Trustee, is the estate also of the deceased Forrest L.
Cease and ordered divided, share and share alike, among his six children the plaintiffs and the
defendants in accordance with Rule 69, Rules of Court;

2) The Resolution to Sell dated October 12, 1959 and the Transfer and Conveyance with Trust
Agreement is hereby set aside as improper and illegal for the purposes and effect that it was intended
and, therefore, null and void;

3) That F.L. Cease Plantation Company is removed as 'Trustee for interest against the estate and
essential to the protection of plaintiffs' rights and is hereby ordered to deliver and convey all the
properties and assets of the defunct Tiaong Milling now under its name, custody and control to
whomsoever be appointed as Receiver - disqualifying and of the parties herein - the latter to act
accordingly upon proper assumption of office; and

4) Special Proceedings No. 3893 for administration is terminated and dismissed; the instant case to
proceed but on issues of damages only and for such action inherently essential for partition.
SO ORDERED.

Lucena City, December 27, 1969., pp. 122-a-123, rollo.

upon receipt of that, defendants there filled a notice of appeal p. 129, rollo together with an appeal
bond and a record on appeal but the plaintiffs moved to dismiss the appeal on the ground that the
judgment was in fact interlocutory and not appealable p. 168 rollo and this position of defendants was
sustained by trial Judge, His Honor ruling that

IN VIEW OF THE FOREGOING, the appeal interposed by plaintiffs is hereby dismissed as premature and
the Record on Appeal is necessarily disapproved as improper at this stage of the proceedings.

SO ORDERED.

Lucena City, April 27, 1970.

and so it was said defendants brought the matter first to the Supreme Court, on mandamus on 20 May,
1970 to compel the appeal and certiorari and prohibition to annul the order of 27 April, 1970 on the
ground that the decision was "patently erroneous" p. 16, rollo; but the Supreme Court remanded the
case to this Court of Appeals by resolution of 27 May 1970, p. 173, and this Court of Appeals on 1 July
1970 p. 175 dismissed the petition so far as the mandamus was concerned taking the view that the
decision sought to be appealed dated 27 December, 1969 was interlocutory and not appealable but on
motion for reconsideration of petitioners and since there was possible merit so far as its prayer for
certiorari and prohibition was concerned, by resolution of the Court on 19 August, 1970, p. 232, the
petition was permitted to go ahead in that capacity; and it is the position of petitioners that the decision
of 27 December, 1969 as well as the order of 27 April, 1970 suffered of certain fatal defects, which
respondents deny and on their part raise the preliminary point that this Court of Appeals has no
authority to give relief to petitioners because not

in aid of its appellate jurisdiction,

and that the questions presented cannot be raised for the first time before this Court of Appeals;

Respondent Court of Appeals in its decision promulgated December 9, 1970 dismissed the petition with
costs against petitioners, hence the present petition to this Court on the following assignment of errors:

THE COURT OF APPEALS ERRED -

I. IN SANCTIONING THE WRONGFUL EXERCISE OF JURISDICTION BEYOND THE LIMITS OF AUTHORITY

CONFERRED BY LAW UPON THE LOWER COURT, WHEN IT PROCEEDED TO HEAR, ADJUDGE AND
ADJUDICATE -

(a) Special Proceedings No. 3893 for the settlement of the Estate of Forrest L. Cease, simultaneously and
concurrently with -

(b) Civil Case No. 6326, wherein the lower Court ordered Partition under Rule 69, Rules of Court -
THE ISSUE OF LEGAL OWNERSHIP OF THE PROPERTIES COMMONLY INVOLVED IN BOTH ACTIONS
HAVING BEEN RAISED AT THE OUTSET BY THE TIAONG MILLING AND PLANTATION COMPANY, AS THE
REGISTERED OWNER OF SUCH PROPERTIES UNDER ACT 496.

II. IN AFFIRMING - UNSUPPORTED BY ANY EVIDENCE WHATSOEVER NOR CITATION OF ANY LAW TO
JUSTIFY - THE UNWARRANTED CONCLUSION THAT SUBJECT PROPERTIES, FOUND BY THE LOWER COURT
AND THE COURT OF APPEALS AS ACTUALLY REGISTERED IN THE NAME OF PETITIONER CORPORATION
AND/OR ITS PREDECESSOR IN INTEREST, THE TIAONG MILLING AND PLANTATION COMPANY, DURING
ALL THE 50 YEARS OF ITS CORPORATE EXISTENCE "ARE ALSO PROPERTIES OF THE ESTATE OF FOREST L.
CEASE."

III. IN AFFIRMING THE ARBITRARY CONCLUSION OF THE LOWER COURT THAT ITS DECISION OF
DECEMBER 27,1969 IS AN "INTERLUCUTORY DECISION." IN DISMISSED NG THE PETITION FOR WRIT OF
MANDAMUS, AND IN AFFIRMING THE MANIFESTLY UNJUST JUDGMENT RENDERED WHICH
CONTRADICTS THE FINDINGS OF ULTIMATE FACTS THEREIN CONTAINED.

During the period that ensued after the filing in this Court of the respective briefs and the subsequent
submission of the case for decision, some incidents had transpired, the summary of which may be stated
as follows:

1. Separate from this present appeal, petitioners filed a petition for certiorari and prohibition in this
Court, docketed as G.R. No. L-35629 (Ernesto Cease, et al. vs. Hon. Manolo L. Maddela, et al.) which
challenged the order of respondent judge dated September 27, 1972 appointing his Branch Clerk of
Court, Mr. Eleno M. Joyas, as receiver of the properties subject of the appealed civil case, which order,
petitioners saw as a virtual execution of the lower court's judgment (p. 92, rollo). In Our resolution of
November 13, 1972, issued in G.R. No. L-35629, the petition was denied since respondent judge merely
appointed an auxilliary receiver for the preservation of the properties as well as for the protection of the
interests of all parties in Civil Case No. 6326; but at the same time, We expressed Our displeasure in the
appointment of the branch clerk of court or any other court personnel for that matter as receiver. (p.
102, rollo).

2. Meanwhile, sensing that the appointed receiver was making some attempts to take possession of the
properties, petitioners filed in this present appeal an urgent petition to restrain proceedings in the lower
court. We resolved the petition on January 29, 1975 by issuing a corresponding temporary restraining
order enjoining the court a quo from implementing its decision of December 27, 1969, more particularly,
the taking over by a receiver of the properties subject of the litigation, and private respondents
Benjamin and Florence Cease from proceeding or taking any action on the matter until further orders
from this Court (pp. 99-100, rollo). Private respondents filed a motion for reconsideration of Our
resolution of January 29, 1975. After weighing the arguments of the parties and taking note of Our
resolution in G.R. No. L-35629 which upheld the appointment of a receiver, We issued another
resolution dated April 11, 1975 lifting effective immediately Our previous temporary restraining order
which enforced the earlier resolution of January 29, 1975 (pp. 140-141, rollo).
3. On February 6, 1976, private respondents filed an urgent petition to restrain proceedings below in
view of the precipitate replacement of the court appointed receiver Mayor Francisco Escueta (vice Mr.
Eleno M. Joyas) and the appointment of Mr. Guillermo Lagrosa on the eve of respondent Judge
Maddela's retirement (p. 166, rollo). The urgent petition was denied in Our resolution of February 18,
1976 (p. 176, rollo).

4. Several attempts at a compromise agreement failed to materialize. A Tentative Compromise

Agreement dated July 30, 1975 was presented to the Court on August 6, 1976 for the signature of the
parties, but respondents "unceremoniously" repudiated the same by leaving the courtroom without the
permission of the court (Court of First Instance of Quezon, Branch 11) as a result of which respondents
and their counsel were cited for contempt (p. 195, 197, rollo) that respondents' reason for the
repudiation appears to be petitioners' failure to render an audited account of their administration
covering the period from May 31, 1961 up to January 29, 1974, plus the inclusion of a provision on
waiver and relinquishment by respondents of whatever rights that may have accrued to their favor by
virtue of the lower court's decision and the affirmative decision of the appellate court.

We go now to the alleged errors committed by the respondent Court of Appeals.

As can be gleaned from petitioners' brief and the petition itself, two contentions underlie the first
assigned error. First, petitioners argue that there was an irregular and arbitrarte termination and
dismissal of the special proceedings for judicial administration simultaneously ordered in the lower court
. s decision in Civil Case No. 6326 adjudicating the partition of the estate, without categorically,
reasoning the opposition to the petition for administration Second, that the issue of ownership had
been raised in the lower court when Tiaong Milling asserted title over the properties registered in its
corporate name adverse to Forrest L. Cease or his estate, and that the said issue was erroneously
disposed of by the trial court in the partition proceedings when it concluded that the assets or
properties of the defunct company is also the estate of the deceased proprietor.

The propriety of the dismissal and termination of the special proceedings for judicial administration
must be affirmed in spite of its rendition in another related case in view of the established jurisprudence
which favors partition when judicial administration become, unnecessary. As observed by the Court of
Appeals, the dismissal at first glance is wrong, for the reason that what was actually heard was Civil Case
No. 6326. The technical consistency, however, it is far less importance than the reason behind the
doctrinal rule against placing an estate under administration. Judicial rulings consistently hold the view
that where partition is possible, either judicial or extrajudicial, the estate should not be burdened with
an administration proceeding without good and compelling reason. When the estate has no creditors or
pending obligations to be paid, the beneficiaries in interest are not bound to submit the property to
judicial administration which is always long and costly, or to apply for the appointment of an
administrator by the court, especially when judicial administration is unnecessary and superfluous. Thus
-

When a person dies without leaving pending obligations to be paid, his heirs, whether of age or not, are
bound to submit the property to a judicial administration, which is always long and costly, or to apply for
the appointment of an administrator by the court. It has been uniformly held that in such case the
judicial administration and the appointment of an administrator are superfluous and unnecessary
proceedings (Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19 Phil, 434; Bondad vs.
Bondad, 34 Phil., 232; Baldemor vs. Malangyaon, 34 Phil., 367; Fule vs. Fule, 46 Phil., 317). Syllabus,
Intestate estate of the deceased Luz Garcia. Pablo G. Utulo vs. Leona Pasion Viuda de Garcia, 66 Phil.
302.

Where the estate has no debts, recourse may be had to an administration proceeding only if the heirs
have good reasons for not resorting to an action for partition. Where partition is possible, either in or
out of court, the estate should not be burdened with an administration proceeding without good and
compelling reasons. (Intestate Estate of Mercado vs. Magtibay, 96 Phil. 383)

In the records of this case, We find no indication of any indebtedness of the estate. No creditor has
come up to charge the estate within the two-year period after the death of Forrest L. Cease, hence, the
presumption under Section 1, Rule 74 that the estate is free from creditors must apply. Neither has the
status of the parties as legal heirs, much less that of respondents, been raised as an issue. Besides,
extant in the records is the stipulation of the parties to submit the pleadings and contents of the
administration proceedings for the cognizance of the trial judge in adjudicating the civil case for
partition (Respondents' Brief, p, 20, rollo). As respondents observe, the parties in both cases are the
same, so are the properties involved; that actual division is the primary objective in both actions; the
theory and defense of the respective parties are likewise common; and that both cases have been
assigned to the same respondent judge. We feel that the unifying effect of the foregoing circumstances
invites the wholesome exception to the structures of procedural rule, thus allowing, instead, room for
judicial flexibility. Respondent judge's dismissal of the administration proceedings then, is a judicious
move, appreciable in today's need for effective and speedy administration of justice. There being ample
reason to support the dismissal of the special proceedings in this appealed case, We cannot see in the
records any compelling reason why it may not be dismissed just the same even if considered in a
separate action. This is inevitably certain specially when the subject property has already been found
appropriate for partition, thus reducing the petition for administration to a mere unnecessary
solicitation.

The second point raised by petitioners in their first assigned error is equally untenable. In effect,
petitioners argue that the action for partition should not have prospered in view of the repudiation of
the co-ownership by Tiaong Milling and Plantation Company when, as early in the trial court, it already
asserted ownership and corporate title over the properties adverse to the right of ownership of Forrest
L. Cease or his estate. We are not unmindful of the doctrine relied upon by petitioners in Rodriguez vs.
Ravilan, 17 Phil. 63 wherein this Court held that in an action for partition, it is assumed that the parties
by whom it is prosecuted are all co-owners or co-proprietors of the property to be divided, and that the
question of common ownership is not to be argued, not the fact as to whether the intended parties are
or are not the owners of the property in question, but only as to how and in what manner and
proportion the said property of common ownership shall be distributed among the interested parties by
order of the Court. Consistent with this dictum, it has been field that if any party to a suit for partition
denies the  pro-indiviso character of the estate whose partition is sought, and claims instead, exclusive
title thereto the action becomes one for recovery of property cognizable in the courts of ordinary
jurisdiction. 2

Petitioners' argument has only theoretical persuasion, to say the least, rather apparent than real. It must
be remembered that when Tiaong Milling adduced its defense and raised the issue of ownership, its
corporate existence already terminated through the expiration of its charter. It is clear in Section 77 of
Act No. 1459 (Corporation Law) that upon the expiration of the charter period, the corporation ceases to
exist and is dissolved ipso facto except for purposes connected with the winding up and liquidation. The
provision allows a three year, period from expiration of the charter within which the entity gradually
settles and closes its affairs, disposes and convey its property and to divide its capital stock, but not for
the purpose of continuing the business for which it was established. At this terminal stage of its
existence, Tiaong Milling may no longer persist to maintain adverse title and ownership of the corporate
assets as against the prospective distributees when at this time it merely holds the property in trust, its
assertion of ownership is not only a legal contradiction, but more so, to allow it to maintain adverse
interest would certainly thwart the very purpose of liquidation and the final distribute loll of the assets
to the proper, parties.

We agree with the Court of Appeals in its reasoning that substance is more important than form when it
sustained the dismissal of Special Proceedings No. 3893, thus -

a) As to the dismissal of Special Proceedings No. 3893, of course, at first glance, this was wrong, for the
reason that the case trial had been heard was Civil Case No. 6326; but what should not be overlooked
either is Chat respondent Judge was the same Judge that had before him in his own sala, said Special
Proceedings No. 3893, p. 43 rollo, and the parties to the present Civil Case No. 6326 had themselves
asked respondent Judge to take judicial notice of the same and its contents page 34, rollo; it is not
difficult to see that when respondent Judge in par. 4 of the dispositive part of his decision complained
of, ordered that,

4) Special Proceedings No. 3893 for administration is terminated and dismissed; the instant case to
proceed but on issues of damages only and for such action inherently essential or partition. p. 123, rollo,

in truth and in fact, His Honor was issuing that order also within Civil Case No. 632 but in connection
with Special Proceedings No. 389:3: for substance is more important Chan form, the contending par ties
in both proceedings being exactly the same, but not only this, let it not be forgotten that when His
Honor dismissed Special Proceedings No. 3893, that dismissal precisely was a dismissal that petitioners
herein had themselves sought and solicited from respondent Judge as petitioners themselves are in
their present petition pp. 5-6, rollo; this Court must find difficulty in reconciling petitioners' attack with
the fact that it was they themselves that had insisted on that dismissal; on the principle that not he who
is favored but he who is hurt by a judicial order is he only who should be heard to complain and
especially since extraordinary legal remedies are remedies in extermies granted to parties ' who have
been the victims not merely of errors but of grave wrongs, and it cannot be seen how one who got what
he had asked could be heard to claim that he had been the victim of a wrong, petitioners should not
now complain of an order they had themselves asked in order to attack such an order afterwards; if at
all, perhaps, third parties, creditors, the Bureau of Internal Revenue, might have been prejudiced, and
could have had the personality to attack that dismissal of Special Proceedings No. 3893, but not
petitioners herein, and it is not now for this Court of Appeals to protect said third persons who have not
come to the Court below or sought to intervene herein;

On the second assigned error, petitioners argue that no evidence has been found to support the
conclusion that the registered properties of Tiaong Milling are also properties of the estate of Forrest L.
Cease; that on the contrary, said properties are registered under Act No. 496 in the name of Tiaong
Milling as lawful owner and possessor for the last 50 years of its corporate existence.

We do not agree. In reposing ownership to the estate of Forrest L. Cease, the trial court indeed found
strong support, one that is based on a well-entrenched principle of law. In sustaining respondents'
theory of "merger of Forrest L. Cease and The Tiaong Milling as one personality", or that "the company
is only the business conduit and alter ego of the deceased Forrest L. Cease and the registered properties
of Tiaong Milling are actually properties of Forrest L. Cease and should be divided equally, share and
share alike among his six children, ... ", the trial court did aptly apply the familiar exception to the
general rule by disregarding the legal fiction of distinct and separate corporate personality and regarding
the corporation and the individual member one and the same. In shredding the fictitious corporate veil,
the trial judge narrated the undisputed factual premise, thus:

While the records showed that originally its incorporators were aliens, friends or third-parties in relation
of one to another, in the course of its existence, it developed into a close family corporation. The Board
of Directors and stockholders belong to one family the head of which Forrest L. Cease always retained
the majority stocks and hence the control and management of its affairs. In fact, during the
reconstruction of its records in 1947 before the Security and Exchange Commission only 9 nominal
shares out of 300 appears in the name of his 3 eldest children then and another person close to them. It
is likewise noteworthy to observe that as his children increase or perhaps become of age, he continued
distributing his shares among them adding Florence, Teresa and Marion until at the time of his death
only 190 were left to his name. Definitely, only the members of his family benefited from the
Corporation.

The accounts of the corporation and therefore its operation, as well as that of the family appears to be
indistinguishable and apparently joined together. As admitted by the defendants (Manifestation of
Compliance with Order of March 7, 1963 [Exhibit "21"] the corporation 'never' had any account with any
banking institution or if any account was carried in a bank on its behalf, it was in the name of Mr. Forrest
L. Cease. In brief, the operation of the Corporation is merged with those of the majority stockholders,
the latter using the former as his instrumentality and for the exclusive benefits of all his family. From the
foregoing indication, therefore, there is truth in plaintiff's allegation that the corporation is only a
business conduit of his father and an extension of his personality, they are one and the same thing.
Thus, the assets of the corporation are also the estate of Forrest L. Cease, the father of the parties
herein who are all legitimate children of full blood.
A rich store of jurisprudence has established the rule known as the doctrine of disregarding or piercing
the veil of corporate fiction. Generally, a corporation is invested by law with a personality separate and
distinct from that of the persons composing it as well as from that of any other legal entity to which it
may be related. By virtue of this attribute, a corporation may not, generally, be made to answer for acts
or liabilities of its stockholders or those of the legal entities to which it may be connected, and vice
versa. This separate and distinct personality is, however, merely a fiction created by law for convenience
and to promote the ends of justice (Laguna Transportation Company vs. Social Security System, L-14606,
April 28, 1960; La Campana Coffee Factory, Inc. vs. Kaisahan ng mga Manggagawa sa La Campana, L-
5677, May 25, 1953). For this reason, it may not be used or invoked for ends subversive of the policy and
purpose behind its creation (Emiliano Cano Enterprises, Inc. vs. CIR, L-20502, Feb. 26, 1965) or which
could not have been intended by law to which it owes its being McConnel vs. Court of Appeals, L- 10510,
March 17, 1961, 1 SCRA 722). This is particularly true where the fiction is used to defeat public
convenience, justify wrong, protect fraud, defend crime (Yutivo Sons Hardware Company vs. Court of
Tax Appeals, L-13203, Jan. 28, 1961, 1 SCRA 160), confuse legitimate legal or judicial issues (R. F. Sugay &
Co. vs. Reyes, L-20451, Dec. 28, 1964), perpetrate deception or otherwise circumvent the law (Gregorio
Araneta, Inc. vs. reason de Paterno, L-2886, Aug. 22, 1952, 49 O.G. 721). This is likewise true where the
corporate entity is being used as an alter ego, adjunct, or business conduit for the sole benefit of the
stockholders or of another corporate entity (McConnel vs. Court of Appeals, supra; Commissioner of
Internal Revenue vs. Norton Harrison Co., L-7618, Aug. 31, 1964).

In any of these cases, the notion of corporate entity will be pierced or disregarded, and the corporation
will be treated merely as an association of persons or, where there are two corporations, they will be
merged as one, the one being merely regarded as part or the instrumentality of the otter (Koppel [Phil.]
Inc. vs. Yatco, 77 Phil. 496, Yutivo Sons Hardware Company vs. Court of Tax Appeals, supra).

So must the case at bar add to this jurisprudence. An indubitable deduction from the findings of the trial
court cannot but lead to the conclusion that the business of the corporation is largely, if not wholly, the
personal venture of Forrest L. Cease. There is not even a shadow of a showing that his children were
subscribers or purchasers of the stocks they own. Their participation as nominal shareholders emanated
solely from Forrest L. Cease's gratuitous dole out of his own shares to the benefit of his children and
ultimately his family.

Were we sustain the theory of petitioners that the trial court acted in excess of jurisdiction or abuse of
discretion amounting to lack of jurisdiction in deciding Civil Case No. 6326 as a case for partition when
the defendant therein, Tiaong Milling and Plantation Company, Inc. as registered owner asserted
ownership of the assets and properties involved in the litigation, which theory must necessarily be based
on the assumption that said assets and properties of Tiaong Milling and Plantation Company, Inc. now
appearing under the name of F. L. Cease Plantation Company as Trustee are distinct and separate from
the estate of Forrest L. Cease to which petitioners and respondents as legal heirs of said Forrest L. Cease
are equally entitled share and share alike, then that legal fiction of separate corporate personality shall
have been used to delay and ultimately deprive and defraud the respondents of their successional rights
to the estate of their deceased father. For Tiaong Milling and Plantation Company shall have been able
to extend its corporate existence beyond the period of its charter which lapsed in June, 1958 under the
guise and cover of F. L, Cease Plantation Company, Inc. as Trustee which would be against the law, and
as Trustee shall have been able to use the assets and properties for the benefit of the petitioners, to the
great prejudice and defraudation. of private respondents. Hence, it becomes necessary and imperative
to pierce that corporate veil.

Under the third assigned error, petitioners claim that the decision of the lower court in the partition
case is not interlocutory but rather final for it consists of final and determinative dispositions of the
contentions of the parties. We find no merit in petitioners' stand.

Under the 1961 pronouncement and ruling of the Supreme Court in Vda. de Zaldarriaga vs. Enriquez, 1
SCRA 1188 (and the sequel case of Vda. de Zaldarriaga vs. Zaldarriaga, 2 SCRA 356), the lower court's
dismissal of petitioners' proposed appeal from its December 27, 1969 judgment as affirmed by the Court
of Appeals on the ground of prematurity in that the judgment was not final but interlocutory was in
order. As was said in said case:

It is true that in Africa vs. Africa, 42 Phil. 934 and other cases it was held - contrary to the rule laid down
in Ron vs. Mojica, 8 Phil. 328;  Rodriguez vs. Ravilan, 17 Phil. 63 - that in a partition case where
defendant relies on the defense of exclusive ownership, the action becomes one for title and the
decision or order directing partition is final, but the ruling to this effect has been expressly reversed in
the Fuentebella case which, in our opinion, expresses the correct view, considering that a decision or
order directing partition is not final because it leaves something more to be done in the trial court for
the complete disposition of the case, namely, the appointment of commissioners, the proceedings to be
had before them, the submission of their report which, according to law, must be set for hearing. In fact,
it is only after said hearing that the court may render a final judgment finally disposing of the action
(Rule 71, section 7, Rules of Court). (1 SCRA at page 1193).

It should be noted, however, that the said ruling in Zaldarriaga as based on Fuentebella vs. Carrascoso,
XIV Lawyers Journal 305 (May 27, 1942), has been expressly abandoned by the Court in Miranda vs.
Court of Appeals, 71 SCRA 295; 331-333 (June 18, 1976) wherein Mr. Justice Teehankee, speaking for the
Court, laid down the following doctrine:

The Court, however, deems it proper for the guidance of the bench and bar to now declare as is clearly
indicated from the compelling reasons and considerations hereinabove stated:

- that the Court considers the better rule to be that stated in H. E. Heacock Co. vs. American Trading
Co.,  to wit, that where the primary purpose of a case is to ascertain and determine who between
plaintiff and defendant is the true owner and entitled to the exclusive use of the disputed property, "the
judgment . . . rendered by the lower court [is] a judgment on the merits as to those questions, and [that]
the order of the court for an accounting was based upon, and is incidental to the judgment on the
merits. That is to say, that the judgment . . . [is] a final judgment ... that in this kind of a case an
accounting is a mere incident to the judgment; that an appeal lies from the rendition of the judgment as
rendered ... "(as is widely held by a great number of judges and members of the bar, as shown by the
cases so decided and filed and still pending with the Court) for the fundamental reasons therein stated
that "this is more in harmony with the  administration of justice and the spirit and intent of the [Rules]. If
on appeal the judgment of the lower court is affirmed, it would not in the least work an injustice to any
of the legal rights of [appellee]. On the other hand, if for any reason this court should reverse the
judgment of the lower court, the accounting would be a waste of time and money, and might work a
material injury to the [appellant]; and

- that accordingly, the contrary ruling in Fuentebella vs. Carrascoso which expressly reversed the
Heacock case and a line of similar decisions and ruled that such a decision for recovery of property with
accounting "is not final but merely interlocutory and therefore not appealable" and subsequent cases
adhering to the same must be now in turn abandoned and set aside.

Fuentebella adopted instead the opposite line of conflicting decisions mostly in partition proceedings
and exemplified by Ron vs. Mojica 8 Phil. 928 (under the old Code of Civil Procedure) that an order for
partition of real property is not final and appealable until after the actual partition of the property as
reported by the court appointed commissioners and approved by the court in its judgment accepting the
report. lt must be especially noted that such rule governing partitions is now so expressly provided and
spelled out in Rule 69 of the Rules of Court, with special reference to Sections 1, 2, 3, 6, 7 and 11, to wit,
that there must first be a preliminar, order for partition of the real estate (section 2) and where the
parties-co-owners cannot agree, the court appointed commissioners make a plan of actual partition
which must first be passed upon and accepted by the trial court and embodied in a judgment to be
rendered by it (sections 6 and 11). In partition cases, it must be further borne in mind that Rule 69,
section 1 refers to "a person having the right to compel the partition of real estate," so that the general
rule of partition that an appeal will not lie until the partition or distribution proceedings are terminated
will not apply where appellant claims exclusive ownership of the whole property and denies the adverse
party's right to any partition, as was the ruling in Villanueva vs. Capistrano and Africa vs .Africa, supra,
Fuentebellas express rehearsal of these cases must likewise be deemed now also abandoned in view of
the Court's expressed preference for the rationale of the Heacock case.

The Court's considered opinion is that imperative considerations of public  policy and of sound

practice  in the courts and adherence to the constitutional mandate  of simplified, just, speedy and
inexpensive determination of every action call for considering such judgments for recovery of property
with accounting as final  judgments which are duly appealable  (and would therefore become final and
executory if not appealed within the reglementary period) with the accounting  as a mere incident of the
judgment to be rendered during the course of the appeal as provided in Rule 39, section 4 or to be
implemented at the execution stage upon final affirmance on appeal of the judgment (as in Court of
Industrial Relations unfair labor practice cases ordering the reinstatement of the worker with
accounting, computation and payment of his backwages less earnings elsewhere during his layoff) and
that the only reason given in Fuentebelia for the contrary ruling, viz, "the general harm that would
follow from throwing the door open to multiplicity of appeals in a single case" of lesser import and
consequence. (Emphasis copied).

The miranda ruling has since then been applied as the new rule by a unanimous Court in Valdez vs.
Bagasao, 82 SCRA 22 (March 8, 1978).
If there were a valid genuine claim of Exclusive ownership of the inherited properties on the part of
petitioners to respondents' action for partition, then under the Miranda ruling, petitioners would be
sustained, for as expressly held therein " the general rule of partition that an appeal will not lie until the
partition or distribution proceedings are terminated will not apply where appellant claims exclusive
ownership of the whole property and denies the adverse party's right to any partition."

But this question has now been rendered moot and academic for the very issue of exclusive ownership
claimed by petitioners to deny and defeat respondents' right to partition - which is the very core of their
rejected appeal - has been squarely resolved herein against them, as if the appeal had been given due
course. The Court has herein expressly sustained the trial court's findings, as affirmed by the Court of
Appeals, that the assets or properties of the defunct company constitute the estate of the deceased
proprietor (supra at page 7) and the defunct company's assertion of ownership of the properties is a
legal contradiction and would but thwart the liquidation and final distribution and partition of the
properties among the parties hereof as children of their deceased father Forrest L. Cease. There is
therefore no further hindrance to effect the partition of the properties among the parties in
implementation of the appealed judgment.

One last consideration. Parties are brothers and sisters, legal heirs of their deceased father, Forrest L.
Cease. By all rights in law and jurisprudence, each is entitled to share and share alike in the estate, which
the trial court correctly ordained and sustained by the appellate court. Almost 20 years have lapsed
since the filing of Special Proceedings No. 3893 for the administration of the Estate of Forrest L. Cease
and Civil Case No. 6326 for liquidation and partition of the assets of the defunct Tiaong Milling and
Plantation Co., Inc. A succession of receivers were appointed by the court to take, keep in possession,
preserve and manage properties of the corporation which at one time showed an income of
P386,152.90 and expenses of P308,405.01 for the period covering January 1, 1960 to August 31, 1967 as
per Summary of Operations of Commissioner for Finance appointed by the Court (Brief for Respondents,
p. 38). In the meantime, ejectment cases were filed by and against the heirs in connection with the
properties involved, aggravating the already strained relations of the parties. A prudent and practical
realization of these circumstances ought and must constrain the parties to give each one his due in law
and with fairness and dispatch that their basic rights be enjoyed. And by remanding this case to the
court a quo  for the actual partition of the properties, the substantial rights of everyone of the heirs have
not been impaired, for in fact, they have been preserved and maintained.

WHEREFORE, IN VIEW OF THE FOREGOING, the judgment appealed from is hereby AFFIRMED with costs
against the petitioners.

SO ORDERED.

Teehankee, Actg. C.J., (Chairman), Makasiar, Fernandez, De Castro and Melencio-Herrera, JJ., concur.
THIRD DIVISION

G.R. No. 195580               April 21, 2014

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC., and
MCARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.

DECISION

VELASCO, JR., J.:

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

The Facts

Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a domestic
corporation organized and existing under Philippine laws, took interest in mining and exploring certain
areas of the province of Palawan. After inquiring with the Department of Environment and Natural
Resources (DENR), it learned that the areas where it wanted to undertake exploration and mining
activities where already covered by Mineral Production Sharing Agreement (MPSA) applications of
petitioners Narra, Tesoro and McArthur.

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

Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in
Barangay Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which includes an
area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan. The MPSA and EP were then
transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006, assigned to petitioner
McArthur.2

Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia
Louise Mining & Development Corporation (PLMDC) which previously filed an application for an MPSA
with the MGB, Region IV-B, DENR on January 6, 1992. Through the said application, the DENR issued
MPSA-IV-1-12 covering an area of 3.277 hectares in barangays Calategas and San Isidro, Municipality of
Narra, Palawan. Subsequently, PLMDC conveyed, transferred and/or assigned its rights and interests
over the MPSA application in favor of Narra.
Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-IVB-154
(formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa Urduja, Municipality of
Narra, Province of Palawan. SMMI subsequently conveyed, transferred and assigned its rights and
interest over the said MPSA application to Tesoro.

On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate
petitions for the denial of petitioners’ applications for MPSA designated as AMA-IVB-153, AMA-IVB-154
and MPSA IV-1-12.

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

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

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

xxxx

(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a corporation,
partnership, association, or cooperative organized or authorized for the purpose of engaging in mining,
with technical and financial capability to undertake mineral resources development and duly registered
in accordance with law at least sixty per cent (60%) of the capital of which is owned by citizens of the
Philippines: Provided, That a legally organized foreign-owned corporation shall be deemed a qualified
person for purposes of granting an exploration permit, financial or technical assistance agreement or
mineral processing permit.

Additionally, they stated that their nationality as applicants is immaterial because they also applied for
Financial or Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for McArthur, AFTA-
IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which are granted to foreign-owned corporations.
Nevertheless, they claimed that the issue on nationality should not be raised since McArthur, Tesoro
and Narra are in fact Philippine Nationals as 60% of their capital is owned by citizens of the Philippines.
They asserted that though MBMI owns 40% of the shares of PLMC (which owns 5,997 shares of
Narra),3 40% of the shares of MMC (which owns 5,997 shares of McArthur) 4 and 40% of the shares of
SLMC (which, in turn, owns 5,997 shares of Tesoro), 5 the shares of MBMI will not make it the owner of
at least 60% of the capital stock of each of petitioners. They added that the best tool used in
determining the nationality of a corporation is the "control test," embodied in Sec. 3 of RA 7042 or the
Foreign Investments Act of 1991. They also claimed that the POA of DENR did not have jurisdiction over
the issues in Redmont’s petition since they are not enumerated in Sec. 77 of RA 7942. Finally, they
stressed that Redmont has no personality to sue them because it has no pending claim or application
over the areas applied for by petitioners.

On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining MPSAs. It
held:

[I]t is clearly established that respondents are not qualified applicants to engage in mining activities. On
the other hand, [Redmont] having filed its own applications for an EPA over the areas earlier covered by
the MPSA application of respondents may be considered if and when they are qualified under the law.
The violation of the requirements for the issuance and/or grant of permits over mining areas is clearly
established thus, there is reason to believe that the cancellation and/or revocation of permits already
issued under the premises is in order and open the areas covered to other qualified applicants.

xxxx

WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro Mining and
Development, Inc., and Narra Nickel Mining and Development Corp. as, DISQUALIFIED for being
considered as Foreign Corporations. Their Mineral Production Sharing Agreement (MPSA) are hereby x x
x DECLARED NULL AND VOID.6

The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a 100%
Canadian company and declared their MPSAs null and void. In the same Resolution, it gave due course
to Redmont’s EPAs. Thereafter, on February 7, 2008, the POA issued an Order 7 denying the Motion for
Reconsideration filed by petitioners.

Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of
Appeal8 and Memorandum of Appeal9 with the Mines Adjudication Board (MAB) while Narra separately
filed its Notice of Appeal10 and Memorandum of Appeal.11

In their respective memorandum, petitioners emphasized that they are qualified persons under the law.
Also, through a letter, they informed the MAB that they had their individual MPSA applications
converted to FTAAs. McArthur’s FTAA was denominated as AFTA-IVB-09 12 on May 2007, while Tesoro’s
MPSA application was converted to AFTA-IVB-08 13 on May 28, 2007, and Narra’s FTAA was converted to
AFTA-IVB-0714 on March 30, 2006.

Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a Complaint 15 with
the Securities and Exchange Commission (SEC), seeking the revocation of the certificates for registration
of petitioners on the ground that they are foreign-owned or controlled corporations engaged in mining
in violation of Philippine laws. Thereafter, Redmont filed on September 1, 2008 a Manifestation and
Motion to Suspend Proceeding before the MAB praying for the suspension of the proceedings on the
appeals filed by McArthur, Tesoro and Narra.
Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon City,
Branch 92 (RTC) a Complaint16 for injunction with application for issuance of a temporary restraining
order (TRO) and/or writ of preliminary injunction, docketed as Civil Case No. 08-63379. Redmont prayed
for the deferral of the MAB proceedings pending the resolution of the Complaint before the SEC.

But before the RTC can resolve Redmont’s Complaint and applications for injunctive reliefs, the MAB
issued an Order on September 10, 2008, finding the appeal meritorious. It held:

WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and SETS ASIDE
the Resolution dated 14 December 2007 of the Panel of Arbitrators of Region IV-B (MIMAROPA) in POA-
DENR Case Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07 February 2008 denying the
Motions for Reconsideration of the Appellants. The Petition filed by Redmont Consolidated Mines
Corporation on 02 January 2007 is hereby ordered DISMISSED. 17

Belatedly, on September 16, 2008, the RTC issued an Order 18 granting Redmont’s application for a TRO
and setting the case for hearing the prayer for the issuance of a writ of preliminary injunction on
September 19, 2008.

Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration 19 of the September 10,
2008 Order of the MAB. Subsequently, it filed a Supplemental Motion for Reconsideration 20 on
September 29, 2008.

Before the MAB could resolve Redmont’s Motion for Reconsideration and Supplemental Motion for
Reconsideration, Redmont filed before the RTC a Supplemental Complaint 21 in Civil Case No. 08-63379.

On October 6, 2008, the RTC issued an Order 22 granting the issuance of a writ of preliminary injunction
enjoining the MAB from finally disposing of the appeals of petitioners and from resolving Redmont’s
Motion for Reconsideration and Supplement Motion for Reconsideration of the MAB’s September 10,
2008 Resolution.

On July 1, 2009, however, the MAB issued a second Order denying Redmont’s Motion for
Reconsideration and Supplemental Motion for Reconsideration and resolving the appeals filed by
petitioners.

Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by the MAB.
On October 1, 2010, the CA rendered a Decision, the dispositive of which reads:

WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September 10, 2008 and
July 1, 2009 of the Mining Adjudication Board are reversed and set aside. The findings of the Panel of
Arbitrators of the Department of Environment and Natural Resources that respondents McArthur,
Tesoro and Narra are foreign corporations is upheld and, therefore, the rejection of their applications
for Mineral Product Sharing Agreement should be recommended to the Secretary of the DENR.

With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or Technical
Assistance Agreement (FTAA) or conversion of their MPSA applications to FTAA, the matter for its
rejection or approval is left for determination by the Secretary of the DENR and the President of the
Republic of the Philippines.

SO ORDERED.23

In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by
petitioners.

After a careful review of the records, the CA found that there was doubt as to the nationality of
petitioners when it realized that petitioners had a common major investor, MBMI, a corporation
composed of 100% Canadians. Pursuant to the first sentence of paragraph 7 of Department of Justice
(DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the
requirement of the Constitution and other laws pertaining to the exploitation of natural resources, the
CA used the "grandfather rule" to determine the nationality of petitioners. It provided:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares corresponding to such
percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the
name of a corporation or partnership at least 60% of the capital stock or capital, respectively, of which
belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than 60%,
or say, 50% of the capital stock or capital of the corporation or partnership, respectively, belongs to
Filipino citizens, only 50,000 shares shall be recorded as belonging to aliens. 24 (emphasis supplied)

In determining the nationality of petitioners, the CA looked into their corporate structures and their
corresponding common shareholders. Using the grandfather rule, the CA discovered that MBMI in effect
owned majority of the common stocks of the petitioners as well as at least 60% equity interest of other
majority shareholders of petitioners through joint venture agreements. The CA found that through a
"web of corporate layering, it is clear that one common controlling investor in all mining corporations
involved x x x is MBMI."25 Thus, it concluded that petitioners McArthur, Tesoro and Narra are also in
partnership with, or privies-in-interest of, MBMI.

Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA
applications suspicious in nature and, as a consequence, it recommended the rejection of petitioners’
MPSA applications by the Secretary of the DENR.

With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the POA
has jurisdiction over them and that it also has the power to determine the of nationality of petitioners as
a prerequisite of the Constitution prior the conferring of rights to "co-production, joint venture or
production-sharing agreements" of the state to mining rights. However, it also stated that the POA’s
jurisdiction is limited only to the resolution of the dispute and not on the approval or rejection of the
MPSAs. It stipulated that only the Secretary of the DENR is vested with the power to approve or reject
applications for MPSA.
Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which considered
petitioners McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the CA determined that
the POA’s declaration that the MPSAs of McArthur, Tesoro and Narra are void is highly improper.

While the petition was pending with the CA, Redmont filed with the Office of the President (OP) a
petition dated May 7, 2010 seeking the cancellation of petitioners’ FTAAs. The OP rendered a
Decision26 on April 6, 2011, wherein it canceled and revoked petitioners’ FTAAs for violating and
circumventing the "Constitution x x x[,] the Small Scale Mining Law and Environmental Compliance
Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584." 27 The OP, in affirming
the cancellation of the issued FTAAs, agreed with Redmont stating that petitioners committed violations
against the abovementioned laws and failed to submit evidence to negate them. The Decision further
quoted the December 14, 2007 Order of the POA focusing on the alleged misrepresentation and claims
made by petitioners of being domestic or Filipino corporations and the admitted continued mining
operation of PMDC using their locally secured Small Scale Mining Permit inside the area earlier applied
for an MPSA application which was eventually transferred to Narra. It also agreed with the POA’s
estimation that the filing of the FTAA applications by petitioners is a clear admission that they are "not
capable of conducting a large scale mining operation and that they need the financial and technical
assistance of a foreign entity in their operation, that is why they sought the participation of MBMI
Resources, Inc."28 The Decision further quoted:

The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate
the violations and lack of qualification of the respondent corporations to engage in mining. The filing of
the FTAA application conversion which is allowed foreign corporation of the earlier MPSA is an
admission that indeed the respondent is not Filipino but rather of foreign nationality who is disqualified
under the laws. Corporate documents of MBMI Resources, Inc. furnished its stockholders in their head
office in Canada suggest that they are conducting operation only through their local counterparts. 29

The Motion for Reconsideration of the Decision was further denied by the OP in a Resolution 30 dated
July 6, 2011. Petitioners then filed a Petition for Review on Certiorari of the OP’s Decision and Resolution
with the CA, docketed as CA-G.R. SP No. 120409. In the CA Decision dated February 29, 2012, the CA
affirmed the Decision and Resolution of the OP. Thereafter, petitioners appealed the same CA decision
to this Court which is now pending with a different division.

Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners put forth
the following errors of the CA:

I.

The Court of Appeals erred when it did not dismiss the case for mootness despite the fact that the
subject matter of the controversy, the MPSA Applications, have already been converted into FTAA
applications and that the same have already been granted.

II.
The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction considering that the
Panel of Arbitrators has no jurisdiction to determine the nationality of Narra, Tesoro and McArthur.

III.

The Court of Appeals erred when it did not dismiss the case on account of Redmont’s willful forum
shopping.

IV.

The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign corporations based on the
"Grandfather Rule" is contrary to law, particularly the express mandate of the Foreign Investments Act
of 1991, as amended, and the FIA Rules.

V.

The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.

VI.

The Court of Appeals erred when it concluded that the conversion of the MPSA Applications into FTAA
Applications were of "suspicious nature" as the same is based on mere conjectures and surmises
without any shred of evidence to show the same. 31

We find the petition to be without merit.

This case not moot and academic

The claim of petitioners that the CA erred in not rendering the instant case as moot is without merit.

Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable controversy
by virtue of supervening events, so that a declaration thereon would be of no practical use or
value."32 Thus, the courts "generally decline jurisdiction over the case or dismiss it on the ground of
mootness."33

The "mootness" principle, however, does accept certain exceptions and the mere raising of an issue of
"mootness" will not deter the courts from trying a case when there is a valid reason to do so. In David v.
Macapagal-Arroyo (David), the Court provided four instances where courts can decide an otherwise
moot case, thus:

1.) There is a grave violation of the Constitution;

2.) The exceptional character of the situation and paramount public interest is involved;

3.) When constitutional issue raised requires formulation of controlling principles to guide the bench,
the bar, and the public; and

4.) The case is capable of repetition yet evading review. 34

All of the exceptions stated above are present in the instant case. We of this Court note that a grave
violation of the Constitution, specifically Section 2 of Article XII, is being committed by a foreign
corporation right under our country’s nose through a myriad of corporate layering under different,
allegedly, Filipino corporations. The intricate corporate layering utilized by the Canadian company,
MBMI, is of exceptional character and involves paramount public interest since it undeniably affects the
exploitation of our Country’s natural resources. The corresponding actions of petitioners during the
lifetime and existence of the instant case raise questions as what principle is to be applied to cases with
similar issues. No definite ruling on such principle has been pronounced by the Court; hence, the
disposition of the issues or errors in the instant case will serve as a guide "to the bench, the bar and the
public."35 Finally, the instant case is capable of repetition yet evading review, since the Canadian
company, MBMI, can keep on utilizing dummy Filipino corporations through various schemes of
corporate layering and conversion of applications to skirt the constitutional prohibition against foreign
mining in Philippine soil.

Conversion of MPSA applications to FTAA applications

We shall discuss the first error in conjunction with the sixth error presented by petitioners since both
involve the conversion of MPSA applications to FTAA applications. Petitioners propound that the CA
erred in ruling against them since the questioned MPSA applications were already converted into FTAA
applications; thus, the issue on the prohibition relating to MPSA applications of foreign mining
corporations is academic. Also, petitioners would want us to correct the CA’s finding which deemed the
aforementioned conversions of applications as suspicious in nature, since it is based on mere
conjectures and surmises and not supported with evidence.

We disagree.

The CA’s analysis of the actions of petitioners after the case was filed against them by respondent is on
point. The changing of applications by petitioners from one type to another just because a case was filed
against them, in truth, would raise not a few sceptics’ eyebrows. What is the reason for such
conversion? Did the said conversion not stem from the case challenging their citizenship and to have the
case dismissed against them for being "moot"? It is quite obvious that it is petitioners’ strategy to have
the case dismissed against them for being "moot."

Consider the history of this case and how petitioners responded to every action done by the court or
appropriate government agency: on January 2, 2007, Redmont filed three separate petitions for denial
of the MPSA applications of petitioners before the POA. On June 15, 2007, petitioners filed a conversion
of their MPSA applications to FTAAs. The POA, in its December 14, 2007 Resolution, observed this
suspect change of applications while the case was pending before it and held:

The filing of the Financial or Technical Assistance Agreement application is a clear admission that the
respondents are not capable of conducting a large scale mining operation and that they need the
financial and technical assistance of a foreign entity in their operation that is why they sought the
participation of MBMI Resources, Inc. The participation of MBMI in the corporation only proves the fact
that it is the Canadian company that will provide the finances and the resources to operate the mining
areas for the greater benefit and interest of the same and not the Filipino stockholders who only have a
less substantial financial stake in the corporation.

xxxx

x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to engage in mining.
The filing of the FTAA application conversion which is allowed foreign corporation of the earlier MPSA is
an admission that indeed the respondent is not Filipino but rather of foreign nationality who is
disqualified under the laws. Corporate documents of MBMI Resources, Inc. furnished its stockholders in
their head office in Canada suggest that they are conducting operation only through their local
counterparts.36

On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing and
setting aside the September 10, 2008 and July 1, 2009 Orders of the MAB. In the said Decision, the CA
upheld the findings of the POA of the DENR that the herein petitioners are in fact foreign corporations
thus a recommendation of the rejection of their MPSA applications were recommended to the Secretary
of the DENR. With respect to the FTAA applications or conversion of the MPSA applications to FTAAs,
the CA deferred the matter for the determination of the Secretary of the DENR and the President of the
Republic of the Philippines.37

In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal of the
petition asserting that on April 5, 2010, then President Gloria Macapagal-Arroyo signed and issued in
their favor FTAA No. 05-2010-IVB, which rendered the petition moot and academic. However, the CA, in
a Resolution dated February 15, 2011 denied their motion for being a mere "rehash of their claims and
defenses."38 Standing firm on its Decision, the CA affirmed the ruling that petitioners are, in fact, foreign
corporations. On April 5, 2011, petitioners elevated the case to us via a Petition for Review on Certiorari
under Rule 45, questioning the Decision of the CA. Interestingly, the OP rendered a Decision dated April
6, 2011, a day after this petition for review was filed, cancelling and revoking the FTAAs, quoting the
Order of the POA and stating that petitioners are foreign corporations since they needed the financial
strength of MBMI, Inc. in order to conduct large scale mining operations. The OP Decision also based the
cancellation on the misrepresentation of facts and the violation of the "Small Scale Mining Law and
Environmental Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O.
584."39 On July 6, 2011, the OP issued a Resolution, denying the Motion for Reconsideration filed by the
petitioners.

Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the fact of the
OP’s Decision and Resolution. In their Reply, petitioners chose to ignore the OP Decision and continued
to reuse their old arguments claiming that they were granted FTAAs and, thus, the case was moot.
Petitioners filed a Manifestation and Submission dated October 19, 2012, 40 wherein they asserted that
the present petition is moot since, in a remarkable turn of events, MBMI was able to sell/assign all its
shares/interest in the "holding companies" to DMCI Mining Corporation (DMCI), a Filipino corporation
and, in effect, making their respective corporations fully-Filipino owned.
Again, it is quite evident that petitioners have been trying to have this case dismissed for being "moot."
Their final act, wherein MBMI was able to allegedly sell/assign all its shares and interest in the petitioner
"holding companies" to DMCI, only proves that they were in fact not Filipino corporations from the start.
The recent divesting of interest by MBMI will not change the stand of this Court with respect to the
nationality of petitioners prior the suspicious change in their corporate structures. The new documents
filed by petitioners are factual evidence that this Court has no power to verify.

The only thing clear and proved in this Court is the fact that the OP declared that petitioner corporations
have violated several mining laws and made misrepresentations and falsehood in their applications for
FTAA which lead to the revocation of the said FTAAs, demonstrating that petitioners are not beyond
going against or around the law using shifty actions and strategies. Thus, in this instance, we can say that
their claim of mootness is moot in itself because their defense of conversion of MPSAs to FTAAs has
been discredited by the OP Decision.

Grandfather test

The main issue in this case is centered on the issue of petitioners’ nationality, whether Filipino or
foreign. In their previous petitions, they had been adamant in insisting that they were Filipino
corporations, until they submitted their Manifestation and Submission dated October 19, 2012 where
they stated the alleged change of corporate ownership to reflect their Filipino ownership. Thus, there is
a need to determine the nationality of petitioner corporations.

Basically, there are two acknowledged tests in determining the nationality of a corporation: the control
test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967
SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the
controlling interests in enterprises engaged in the exploitation of natural resources owned by Filipino
citizens, provides:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares corresponding to such
percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the
name of a corporation or partnership at least 60% of the capital stock or capital, respectively, of which
belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than 60%,
or say, 50% of the capital stock or capital of the corporation or partnership, respectively, belongs to
Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shall be
recorded as belonging to aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of
Philippine nationality," pertains to the control test or the liberal rule. On the other hand, the second part
of the DOJ Opinion which provides, "if the percentage of the Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such percentage shall be
counted as Philippine nationality," pertains to the stricter, more stringent grandfather rule.
Prior to this recent change of events, petitioners were constant in advocating the application of the
"control test" under RA 7042, as amended by RA 8179, otherwise known as the Foreign Investments Act
(FIA), rather than using the stricter grandfather rule. The pertinent provision under Sec. 3 of the FIA
provides:

SECTION 3. Definitions. - As used in this Act:

a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by the citizens of the Philippines; a corporation organized under the laws of
the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote
is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the
fund will accrue to the benefit of Philippine nationals: Provided, That were a corporation and its non-
Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at
least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of both
corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of
the members of the Board of Directors, in order that the corporation shall be considered a Philippine
national. (emphasis supplied)

The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the definition
of a "Philippine National" under Sec. 3 of the FIA does not provide for it. They further claim that the
grandfather rule "has been abandoned and is no longer the applicable rule." 41 They also opined that the
last portion of Sec. 3 of the FIA admits the application of a "corporate layering" scheme of corporations.
Petitioners claim that the clear and unambiguous wordings of the statute preclude the court from
construing it and prevent the court’s use of discretion in applying the law. They said that the plain, literal
meaning of the statute meant the application of the control test is obligatory.

We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the
Constitution and pertinent laws, then it becomes illegal. Further, the pronouncement of petitioners that
the grandfather rule has already been abandoned must be discredited for lack of basis.

Art. XII, Sec. 2 of the Constitution provides:

Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces
of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are
owned by the State. With the exception of agricultural lands, all other natural resources shall not be
alienated. The exploration, development, and utilization of natural resources shall be under the full
control and supervision of the State. The State may directly undertake such activities, or it may enter
into co-production, joint venture or production-sharing agreements with Filipino citizens, or
corporations or associations at least sixty per centum of whose capital is owned by such citizens. Such
agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-
five years, and under such terms and conditions as may be provided by law.

xxxx
The President may enter into agreements with Foreign-owned corporations involving either technical or
financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and
other mineral oils according to the general terms and conditions provided by law, based on real
contributions to the economic growth and general welfare of the country. In such agreements, the State
shall promote the development and use of local scientific and technical resources. (emphasis supplied)

The emphasized portion of Sec. 2 which focuses on the State entering into different types of agreements
for the exploration, development, and utilization of natural resources with entities who are deemed
Filipino due to 60 percent ownership of capital is pertinent to this case, since the issues are centered on
the utilization of our country’s natural resources or specifically, mining. Thus, there is a need to ascertain
the nationality of petitioners since, as the Constitution so provides, such agreements are only allowed
corporations or associations "at least 60 percent of such capital is owned by such citizens." The
deliberations in the Records of the 1986 Constitutional Commission shed light on how a citizenship of a
corporation will be determined:

Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an independent national economy
is freedom from undue foreign control? What is the meaning of undue foreign control?

MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty and the
welfare of the Filipino in the economic sphere.

MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply freedom
from foreign control? I think that is the meaning of independence, because as phrased, it still allows for
foreign control.

MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the 60/40
possibility in the cultivation of natural resources, 40 percent involves some control; not total control, but
some control.

MR. BENNAGEN: In any case, I think in due time we will propose some amendments.

MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.

Mr. BENNAGEN: Yes.

Thank you, Mr. Vice-President.

xxxx

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity;
namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS: That is right.

MR. NOLLEDO: In teaching law, we are always faced with the question: ‘Where do we base the equity
requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up
capital stock of a corporation’? Will the Committee please enlighten me on this?

MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP Law
Center who provided us with a draft. The phrase that is contained here which we adopted from the UP
draft is ‘60 percent of the voting stock.’

MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared delinquent,
unpaid capital stock shall be entitled to vote.

MR. VILLEGAS: That is right.

MR. NOLLEDO: Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40
percent equity invests in another corporation which is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?

MR. VILLEGAS: Yes, that is the understanding of the Committee.

MR. NOLLEDO: Therefore, we need additional Filipino capital?

MR. VILLEGAS: Yes.42 (emphasis supplied)

It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule in
cases where corporate layering is present.

Elementary in statutory construction is when there is conflict between the Constitution and a statute,
the Constitution will prevail. In this instance, specifically pertaining to the provisions under Art. XII of the
Constitution on National Economy and Patrimony, Sec. 3 of the FIA will have no place of application. As
decreed by the honorable framers of our Constitution, the grandfather rule prevails and must be
applied.

Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:

The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a corporation
for purposes, among others, of determining compliance with nationality requirements (the ‘Investee
Corporation’). Such manner of computation is necessary since the shares in the Investee Corporation
may be owned both by individual stockholders (‘Investing Individuals’) and by corporations and
partnerships (‘Investing Corporation’). The said rules thus provide for the determination of nationality
depending on the ownership of the Investee Corporation and, in certain instances, the Investing
Corporation.

Under the above-quoted SEC Rules, there are two cases in determining the nationality of the Investee
Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control Test in its 30 May
1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states,
‘(s)hares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality.’ Under the liberal Control Test, there is
no need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing
Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino.

The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said
Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares corresponding to such
percentage shall be counted as of Philippine nationality." Under the Strict Rule or Grandfather Rule
Proper, the combined totals in the Investing Corporation and the Investee Corporation must be traced
(i.e., "grandfathered") to determine the total percentage of Filipino ownership.

Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing
Corporation and added to the shares directly owned in the Investee Corporation x x x.

xxxx

In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of
the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases
where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino
stockholdings [or 59%] invests in other joint venture corporation which is either 60-40% Filipino-alien or
the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in
doubt, the Grandfather Rule will not apply. (emphasis supplied)

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

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails to
convince this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only made an
example of an instance where "doubt" as to the ownership of the corporation exists. It would be
ludicrous to limit the application of the said word only to the instances where the stockholdings of non-
Filipino stockholders are more than 40% of the total stockholdings in a corporation. The corporations
interested in circumventing our laws would clearly strive to have "60% Filipino Ownership" at face value.
It would be senseless for these applying corporations to state in their respective articles of incorporation
that they have less than 60% Filipino stockholders since the applications will be denied instantly. Thus,
various corporate schemes and layerings are utilized to circumvent the application of the Constitution.
Obviously, the instant case presents a situation which exhibits a scheme employed by stockholders to
circumvent the law, creating a cloud of doubt in the Court’s mind. To determine, therefore, the actual
participation, direct or indirect, of MBMI, the grandfather rule must be used.

McArthur Mining, Inc.

To establish the actual ownership, interest or participation of MBMI in each of petitioners’ corporate
structure, they have to be "grandfathered."

As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its
application from SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000) divided into
10,000 common shares at one thousand pesos (PhP 1,000) per share, subscribed to by the following: 44

Name Nationality Number Amount Amount Paid

of Subscribed
Shares

Madridejos Filipino 5,997 PhP PhP

Mining 5,997,000.00 825,000.00
Corporation

MBMI Canadian 3,998 PhP PhP

Resources, 3,998,000.0 1,878,174.60
Inc.

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

Salazar

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

Esguerra

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

Agcaoili

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

Mason

Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00

Cawkell

  Total 10,000 PhP PhP

10,000,000.00 2,708,174.60
(emphasis
 supplied)

Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure and
composition as McArthur. In fact, it would seem that MBMI is also a major investor and
"controls"45 MBMI and also, similar nominal shareholders were present, i.e. Fernando B. Esguerra
(Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):

Madridejos Mining Corporation

Name Nationality Number Amount Amount Paid

of Subscribed
Shares

Olympic Filipino 6,663 PhP PhP 0

Mines & 6,663,000.00

Developmen
t

Corp.

MBMI Canadian 3,331 PhP PhP

Resources, 3,331,000.00 2,803,900.00

Inc.

Amanti Filipino 1 PhP 1,000.00 PhP 1,000.00

Limson

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

Esguerra

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

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando

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

Mason

Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00

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

(emphasis
supplied)

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

On September 9, 2004, the Company and Olympic Mines & Development Corporation ("Olympic")
entered into a series of agreements including a Property Purchase and Development Agreement (the
Transaction Documents) with respect to three nickel laterite properties in Palawan, Philippines (the
"Olympic Properties"). The Transaction Documents effectively establish a joint venture between the
Company and Olympic for purposes of developing the Olympic Properties. The Company holds directly
and indirectly an initial 60% interest in the joint venture. Under certain circumstances and upon
achieving certain milestones, the Company may earn up to a 100% interest, subject to a 2.5% net
revenue royalty.47 (emphasis supplied)

Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company layering
was utilized by MBMI to gain control over McArthur. It is apparent that MBMI has more than 60% or
more equity interest in McArthur, making the latter a foreign corporation.

Tesoro Mining and Development, Inc.

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

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

Name Nationalit Number Amount Amount

y of Paid
Subscribed
Shares

Sara Marie Filipino 5,997 PhP PhP

5,997,000.00 825,000.00
Mining,
Inc.
MBMI Canadian 3,998 PhP PhP
3,998,000.00 1,878,174.60
Resources,
Inc.

Lauro L. Filipino 1 PhP 1,000.00 PhP

Salazar 1,000.00

Fernando Filipino 1 PhP 1,000.00 PhP

B. 1,000.00

Esguerra

Manuel A. Filipino 1 PhP 1,000.00 PhP

1,000.00
Agcaoili

Michael T. American 1 PhP 1,000.00 PhP

Mason 1,000.00

Kenneth Canadian 1 PhP 1,000.00 PhP

Cawkell 1,000.00

  Total 10,000 PhP PhP

10,000,000.0 2,708,174.60
0
(emphasis
supplied)

Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures as the
corporate structure of petitioner McArthur, down to the last centavo. All the other shareholders are the
same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number
of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same. Delving deeper, we
scrutinize SMMI’s corporate structure:

Sara Marie Mining, Inc.

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

Name Nationalit Numbe Amount Amount

y r of Paid
Subscribed
 Shares

Olympic Filipino 6,663 PhP PhP 0

Mines & 6,663,000.00

Developmen
t

Corp.

MBMI Canadian 3,331 PhP PhP

Resources, 3,331,000.00 2,794,000.0
0
Inc.

Amanti Filipino 1 PhP 1,000.00 PhP

Limson 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP

1,000.00
Esguerra

Lauro Filipino 1 PhP 1,000.00 PhP

Salazar 1,000.00

Emmanuel Filipino 1 PhP 1,000.00 PhP

G. 1,000.00

Hernando

Michael T. American 1 PhP 1,000.00 PhP

Mason 1,000.00

Kenneth Canadian 1 PhP 1,000.00 PhP

Cawkell 1,000.00

  Total 10,000 PhP PhP

10,000,000.0 2,809,900.0
0 0

(emphasis
supplied)
After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the glaring
similarity between SMMI and MMC’s corporate structure. Again, the presence of identical stockholders,
namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The
figures under the headings "Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid"
are exactly the same except for the amount paid by MBMI which now reflects the amount of two million
seven hundred ninety four thousand pesos (PhP 2,794,000). Oddly, the total value of the amount paid is
two million eight hundred nine thousand nine hundred pesos (PhP 2,809,900).

Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in SMMI’s
corporate structure, it is clear that MBMI is in control of Tesoro and owns 60% or more equity interest in
Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus, disqualifies it to participate in
the exploitation, utilization and development of our natural resources.

Narra Nickel Mining and Development Corporation

Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA
application, whose corporate structure’s arrangement is similar to that of the first two petitioners
discussed. The capital stock of Narra is ten million pesos (PhP 10,000,000), which is divided into ten
thousand common shares (10,000) at one thousand pesos (PhP 1,000) per share, shown as follows:

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

Name Nationalit Numbe Amount Amount

y r of Paid
Subscribed
Shares

Patricia Filipino 5,997 PhP PhP

Louise 5,997,000.00 1,677,000.0
0
Mining &

Developmen
t

Corp.

MBMI Canadian 3,998 PhP PhP

3,996,000.00 1,116,000.0
Resources, 0
Inc.

Higinio C. Filipino 1 PhP 1,000.00 PhP

Mendoza, Jr. 1,000.00

Henry E. Filipino 1 PhP 1,000.00 PhP

1,000.00
Fernandez

Manuel A. Filipino 1 PhP 1,000.00 PhP

1,000.00
Agcaoili

Ma. Elena A. Filipino 1 PhP 1,000.00 PhP

1,000.00
Bocalan

Bayani H. Filipino 1 PhP 1,000.00 PhP

Agabin 1,000.00

Robert L. American 1 PhP 1,000.00 PhP

1,000.00
McCurdy

Kenneth Canadian 1 PhP 1,000.00 PhP

Cawkell 1,000.00

  Total 10,000 PhP PhP

10,000,000.0 2,800,000.0
0 0
(emphasis
supplied)

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

Patricia Louise Mining & Development Corporation

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

Name Nationality Number Amount Amount

of Subscribed Paid
Shares

Palawan Filipino 6,596 PhP PhP 0

Alpha South 6,596,000.00
Resources
 Development
Corporation

MBMI Canadian 3,396 PhP PhP

Resources, 3,396,000.00 2,796,000.00

Inc.

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

Mendoza, Jr.

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

Esguerra

Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernandez

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

Salazar

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

Agcaoili

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

Agabin

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

Mason

Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00

Cawkell

  Total 10,000 PhP PhP

10,000,000.00 2,708,174.60
(emphasis
supplied)

Yet again, the usual players in petitioners’ corporate structures are present. Similarly, the amount of
money paid by the 2nd tier majority stock holder, in this case, Palawan Alpha South Resources and
Development Corp. (PASRDC), is zero.

Studying MBMI’s Summary of Significant Accounting Policies dated October 31, 2005 explains the reason
behind the intricate corporate layering that MBMI immersed itself in:
JOINT VENTURES The Company’s ownership interests in various mining ventures engaged in the
acquisition, exploration and development of mineral properties in the Philippines is described as follows:

(a) Olympic Group

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

Olympic- Philippines (the "Olympic Group")

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

Tesoro Mining & Development, Inc. (Tesoro) 60.0%

Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an effective
equity interest in the Olympic Property of 60.0%. Pursuant to a shareholders’ agreement, the Company
exercises joint control over the companies in the Olympic Group.

(b) Alpha Group

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

Alpha- Philippines (the "Alpha Group")

Patricia Louise Mining Development Inc. ("Patricia") 34.0%

Narra Nickel Mining & Development Corporation (Narra) 60.4%

Under a joint venture agreement the Company holds directly and indirectly an effective equity interest
in the Alpha Property of 60.4%. Pursuant to a shareholders’ agreement, the Company exercises joint
control over the companies in the Alpha Group. 48 (emphasis supplied)

Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and
Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their equity
interests. Such conclusion is derived from grandfathering petitioners’ corporate owners, namely: MMI,
SMMI and PLMDC. Going further and adding to the picture, MBMI’s Summary of Significant Accounting
Policies statement– –regarding the "joint venture" agreements that it entered into with the "Olympic"
and "Alpha" groups––involves SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership of the
"layered" corporations boils down to MBMI, Olympic or corporations under the "Alpha" group wherein
MBMI has joint venture agreements with, practically exercising majority control over the corporations
mentioned. In effect, whether looking at the capital structure or the underlying relationships between
and among the corporations, petitioners are NOT Filipino nationals and must be considered foreign
since 60% or more of their capital stocks or equity interests are owned by MBMI.

Application of the res inter alios acta rule

Petitioners question the CA’s use of the exception of the res inter alios acta or the "admission by co-
partner or agent" rule and "admission by privies" under the Rules of Court in the instant case, by
pointing out that statements made by MBMI should not be admitted in this case since it is not a party to
the case and that it is not a "partner" of petitioners.

Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:

Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the party
within the scope of his authority and during the existence of the partnership or agency, may be given in
evidence against such party after the partnership or agency is shown by evidence other than such act or
declaration itself. The same rule applies to the act or declaration of a joint owner, joint debtor, or other
person jointly interested with the party.

Sec. 31. Admission by privies.- Where one derives title to property from another, the act, declaration, or
omission of the latter, while holding the title, in relation to the property, is evidence against the former.

Petitioners claim that before the above-mentioned Rule can be applied to a case, "the partnership
relation must be shown, and that proof of the fact must be made by evidence other than the admission
itself."49 Thus, petitioners assert that the CA erred in finding that a partnership relationship exists
between them and MBMI because, in fact, no such partnership exists.

Partnerships vs. joint venture agreements

Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by entering
into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur. They challenged the
conclusion of the CA which pertains to the close characteristics of

"partnerships" and "joint venture agreements." Further, they asserted that before this particular
partnership can be formed, it should have been formally reduced into writing since the capital involved
is more than three thousand pesos (PhP 3,000). Being that there is no evidence of written agreement to
form a partnership between petitioners and MBMI, no partnership was created.

We disagree.

A partnership is defined as two or more persons who bind themselves to contribute money, property, or
industry to a common fund with the intention of dividing the profits among themselves. 50 On the other
hand, joint ventures have been deemed to be "akin" to partnerships since it is difficult to distinguish
between joint ventures and partnerships. Thus:

[T]he relations of the parties to a joint venture and the nature of their association are so similar and
closely akin to a partnership that it is ordinarily held that their rights, duties, and liabilities are to be
tested by rules which are closely analogous to and substantially the same, if not exactly the same, as
those which govern partnership. In fact, it has been said that the trend in the law has been to blur the
distinctions between a partnership and a joint venture, very little law being found applicable to one that
does not apply to the other.51
Though some claim that partnerships and joint ventures are totally different animals, there are very few
rules that differentiate one from the other; thus, joint ventures are deemed "akin" or similar to a
partnership. In fact, in joint venture agreements, rules and legal incidents governing partnerships are
applied.52

Accordingly, culled from the incidents and records of this case, it can be assumed that the relationships
entered between and among petitioners and MBMI are no simple "joint venture agreements." As a rule,
corporations are prohibited from entering into partnership agreements; consequently, corporations
enter into joint venture agreements with other corporations or partnerships for certain transactions in
order to form "pseudo partnerships."

Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI was
executed to circumvent the legal prohibition against corporations entering into partnerships, then the
relationship created should be deemed as "partnerships," and the laws on partnership should be
applied. Thus, a joint venture agreement between and among corporations may be seen as similar to
partnerships since the elements of partnership are present.

Considering that the relationships found between petitioners and MBMI are considered to be
partnerships, then the CA is justified in applying Sec. 29, Rule 130 of the Rules by stating that "by
entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur.

Panel of Arbitrators’ jurisdiction

We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case. The POA
has jurisdiction to settle disputes over rights to mining areas which definitely involve the petitions filed
by Redmont against petitioners Narra, McArthur and Tesoro. Redmont, by filing its petition against
petitioners, is asserting the right of Filipinos over mining areas in the Philippines against alleged foreign-
owned mining corporations. Such claim constitutes a "dispute" found in Sec. 77 of RA 7942:

Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall
have exclusive and original jurisdiction to hear and decide the following:

(a) Disputes involving rights to mining areas

(b) Disputes involving mineral agreements or permits

We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.: 53

The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or opposition
to an application for mineral agreement. The POA therefore has the jurisdiction to resolve any adverse
claim, protest, or opposition to a pending application for a mineral agreement filed with the concerned
Regional Office of the MGB. This is clear from Secs. 38 and 41 of the DENR AO 96-40, which provide:

Sec. 38.

xxxx
Within thirty (30) calendar days from the last date of publication/posting/radio announcements, the
authorized officer(s) of the concerned office(s) shall issue a certification(s) that the
publication/posting/radio announcement have been complied with. Any adverse claim, protest,
opposition shall be filed directly, within thirty (30) calendar days from the last date of
publication/posting/radio announcement, with the concerned Regional Office or through any concerned
PENRO or CENRO for filing in the concerned Regional Office for purposes of its resolution by the Panel of
Arbitrators pursuant to the provisions of this Act and these implementing rules and regulations. Upon
final resolution of any adverse claim, protest or opposition, the Panel of Arbitrators shall likewise issue a
certification to that effect within five (5) working days from the date of finality of resolution thereof.
Where there is no adverse claim, protest or opposition, the Panel of Arbitrators shall likewise issue a
Certification to that effect within five working days therefrom.

xxxx

No Mineral Agreement shall be approved unless the requirements under this Section are fully complied
with and any adverse claim/protest/opposition is finally resolved by the Panel of Arbitrators.

Sec. 41.

xxxx

Within fifteen (15) working days form the receipt of the Certification issued by the Panel of Arbitrators
as provided in Section 38 hereof, the concerned Regional Director shall initially evaluate the Mineral
Agreement applications in areas outside Mineral reservations. He/She shall thereafter endorse his/her
findings to the Bureau for further evaluation by the Director within fifteen (15) working days from
receipt of forwarded documents. Thereafter, the Director shall endorse the same to the secretary for
consideration/approval within fifteen working days from receipt of such endorsement.

In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15)
working days from receipt of the Certification issued by the Panel of Arbitrators as provided for in
Section 38 hereof, the same shall be evaluated and endorsed by the Director to the Secretary for
consideration/approval within fifteen days from receipt of such endorsement. (emphasis supplied)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining
areas" under Sec. 77(a) specifically refer only to those disputes relative to the applications for a mineral
agreement or conferment of mining rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is
further elucidated by Secs. 219 and 43 of DENR AO 95-936, which read:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28,
43 and 57 above, any adverse claim, protest or opposition specified in said sections may also be filed
directly with the Panel of Arbitrators within the concerned periods for filing such claim, protest or
opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement.-

xxxx

The Regional Director or concerned Regional Director shall also cause the posting of the application on
the bulletin boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and
municipality(ies), copy furnished the barangays where the proposed contract area is located once a
week for two (2) consecutive weeks in a language generally understood in the locality. After forty-five
(45) days from the last date of publication/posting has been made and no adverse claim, protest or
opposition was filed within the said forty-five (45) days, the concerned offices shall issue a certification
that publication/posting has been made and that no adverse claim, protest or opposition of whatever
nature has been filed. On the other hand, if there be any adverse claim, protest or opposition, the same
shall be filed within forty-five (45) days from the last date of publication/posting, with the Regional
Offices concerned, or through the Department’s Community Environment and Natural Resources
Officers (CENRO) or Provincial Environment and Natural Resources Officers (PENRO), to be filed at the
Regional Office for resolution of the Panel of Arbitrators. However previously published valid and
subsisting mining claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully complied
with and any opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel
of Arbitrators. (Emphasis supplied.)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining
areas" under Sec. 77(a) specifically refer only to those disputes relative to the applications for a mineral
agreement or conferment of mining rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is
further elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28,
43 and 57 above, any adverse claim, protest or opposition specified in said sections may also be filed
directly with the Panel of Arbitrators within the concerned periods for filing such claim, protest or
opposition as specified in said Sections.

Sec. 43. Publication/Posting of Mineral Agreement Application.-

xxxx

The Regional Director or concerned Regional Director shall also cause the posting of the application on
the bulletin boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and
municipality(ies), copy furnished the barangays where the proposed contract area is located once a
week for two (2) consecutive weeks in a language generally understood in the locality. After forty-five
(45) days from the last date of publication/posting has been made and no adverse claim, protest or
opposition was filed within the said forty-five (45) days, the concerned offices shall issue a certification
that publication/posting has been made and that no adverse claim, protest or opposition of whatever
nature has been filed. On the other hand, if there be any adverse claim, protest or opposition, the same
shall be filed within forty-five (45) days from the last date of publication/posting, with the Regional
offices concerned, or through the Department’s Community Environment and Natural Resources
Officers (CENRO) or Provincial Environment and Natural Resources Officers (PENRO), to be filed at the
Regional Office for resolution of the Panel of Arbitrators. However, previously published valid and
subsisting mining claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully complied
with and any opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel
of Arbitrators. (Emphasis supplied.)

These provisions lead us to conclude that the power of the POA to resolve any adverse claim,
opposition, or protest relative to mining rights under Sec. 77(a) of RA 7942 is confined only to adverse
claims, conflicts and oppositions relating to applications for the grant of mineral rights.

POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts and oppositions and it
has no authority to approve or reject said applications. Such power is vested in the DENR Secretary upon
recommendation of the MGB Director. Clearly, POA’s jurisdiction over "disputes involving rights to
mining areas" has nothing to do with the cancellation of existing mineral agreements. (emphasis ours)

Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve disputes
over MPSA applications subject of Redmont’s petitions. However, said jurisdiction does not include
either the approval or rejection of the MPSA applications, which is vested only upon the Secretary of the
DENR. Thus, the finding of the POA, with respect to the rejection of petitioners’ MPSA applications being
that they are foreign corporation, is valid.

Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the POA,
that has jurisdiction over the MPSA applications of petitioners.

This postulation is incorrect.

It is basic that the jurisdiction of the court is determined by the statute in force at the time of the
commencement of the action.54

Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization

Act of 1980" reads:

Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive original jurisdiction:

1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.

On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:

Section 77. Panel of Arbitrators.—

x x x Within thirty (30) days, after the submission of the case by the parties for the decision, the panel
shall have exclusive and original jurisdiction to hear and decide the following:

(c) Disputes involving rights to mining areas

(d) Disputes involving mineral agreements or permits

It is clear that POA has exclusive and original jurisdiction over any and all disputes involving rights to
mining areas. One such dispute is an MPSA application to which an adverse claim, protest or opposition
is filed by another interested applicant.1âwphi1 In the case at bar, the dispute arose or originated from
MPSA applications where petitioners are asserting their rights to mining areas subject of their respective
MPSA applications. Since respondent filed 3 separate petitions for the denial of said applications, then a
controversy has developed between the parties and it is POA’s jurisdiction to resolve said disputes.

Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the DENR
Regional Office or any concerned DENRE or CENRO are MPSA applications. Thus POA has jurisdiction.

Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary
jurisdiction. Euro-med Laboratories v. Province of Batangas 55 elucidates:

The doctrine of primary jurisdiction holds that if a case is such that its determination requires the
expertise, specialized training and knowledge of an administrative body, relief must first be obtained in
an administrative proceeding before resort to the courts is had even if the matter may well be within
their proper jurisdiction.

Whatever may be the decision of the POA will eventually reach the court system via a resort to the CA
and to this Court as a last recourse.

Selling of MBMI’s shares to DMCI

As stated before, petitioners’ Manifestation and Submission dated October 19, 2012 would want us to
declare the instant petition moot and academic due to the transfer and conveyance of all the
shareholdings and interests of MBMI to DMCI, a corporation duly organized and existing under
Philippine laws and is at least 60% Philippine-owned. 56 Petitioners reasoned that they now cannot be
considered as foreign-owned; the transfer of their shares supposedly cured the "defect" of their
previous nationality. They claimed that their current FTAA contract with the State should stand since
"even wholly-owned foreign corporations can enter into an FTAA with the State." 57 Petitioners stress
that there should no longer be any issue left as regards their qualification to enter into FTAA contracts
since they are qualified to engage in mining activities in the Philippines. Thus, whether the "grandfather
rule" or the "control test" is used, the nationalities of petitioners cannot be doubted since it would pass
both tests.

The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and said fact
should be disregarded. The manifestation can no longer be considered by us since it is being tackled in
G.R. No. 202877 pending before this Court.1âwphi1 Thus, the question of whether petitioners, allegedly
a Philippine-owned corporation due to the sale of MBMI's shareholdings to DMCI, are allowed to enter
into FTAAs with the State is a non-issue in this case.

In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the
exploration, development and utilization of the natural resources of the Philippines. When in the mind
of the Court there is doubt, based on the attendant facts and circumstances of the case, in the 60-40
Filipino-equity ownership in the corporation, then it may apply the "grandfather rule."

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of Appeals
Decision dated October 1, 2010 and Resolution dated February 15, 2011 are hereby AFFIRMED.

SO ORDERED.

FIRST DIVISION

G.R. No. 141994             January 17, 2005

FILIPINAS BROADCASTING NETWORK, INC., petitioner,

vs.
AGO MEDICAL AND EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE, (AMEC-BCCM)
and ANGELITA F. AGO, respondents.

DECISION

CARPIO, J.:

The Case

This petition for review1 assails the 4 January 1999 Decision2 and 26 January 2000 Resolution of the
Court of Appeals in CA-G.R. CV No. 40151. The Court of Appeals affirmed with modification the 14
December 1992 Decision3 of the Regional Trial Court of Legazpi City, Branch 10, in Civil Case No. 8236.
The Court of Appeals held Filipinas Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre
and Carmelo Rima liable for libel and ordered them to solidarily pay Ago Medical and Educational
Center-Bicol Christian College of Medicine moral damages, attorney’s fees and costs of suit.

The Antecedents

"Exposé" is a radio documentary4 program hosted by Carmelo ‘Mel’ Rima ("Rima") and Hermogenes
‘Jun’ Alegre ("Alegre").5 Exposé is aired every morning over DZRC-AM which is owned by Filipinas
Broadcasting Network, Inc. ("FBNI"). "Exposé" is heard over Legazpi City, the Albay municipalities and
other Bicol areas.6

In the morning of 14 and 15 December 1989, Rima and Alegre exposed various alleged complaints from
students, teachers and parents against Ago Medical and Educational Center-Bicol Christian College of
Medicine ("AMEC") and its administrators. Claiming that the broadcasts were defamatory, AMEC and
Angelita Ago ("Ago"), as Dean of AMEC’s College of Medicine, filed a complaint for damages 7 against
FBNI, Rima and Alegre on 27 February 1990. Quoted are portions of the allegedly libelous broadcasts:

JUN ALEGRE:

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

xxx

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

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

xxx

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

xxx

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

xxx

MEL RIMA:

xxx My friends based on the expose, AMEC is a dumping ground for moral and physically misfit people.
What does this mean? Immoral and physically misfits as teachers.

May I say I’m sorry to Dean Justita Lola. But this is the truth. The truth is this, that your are no longer fit
to teach. You are too old. As an aviation, your case is zero visibility. Don’t insist.

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

xxx

xxx On our end our task is to attend to the interests of students. It is likely that the students would be
influenced by evil. When they become members of society outside of campus will be liabilities rather
than assets. What do you expect from a doctor who while studying at AMEC is so much burdened with
unreasonable imposition? What do you expect from a student who aside from peculiar problems –
because not all students are rich – in their struggle to improve their social status are even more
burdened with false regulations. xxx9 (Emphasis supplied)

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

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

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

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

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

WHEREFORE, premises considered, this court finds for the plaintiff. Considering the degree of damages
caused by the controversial utterances, which are not found by this court to be really very serious and
damaging, and there being no showing that indeed the enrollment of plaintiff school
dropped, defendants Hermogenes "Jun" Alegre, Jr. and Filipinas Broadcasting Network (owner of the
radio station DZRC), are hereby jointly and severally ordered to pay plaintiff Ago Medical and
Educational Center-Bicol Christian College of Medicine (AMEC-BCCM) the amount of ₱300,000.00 moral
damages, plus ₱30,000.00 reimbursement of attorney’s fees, and to pay the costs of suit.

SO ORDERED. 13 (Emphasis supplied)

Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on the other, appealed
the decision to the Court of Appeals. The Court of Appeals affirmed the trial court’s judgment with
modification. The appellate court made Rima solidarily liable with FBNI and Alegre. The appellate court
denied Ago’s claim for damages and attorney’s fees because the broadcasts were directed against
AMEC, and not against her. The dispositive portion of the Court of Appeals’ decision reads:

WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the modification that
broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes Alegre.

SO ORDERED.14

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

Hence, FBNI filed this petition.15

The Ruling of the Court of Appeals

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

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

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

The Court of Appeals held that FBNI failed to exercise due diligence in the selection and supervision of
its employees for allowing Rima and Alegre to make the radio broadcasts without the proper KBP
accreditation. The Court of Appeals denied Ago’s claim for damages and attorney’s fees because the
libelous remarks were directed against AMEC, and not against her. The Court of Appeals adjudged FBNI,
Rima and Alegre solidarily liable to pay AMEC moral damages, attorney’s fees and costs of
suit.1awphi1.nét

Issues

FBNI raises the following issues for resolution:

I. WHETHER THE BROADCASTS ARE LIBELOUS;

II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;

III. WHETHER THE AWARD OF ATTORNEY’S FEES IS PROPER; and

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

The Court’s Ruling

We deny the petition.

This is a civil action for damages as a result of the allegedly defamatory remarks of Rima and Alegre
against AMEC.17 While AMEC did not point out clearly the legal basis for its complaint, a reading of the
complaint reveals that AMEC’s cause of action is based on Articles 30 and 33 of the Civil Code. Article
3018 authorizes a separate civil action to recover civil liability arising from a criminal offense. On the
other hand, Article 3319 particularly provides that the injured party may bring a separate civil action for
damages in cases of defamation, fraud, and physical injuries. AMEC also invokes Article 19 20 of the Civil
Code to justify its claim for damages. AMEC cites Articles 2176 21 and 218022 of the Civil Code to hold FBNI
solidarily liable with Rima and Alegre.

I.

Whether the broadcasts are libelous

A libel23 is a public and malicious imputation of a crime, or of a vice or defect, real or imaginary, or any
act or omission, condition, status, or circumstance tending to cause the dishonor, discredit, or contempt
of a natural or juridical person, or to blacken the memory of one who is dead. 24

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

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

FBNI’s contentions are untenable.

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

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

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

FBNI’s reliance on Borjal is misplaced. In Borjal, the Court elucidated on the "doctrine of fair comment,"
thus:

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

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

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

Secondly, there is reason to believe that defendant radio broadcasters, contrary to the mandates of
their duties, did not verify and analyze the truth of the reports before they aired it, in order to prove
that they are in good faith.
Alegre contended that plaintiff school had no permit and is not accredited to offer Physical Therapy
courses. Yet, plaintiff produced a certificate coming from DECS that as of Sept. 22, 1987 or more than 2
years before the controversial broadcast, accreditation to offer Physical Therapy course had already
been given the plaintiff, which certificate is signed by no less than the Secretary of Education and
Culture herself, Lourdes R. Quisumbing (Exh. C-rebuttal). Defendants could have easily known this were
they careful enough to verify. And yet, defendants were very categorical and sounded too positive when
they made the erroneous report that plaintiff had no permit to offer Physical Therapy courses which
they were offering.

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

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

As for the allegation that plaintiff is the dumping ground for misfits, and immoral teachers, defendant[s]
singled out Dean Justita Lola who is said to be so old, with zero visibility already. Dean Lola testified in
court last Jan. 21, 1991, and was found to be 75 years old. xxx Even older people prove to be effective
teachers like Supreme Court Justices who are still very much in demand as law professors in their late
years. Counsel for defendants is past 75 but is found by this court to be still very sharp and
effective.l^vvphi1.net So is plaintiffs’ counsel.

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

The contention that plaintiffs’ graduates become liabilities rather than assets of our society is a mere
conclusion. Being from the place himself, this court is aware that majority of the medical graduates of
plaintiffs pass the board examination easily and become prosperous and responsible professionals. 33

Had the comments been an expression of opinion based on established facts, it is immaterial that the
opinion happens to be mistaken, as long as it might reasonably be inferred from the facts. 34 However,
the comments of Rima and Alegre were not backed up by facts. Therefore, the broadcasts are not
privileged and remain libelous per se.

The broadcasts also violate the Radio Code 35 of the Kapisanan ng mga Brodkaster sa Pilipinas,
Ink.  ("Radio Code"). Item I(B) of the Radio Code provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES

1. x x x

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

xxx

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

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

The broadcasts fail to meet the standards prescribed in the Radio Code, which lays down the code of
ethical conduct governing practitioners in the radio broadcast industry. The Radio Code is a voluntary
code of conduct imposed by the radio broadcast industry on its own members. The Radio Code is a
public warranty by the radio broadcast industry that radio broadcast practitioners are subject to a code
by which their conduct are measured for lapses, liability and sanctions.

The public has a right to expect and demand that radio broadcast practitioners live up to the code of
conduct of their profession, just like other professionals. A professional code of conduct provides the
standards for determining whether a person has acted justly, honestly and with good faith in the
exercise of his rights and performance of his duties as required by Article 19 37 of the Civil Code. A
professional code of conduct also provides the standards for determining whether a person who willfully
causes loss or injury to another has acted in a manner contrary to morals or good customs under Article
2138 of the Civil Code.

II.

Whether AMEC is entitled to moral damages

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

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

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

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

However, we find the award of ₱300,000 moral damages unreasonable. The record shows that even
though the broadcasts were libelous per se, AMEC has not suffered any substantial or material damage
to its reputation. Therefore, we reduce the award of moral damages from ₱300,000 to ₱150,000.

III.

Whether the award of attorney’s fees is proper

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

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

[I]t is an accepted doctrine that the award thereof as an item of damages is the exception rather than
the rule, and counsel’s fees are not to be awarded every time a party wins a suit. The power of the court
to award attorney’s fees under Article 2208 of the Civil Code demands factual, legal and equitable
justification, without which the award is a conclusion without a premise, its basis being improperly
left to speculation and conjecture. In all events, the court must explicitly state in the text of the
decision, and not only in the decretal portion thereof, the legal reason for the award of attorney’s
fees.51 (Emphasis supplied)

While it mentioned about the award of attorney’s fees by stating that it "lies within the discretion of the
court and depends upon the circumstances of each case," the Court of Appeals failed to point out any
circumstance to justify the award.

IV.

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

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

FBNI’s arguments do not persuade us.

The basis of the present action is a tort. Joint tort feasors are jointly and severally liable for the tort
which they commit.52 Joint tort feasors are all the persons who command, instigate, promote,
encourage, advise, countenance, cooperate in, aid or abet the commission of a tort, or who approve of
it after it is done, if done for their benefit. 53 Thus, AMEC correctly anchored its cause of action against
FBNI on Articles 2176 and 2180 of the Civil Code.1a\^/phi1.net

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

Moreover, there is insufficient evidence on record that FBNI exercised due diligence in
the selection and supervision of its employees, particularly Rima and Alegre. FBNI merely showed that it
exercised diligence in the selection of its broadcasters without introducing any evidence to prove that it
observed the same diligence in the supervision of Rima and Alegre. FBNI did not show how it exercised
diligence in supervising its broadcasters. FBNI’s alleged constant reminder to its broadcasters to
"observe truth, fairness and objectivity and to refrain from using libelous and indecent language" is not
enough to prove due diligence in the supervision of its broadcasters. Adequate training of the
broadcasters on the industry’s code of conduct, sufficient information on libel laws, and continuous
evaluation of the broadcasters’ performance are but a few of the many ways of showing diligence in the
supervision of broadcasters.
FBNI claims that it "has taken all the precaution in the selection of Rima and Alegre as broadcasters,
bearing in mind their qualifications." However, no clear and convincing evidence shows that Rima and
Alegre underwent FBNI’s "regimented process" of application. Furthermore, FBNI admits that Rima and
Alegre had deficiencies in their KBP accreditation, 56 which is one of FBNI’s requirements before it hires a
broadcaster. Significantly, membership in the KBP, while voluntary, indicates the broadcaster’s strong
commitment to observe the broadcast industry’s rules and regulations. Clearly, these circumstances
show FBNI’s lack of diligence in selecting and supervising Rima and Alegre. Hence, FBNI is solidarily liable
to pay damages together with Rima and Alegre.

WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January 1999 and Resolution
of 26 January 2000 of the Court of Appeals in CA-G.R. CV No. 40151 with the MODIFICATION that the
award of moral damages is reduced from ₱300,000 to ₱150,000 and the award of attorney’s fees is
deleted. Costs against petitioner.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Quisumbing, Ynares-Santiago, and Azcuna, JJ., concur.

EN BANC

G.R. No. L-23606           July 29, 1968

ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC., petitioner,

vs.
SECURITIES & EXCHANGE COMMISSION, respondent.

Gamboa and Gamboa for petitioner.

Office of the Solicitor General for respondent.

SANCHEZ, J.:

To the question — May a corporation extend its life by amendment of its articles of incorporation
effected during the three-year statutory period for liquidation when its original term of existence had
already expired? — the answer of the Securities and Exchange Commissioner was in the negative.
Offshoot is this appeal.

That problem emerged out of the following controlling facts:

Petitioner Alhambra Cigar and Cigarette Manufacturing Company, Inc. (hereinafter referred to simply
as Alhambra) was duly incorporated under Philippine laws on January 15, 1912. By its corporate articles
it was to exist for fifty (50) years from incorporation. Its term of existence expired on January 15, 1962.
On that date, it ceased transacting business, entered into a state of liquidation.
Thereafter, a new corporation. — Alhambra Industries, Inc. — was formed to carry on the business of
Alhambra.

On May 1, 1962, Alhambra's stockholders, by resolution named Angel S. Gamboa trustee to take charge
of its liquidation.

On June 20, 1963 — within Alhambra's three-year statutory period for liquidation - Republic Act 3531
was enacted into law. It amended Section 18 of the Corporation Law; it empowered domestic private
corporations to extend their corporate life beyond the period fixed by the articles of incorporation for a
term not to exceed fifty years in any one instance. Previous to Republic Act 3531, the maximum non-
extendible term of such corporations was fifty years.

On July 15, 1963, at a special meeting, Alhambra's board of directors resolved to amend paragraph
"Fourth" of its articles of incorporation to extend its corporate life for an additional fifty years, or a total
of 100 years from its incorporation.

On August 26, 1963, Alhambra's stockholders, representing more than two-thirds of its subscribed
capital stock, voted to approve the foregoing resolution. The "Fourth" paragraph of Alhambra's articles
of incorporation was thus altered to read:

FOURTH. That the term for which said corporation is to exist is fifty (50) years from and after the date of
incorporation, and for an additional period of fifty (50) years thereafter.

On October 28, 1963, Alhambra's articles of incorporation as so amended certified correct by its
president and secretary and a majority of its board of directors, were filed with respondent Securities
and Exchange Commission (SEC).

On November 18, 1963, SEC, however, returned said amended articles of incorporation to Alhambra's
counsel with the ruling that Republic Act 3531 "which took effect only on June 20, 1963, cannot be
availed of by the said corporation, for the reason that its term of existence had already expired when
the said law took effect in short, said law has no retroactive effect."

On December 3, 1963, Alhambra's counsel sought reconsideration of SEC's ruling aforesaid, refiled the
amended articles of incorporation.

On September 8, 1964, SEC, after a conference hearing, issued an order denying the reconsideration
sought.

Alhambra now invokes the jurisdiction of this Court to overturn the conclusion below. 1

1. Alhambra relies on Republic Act 3531, which amended Section 18 of the Corporation Law. Well it is to
take note of the old and the new statutes as they are framed. Section 18, prior to and after its
modification by Republic Act 3531, covers the subject of amendment of the articles of incorporation of
private corporations. A provision thereof which remains unaltered is that a corporation may amend its
articles of incorporation "by a majority vote of its board of directors or trustees and ... by the vote or
written assent of the stockholders representing at least two-thirds of the subscribed capital stock ... "

But prior to amendment by Republic Act 3531, an explicit prohibition existed in Section 18, thus:

... Provided, however, That the life of said corporation shall not be extended by said amendment beyond
the time fixed in the original articles: ...

This was displaced by Republic Act 3531 which enfranchises all private corporations to extend their
corporate existence. Thus incorporated into the structure of Section 18 are the following:

... Provided, however, That should the amendment consist in extending the corporate life, the extension
shall not exceed fifty years in any one instance: Provided, further, That the original articles, and
amended articles together shall contain all provisions required by law to be set out in the articles of
incorporation: ...

As we look in retrospect at the facts, we find these: From July 15 to October 28, 1963, when Alhambra
made its attempt to extend its corporate existence, its original term of fifty years had already expired
(January 15, 1962); it was in the midst of the three-year grace period statutorily fixed in Section 77 of
the Corporation Law, thus: .

SEC. 77. Every corporation whose charter expires by its own limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three years after the time when it would have been
so dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it
gradually to settle and close its affairs, to dispose of and convey its property and to divide its capital
stock, but not for the purpose of continuing the business for which it was established. 2

Plain from the language of the provision is its meaning: continuance of a "dissolved" corporation as a
body corporate for three years has for its purpose the final closure of its affairs, and no other; the
corporation is specifically enjoined from "continuing the business for which it was established". The
liquidation of the corporation's affairs set forth in Section 77 became necessary precisely because its life
had ended. For this reason alone, the corporate existence and juridical personality of that corporation to
do business may no longer be extended.

Worth bearing in mind, at this juncture, is the basic development of corporation law.

The common law rule, at the beginning, was rigid and inflexible in that upon its dissolution, a
corporation became legally dead for all purposes. Statutory authorizations had to be provided for its
continuance after dissolution "for limited and specified purposes incident to complete liquidation of its
affairs".3 Thus, the moment a corporation's right to exist as an "artificial person" ceases, its corporate
powers are terminated "just as the powers of a natural person to take part in mundane affairs cease to
exist upon his death".4 There is nothing left but to conduct, as it were, the settlement of the estate of a
deceased juridical person.
2. Republic Act 3531, amending Section 18 of the Corporation Law, is silent, it is true, as to when such
act of extension may be made. But even with a superficial knowledge of corporate principles, it does not
take much effort to reach a correct conclusion. For, implicit in Section 77 heretofore quoted is that the
privilege given to prolong corporate life under the amendment must be exercised before the expiry of
the term fixed in the articles of incorporation.

Silence of the law on the matter is not hard to understand. Specificity is not really necessary. The
authority to prolong corporate life was inserted by Republic Act 3531 into a section of the law that deals
with the power of a corporation to amend its articles of incorporation. (For, the manner of prolongation
is through an amendment of the articles.) And it should be clearly evident that under Section 77 no
corporation in a state of liquidation can act in any way, much less amend its articles, "for the purpose of
continuing the business for which it was established".

All these dilute Alhambra's position that it could revivify its corporate life simply because when it
attempted to do so, Alhambra was still in the process of liquidation. It is surely impermissible for us to
stretch the law — that merely empowers a corporation to act in liquidation — to inject therein the
power to extend its corporate existence.

3. Not that we are alone in this view. Fletcher has written: "Since the privilege of extension is purely
statutory, all of the statutory conditions precedent must be complied with in order that the extension
may be effectuated. And, generally these conditions must be complied with, and the steps necessary to
effect the extension must be taken, during the life of the corporation, and before the expiration of the
term of existence as original fixed by its charter or the general law, since, as a rule, the corporation is
ipso facto dissolved as soon as that time expires. So where the extension is by amendment of the articles
of incorporation, the amendment must be adopted before that time. And, similarly, the filing and
recording of a certificate of extension after that time cannot relate back to the date of the passage of a
resolution by the stockholders in favor of the extension so as to save the life of the corporation. The
contrary is true, however, and the doctrine of relation will apply, where the delay is due to the neglect
of the officer with whom the certificate is required to be filed, or to a wrongful refusal on his part to
receive it. And statutes in some states specifically provide that a renewal may be had within a specified
time before or after the time fixed for the termination of the corporate existence". 5

The logic of this position is well expressed in a foursquare case decided by the Court of Appeals of
Kentucky.6 There, pronouncement was made as follows:

... But section 561 (section 2147) provides that, when any corporation expires by the terms of its articles
of incorporation, it may be thereafter continued to act for the purpose of closing up its business, but for
no other purpose. The corporate life of the Home Building Association expired on May 3, 1905. After
that date, by the mandate of the statute, it could continue to act for the purpose of closing up its
business, but for no other purpose. The proposed amendment was not made until January 16, 1908, or
nearly three years after the corporation expired by the terms of the articles of incorporation. When the
corporate life of the corporation was ended, there was nothing to extend. Here it was proposed nearly
three years after the corporate life of the association had expired to revivify the dead body, and to make
that relate back some two years and eight months. In other words, the association for two years and
eight months had only existed for the purpose of winding up its business, and, after this length of time,
it was proposed to revivify it and make it a live corporation for the two years and eight months daring
which it had not been such.

The law gives a certain length of time for the filing of records in this court, and provides that the time
may be extended by the court, but under this provision it has uniformly been held that when the time
was expired, there is nothing to extend, and that the appeal must be dismissed... So, when the articles
of a corporation have expired, it is too late to adopt an amendment extending the life of a corporation;
for, the corporation having expired, this is in effect to create a new corporation  ..."7

True it is, that the Alabama Supreme Court has stated in one case. 8 that a corporation empowered by
statute to renew its corporate existence may do so even after the expiration of its corporate life,
provided renewal is taken advantage of within the extended statutory period for purposes of
liquidation. That ruling, however, is inherently weak as persuasive authority for the situation at bar for
at least two reasons: First. That case was a suit for mandamus to compel a former corporate officer to
turn over books and records that came into his possession and control by virtue of his office. It was
there held that such officer was obliged to surrender his books and records even if the corporation had
already expired. The holding on the continued existence of the corporation was a mere dictum. Second.
Alabama's law is different. Corporations in that state were authorized not only to extend but also
to renew their corporate existence.That very case defined the word "renew" as follows; "To make new
again; to restore to freshness; to make new spiritually; to regenerate; to begin again; to recommence; to
resume; to restore to existence, to revive; to re-establish; to recreate; to replace; to grant or obtain an
extension of Webster's New International Dict.; 34 Cyc. 1330; Carter v. Brooklyn Life Ins. Co.,  110 N.Y.
15, 21, 22, 17 N.E. 396; 54 C.J. 379. Sec". 9

On this point, we again draw from Fletcher: "There is a broad distinction between the extension of a
charter and the grant of a new one. To renew a charter is to revive a charter which has expired, or, in
other words, "to give a new existence to one which has been forfeited, or which has lost its vitality by
lapse of time". To "extend" a charter is "to increase the time for the existence of one which would
otherwise reach its limit at an earlier period". 10 Nowhere in our statute — Section 18, Corporation Law,
as amended by Republic Act 3531 — do we find the word "renew" in reference to the authority given to
corporations to protract their lives. Our law limits itself to extension of corporate existence. And, as so
understood, extension may be made only before the term provided in the corporate charter expires.

Alhambra draws attention to another case 11 which declares that until the end of the extended period for
liquidation, a dissolved corporation "does not become an extinguished entity". But this statement was
obviously lifted out of context. That case dissected the question whether or not suits can be commenced
by or against a corporation within its liquidation period. Which was answered in the affirmative. For, the
corporation still exists for the settlement of its affairs.

People, ex rel. vs. Green,12 also invoked by Alhambra, is as unavailing. There, although the corporation
amended its articles to extend its existence at a time when it had no legal authority yet, it adopted the
amended articles later on when it had the power to extend its life and during its original term when it
could amend its articles.

The foregoing notwithstanding, Alhambra falls back on the contention that its case is arguably within the
purview of the law. It says that before cessation of its corporate life, it could not have extended the
same, for the simple reason that Republic Act 3531 had not then become law. It must be remembered
that Republic Act 3531 took effect on June 20, 1963, while the original term of Alhambra's existence
expired before that date — on January 15, 1962. The mischief that flows from this theory is at once
apparent. It would certainly open the gates for all defunct corporations — whose charters have expired
even long before Republic Act 3531 came into being — to resuscitate their corporate existence.

4. Alhambra brings into argument Republic Act 1932, which amends Section 196 of the Insurance Act,
now reading as follows: 1äwphï1.ñët

SEC. 196. Any provision of law to the contrary notwithstanding, every domestic life insurance
corporation, formed for a limited period under the provisions of its articles of incorporation, may extend
its corporate existence for a period not exceeding fifty years in any one instance by amendment to its
articles of incorporation on or before the expiration of the term so fixed in said articles ...

To be observed is that the foregoing statute — unlike Republic Act 3531 — expressly authorizes
domestic insurance corporations to extend their corporate existence "on or before the expiration of the
term" fixed in their articles of incorporation. Republic Act 1932 was approved on June 22, 1957, long
before the passage of Republic Act 3531 in 1963. Congress, Alhambra points out, must have been aware
of Republic Act 1932 when it passed Republic Act 3531. Since the phrase "on or before", etc., was
omitted in Republic Act 3531, which contains no similar limitation, it follows, according to Alhambra,
that it is not necessary to extend corporate existence on or before the expiration of its original term.

That Republic Act 3531 stands mute as to when extention of corporate existence may be made, assumes
no relevance. We have already said, in the face of a familiar precept, that a defunct corporation is bereft
of any legal faculty not otherwise expressly sanctioned by law.

Illuminating here is the explanatory note of H.B. 1774, later Republic Act 3531 — now in dispute. Its first
paragraph states that "Republic Act No. 1932 allows the automatic extension of the corporate existence
of domestic life insurance corporations upon amendment of their articles of incorporation on or before
the expiration of the terms fixed by said articles". The succeeding lines are decisive: "This is a good law,
a sane and sound one. There appears to be no valid reason why it should not be made to apply to other
private corporations.13

The situation here presented is not one where the law under consideration is ambiguous, where courts
have to put in harness extrinsic aids such as a look at another statute to disentangle doubts. It is an
elementary rule in legal hermeneutics that where the terms of the law are clear, no statutory
construction may be permitted. Upon the basic conceptual scheme under which corporations operate,
and with Section 77 of the Corporation Law particularly in mind, we find no vagueness in Section 18, as
amended by Republic Act 3531. As we view it, by directing attention to Republic Act 1932, Alhambra
would seek to create obscurity in the law; and, with that, ask of us a ruling that such obscurity be
explained. This, we dare say, cannot be done.

The pari materia rule of statutory construction, in fact, commands that statutes must be harmonized
with each other.14 So harmonizing, the conclusion is clear that Section 18 of the Corporation Law, as
amended by Republic Act 3531 in reference to extensions of corporate existence, is to be read in the
same light as Republic Act 1932. Which means that domestic corporations in general, as with domestic
insurance companies, can extend corporate existence only on or before the expiration of the term fixed
in their charters.

5. Alhambra pleads for munificence in interpretation, one which brushes technicalities aside. Bases for
this posture are that Republic Act 3531 is a remedial statute, and that extension of corporate life is
beneficial to the economy.

Alhambra's stance does not induce assent. Expansive construction is possible only when there is
something to expand. At the time of the passage of Republic Act 3531, Alhambra's corporate life had
already expired. It had overstepped the limits of its limited existence. No life there is to prolong.

Besides, a new corporation — Alhambra Industries, Inc., with but slight change in stockholdings 15 — has
already been established. Its purpose is to carry on, and it actually does carry on, 16 the business of the
dissolved entity. The beneficial-effects argument is off the mark.

The way the whole case shapes up then, the only possible drawbacks of Alhambra might be that, instead
of the new corporation (Alhambra Industries, Inc.) being written off, the old one (Alhambra Cigar &
Cigarette Manufacturing Company, Inc.) has to be wound up; and that the old corporate name cannot
be retained fully in its exact form. 17 What is important though is that the word Alhambra, the name that
counts [it has goodwill], remains.

FOR THE REASONS GIVEN, the ruling of the Securities and Exchange Commission of November 18, 1963,
and its order of September 8, 1964, both here under review, are hereby affirmed.

Costs against petitioner Alhambra Cigar & Cigarette Manufacturing Company, Inc. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Angeles and Fernando, JJ., concur.

💡 NELL DOCTRINE

Generally, where one corporation sells or otherwise transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor, except:

1. Where the purchaser expressly or impliedly agrees to assume such debts;

2. Where the transaction amounts to a consolidation or merger of the corporations;
3. Where the purchasing corporation is merely a continuation of the selling corporation; and
4. Where the transaction is entered into fraudulently in order to escape liability for such debts.
The Nell Doctrine states the general rule that the transfer of all the assets of a corporation to another
shall not render the latter liable to the liabilities of the transferor. If any of the above-cited exceptions
are present, then the transferee corporation shall assume the liabilities of the transferor.

Nell v. Pacific Farms, Inc., 122 Phil. 825 (1965).

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 (11 th)Judicial Region, Branch No. 10 of Davao City in Civil Case
No. 29,047-02 is hereby AFFIRMED with 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 quo and 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.

EN BANC

G.R. No. 207161, September 08, 2015

Y-I LEISURE PHILIPPINES, INC., YATS INTERNATIONAL LTD. AND Y-I CLUBS AND RESORTS,
INC., Petitioners, v. JAMES YU, Respondent.

DECISION
MENDOZA, J.:

The present case attempts to unravel whether the transfer of all or substantially all the assets of a
corporation under Section 40 of the Corporation Code carries with it the assumption of corporate
liabilities.

This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the January 30,
2012 Decision1 and the April 29, 2013 Resolution2 of the Court of Appeals (CA), in CA-G.R. CV No. 96036,
which affirmed with modification the August 31, 2010 Decision 3 of the Regional Trial Court, Branch 81,
Quezon City (RTC).

The Facts

Mt. Arayat Development Co. Inc. (MADCI) was a real estate development corporation, which was
registered4 on February 7, 1996 before the Security and Exchange Commission (SEC). On the other hand,
respondent James Yu (Yu) was a businessman, interested in purchasing golf and country club shares.

Sometime in 1997, MADCI offered for sale shares of a golf and country club located in the vicinity of Mt.
Arayat in Arayat, Pampanga, for the price of P550.00 per share. Relying on the representation of
MADCI's brokers and sales agents, Yu bought 500 golf and 150 country club shares for a total price of
P650,000.00 which he paid by installment with fourteen (14) Far East Bank and Trust Company (FEBTC)
checks.5cralawrednad

Upon full payment of the shares to MADCI, Yu visited the supposed site of the golf and country club and
discovered that it was non-existent. In a letter, dated February 5, 2000, Yu demanded from MADCI that
his payment be returned to him.6 MADCI recognized that Yu had an investment of P650,000.00, but the
latter had not yet received any refund. 7cralawrednad

On August 14, 2000, Yu filed with the RTC a complaint 8 for collection of sum of money and damages with
prayer for preliminary attachment against MADCI and its president Rogelio Sangil (Sangil) to recover his
payment for the purchase of golf and country club shares. In his transactions with MADCI, Yu alleged
that he dealt with Sangil, who used MADCI's corporate personality to defraud him.

In his Answer,9 Sangil alleged that Yu dealt with MADCI as a juridical person and that he did not benefit
from the sale of shares. He added that the return of Yu's money was no longer possible because its
approval had been blocked by the new set of officers of MADCI, which controlled the majority of its
board of directors.

In its Answer,10 MADCI claimed that it was Sangil who defrauded Yu. It invoked the Memorandum of
Agreement11 (MOA), dated May 29, 1999, entered into by MADCI, Sangil and petitioner Yats
International Ltd. (YIL). Under the MOA, Sangil undertook to redeem MADCI proprietary shares sold to
third persons or settle in full all their claims for refund of payments. 12 Thus, it was MADCI's position that
Sangil should be ultimately liable to refund the payment for shares purchased.

After the pre-trial, Yu filed an Amended Complaint, 13 wherein he also impleaded YIL, Y-I Leisure Phils.,
Inc. (YILPI) and Y-I Club & Resorts, Inc. (YICRI). According to Yu, he discovered in the Registry of Deeds of
Pampanga that, substantially, all the assets of MADCI, consisting of one hundred twenty (120) hectares
of land located in Magalang, Pampanga, were sold to YIL, YILPI and YICRI. The transfer was done in fraud
of MADCI's creditors, and without the required approval of its stockholders and board of directors under
Section 40 of the Corporation Code. Yu also alleged that Sangil even filed a case in Pampanga which
assailed the said irregular transfers of lands.

In their Answer,14 YIL, YILPI and YICRI alleged that they only had an interest in MADCI in 1999 when YIL
bought some of its corporate shares pursuant to the MOA. This occurred two (2) years after Yu bought
his golf and country club shares from MADCI. As a mere stockholder of MADCI, YIL could not be held
responsible for the liabilities of the corporation. As to the transfer of properties from MADCI to
YILPI15 and subsequently to YICRI,16 they averred that it was not undertaken to defraud MADCI's
creditors and it was done in accordance with the MOA. In fact, it was stipulated in the MOA that Sangil
undertook to settle all claims for refund of third parties.

During the trial, the MOA was presented before the RTC. It stated that Sangil controlled 60% of the
capital stock of MADCI, while the latter owned 120 hectares of agricultural land in Magalang, Pampanga,
the property intended for the development of a golf course; that YIL was to subscribe to the remaining
40% of the capital stock of MADCI for a consideration of P31,000,000.00; that YIL also gave P500,000.00
to acquire the shares of minority stockholders; that as a condition for YIL's subscription, MADCI and
Sangil were obligated to obtain several government permits, such as an environmental compliance
certificate and land conversion permit; that should MADCI and Sangil fail in their obligations, they must
return the amounts paid by YIL with interests; that if they would still fail to return the same, YIL would
be authorized to sell the 120 hectare land to satisfy their obligation; and that, as an additional security,
Sangil undertook to redeem all the MADCI proprietary shares sold to third parties or to settle in full all
their claims for refund.

Sangil then testified that MADCI failed to develop the golf course because its properties were taken over
by YIL after he allegedly violated the MOA. 17 The lands of MADCI were eventually sold to YICRI for a
consideration of P9.3 million, which was definitely lower than their market price. 18 Unfortunately, the
case assailing the transfers was dismissed by a trial court in Pampanga. 19cralawrednad

The president and chief executive officer of YILPI and YICRI, and managing director of YIL, Denny On Yat
Wang (Wang), was presented as a witness by YIL. He testified that YIL was an investment company
engaged in the development of real estates, projects, leisure, tourism, and related businesses. 20 He
explained that YIL subscribed to. the shares of MADCI because it was interested in its golf course
development project in Pampanga.21 Thus, he signed the MOA on behalf of YIL and he paid P31.5 million
to subscribe to MADCI's shares, subject to the fulfilment of Sangil's obligations. 22cralawrednad
Wang further testified that the MOA stipulated that MADCI would execute a special power of attorney
in his favor, empowering him to sell the property of MADCI in case of default in the performance of
obligations.23 Due to Sangil's subsequent default, a deed of absolute sale over the lands of MADCI was
eventually executed in favor of YICRI, its designated company. 24 Wang also stated that, aside from its
lands, MADCI had other assets in the form of loan advances of its directors. 25cralawredcralawrednad

The RTC Ruling

In its August 31, 2010 Decision, the RTC ruled that because MADCI did not deny its contractual
obligation with Yu, it must be liable for the return of his payments. The trial court also ruled that Sangil
should be solidarily liable with MADCI because he used the latter as a mere alter ego or business
conduit. The RTC was convinced that Sangil had absolute control over the corporation and he started
selling golf and country club shares under the guise of MADCI even without clearance from SEC.

The RTC, however, exonerated YIL, YILPI and YICRI from liability because they were not part of the
transactions between MADCI and Sangil, on one hand and Yu, on the other hand. It opined that YIL, YILPI
and YICRI even had the foresight of protecting the creditors of MADCI when they made Sangil
responsible for settling the claims of refunds of thirds persons in the proprietary shares. The decretal
portion of the decision reads:ChanRoblesvirtualLawlibrary

WHEREFORE, premises considered, judgment is hereby rendered as follows:ChanRoblesvirtualLawlibrary

1. Ordering defendants Mt. Arayat Development Corporation, Inc. and Rogelio Sangil to pay plaintiff
James Yu jointly and severally the amounts of P650,000.04 with 6% legal rate of interest from the filing
of the amended complaint until full payment and and P50,000.00 as attorney's fees.

2. Dismissing the instant case against defendant Y-I Leisure Philippines, Inc., YATS International Limited
and Y-I Clubs and Resorts, Inc.; and

3. Dismissing the counterclaims of Y-I Leisure Philippines, Inc., YATS International Limited and Y-I Clubs
and Resorts, Inc.

SO ORDERED.26

In two separate appeals, the parties elevated the case to the CA.

The CA Ruling

In its assailed Decision, dated January 30, 2012, the CA partly granted the appeals and modified the RTC
decision by holding YIL and its companies, YILPI and YICRI, jointly and severally, liable for the satisfaction
of Yu's claim.
The CA held that the sale of lands between MADCI and YIL must be upheld because Yu failed to prove
that it was simulated or that fraud was employed. This did not mean, however, that YIL and its
companies were free from any liability for the payment of Yu's claim.

The CA explained that YIL, YILPI and YICRI could not escape liability by simply invoking the provision in
the MOA that Sangil undertook the responsibility of paying all the creditors' claims for refund. The
provision was, in effect, a novation under Article 1293 of the Civil Code, specifically the substitution of
debtors. Considering that Yu, as creditor of MADCI, had no knowledge of the "change of debtors," the
MOA could not validly take effect against him. Accordingly, MADCI remained to be a debtor of Yu.

Consequently, as the CA further held, the transfer of the entire assets of MADCI to YICRI should not
prejudice the transferor's creditors. Citing the case of Caltex Philippines, Inc. v, PNOC Shipping and
Transport Corporation27 (Caltex), the CA ruled that the sale by MADCI of all its corporate assets to YIL
and its companies necessarily included the assumption of the its liabilities. Otherwise, the assets were
put beyond the reach of the creditors, like Yu. The CA stated that the liability of YIL and its companies
was determined not by their participation in the sale of the golf and country club shares, but by the fact
that they bought the entire assets of MADCI and its creditors might not have other means of collecting
the amounts due to them, except by going after the assets sold.

Anent Sangil's liability, the CA ruled that he could not use the separate corporate personality of MADCI
as a tool to evade his existing personal obligations under the MOA. The dispositive portion of the
decision reads:ChanRoblesvirtualLawlibrary

WHEREFORE, the appeals are PARTLY GRANTED. Accordingly, the assailed Decision dated August 31,
2010 in Civil Case No. Q-oo-41579 of the RTC of Quezon City, Branch 81, is hereby AFFIRMED WITH
MODIFICATION, in that defendants-appellees YIL, YILPI and YICRI are hereby held jointly and severally
liable with defendant-appellee MADCI and defendant-appellant Sangil for the satisfaction of plaintiff-
appellant Yu's claim.

In all other respects, the assailed decision stands.

SO ORDERED.28

YIL and its companies, YILPI and YICRI, moved for reconsideration, but their motion was denied by the
CA in its assailed Resolution, dated April 29,2013.

Hence, this petition.

ISSUE
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT PETITIONERS YATS GROUP
SHOULD BE HELD JOINTLY AND SEVERALLY LIABLE TO RESPONDENT YU DESPITE THE ABSENCE OF
FRAUD IN THE SALE OF ASSETS AND BAD FAITH ON THE PART OF PETITIONERS YATS GROUP. 29

Petitioners YIL, YILPI and YICRI contend that the facts of Caltex are not on all fours with the case at
bench. In Caltex, there was an express stipulation of the assumption of all the obligations of the
judgment debtor. Here, there was no stipulation whatsoever stating that the petitioners shall assume
the payment of MADCI's debts.

The petitioners also argue that fraud must exist to hold third parties liable. The sale in this case was not
in any way tainted by any of the "badges of fraud" cited in Oria v. McMicking.30 The CA itself stated that
the alleged simulation of the sale was not established by respondent Yu. Moreover, Article 1383 of the
Civil Code requires that the creditor must prove that he has no other legal remedy to satisfy his claim.
Such requirement must be followed whether by an action for rescission or action for sum of money.

On September 20, 2013, respondent Yu filed his Comment. 31 He asserted that the CA correctly
applied Caltex in the present case as the lands sold to the petitioners were the only assets of MADCI.
After the sale, MADCI became incapable of continuing its business, and its corporate existence has just
remained to this day in a virtual state of suspended animation. Thus, unless the creditors had agreed to
the sale of all the assets of the corporation and had accepted the purchasing corporation as the new
debtor, sufficient assets should have been reserved to pay their claims.

On June 19, 2014, the petitioners filed their Reply, 32 reiterating their previous argument that the
element of fraud was required in order for a third party buyer to be liable to the seller's creditors.

The Court's Ruling

The petition lacks merit.

To recapitulate, respondent Yu bought several golf and country club shares from MADCI. Regrettably,
the latter did not develop the supposed project. Yu then demanded the return of his payment, but
MADCI could not return it anymore because all its assets had been transferred. Through the acts of YIL,
MADCI sold all its lands to YILPI and, subsequently to YICRI. Thus, Yu now claims that the petitioners
inherited the obligations of MADCI. On the other hand, the petitioners counter that they did not assume
such liabilities because the transfer of assets was not committed in fraud of the MADCI's creditors.

Hence, the issue at hand presents a complex question of law - whether fraud must exist in the transfer
of all the corporate assets in order for the transferee to assume the liabilities of the transferor. To
resolve this issue, a review of the laws and jurisprudence concerning corporate assumption of liabilities
must be undertaken.

Background on the corporate

assumption of liabilities

In the 1965 case of Nell v. Pacific Farms, Inc.,33 the Court first pronounced the rule regarding the transfer
of all the assets of one corporation to another (hereafter referred to as the  Nell Doctrine) as
follows:ChanRoblesvirtualLawlibrary

Generally, where one corporation sells or otherwise transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor, except:

1. Where the purchaser expressly or impliedly agrees to assume such debts;

2. Where the transaction amounts to a consolidation or merger of the corporations;

3. Where the purchasing corporation is merely a continuation of the selling corporation; and

4. Where the transaction is entered into fraudulently in order to escape liability for such debts.

The Nell Doctrine states the general rule that the transfer of all the assets of a corporation to another
shall not render the latter liable to the liabilities of the transferor. If any of the above-cited exceptions
are present, then the transferee corporation shall assume the liabilities of the transferor.

Legal bases of the Nell Doctrine

An evaluation of our contract and corporation laws validates that the Nell Doctrine is fully supported by
Philippine statutes. The general rule expressed by the doctrine reflects the principle of relativity
under Article 131134 of the Civil Code. Contracts, including the rights and obligations arising therefrom,
are valid and binding only between the contracting parties and their successors-in-interest. Thus,
despite the sale of all corporate assets, the transferee corporation cannot be prejudiced as it is not in
privity with the contracts between the transferor corporation and its creditors.

The first exception under the Nell Doctrine, where the transferee corporation expressly or impliedly
agrees to assume the transferor's debts, is provided under Article 204735 of the Civil Code. When a
person binds himself solidarity with the principal debtor, then a contract of suretyship is produced.
Necessarily, the corporation which expressly or impliedly agrees to assume the transferor's debts shall
be liable to the same.

The second exception under the doctrine, as to the merger and consolidation of corporations, is well-
established under Sections 76 to 80, Title X of the Corporation Code. If the transfer of assets of one
corporation to another amounts to a merger or consolidation, then the transferee corporation must
take over the liabilities of the transferor.
Another exception of the doctrine, where the sale of all corporate assets is entered into fraudulently to
escape liability for transferor's debts, can be found under Article 1388 of the Civil Code. It provides that
whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for
damages suffered. Thus, if there is fraud in the transfer of all the assets of the transferor corporation, its
creditors can hold the transferee liable.

The legal basis of the last in the four (4) exceptions to the Nell Doctrine, where the purchasing
corporation is merely a continuation of the selling corporation, is challenging to determine. In his book,
Philippine Corporate Law,36 Dean Cesar Villanueva explained that this exception contemplates the
"business-enterprise transfer." In such transfer, the transferee corporation's interest goes beyond the
assets of the transferor's assets and its desires to acquire the latter's business enterprise, including its
goodwill.

In Villa Rev Transit, Inc. v. Ferrer,37 the Court held that when one were to buy the business of another as
a going concern, he would usually wish to keep it going; he would wish to get the location, the building,
the stock in trade, and the customers. He would wish to step into the seller's shoes and to enjoy the
same business relations with other men. He would be willing to pay much more if he could get the
"good will" of the business, meaning by this, the good will of the customers, that they may continue to
tread the old footpath to his door and maintain with him the business relations enjoyed by the seller.

In other words, in this last exception, the transferee purchases not only the assets of the transferor, but
also its business. As a result of the sale, the transferor is merely left with its juridical existence, devoid of
its industry and earning capacity. Fittingly, the proper provision of law that is contemplated by this
exception would be Section 40 of the Corporation Code,38 which provides:ChanRoblesvirtualLawlibrary

Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its
property and assets, including its goodwill, upon such terms and conditions and for such consideration,
which may be money, stocks, bonds or other instruments for the payment of money or other property
or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote
of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of
non-stock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholder's or
member's meeting duly called for the purpose. Written notice of the proposed action and of the time
and place of the meeting shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addressee in the post office with postage
prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right
under the conditions provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.

After such authorization or approval by the stockholders or members, the board of directors or trustees
may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other
disposition of property and assets, subject to the rights of third parties under any contract relating
thereto, without further action or approval by the stockholders or members.

Nothing in this section is intended to restrict the power of any corporation, without the authorization by
the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of
its property and assets if the same is necessary in the usual and regular course of business of said
corporation or if the proceeds of the sale or other disposition of such property and assets be
appropriated for the conduct of its remaining business.

In non-stock corporations where there are no members with voting rights, the vote of at least a majority
of the trustees in office will be sufficient authorization for the corporation to enter into any transaction
authorized by this section.

[Emphases Supplied]

To reiterate, Section 40 refers to the sale, lease, exchange or disposition of all or substantially all of the
corporation's assets, including its goodwill.39 The sale under this provision does not contemplate an
ordinary sale of all corporate assets; the transfer must be of such degree that the transferor corporation
is rendered incapable of continuing its business or its corporate purpose. 40cralawrednad

Section 40 suitably reflects the business-enterprise transfer under the exception of the Nell Doctrine
because the purchasing or transferee corporation necessarily continued the business of the selling or
transferor corporation. Given that the transferee corporation acquired not only the assets but also the
business of the transferor corporation, then the liabilities of the latter are inevitably assigned to the
former.

It must be clarified, however, that not every transfer of the entire corporate assets would qualify under
Section 40. It does not apply (1) if the sale of the entire property and assets is necessary in the usual and
regular course of business of corporation, or (2) if the proceeds of the sale or other disposition of such
property and assets will be appropriated for the conduct of its remaining business. 41 Thus, the litmus
test to determine the applicability of Section 40 would be the capacity of the corporation to continue its
business after the sale of all or substantially all its assets.

Jurisprudential recognition of the

business-enterprise transfer

Jurisprudence has held that in a business-enterprise transfer, the transferee is liable for the debts and
liabilities of his transferor arising from the business enterprise conveyed. Many of the application of the
business-enterprise transfer have been related by the Court to the application of the piercing
doctrine.42cralawrednad

In A.D. Santos, Inc. v. Vasquez,43 a taxi driver filed a suit for workmen's compensation against the
petitioner corporation therein. The latter's defense was that the taxi driver's employer was Amador
Santos, and not the corporation. Initially, the taxi driver was employed by City Cab, a sole proprietary by
Amador Santos. The taxi business was, however, transferred to the petitioner. Applying the piercing
doctrine, the Court held that the petitioner must still be held liable due to the transfer of the business
and should not be allowed to confuse the legitimate issues.

In Buan v. Alcantara,44 the Spouses Buan were the owners of Philippine Rabbit Bus Lines. They died in a
vehicular accident and the administrators of their estates were appointed. The administrators then
incorporated the Philippine Rabbit Bus Lines. The issue raised was whether the liabilities of the estates
of the spouses were conveyed to the new corporation due to the transfer of the business. Utilizing the
alter-ego doctrine, the Court ruled in the affirmative and stated that:ChanRoblesvirtualLawlibrary

As between the estate and the corporation, the intention of incorporation was to make the corporation
liable for past and pending obligations of the estate as the transportation business itself was being
transferred to and placed in the name of the corporation. That liability on the part of the
corporation, vis-a-vis the estate, should continue to remain with it even after the percentage of the
estate's shares of stock in the corporation should be diluted. 45

The Court, however, applied the business-enterprise transfer doctrine independent of the piercing
doctrine in other cases. In San Teodoro Development Enterprises v. SSS,46 the petitioner corporation
therein attempted to avoid the compulsory coverage of the Social Security Law by alleging that it was a
distinct and separate entity from its limited partnership predecessor, Chua Lam & Company, Ltd. The
Court, however, upheld the findings of the SSS that the entire business of the previous partnership was
transferred to the corporation ostensibly for a valuable consideration. Hence, "[t]he juridical person
owning and operating the business remain the same even if its legal personality was
changed."47cralawrednad

Similarly, in Laguna Trans. Co., Inc. v. SSS,48 the Court held that the transferee corporation continued the
same transportation business of the unregistered partnership therein, using the same lines and
equipment. There was, in effect, only a change in the form of the organization of the entity engaged in
the business of transportation of passengers.

Perhaps the most telling jurisprudence which recognized the business-enterprise transfer would be the
assailed case of Caltex. In that case, under an agreement of assumption of obligations, LUSTEVECO
transferred, conveyed and assigned to respondent PSTC all of its business, properties and assets
pertaining to its tanker and bulk business together with all the obligations, properties and
assets.49 Meanwhile, petitioner Caltex, Inc. obtained a judgment debt against LUSTEVECO, and it sought
to enforce the same against PSTC. The Court ruled that PSTC was bound by its agreement with
LUSTEVECO and the former assumed all of the latter's obligations pertaining to such business.

More importantly, the Court held that, even without the agreement, PSTC was still liable to Caltex, Inc.
based on Section 40, as follows:ChanRoblesvirtualLawlibrary

While the Corporation Code allows the transfer of all or substantially all the properties and assets of a
corporation, the transfer should not prejudice the creditors of the assignor. The only way the transfer
can proceed without prejudice to the creditors is to hold the assignee liable for the obligations of the
assignor. The acquisition by the assignee of all or substantially all of the assets of the assignor
necessarily includes the assumption of the assignor's liabilities, unless the creditors who did not
consent to the transfer choose to rescind the transfer on the ground of fraud. To allow an assignor to
transfer all its business, properties and assets without the consent of its creditors and without requiring
the assignee to assume the assignor's obligations will defraud the creditors. The assignment will place
the assignor's assets beyond the reach of its creditors.

Here, Caltex could not enforce the judgment debt against LUSTEVECO. The writ of execution could not
be satisfied because LUSTEVECO's remaining properties had been foreclosed by lienholders. In addition,
all of LUSTEVECO's business, properties and assets pertaining to its tanker and bulk business had been
assigned to PSTC without the knowledge of its creditors. Caltex now has no other means of enforcing
the judgment debt except against PSTC. 50cralawrednad

[Emphasis Supplied]

The Caltex case, thus, affirmed that the transfer of all or substantially all the proper from one
corporation to another under Section 40 necessarily entails the assumption of the assignor's liabilities,
notwithstanding the absence of any agreement on the assumption of obligations. The transfer of all its
business, properties and assets without the consent of its creditors must certainly include the liabilities;
or else, the assignment will place the assignor's assets beyond the reach of its creditors. In order to
protect the creditors against unscrupulous conveyance of the entire corporate assets, Caltex justifiably
concluded that the transfer of assets of a corporation under Section 40 must likewise carry with it the
transfer of its liabilities.

Fraud is not an essential

consideration in a business-
enterprise transfer

Notably, an evaluation of the relevant jurisprudence reveals that fraud is not an essential element for
the application of the business-enterprise transfer. 51 The petitioners in this case, however, assert
otherwise. They insist that under the  Caltex case, there was an assumption of liabilities because fraud
existed on the part of PSTC, as the transferee corporation.
The Court disagrees.

The exception of the Nell doctrine,52 which finds its legal basis under Section 40, provides that the
transferee corporation assumes the debts and liabilities of the transferor corporation because it is
merely a continuation of the latter's business. A cursory reading of the exception shows that it does not
require the existence of fraud against the creditors before it takes full force and effect. Indeed, under
the Nell Doctrine, the transferee corporation may inherit the liabilities of the transferor despite the lack
of fraud due to the continuity of the latter's business.

The purpose of the business-enterprise transfer is to protect the creditors of the business by allowing
them a remedy against the new owner of the assets and business enterprise. Otherwise, creditors would
be left "holding the bag," because they may not be able to recover from the transferor who has
"disappeared with the loot," or against the transferee who can claim that he is a purchaser in good faith
and for value.53 Based on the foregoing, as the exception of the Nell doctrine relates to the protection of
the creditors of the transferor corporation, and does not depend on any deceit committed by the
transferee -corporation, then fraud is certainly not an element of the business enterprise doctrine.

The Court also agrees with the CA, in its assailed April 29, 2013 resolution, that there was no finding of
fraud in the Caltex  case; otherwise it should have been clearly and categorically stated. 54 The discussion
in Caltex relative to fraud seems more hypothetical than factual, thus:ChanRoblesvirtualLawlibrary

If PSTC refuses to honor its written commitment to assume the obligations of LUSTEVECO, there will be
a fraud on the creditors of LUSTEVECO. x x x To allow PSTC now to welsh on its commitment is to
sanction a fraud on LUSTEVECO's creditors. 55

Besides, the supposed fraud in Caltex referred to PSTC's refusal to pay LUSTEVECO's creditors despite
the agreement on assumption of the latter's obligations. Again, the Court emphasizes in the said
case, even without the agreement, PSTC was still liable to Caltex, Inc. under Section 40, due to the
transfer of all or substantially all of the corporate assets. At best, transfers of all or substantially all of
the assets to a transferee corporation without the consent of the transferor corporation's creditor gives
rise to a presumption of fraud against the said creditors. 56cralawrednad

Applicability of the
business-enterprise transfer
in the present case

Bearing in mind that fraud is not required to apply the business-enterprise transfer, the next issue to be
resolved is whether the petitioners indeed became a continuation of MADCI's business. Synthesizing
Section 40 and the previous rulings of this Court, it is apparent that the business-enterprise transfer rule
applies when two requisites concur: (a) the transferor corporation sells all or substantially all of its
assets to another entity; and (b) the transferee corporation continues the business of the transferor
corporation. Both requisites are present in this case.

According to its articles of incorporation, the primary purpose of MADCI was "[t]o acquire by purchase,
lease, donation or otherwise, and to own, use, improve, develop, subdivide, sell, mortgage, exchange,
lease, develop and hold for investment or otherwise, real estate of all kinds, whether improved,
managed or otherwise disposed of buildings, houses, apartment, and other structures of whatever kind,
together with their appurtenance."57 During the trial before the RTC, Sangil testified that MADCI was a
development company which acquired properties in Magalang, Pampanga to be developed into a golf
course.58cralawrednad

The CA found that MADCI had an entire asset consisting of 120 hectares of land, and that its sale to the
petitioners rendered it incapable of continuing its intended golf and country club business. 59 The Court
holds that such finding is fully substantiated by the records of the case. The MOA itself stated that
MADCI had 120 hectares of agricultural land in Magalang, Pampanga, for the development of a golf
course.60 MADCI had the right of ownership over these properties consisting of 97 land titles, except for
the 27 titles previous delivered to YIL. 61 The 120-hectare land, however, was then sold to YILPI, 62 and
then transferred to YICRI.63cralawrednad

Respondent Yu testified that he verified the landholdings of MADCI with the Register of Deeds in
Pamapanga and discovered that all its lands were transferred to YICRI. 64 Because the properties of
MADCI were already conveyed, Yu had no other way of collecting his refund. 65cralawrednad

Sangil also testified that MADCI had no more properties left after the sale of the lands to the
petitioners:ChanRoblesvirtualLawlibrary

Atty. Nuguid: And after the sale, it has no more properties?

Sangil: That's right, Sir.

Q: And the business of MADCI was to operate and build golf course?
A: That's right, Sir.

Q: And because of the sale of all these properties, MADCI was not able to build the golf course?
A: Yes, Sir.

Q: And did not anymore operate as a corporation?

A: MADCI is still there but as far the development of the golf course, it was taken over by Mr.
Wang.66cralawrednad

[Emphasis Supplied]

As a witness for the petitioners, Wang testified that Y1L bought the shares of stock of MADCI because it
had some interest in the project involving the development of a golf course. The petitioners then found
that MADCI had landholdings in Pampanga which it would be able to develop into a golf course. 67 Hence,
the petitioners were fully aware of the nature of MADCFs business and its assets, but they continued to
acquire its lands through the designated company, YICRI. 68cralawrednad

Based on these factual findings, the Court is convinced that MADCI indeed had assets consisting of 120
hectares of landholdings in Magalang, Pampanga, to be developed into a golf course, pursuant to its
primary purpose. Because of its alleged violation of the MOA, however, MADCI was made to transfer all
its assets to the petitioners. No evidence existed that MADCI subsequently acquired other lands for its
development projects. Thus, MADCI, as a real estate development corporation, was left without any
property to develop eventually rendering it incapable of continuing the business or accomplishing the
purpose for which it was incorporated.

Section 40 must apply.

Consequently, the transfer of the assets of MADCI to the petitioners should have complied with the
requirements under Section 40. Nonetheless, the present petition is not concerned with the validity of
the transfer; but the respondent's claim of refund of his P650,000.00 payment for golf and country club
shares. Both the CA and the RTC ruled that MADCI and Sangil were liable.

On the question of whether the petitioners must also be held solidarily liable to Yu, the Court answers in
the affirmative.

While the Corporation Code allows the transfer of all or substantially all of the assets of a corporation,
the transfer should not prejudice the creditors of the assignor corporation. 69 Under the business-
enterprise transfer, the petitioners have consequently inherited the liabilities of MADCI because they
acquired all the assets of the latter corporation. The continuity of MADCI's land developments is now in
the hands of the petitioners, with all its assets and liabilities. There is absolutely no certainty that Yu can
still claim its refund from MADCI with the latter losing all its assets. To allow an assignor to transfer all its
business, properties and assets without the consent of its creditors will place the assignor's assets
beyond the reach of its creditors. Thus, the only way for Yu to recover his money would be to assert his
claim against the petitioners as transferees of the assets.

The MOA cannot

prejudice respondent

The MOA, which contains a provision that Sangil undertook to redeem MADCI proprietary shares sold to
third persons or settle in full all their claims for refund of payments, should not prejudice respondent Yu.
The CA correctly ruled that such provision constituted novation under Article 129370 of the Civil Code.
When there is a substitution of debtors, the creditor must consent to the same; otherwise, it shall not in
any way affect the creditor. In this case, it was established that Yu's consent was not secured in the
execution of the MOA. Thus, insofar as the respondent was concerned, the debtor remained to be
MADCI. And given that the assets and business of MADCI have been transferred to the petitioners, then
the latter shall be liable.

Interestingly, the same issue on novation was tackled in the Caltex case and the Court resolved it in this
wise:ChanRoblesvirtualLawlibrary

The Agreement, under Article 1291 of the Civil Code, is also a novation of LUSTEVECO's obligations by
substituting the person of the debtor. Under Article 1293 of the Civil Code, a novation which consists in
substituting a new debtor in place of the original debtor cannot be made without the consent of the
creditor. Here, since the Agreement novated the debt without the knowledge and consent of Caltex,
the Agreement cannot prejudice Caltex. Thus, the assets that LUSTEVECO transferred to PSTC in
consideration, among others, of the novation, or the value of such assets, remain even in the hands of
PSTC subject to execution to satisfy the judgment claim of Caltex. 71cralawrednad

[Emphasis Supplied]

Free and Harmless Clause

The petitioners, however, are not left without recourse as they can invoke the free and harmless clause
under the MOA. In business-enterprise transfer, it is possible that the transferor and the transferee may
enter into a contractual stipulation stating that the transferee shall not be liable for any or all debts
arising from the business which were contracted prior to the time of transfer. Such stipulations are valid,
but only as to the transferor and the transferee. These stipulations, though, are not binding on the
creditors of the business enterprise who can still go after the transferee for the enforcement of the
liabilities.72cralawrednad

An example of a free and harmless clause can be observed in the case of  PCI Leasing v. UCPB.73 In that
case, a claim for damages was filed against the petitioner therein as the registered owner of the vehicle,
even though it was the latter's lessee that committed an infraction. The Court granted the claim against
the petitioner based on the registered-owner rule. Even so, the Court stated therein
that:ChanRoblesvirtualLawlibrary

xxx the Court believes that petitioner and other companies so situated are not entirely left without
recourse. They may resort to third-party complaints against their lessees or whoever are the actual
operators of their vehicles. In the case at bar, there is, in fact, a provision in the lease contract between
petitioner and SUGECO to the effect that the latter shall indemnify and hold the former free and
harmless from any "liabilities, damages, suits, claims or judgments" arising from the latter's use of the
motor vehicle. Whether petitioner would act against SUGECO based on this provision is its own option.

In the present case, the MOA stated that Sangil undertook to redeem MADCI proprietary shares sold to
third persons or settle in full all their claims for refund of payments. While this free and harmless clause
cannot affect respondent as a creditor, the petitioners may resort to this provision to recover damages
in a third-party complaint. Whether the petitioners would act against Sangil under this provision is their
own option.

WHEREFORE, the petition is DENIED. The January 30, 2012 Decision and the April 29, 2013 Resolution of
the Court of Appeals in CA-G.R. CV No. 96036 are hereby AFFIRMED in toto.

SO ORDERED.chanrobles virtuallawlibrary

Sereno, C.J., Carpio, Leonardo-De Castro, Brion, Peralta, Bersamin, Del Castillo, Villarama, Jr., Perez,
Perlas-Bernabe, and Jardeleza, JJ., concur.ChanRoblesVirtualawlibrary
Velasco, Jr., J., please see concurring opinion.
Reyes, J., on leave.
Leonen, J., see separate concurring opinion.

Endnotes:

1
 Penned by Associate Justice Remedios A. Salazar-Fernando, with Associate Justices Mario V. Lopez and
Amy C. Lazaro-Javier, concurring; rollo, pp. 31-57.

2
 Id. at 58-60.

3
 Penned by Judge Ma. Theresa L. Dcla Torre-Yadao; id. at 61-76.

4
 Records, Vol. II, p. 787.

5
 Id. at 770-782.

6
 Id. at 783-785.

7
 Id. at 857.

8
 Records, Vol. I, pp. 1-6.

9
 Id. at 97-100.

10
 Id. at 138-141.

11
 Id. at 142-149.
12
 Id. at 163.

13
 Id. at 239-248.

14
 Id. at 584-591.

15
 Records, Vol. II, p. 817.

16
 Id. at 822.

17
 TSN, July 13,2007, p. 10.

18
 Id. at 7.

19
 Id. at 25.

20
 TSN, November 7, 2008, p. 13.

21
 TSN, September 11, 2009, p. 10.

22
 TSN, November 7, 2008. p. 19.

23
 Id. at 25.

24
 Id. at 29.

25
cralawred Id. at 32.

26
Rollo, pp. 75-76.

27
 530 Phil. 149(2006).

28
Rollo, p. 56.

29
 Id. at 17.

30
 21 Phil. 243(1912).

31
Rollo, pp. 85-92.

32
 Id. at 99-103.
33
 122 Phil. 825 (1965).

34
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.

xxx

35
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarity with the principal debtor, the provisions of Section 4, Chapter 3, Title
I of this Book shall be observed. In such case the contract is called a suretyship.

36
 2010 ed, p. 682.

37
 134 Phil. 796(1968).

38
 See Villanueva, Philippine Corporate Law, 2010 ed., p. 684.

39
Lopez Realty, Inc. v. Fontecha, 317 Phil. 216, 229 (1995).

40
 See Paragraph 2, Section 40, Corporation Code.

41
 See Paragraph 3, Section 40, Corporation Code.

42
 Villanueva, Philippine Corporate Law, 2010 ed., p. 686, 687.

43
 131 Phil. 262(1968).

44
 212 Phil. 723(1984).

45
 Id. at 733.

46
 118 Phil. 103(1963).

47
 Id. at 106.

48
 107 Phil. 833(1960).
49
 Supra note 27 at 158.

50
 Id. at 159-160.

51
 Id. at 688.

52
 3. Where the purchasing corporation is merely a continuation of the selling corporation.

53
 Villanueva, Philippine Corporate Law, 2010 ed., p. 686.

54
Rollo, p. 59.

55
Caltex v, PNOC, supra note 27, at 160.

See also Act No. 3952 or the Bulk Sales Law. Section 3 thereof mandates that "[e]very person who shall
sell, mortgage, transfer, or assign any stock of goods, wares, merchandise, provisions or materials in
bulk, for cash or on credit, before receiving from the vendee, mortgagee, or his, or its agent or
representative any part of the purchase price thereof, or any promissory note, memorandum, or other
evidence therefor, to deliver to such vendee, mortgagee, or agent xxx a written statement, sworn to
substantially xxx of the names and addresses of all creditors to whom said vendor or mortgagor may be
indebted."

Section 4 therein provides any person who failed to comply with the submission of the sworn statement
of creditors under Section 3 is "[d]eemed to have violated this Act, and any such sale, transfer or
mortgage shall be fraudulent and void."

57
 Records, Vol. II, p. 788.

58
 TSN, September 22, 2006, p. 27.

59
Rollo, p. 22.

60
 Records, Vol. I, p. 161.

61
 Id. at 162.

62
 Records, Vol. II, p. 817.

63
 Id. at 822.

64
 TSN, May 28, 2004, p. 13; TSN, July 2, 2004, p. 7.
65
 TSN, September 24, 2004, p. 11,

66
 TSN, July 13, 2007, p. 10.

67
 TSN, September 11, 2009, p. 10.

68
 TSN, November 7, 2008, p. 29.

69
STRADEC v. Radstock 622 Phil. 431, 535 (2009).

70
 Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may
be made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a)

71
Caltex v. PNOC, supra note 27, at 162-163.

72
 Villanueva, Philippine Corporate Law, 2010 ed., p. 692.

73
 579 Phil. 418, 431 (2008).

CONCURRING OPINION

VELASCO, JR., J.:

I concur with the findings and conclusions of the ponencia that the purchase by the petitioners of
substantially all of Mt. Arayat Development Co., Inc.'s (MADCI) assets which resulted in the cessation of
the latter's operations carried with it the assumption of MADCI's liabilities to third persons, including
respondent James Yu.

The Court is once again faced with the question of whether the sale by a corporation of all or
substantially all of its assets to another entity would carry with it the obligation to settle the transferor's
liabilities.

Let us briefly recall the facts. MADCI, a real estate development corporation, ventured in the
development of a golf and country club in its 120-hectare property located in Mt. Arayat, Pampanga.
Sometime in 1997, pending the commencement of the project, MADCI sold to respondent golf and
country club shares totaling P650,000.00, which respondent paid on installment.
Thereafter, or on May 29, 1999, MADCI and its president Rogelio Sangil (Sangil) entered into a
Memorandum of Agreement (MOA) with petitioner Yats International Ltd. (YIL), an investment company
likewise engaged in the development of real estate, projects, leisure, tourism, and related businesses.
Under the MOA, Sangil controlled 60% of MADCI's capital stock and YIL was to subscribe to the
remaining 40%, priced at P31M, conditioned on the securing by MADCI and Sangil of the necessary
government permits. It was also embodied therein that MADCI owned said 120-hectare property which
is intended for the development of a golf course. Furthermore, Sangil undertook to redeem MADCI
proprietary shares sold to third persons or settle in full all their claims for refund of payments. YIL also
gave P500,000.00 to acquire the shares of minority stockholders. Lastly, per the Agreement, the parties
agreed that should MADCI and Sangil fall short in their obligations, YIL can recover the amounts that it
paid to the former, plus interest, and that should they fail to deliver said amounts, YIL would be
authorized to sell said 120-hectare property to satisfy their obligation.

Thus, pursuant to the Agreement, YIL, together with Y-I Leisure Phils., Inc. (YILPI) and Y-I Club & Resorts,
Inc. (YICRI), bought some of MADCI's corporate shares. As it turned out, however, MADCI and Sangil
violated the terms of the MOA. The property was eventually sold to YICRI, its designated company, for
P9.3M.

Then, sometime in 2000, Yu discovered that the project never pushed through. This prompted him to
demand from MADCI the return of his payment for the golf and country club shares. While MADCI
recognized Yu's investment, it did not heed the latter's demand, reasoning that said payment was no
longer possible because MADCI's new set of officers did not give their imprimatur thereto. This
prompted Yu to file with the RTC a complaint for sum of money. Yu later filed an Amended Complaint,
impleading YIL, YILPI, and YICRI on the basis of the allegedly suspicious transfer of MADCI's property to
petitioner which, according to him, was done in fraud of MADCI's creditors.

In their defense, MADCI and petitioners YIL, YILPI, and YICRI insist, among other things, on the
observance of the MOA's stipulations, particularly Sangil's categorical undertaking to settle all claims for
refund of third parties. For his part, Sangil alleges that Yu dealt with MADCI as a juridical person and that
he personally did not benefit from the sale of shares. Too, according to Sangil, MADCI's new set of
officers blocked the approval of the refund.

The RTC, in its August 31, 2010 Decision, ruled in Yu's favor, holding MADCI and Sangil solidarity liable
for the refund. Petitioners YIL, YILPI, and YICRI were, however, exonerated since, according to the trial
court, they were not part of the transactions between Yu, MADCI, and Sangil. Furthermore, the
stipulation in the MOA whereby Sangil obliged himself to settle third party claims for refund was
considered by the trial court as foresight on petitioners' part to protect MADCFs creditors.

On appeal, the CA modified the RTC's decision and ruled that petitioners are jointly and severally liable
for the satisfaction of Yu's claim. Citing  Caltex (Philippines), Inc. v. PNOC Shipping and Transport
Corporation,1 the appellate court ruled that the transfer of the entire assets of MADCI to YICRI carried
with it the assumption by the transferee of the transferor's liabilities and should not prejudice the
transferor's creditors, in this case, respondent Yu. Aggrieved, transferees YIL, YILPI, and YICRI come
before this Court insisting on the reversal of the CA's modification and the reinstatement of their
exoneration from liability by the trial court.

Simply put, the instant petition seeks to put an end to respondent James Yu's quandary as to who
should be liable for his claim, the existence of which was admitted by the transferor.

Petitioners fault the CA for relying heavily on Caltex,2 arguing that the instant case is not on all fours
with said case, for in the latter case, there was an express assumption of all obligations of the judgment
debtor by the transferee. They likewise insist that fraud, which if present would make the transferee
liable for the transferor's obligations to third persons, does not obtain in the instant case. Yu, for his
part, contends that the facts of the case properly call for the application of Caltex  since the transfer
resulted in MADCI's paralysis.

In affirming the modification by the CA, the  ponencia applied Section 40 of the Corporation Code which
reads:ChanRoblesvirtualLawlibrary

Section 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its
property and assets, including its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other instruments for the payment of money or
other property or consideration, as its board of directors or trustees may deem expedient, when
authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or in case of non-stock corporation, by the vote of at least two-thirds (2/3) of the
members, in a stockholder's,or member's meeting duly called for the puipose. x x x.

A sale or other disposition shall be deemed to cover substantially all the corporate property and
assets if thereby the corporation would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated, (emphasis and underscoring added)

The provision adverted to, as correctly enunciated by the ponencia, citing Lopez Realty, Inc. v.
Fontecha,3 contemplates a business-enterprise transfer whereby one corporation (transferor) sells to
another entity (transferee) all or substantially all of its corporate assets, including its goodwill, rendering
it incapable of continuing its business or its purpose.

Object of the sale: Meaning of

"all or substantially all of the
corporation's business"
In SEC-OGC Opinion No. 13-13,4 the Securities and Exchange Commission (SEC), Office of the General
Counsel, clarifying the meaning of a sale of all or substantially all of the corporation's 'assets within the
context of Paragraph 2 of Sec. 40, explained that:ChanRoblesvirtualLawlibrary

In interpreting paragraph 2 of Section 40, this Commission has been guided not so much by the number
or volume of assets transferred but by the effect of such transfer on the corporation's business. Any
disposition which does not involve all or substantially all of the corporate assets x x x, made in the
ordinary course of business does not require the approval of the stockholders or members.(emphasis
added)

The SEC then emphasized that in determining whether the sale is made in the ordinary course of
business, "the test is not the amount involved but the nature of the transaction." 5 Hence, according to
the SEC, "if the sale thereof will not render the corporation incapable of continuing its business or if the
disposition is necessary in the usual or regular course of business, the requirements under Section 40
will not apply."6cralawrednad

Continuation by the transferee

of the transferor's business

Along with the above explanation from the SEC that the nature of the transaction determines the
applicability or non-applicability of Sec. 40, it is likewise material that, in addition to the transferor's
paralysis, said transfer must result in the continuation by the transferee of the former's business. The
sale or transfer by one corporation of all of its assets to another corporation for value, does not, by that
fact alone, render Sec. 40 applicable and make the transferee liable for the debts of the transferor. 7 The
business-enterprise transfer doctrine involves an acquisition by the transferee of the
transferor's business enterprise which effectively results in:ChanRoblesvirtualLawlibrary

(1) the termination of the transferor's entire operations and the prevention of the fulfillment of the
transferor's purpose for incorporation; and

(2) the continuation by the transferee of said venture.

It does not, therefore, contemplate a mere purchase or sale of assets.

To distinguish a mere sale of assets from a business-enterprise transfer, the Court's ruling in China
Banking Corporation v. Dyne-Sem Electronics Corporation, 8 on the basic but crucial characteristic of a
sale of assets, is instructive.

Briefly, China Banking Corporation  involved the assertion by the creditor bank that the transferor's
unpaid loan with them should be paid by the transferee. There, the creditor bank argued that this
should be so since the transferee and the transferor are both engaged in the same line of business and
that the transferee acquired some of the transferor's machineries and equipment before the transferor
ultimately ceased its operations.9cralawrednad

There, the Court ruled in favor of the transferee and held that the "acquisition of some of the
machineries and equipment of [the transferor] was not proof that [the transferee] was formed to
defraud petitioner. As the [CA] found, no merger took place between [the transferor and the
transferee]. What took place was a sale of the assets of the former to the latter, x x x Thus, where one
corporation sells or otherwise transfers all its assets to another corporation for value, the latter is
not, by that fact alone, liable for the debts and liabilities of the transferor." 10 (emphasis and words in
brackets added)

It was therein cited that "[i]n a sale of assets, the transferee is only interested in the raw assets of the
selling corporation perhaps to be used to establish his own business enterprise or as an addition to his
on-going business enterprise.11 In other words, the object of the disposition in a sale of assets is not the
very business itself, but simply the properties of the transferor. The Court further noted that in a sale of
assets, the purchasing corporation is not generally liable for the debts and liabilities of the selling
corporation, the selling corporation contemplates a liquidation of the enterprise, the transfer of title is
by virtue of a contract, and the selling corporation is not dissolved by the mere transfer of all its
property.12 Clearly, this kind of alienation of corporate assets is not the sale contemplated under Section
40.

These facets and legal effects of a sale of assets became pivotal in Bank of Commerce v. Radio
Philippines Network, Inc.,13 which involved the issue of whether the purchase by the transferee of the
transferor's assets carried with it the liability for the latter's judgment debts.

In resolving the case and ultimately holding that the purchaser is not liable for the transferor's judgment
debt subject of the case, the Court clarified that no merger took place between the transferee and the
transferor, since therein transferor was still able to continue its operations despite the sale of its
banking venture to the transferee.14 There, this Court categorized the sale as one simply of the
transferor's assets (its entire banking business) with assumption of liabilities, 15 and not a purchase of all
or substantially all of its corporate assets which would ultimately cripple it as a business entity. Therein
transferee, therefore, according to this Court, could not be considered as the transferor's successor-in-
interest.

Unlike Bank of Commerce, in the present petition, the transfer rendered MADCI incapable of continuing
its business. This is so since the only property that MADCI had in order for it to be able to conduct the
very reason for its incorporation - that is, "[t]o acquire by purchase, lease, donation, or otherwise, and
to own, use, improve, develop, subdivide, sell, mortgage, exchange, lease, develop, and hold for
investment or otherwise, real estate of all kinds, whether improved, managed or otherwise disposed of
buildings, houses, apartments, and other structures of whatever'kind, together with their appurtenance
- is the 120-hectare property later sold to YICRI. Petitioners were unable to show that MADCI was still
able to continue its operations or to purchase other properties for that purpose. As such, the purchase
by YICRI of the said property effectively resulted in the cessation of MADCI's business.

It may be noted that MADCI actually still had other assets comprised of loan advances of its directors.
Petitioners, however, failed to show that said remaining assets were sufficient in order for MADCI to be
able to continue its operations. It is well to emphasize that Section 40 contemplates not only of a sale of
all of the corporation's assets, but also substantially all of said assets. This being the case, it is not
necessary for the transferor not to be left with any corporate property. What is only required under Sec.
40 is that, as opined by the SEC, the nature of the transfer prevents the transferor from continuing its
business or the purpose for which it was incorporated.

Consideration in exchange
for transferor's assets

Aside from the nature of the transaction, the consideration to be paid in exchange for the transferor's
assets is likewise significant in determining the applicability of Sec. 40. In this respect, the Court
distinguishes between a  de facto merger and a business-enterprise transfer.

For one, this Court has previously clarified that Sec. 40 does not contemplate a de facto merger because
the provision recognizes the separate existence of the two corporations that transact the
sale.16cralawrednad

Further, and more importantly, even though a business-enterprise transfer and a de facto merger may
both involve the acquisition by another entity of all or substantially all of the transferor's assets which
would ultimately result in the continuation by the transferee of the transferor's business venture, the
distinction hinges on the consideration in exchange for said assets.

Citing with approval Dean Cesar Villanueva's explanation on the characteristics of a de facto merger, this
Court stated that:ChanRoblesvirtualLawlibrary

"a de facto merger can be pursued by one corporation acquiring all or substantially all of the properties
of another corporation in exchange of shares of stock of the acquiring corporation. The acquiring
corporation would end up with the business enterprise of the target corporation; whereas, the target
corporation would end up with basically its only remaining assets being the shares of stock of the
acquiring corporation."17 (emphasis Ours)

Thus, unlike in a business-enterprise transfer where the transfer is not in exchange for shares of stock in
the transferee and that the transferor does not become a stockholder thereat, in a de facto merger, the
acquisition of all or substantially all of the transferor's assets is precisely in exchange of shares of stock
of the acquiring corporation.

Here, suffice it to state that the consideration for the sale was not shares of stocks in any of the
petitioners. It was admitted by the parties that the amount of P9.3M was paid by petitioner YICRI for
and in consideration of the 120-hectare property, which, as argued, was way below the market value of
said lot. Thus, the . MOA in the instant case could not be said to have resulted into a de facto merger.

Absorption of Liabilities

Anent the issue of absorption or non-absorption by the transferee of the transferor's liabilities,
the ponencia pointed out that under the business-enterprise transfer doctrine, the transferee inherits
the liabilities of the transferor as a consequence of the purchase. This is so since the transaction is not
only limited to the assets of the transferor, as in a sale of assets as previously discussed, but also
extends to its goodwill. Additionally, holding the transferee liable for the debts of the transferor is a
protection afforded by law to the transferor's creditors. 18 It, therefore, does not require a contractual
stipulation to that effect, nor must the transfer itself be in fraud of creditors before liability may attach
to the transferee. The mere operation of Section 40 imposes upon the transferee the obligation to
answer for the transferor's debts, as correctly observed by the ponencia.

The factual situation in the instant case can be distinguished from  Bank of Commerce.19

In the instant dispute, petitioners, as transferees, replaced the transferor, MADCI, in the undertaking
of the development of the golf and country club, as a necessary consequence of the sale. As observed
by the ponencia, no evidence existed to show that MADCI subsequently acquired other lands for its
development projects. It was, thus, rendered incapable of continuing its operations and accomplishing
the purpose for which it was incorporated as it was left without any property to develop. As held, after
the transfer, MADCI was left in a state of suspended animation. But with respect to the golf and country
club development project, per Sangil's testimony, this was being undertaken by the managing director of
petitioner YIL. In other words, petitioners ventured in the project which MADCI could no longer
undertake. To my mind, this, in addition to MADCI's resulting state, calls for the application of Sec. 40.

In contrast, in Bank of Commerce, the transferee therein was not considered by the Court to be the
transferor's successor-in-interest. There, the Court categorized the sale therein as a mere sale of
assets and not a de facto merger. Furthermore, for the sake of discussion, neither can it be considered
as a business-enterprise transfer because the transferee remains existent and is able to continue its
operations, although not its banking venture - the business, the assets for which were sold to the
transferee. In the latter case, the transferee would still be able to, in fact continued to, operate since it
has other ventures remaining, unlike in the present case where MADCI only had one business - the
development of the 120 hectare property into a golf and country club.

More important is the fact that in  Bank of Commerce, an escrow fund of P50M was set aside for the
payment of the transferor's liabilities, in addition to the stipulation as to what liabilities are specifically
shouldered by the transferee. The intent is clear - to limit the liabilities of the transferee to those
agreed upon and those covered by the escrow fund. This, in proper cases, bolsters the fact that the
transaction is a mere sale of assets and this intention is undoubtedly absent in the present case.
Considering these basic but material distinctions show that the requirement under Sec. 40 that the
transfer must render the transferor incapable of continuing its operations is not present in Bank of
Commerce. That being the case, therein transferee was not held liable for the debts of the transferor
which it did not expressly assume under their Agreement. The transferor, therefore, continued to be
liable for its excluded liabilities 20 and the only liabilities that the transferee had to absorb and settle were
those which it expressly assumed under their Purchase and Assumption Agreement.

In Caltex (Phils.), Inc. v. PNOC,21 the Court also recognized this contractual assumption by the transferee
of the transferor's liabilities. There, the transferor -Luzon Stevedoring Corporation - and the transferee -
PNOC Shipping and Transport Corporation — entered into an Agreement of Assumption of
Obligations whereby the former "transferred, conveyed and assigned unto [the latter] all of the
[former's] business, properties and assets pertaining to its tanker and bulk all (sic)
departments, together with all the obligations relating to said business, properties and
assets.22cralawrednad

At this point it is well to mention that even in a mere  sale of assets, as opposed to a business-enterprise
transfer, liability may still attach to the transferee if the alienation was done in fraud of the transferor's
creditors.23 In  Bank of Commerce, this non-attachment of liability for excluded obligations was not only
supported by the fact that the existence and operations of the transferor continued even after the sale
but also, as observed by the Court, the transfer was entered into by the parties at arm's length.24 This
bona fide quality of the execution of said Agreement reinforced the transferee's exclusion from the
entities upon which the judgment debt may be enforced.

This element of fraud, however, is not required in order for the transferee to be liable under Section 40
of the Corporation Code, as previously mentioned. This is so since the basis for the liability thereon is
not that the transfer was done in fraud of creditors but that it included the goodwill of the transferor, as
discussed by the ponencia, and to protect the creditors of the transferor since the alienation effectively
removes the transferor's properties from its creditors' reach.

With the above disquisition, I concur with the conclusion of the ponencia that the sale between MADCI
and petitioners of the 120-hectare property was a business-enterprise transfer contemplated under
Section 40 of the Corporation Code, which results in the solidary assumption by petitioners of MADCI's
admitted obligation.

I vote to DENY the present petition.

Trust fund doctrine is a principle of judicial invention which says that corporate assets are held as a trust
fund for the benefit of shareholders and creditors and that the corporate officers have a fiduciary duty
to deal with them properly. The subscribed capital stock of the corporation is a trust fund for the
payment of debts of the corporation which the creditors have the right to look up to satisfy their credits.
The creditors can use it to reduce the debts, unless it has passed into the hands of a bona fide purchaser
without notice.

The trust fund doctrine usually applies in four cases:

(a) Where the corporation has distributed its capital among the stockholders without providing for the
payment of creditors;

(b) where it had released the subscribers to the capital stock from their subscriptions;

(c) where it has transferred the corporate property in fraud of its creditors;

(d) where the corporation is insolvent.

THIRD DIVISION

G.R. No. 157549               May 30, 2011

DONNINA C. HALLEY, Petitioner,
vs.
PRINTWELL, INC., Respondent.

DECISION

BERSAMIN, J:

Stockholders of a corporation are liable for the debts of the corporation up to the extent of their unpaid
subscriptions. They cannot invoke the veil of corporate identity as a shield from liability, because the veil
may be lifted to avoid defrauding corporate creditors.

Weaffirm with modification the decisionpromulgated on August 14, 2002, 1whereby the Court of
Appeals(CA) upheld thedecision of the Regional Trial Court, Branch 71, in Pasig City (RTC), 2ordering the
defendants (including the petitioner)to pay to Printwell, Inc. (Printwell) the principal sum of ₱291,342.76
plus interest.

Antecedents

The petitioner wasan incorporator and original director of Business Media Philippines, Inc. (BMPI),
which, at its incorporation on November 12, 1987, 3had an authorized capital stock of ₱3,000,000.00
divided into 300,000 shares each with a par value of ₱10.00,of which 75,000 were initially subscribed, to
wit:

Subscriber No. of Total Amount

 shares subscription paid

Donnina C. 35,000 ₱ 350,000.00 ₱87,500.00

Halley

Roberto V. 18,000 ₱ 180,000.00 ₱45,000.00

Cabrera, Jr.

Albert T. Yu 18,000 ₱ 180,000.00 ₱45,000.00

Zenaida V. Yu 2,000 ₱ 20,000.00 ₱5,000.00

Rizalino C. 2,000 ₱ 20,000.00 ₱5,000.00

Vineza

TOTAL 75,000 ₱750,000.00 ₱187,500.00

Printwellengaged in commercial and industrial printing.BMPI commissioned Printwell for the printing of
the magazine Philippines, Inc. (together with wrappers and subscription cards) that BMPI published and
sold. For that purpose, Printwell extended 30-day credit accommodations to BMPI.

In the period from October 11, 1988 until July 12, 1989, BMPI placedwith Printwell several orders on
credit, evidenced byinvoices and delivery receipts totaling₱316,342.76.Considering that BMPI
paidonly₱25,000.00,Printwell suedBMPIon January 26, 1990 for the collection of the unpaid balance of
₱291,342.76 in the RTC.4

On February 8, 1990,Printwell amended thecomplaint in order to implead as defendants all the original
stockholders and incorporators to recover on theirunpaid subscriptions, as follows: 5

Name Unpaid Shares

Donnina C. Halley ₱ 262,500.00

Roberto V. Cabrera, Jr. ₱135,000.00

Albert T. Yu ₱135,000.00

Zenaida V. Yu ₱15,000.00

Rizalino C. Viñeza ₱15,000.00

TOTAL ₱ 562,500.00

The defendants filed a consolidated answer, 6averring that they all had paid their subscriptions in full;
that BMPI had a separate personality from those of its stockholders; thatRizalino C. Viñeza had assigned
his fully-paid up sharesto a certain Gerardo R. Jacinto in 1989; andthat the directors and stockholders of
BMPI had resolved to dissolve BMPI during the annual meetingheld on February 5, 1990.

To prove payment of their subscriptions, the defendantstockholderssubmitted in evidenceBMPI official

receipt (OR) no. 217, OR no. 218, OR no. 220,OR no. 221, OR no. 222, OR no. 223, andOR no. 227,to wit:

Receipt Date Name Amount

No.

217 November 5, Albert T. Yu ₱ 45,000.00

1987

218 May 13, 1988 Albert T. Yu ₱

135,000.00

220 May 13, 1988 Roberto V. ₱

Cabrera, Jr. 135,000.00

221 November 5, Roberto V. ₱ 45,000.00

1987 Cabrera, Jr.

222 November 5, Zenaida V. Yu ₱ 5,000.00

1987

223 May 13, 1988 Zenaida V. Yu ₱ 15,000.00

227 May 13, 1988 Donnina C. ₱

Halley 262,500.00

In addition, the stockholderssubmitted other documentsin evidence, namely:(a) an audit report dated
March 30, 1989 prepared by Ilagan, Cepillo & Associates (submitted to the SEC and the BIR); 7(b)
BMPIbalance sheet8 and income statement9as of December 31, 1988; (c) BMPI income tax return for the
year 1988 (stamped "received" by the BIR); 10(d) journal vouchers;11(e) cash deposit slips;12 and(f)Bank of
the Philippine Islands (BPI) savings account passbookin the name of BMPI. 13

Ruling of the RTC

On November 3, 1993, the RTC rendereda decision in favor of Printwell, rejecting the allegation of
payment in full of the subscriptions in view of an irregularity in the issuance of the ORs and
observingthat the defendants had used BMPI’s corporate personality to evade payment and create
injustice, viz:

The claim of individual defendants that they have fully paid their subscriptions to defend[a]nt
corporation, is not worthy of consideration, because: —
a) in the case of defendants-spouses Albert and Zenaida Yu, it will be noted that the alleged payment
made on May 13, 1988 amounting to ₱135,000.00, is covered by Official Receipt No. 218 (Exh. "2"),
whereas the alleged payment made earlier on November 5, 1987, amounting to ₱5,000.00, is covered
by Official Receipt No. 222 (Exh. "3"). This is cogent proof that said receipts were belatedly issued just to
suit their theory since in the ordinary course of business, a receipt issued earlier must have serial
numbers lower than those issued on a later date. But in the case at bar, the receipt issued on November
5, 1987 has serial numbers (222) higher than those issued on a later date (May 13, 1988).

b) The claim that since there was no call by the Board of Directors of defendant corporation for the
payment of unpaid subscriptions will not be a valid excuse to free individual defendants from liability.
Since the individual defendants are members of the Board of Directors of defendantcorporation, it was
within their exclusive power to prevent the fulfillment of the condition, by simply not making a call for
the payment of the unpaid subscriptions. Their inaction should not work to their benefit and unjust
enrichment at the expense of plaintiff.

Assuming arguendo that the individual defendants have paid their unpaid subscriptions, still, it is very
apparent that individual defendants merely used the corporate fiction as a cloak or cover to create an
injustice; hence, the alleged separate personality of defendant corporation should be disregarded (Tan
Boon Bee & Co., Inc. vs. Judge Jarencio, G.R. No. 41337, 30 June 1988). 14

Applying the trust fund doctrine, the RTC declared the defendant stockholders liable to Printwell pro
rata, thusly:

Defendant Business Media, Inc. is a registered corporation (Exhibits "A", "A-1" to "A-9"), and, as
appearing from the Articles of Incorporation, individual defendants have the following unpaid
subscriptions:

Names Unpaid Subscription

Donnina C. Halley ₱262,500.00

Roberto V. Cabrera, Jr. 135.000.00

Albert T. Yu 135,000.00

Zenaida V. Yu 15,000.00

Rizalino V. Vineza 15,000.00

--------------------------------

Total ₱562,500.00

and it is an established doctrine that subscriptions to the capital stock of a corporation constitute a fund
to which creditors have a right to look for satisfaction of their claims (Philippine National Bank vs. Bitulok
Sawmill, Inc., 23 SCRA 1366) and, in fact, a corporation has no legal capacity to release a subscriber to its
capital stock from the obligation to pay for his shares, and any agreement to this effect is invalid
(Velasco vs. Poizat, 37 Phil. 802).

The liability of the individual stockholders in the instant case shall be pro-rated as follows:

Names Amount

Donnina C. Halley ₱149,955.65

Roberto V. Cabrera, Jr. 77,144.55

Albert T. Yu 77,144.55

Zenaida V. Yu 8,579.00

Rizalino V. Vineza 8,579.00

--------------------------------

Total ₱321,342.7515

The RTC disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants, ordering
defendants to pay to plaintiff the amount of ₱291,342.76, as principal, with interest thereon at 20% per
annum, from date of default, until fully paid, plus ₱30,000.00 as attorney’s fees, plus costs of suit.

Defendants’ counterclaims are ordered dismissed for lack of merit.

SO ORDERED.16

Ruling of the CA

All the defendants, except BMPI, appealed.

Spouses Donnina and Simon Halley, andRizalinoViñeza defined the following errors committed by the
RTC, as follows:

I.

THE TRIAL COURT ERRED IN HOLDING APPELLANTS-STOCKHOLDERS LIABLE FOR THE LIABILITIES OF THE
DEFENDANT CORPORATION.

II.
ASSUMING ARGUENDO THAT APPELLANTS MAY BE LIABLE TO THE EXTENT OF THEIR UNPAID
SUBSCRIPTION OF SHARES OF STOCK, IF ANY, THE TRIAL COURT NONETHELESS ERRED IN NOT FINDING
THAT APPELLANTS-STOCKHOLDERS HAVE, AT THE TIME THE SUIT WAS FILED, NO SUCH UNPAID
SUBSCRIPTIONS.

On their part, Spouses Albert and Zenaida Yu averred:

I.

THE RTC ERRED IN REFUSING TO GIVE CREDENCE AND WEIGHT TO DEFENDANTS-APPELLANTS SPOUSES
ALBERT AND ZENAIDA YU’S EXHIBITS 2 AND 3 DESPITE THE UNREBUTTED TESTIMONY THEREON BY
APPELLANT ALBERT YU AND THE ABSENCE OF PROOF CONTROVERTING THEM.

II.

THE RTC ERRED IN HOLDING DEFENDANTS-APPELLANTS SPOUSES ALBERT AND ZENAIDA YU PERSONALLY
LIABLE FOR THE CONTRACTUAL OBLIGATION OF BUSINESS MEDIA PHILS., INC. DESPITE FULL PAYMENT
BY SAID DEFENDANTS-APPELLANTS OF THEIR RESPECTIVE SUBSCRIPTIONS TO THE CAPITAL STOCK OF
BUSINESS MEDIA PHILS., INC.

Roberto V. Cabrera, Jr. argued:

I.

IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO APPLY THE DOCTRINE OF PIERCING THE VEIL
OF CORPORATE PERSONALITY IN ABSENCE OF ANY SHOWING OF EXTRA-ORDINARY CIRCUMSTANCES
THAT WOULD JUSTIFY RESORT THERETO.

II.

IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO RULE THAT INDIVIDUAL DEFENDANTS ARE
LIABLE TO PAY THE PLAINTIFF-APPELLEE’S CLAIM BASED ON THEIR RESPECTIVE SUBSCRIPTION.
NOTWITHSTANDING OVERWHELMING EVIDENCE SHOWING FULL SETTLEMENT OF SUBSCRIBED CAPITAL
BY THE INDIVIDUAL DEFENDANTS.

On August 14, 2002, the CA affirmed the RTC, holding that the defendants’ resort to the corporate
personality would createan injustice becausePrintwell would thereby be at a loss against whom it would
assert the right to collect, viz:

Settled is the rule that when the veil of corporate fiction is used as a means of perpetrating fraud or an
illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the
achievements or perfection of monopoly or generally the perpetration of knavery or crime, the veil with
which the law covers and isolates the corporation from the members or stockholders who compose it
will be lifted to allow for its consideration merely as an aggregation of individuals (First Philippine
International Bank vs. Court of Appeals, 252 SCRA 259). Moreover, under this doctrine, the corporate
existence may be disregarded where the entity is formed or used for non-legitimate purposes, such as to
evade a just and due obligations or to justify wrong (Claparols vs. CIR, 65 SCRA 613).

In the case at bench, it is undisputed that BMPI made several orders on credit from appellee PRINTWELL
involving the printing of business magazines, wrappers and subscription cards, in the total amount of
P291,342.76 (Record pp. 3-5, Annex "A") which facts were never denied by appellants’ stockholders that
they owe appellee the amount of P291,342.76. The said goods were delivered to and received by BMPI
but it failed to pay its overdue account to appellee as well as the interest thereon, at the rate of 20% per
annum until fully paid. It was also during this time that appellants stockholders were in charge of the
operation of BMPI despite the fact that they were not able to pay their unpaid subscriptions to BMPI yet
greatly benefited from said transactions. In view of the unpaid subscriptions, BMPI failed to pay appellee
of its liability, hence appellee in order to protect its right can collect from the appellants’ stockholders
regarding their unpaid subscriptions. To deny appellee from recovering from appellants would place
appellee in a limbo on where to assert their right to collect from BMPI since the stockholders who are
appellants herein are availing the defense of corporate fiction to evade payment of its obligations. 17

Further, the CA concurred with the RTC on theapplicability of thetrust fund doctrine, under which
corporate debtors might look to the unpaid subscriptions for the satisfaction of unpaid corporate debts,
stating thus:

It is an established doctrine that subscription to the capital stock of a corporation constitute a fund to
which creditors have a right to look up to for satisfaction of their claims, and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the
payment of its debts (PNB vs. Bitulok Sawmill, 23 SCRA 1366).

Premised on the above-doctrine, an inference could be made that the funds, which consists of the
payment of subscriptions of the stockholders, is where the creditors can claim monetary considerations
for the satisfaction of their claims. If these funds which ought to be fully subscribed by the stockholders
were not paid or remain an unpaid subscription of the corporation then the creditors have no other
recourse to collect from the corporation of its liability. Such occurrence was evident in the case at bar
wherein the appellants as stockholders failed to fully pay their unpaid subscriptions, which left the
creditors helpless in collecting their claim due to insufficiency of funds of the corporation. Likewise, the
claim of appellants that they already paid the unpaid subscriptions could not be given weight because
said payment did not reflect in the Articles of Incorporations of BMPI that the unpaid subscriptions were
fully paid by the appellants’ stockholders. For it is a rule that a stockholder may be sued directly by
creditors to the extent of their unpaid subscriptions to the corporation (Keller vs. COB Marketing, 141
SCRA 86).

Moreover, a corporation has no power to release a subscription or its capital stock, without valuable
consideration for such releases, and as against creditors, a reduction of the capital stock can take place
only in the manner and under the conditions prescribed by the statute or the charter or the Articles of
Incorporation. (PNB vs. Bitulok Sawmill, 23 SCRA 1366). 18
The CAdeclared thatthe inconsistency in the issuance of the ORs rendered the claim of full payment of
the subscriptions to the capital stock unworthy of consideration; andheld that the veil of corporate
fiction could be pierced when it was used as a shield to perpetrate a fraud or to confuse legitimate
issues, to wit:

Finally, appellants SPS YU, argued that the fact of full payment for the unpaid subscriptions was
incontrovertibly established by competent testimonial and documentary evidence, namely – Exhibits
"1", "2", "3" & "4", which were never disputed by appellee, clearly shows that they should not be held
liable for payment of the said unpaid subscriptions of BMPI.

The reliance is misplaced.

We are hereby reproducing the contents of the above-mentioned exhibits, to wit:

Exh: "1" – YU – Official Receipt No. 217 dated November 5, 1987 amounting to ₱45,000.00 allegedly
representing the initial payment of subscriptions of stockholder Albert Yu.

Exh: "2" – YU – Official Receipt No. 218 dated May 13, 1988 amounting to ₱135,000.00 allegedly
representing full payment of balance of subscriptions of stockholder Albert Yu. (Record p. 352).

Exh: "3" – YU – Official Receipt No. 222 dated November 5, 1987 amounting to ₱5,000.00 allegedly
representing the initial payment of subscriptions of stockholder Zenaida Yu.

Exh: "4" – YU – Official Receipt No. 223 dated May 13, 1988 amounting to ₱15,000.00 allegedly
representing the full payment of balance of subscriptions of stockholder Zenaida Yu. (Record p. 353).

Based on the above exhibits, we are in accord with the lower court’s findings that the claim of the
individual appellants that they fully paid their subscription to the defendant BMPI is not worthy of
consideration, because, in the case of appellants SPS. YU, there is an inconsistency regarding the
issuance of the official receipt since the alleged payment made on May 13, 1988 amounting to
₱135,000.00 was covered by Official Receipt No. 218 (Record, p. 352), whereas the alleged payment
made earlier on November 5, 1987 amounting to ₱5,000.00 is covered by Official Receipt No. 222
(Record, p. 353). Such issuance is a clear indication that said receipts were belatedly issued just to suit
their claim that they have fully paid the unpaid subscriptions since in the ordinary course of business, a
receipt is issued earlier must have serial numbers lower than those issued on a later date. But in the
case at bar, the receipt issued on November 5, 1987 had a serial number (222) higher than those issued
on May 13, 1988 (218). And even assuming arguendo that the individual appellants have paid their
unpaid subscriptions, still, it is very apparent that the veil of corporate fiction may be pierced when
made as a shield to perpetuate fraud and/or confuse legitimate issues. (Jacinto vs. Court of Appeals, 198
SCRA 211).19

Spouses Halley and Viñeza moved for a reconsideration, but the CA denied their motion for
reconsideration.

Issues
Only Donnina Halley has come to the Court to seek a further review, positing the following for our
consideration and resolution, to wit:

I.

THE COURT OF APPEALS ERRED IN AFFIRMING IN TOTO THE DECISION THAT DID NOTSTATE THE FACTS
AND THE LAW UPON WHICH THE JUDGMENT WAS BASED BUT MERELY COPIED THE CONTENTS OF
RESPONDENT’S MEMORANDUM ADOPTING THE SAME AS THE REASON FOR THE DECISION

II.

THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE REGIONAL TRIAL COURT WHICH
ESSENTIALLY ALLOWED THE PIERCING OF THE VEIL OF CORPORATE FICTION

III.

THE HONORABLE COURT OF APPEALS ERRED IN APPLYING THE TRUST FUND DOCTRINE WHEN THE
GROUNDS THEREFOR HAVE NOT BEEN SATISFIED.

On the first error, the petitioner contends that the RTC lifted verbatim from the memorandum of
Printwell; and submits that the RTCthereby violatedthe requirement imposed in Section 14, Article VIII
of the Constitution20 as well as in Section 1,Rule 36 of the Rules of Court, 21to the effect that a judgment
or final order of a court should state clearly and distinctly the facts and the law on which it is based. The
petitioner claims that the RTC’s violation indicated that the RTC did not analyze the case before
rendering its decision, thus denying her the opportunity to analyze the decision; andthat a suspicion of
partiality arose from the fact that the RTC decision was but a replica of Printwell’s memorandum.She
cites Francisco v. Permskul,22 in which the Court has stated that the reason underlying the constitutional
requirement, that every decision should clearly and distinctly state the facts and the law on which it is
based, is to inform the reader of how the court has reached its decision and thereby give the losing
party an opportunity to study and analyze the decision and enable such party to appropriately assign the
errors committed therein on appeal.

On the second and third errors, the petitioner maintains that the CA and the RTC erroneously pierced
the veil of corporate fiction despite the absence of cogent proof showing that she, as stockholder of
BMPI, had any hand in transacting with Printwell; thatthe CA and the RTC failed to appreciate the
evidence that she had fully paid her subscriptions; and the CA and the RTCwrongly relied on the articles
of incorporation in determining the current list of unpaid subscriptions despite the articles of
incorporationbeing at best reflectiveonly of the pre-incorporation status of BMPI.

As her submissions indicate, the petitioner assails the decisions of the CA on: (a) the propriety of
disregarding the separate personalities of BMPI and its stockholdersby piercing the thin veil that
separated them; and (b) the application of the trust fund doctrine.

Ruling
The petition for review fails.

I
The RTC did not violate
the Constitution and the Rules of Court

The contention of the petitioner, that the RTC merely copied the memorandum of Printwell in writing its
decision, and did not analyze the records on its own, thereby manifesting a bias in favor of Printwell, is
unfounded.

It is noted that the petition for review merely generally alleges that starting from its page 5, the decision
of the RTC "copied verbatim the allegations of herein Respondents in its Memorandum before the said
court," as if "the Memorandum was the draft of the Decision of the Regional Trial Court of Pasig," 23but
fails to specify either the portions allegedly lifted verbatim from the memorandum, or why she regards
the decision as copied. The omission renders thepetition for review insufficient to support her
contention, considering that the mere similarityin language or thought between Printwell’s
memorandum and the trial court’s decisiondid not necessarily justify the conclusion that the RTC simply
lifted verbatim or copied from thememorandum.

It is to be observed in this connection that a trial or appellate judge may occasionally viewa party’s
memorandum or brief as worthy of due consideration either entirely or partly. When he does so, the
judgemay adopt and incorporatein his adjudicationthe memorandum or the parts of it he deems
suitable,and yet not be guilty of the accusation of lifting or copying from the memorandum. 24 This
isbecause ofthe avowed objective of the memorandum to contribute in the proper illumination and
correct determination of the controversy.Nor is there anything untoward in the congruence of ideas and
views about the legal issues between himself and the party drafting the memorandum.The frequency of
similarities in argumentation, phraseology, expression, and citation of authorities between the decisions
of the courts and the memoranda of the parties, which may be great or small, can be fairly attributable
tothe adherence by our courts of law and the legal profession to widely knownor universally accepted
precedents set in earlier judicial actions with identical factual milieus or posing related judicial
dilemmas.

We also do not agree with the petitioner that the RTC’s manner of writing the decisiondeprivedher ofthe
opportunity to analyze its decisionas to be able to assign errors on appeal. The contrary appears,
considering that she was able to impute and assignerrors to the RTCthat she extensively discussed in her
appeal in the CA, indicating her thorough analysis ofthe decision of the RTC.

Our own readingof the trial court’s decision persuasively shows that the RTC did comply with the
requirements regarding the content and the manner of writing a decision prescribed in the Constitution
and the Rules of Court. The decision of the RTC contained clear and distinct findings of facts, and stated
the applicablelaw and jurisprudence, fully explaining why the defendants were being held liable to the
plaintiff. In short, the reader was at once informed of the factual and legal reasons for the ultimate
result.
II
Corporate personality not to be used to foster injustice

Printwell impleaded the petitioner and the other stockholders of BMPI for two reasons, namely: (a) to
reach the unpaid subscriptions because it appeared that such subscriptions were the remaining visible
assets of BMPI; and (b) to avoid multiplicity of suits. 25

The petitionersubmits that she had no participation in the transaction between BMPI and Printwell;that
BMPI acted on its own; and that shehad no hand in persuading BMPI to renege on its obligation to pay.
Hence, she should not be personally liable.

We rule against the petitioner’s submission.

Although a corporation has a personality separate and distinct from those of its stockholders, directors,
or officers,26such separate and distinct personality is merely a fiction created by law for the sake of
convenience and to promote the ends of justice. 27The corporate personality may be disregarded, and
the individuals composing the corporation will be treated as individuals, if the corporate entity is being
used as a cloak or cover for fraud or illegality;as a justification for a wrong; as an alter ego, an adjunct, or
a business conduit for the sole benefit of the stockholders. 28 As a general rule, a corporation is looked
upon as a legal entity, unless and until sufficient reason to the contrary appears. Thus,the courts always
presume good faith, andfor that reason accord prime importance to the separate personality of the
corporation, disregarding the corporate personality only after the wrongdoing is first clearly and
convincingly established.29It thus behooves the courts to be careful in assessing the milieu where the
piercing of the corporate veil shall be done. 30

Although nowhere in Printwell’s amended complaint or in the testimonies Printwell offered can it be
read or inferred from that the petitioner was instrumental in persuading BMPI to renege onits obligation
to pay; or that sheinduced Printwell to extend the credit accommodation by misrepresenting the
solvency of BMPI toPrintwell, her personal liability, together with that of her co-defendants,
remainedbecause the CA found her and the other defendant stockholders to be in charge of the
operations of BMPI at the time the unpaid obligation was transacted and incurred, to wit:

In the case at bench, it is undisputed that BMPI made several orders on credit from appellee PRINTWELL
involving the printing of business magazines, wrappers and subscription cards, in the total amount of
₱291,342.76 (Record pp. 3-5, Annex "A") which facts were never denied by appellants’ stockholders that
they owe(d) appellee the amount of ₱291,342.76. The said goods were delivered to and received by
BMPI but it failed to pay its overdue account to appellee as well as the interest thereon, at the rate of
20% per annum until fully paid. It was also during this time that appellants stockholders were in charge
of the operation of BMPI despite the fact that they were not able to pay their unpaid subscriptions to
BMPI yet greatly benefited from said transactions. In view of the unpaid subscriptions, BMPI failed to
pay appellee of its liability, hence appellee in order to protect its right can collect from the appellants
stockholders regarding their unpaid subscriptions. To deny appellee from recovering from appellants
would place appellee in a limbo on where to assert their right to collect from BMPI since the
stockholders who are appellants herein are availing the defense of corporate fiction to evade payment
of its obligations.31

It follows, therefore, that whether or not the petitioner persuaded BMPI to renege on its obligations to
pay, and whether or not she induced Printwell to transact with BMPI were not gooddefensesin the
suit.1avvphi1

III
Unpaid creditor may satisfy its claim from
unpaid subscriptions;stockholders must
prove full payment oftheir subscriptions

Both the RTC and the CA applied the trust fund doctrineagainst the defendant stockholders, including
the petitioner.

The petitionerargues, however,that the trust fund doctrinewas inapplicablebecause she had already
fully paid her subscriptions to the capital stock of BMPI. She thus insiststhat both lower courts erred in
disregarding the evidence on the complete payment of the subscription, like receipts, income tax
returns, and relevant financial statements.

The petitioner’s argumentis devoid of substance.

The trust fund doctrineenunciates a –

xxx rule that the property of a corporation is a trust fund for the payment of creditors, but such property
can be called a trust fund ‘only by way of analogy or metaphor.’ As between the corporation itself and
its creditors it is a simple debtor, and as between its creditors and stockholders its assets are in equity a
fund for the payment of its debts. 32

The trust fund doctrine, first enunciated in the American case of Wood v. Dummer, 33was adopted in our
jurisdiction in Philippine Trust Co. v. Rivera,34where thisCourt declared that:

It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its
debts. (Velasco vs. Poizat, 37 Phil., 802) xxx 35

We clarify that the trust fund doctrineis not limited to reaching the stockholder’s unpaid subscriptions.
The scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but
also other property and assets generally regarded in equity as a trust fund for the payment of corporate
debts.36All assets and property belonging to the corporation held in trust for the benefit of creditors
thatwere distributed or in the possession of the stockholders, regardless of full paymentof their
subscriptions, may be reached by the creditor in satisfaction of its claim.
Also, under the trust fund doctrine,a corporation has no legal capacity to release an original subscriber
to its capital stock from the obligation of paying for his shares, in whole or in part, 37 without a valuable
consideration,38 or fraudulently, to the prejudice of creditors. 39The creditor is allowed to maintain an
action upon any unpaid subscriptions and thereby steps into the shoes of the corporation for the
satisfaction of its debt.40To make out a prima facie case in a suit against stockholders of an insolvent
corporation to compel them to contribute to the payment of its debts by making good unpaid balances
upon their subscriptions, it is only necessary to establish that thestockholders have not in good faith
paid the par value of the stocks of the corporation. 41

The petitionerposits that the finding of irregularity attending the issuance of the receipts (ORs) issued to
the other stockholders/subscribers should not affect her becauseher receipt did not suffer similar
irregularity.

Notwithstanding that the RTC and the CA did not find any irregularity in the OR issued in her favor,we
still cannot sustain the petitioner’s defense of full payment of her subscription.

In civil cases, theparty who pleads payment has the burden of proving it, that even where the plaintiff
must allege nonpayment, the general rule is that the burden rests on the defendant to prove payment,
rather than on the plaintiff to prove nonpayment. In other words, the debtor bears the burden of
showing with legal certainty that the obligation has been discharged by payment. 42

Apparently, the petitioner failed to discharge her burden.

A receipt is the written acknowledgment of the fact of payment in money or other settlement between
the seller and the buyer of goods, thedebtor or thecreditor, or theperson rendering services, and
theclient or thecustomer.43Althougha receipt is the best evidence of the fact of payment, it isnot
conclusive, but merely presumptive;nor is it exclusive evidence,considering thatparole evidence may
also establishthe fact of payment.44

The petitioner’s ORNo. 227,presentedto prove the payment of the balance of her subscription, indicated
that her supposed payment had beenmade by means of a check. Thus, to discharge theburden to prove
payment of her subscription, she had to adduce evidence satisfactorily proving that her payment by
check wasregardedas payment under the law.

Paymentis defined as the delivery of money. 45Yet, because a check is not money and only substitutes for
money, the delivery of a check does not operate as payment and does not discharge the obligation
under a judgment.46 The delivery of a bill of exchange only produces the fact of payment when the bill
has been encashed.47The following passage fromBank of Philippine Islands v. Royeca 48is enlightening:

Settled is the rule that payment must be made in legal tender. A check is not legal tender and, therefore,
cannot constitute a valid tender of payment. Since a negotiable instrument is only a substitute for
money and not money, the delivery of such an instrument does not, by itself, operate as payment. Mere
delivery of checks does not discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by commercial document is actually realized.
To establish their defense, the respondents therefore had to present proof, not only that they delivered
the checks to the petitioner, but also that the checks were encashed. The respondents failed to do so.
Had the checks been actually encashed, the respondents could have easily produced the cancelled
checks as evidence to prove the same. Instead, they merely averred that they believed in good faith that
the checks were encashed because they were not notified of the dishonor of the checks and three years
had already lapsed since they issued the checks.

Because of this failure of the respondents to present sufficient proof of payment, it was no longer
necessary for the petitioner to prove non-payment, particularly proof that the checks were dishonored.
The burden of evidence is shifted only if the party upon whom it is lodged was able to adduce
preponderant evidence to prove its claim.

Ostensibly, therefore, the petitioner’s mere submission of the receipt issued in exchange of the check
did not satisfactorily establish her allegation of full payment of her subscription. Indeed, she could not
even inform the trial court about the identity of her drawee bank, 49and about whether the check was
cleared and its amount paid to BMPI. 50In fact, she did not present the check itself.

Theincome tax return (ITR) and statement of assets and liabilities of BMPI, albeit presented, had no
bearing on the issue of payment of the subscription because they did not by themselves prove payment.
ITRsestablish ataxpayer’s liability for taxes or a taxpayer’s claim for refund. In the same manner, the
deposit slips and entries in the passbook issued in the name of BMPI were hardly relevant due to their
not reflecting the alleged payments.

It is notable, too, that the petitioner and her co-stockholders did not support their allegation of
complete payment of their respective subscriptions with the stock and transfer book of BMPI. Indeed,
books and records of a corporation (including the stock and transfer book) are admissible in evidence in
favor of or against the corporation and its members to prove the corporate acts, its financial status and
other matters (like the status of the stockholders), and are ordinarily the best evidence of corporate acts
and proceedings.51Specifically, a stock and transfer book is necessary as a measure of precaution,
expediency, and convenience because it provides the only certain and accurate method of establishing
the various corporate acts and transactions and of showing the ownership of stock and like
matters.52That she tendered no explanation why the stock and transfer book was not presented
warrants the inference that the book did not reflect the actual payment of her subscription.

Nor did the petitioner present any certificate of stock issued by BMPI to her. Such a certificate covering
her subscription might have been a reliable evidence of full payment of the subscriptions, considering
that under Section 65 of the Corporation Code a certificate of stock issues only to a subscriber who has
fully paid his subscription. The lack of any explanation for the absence of a stock certificate in her favor
likewise warrants an unfavorable inference on the issue of payment.

Lastly, the petitioner maintains that both lower courts erred in relying on the articles of incorporationas
proof of the liabilities of the stockholders subscribing to BMPI’s stocks, averring that the articles of
incorporationdid not reflect the latest subscription status of BMPI.
Although the articles of incorporation may possibly reflect only the pre-incorporation status of a
corporation, the lower courts’ reliance on that document to determine whether the original
subscribersalready fully paid their subscriptions or not was neither unwarranted nor erroneous. As
earlier explained, the burden of establishing the fact of full payment belonged not to Printwell even if it
was the plaintiff, but to the stockholders like the petitioner who, as the defendants, averredfull payment
of their subscriptions as a defense. Their failure to substantiate their averment of full payment, as well
as their failure to counter the reliance on the recitals found in the articles of incorporation simply meant
their failure or inability to satisfactorily prove their defense of full payment of the subscriptions.

To reiterate, the petitionerwas liablepursuant to the trust fund doctrine for the corporate obligation of
BMPI by virtue of her subscription being still unpaid. Printwell, as BMPI’s creditor,had a right to reachher
unpaid subscription in satisfaction of its claim.

IV
Liability of stockholders for corporate debts isup
to the extentof their unpaid subscription

The RTC declared the stockholders pro rata liable for the debt(based on the proportion to their shares in
the capital stock of BMPI); and held the petitionerpersonally liable onlyin the amount of ₱149,955.65.

We do not agree. The RTC lacked the legal and factual support for its prorating the liability. Hence, we
need to modify the extent of the petitioner’s personal liability to Printwell. The prevailing rule is that a
stockholder is personally liable for the financial obligations of the corporation to the extent of his unpaid
subscription.53In view ofthe petitioner’s unpaid subscription being worth ₱262,500.00, shewas liable up
to that amount.

Interest is also imposable on the unpaid obligation. Absent any stipulation, interest is fixed at 12% per
annum from the date the amended complaint was filed on February 8, 1990 until the obligation (i.e., to
the extent of the petitioner’s personal liability of ₱262,500.00) is fully paid. 54

Lastly, we find no basis togrant attorney’s fees, the award for which must be supported by findings of
fact and of law as provided under Article 2208 of the Civil Code 55incorporated in the body of decision of
the trial court. The absence of the requisite findings from the RTC decision warrants the deletion of the
attorney’s fees.

ACCORDINGLY, we deny the petition for review on certiorari;and affirm with modification the decision
promulgated on August 14, 2002by ordering the petitionerto pay to Printwell, Inc. the sum of
₱262,500.00, plus interest of 12% per annum to be computed from February 8, 1990 until full payment.

The petitioner shall paycost of suit in this appeal.

SO ORDERED.
SECOND DIVISION

[G.R. NO. 150283 : April 16, 2008]

RYUICHI YAMAMOTO, Petitioner, v. NISHINO LEATHER INDUSTRIES, INC. and IKUO

NISHINO, Respondents.

DECISION

CARPIO MORALES, J.:

In 1983, petitioner, Ryuichi Yamamoto (Yamamoto), a Japanese national, organized under Philippine
laws Wako Enterprises Manila, Incorporated (WAKO), a corporation engaged principally in leather
tanning, now known as Nishino Leather Industries, Inc. (NLII), one of herein respondents.

In 1987, Yamamoto and the other respondent, Ikuo Nishino (Nishino), also a Japanese national, forged a
Memorandum of Agreement under which they agreed to enter into a joint venture wherein Nishino
would acquire such number of shares of stock equivalent to 70% of the authorized capital stock of
WAKO.

Eventually, Nishino and his brother1 Yoshinobu Nishino (Yoshinobu) acquired more than 70% of the
authorized capital stock of WAKO, reducing Yamamoto's investment therein to, by his claim, 10%, 2 less
than 10% according to Nishino.3

The corporate name of WAKO was later changed to, as reflected earlier, its current name NLII.

Negotiations subsequently ensued in light of a planned takeover of NLII by Nishino who would buy-out
the shares of stock of Yamamoto. In the course of the negotiations, Yoshinobu and Nishino's counsel
Atty. Emmanuel G. Doce (Atty. Doce) advised Yamamoto by letter dated October 30, 1991, the pertinent
portions of which follow:

Hereunder is a simple memorandum of the subject matters discussed with me by Mr. Yoshinobu Nishino
yesterday, October 29th, based on the letter of Mr. Ikuo Nishino from Japan, and which I am now
transmitting to you.4

xxx

12. Machinery and Equipment:

The following machinery/equipment have been contributed by you to the company:

Splitting - 1 unit
machine
Samming - 1 unit
machine

Forklift - 1 unit

Drums - 4 units

Toggling - 2 units
machine

Regarding the above machines, you may take them out with you (for your own use and sale) if you
want, provided, the value of such machines is deducted from your and Wako's capital contributions,
which will be paid to you.

Kindly let me know of your comments on all the above, soonest.

x x x x5 (Emphasis and underscoring supplied)cralawlibrary

On the basis of such letter, Yamamoto attempted to recover the machineries and equipment which
were, by Yamamoto's admission, part of his investment in the corporation, 6 but he was frustrated by
respondents, drawing Yamamoto to file on January 15, 1992 before the Regional Trial Court (RTC) of
Makati a complaint7 against them for replevin.

Branch 45 of the Makati RTC issued a writ of replevin after Yamamoto filed a bond. 8

In their Answer with Counterclaim,9 respondents claimed that the machineries and equipment subject of
replevin form part of Yamamoto's capital contributions in consideration of his equity in NLII and should
thus be treated as corporate property; and that the above-said letter of Atty. Doce to Yamamoto was
merely a proposal, "conditioned on [Yamamoto's] sell-out to . . . Nishino of his entire equity,"10 which
proposal was yet to be authorized by the stockholders and Board of Directors of NLII.

By way of Counterclaim, respondents, alleging that they suffered damage due to the seizure via the
implementation of the writ of replevin over the machineries and equipment, prayed for the award to
them of moral and exemplary damages, attorney's fees and litigation expenses, and costs of suit.

The trial court, by Decision of June 9, 1995, decided the case in favor of Yamamoto, 11 disposing thus:

WHEREFORE, judgment is hereby rendered: (1) declaring plaintiff as the rightful owner and possessor of
the machineries in question, and making the writ of seizure permanent; (2) ordering defendants to pay
plaintiff attorney's fees and expenses of litigation in the amount of Fifty Thousand Pesos (P50,000.00),
Philippine Currency; (3) dismissing defendants' counterclaims for lack of merit; and (4) ordering
defendants to pay the costs of suit.

SO ORDERED.12 (Underscoring supplied)cralawlibrary
On appeal,13 the Court of Appeals held in favor of herein respondents and accordinglyreversed the RTC
decision and dismissed the complaint.14 In so holding, the appellate court found that the machineries
and equipment claimed by Yamamoto are corporate property of NLII and may not thus be retrieved
without the authority of the NLII Board of Directors; 15 and that petitioner's argument that Nishino and
Yamamoto cannot hide behind the shield of corporate fiction does not lie, 16 nor does petitioner's
invocation of the doctrine of promissory estoppel. 17 At the same time, the Court of Appeals found no
ground to support respondents' Counterclaim. 18

The Court of Appeals having denied19 his Motion for Reconsideration,20 Yamamoto filed the present
petition,21 faulting the Court of Appeals

A.

x x x IN HOLDING THAT THE VEIL OF CORPORATE FICTION SHOULD NOT BE PIERCED IN THE CASE AT BAR.

B.

x x x IN HOLDING THAT THE DOCTRINE OF PROMISSORY ESTOPPEL DOES NOT APPLY TO THE CASE AT
BAR.

C.

x x x IN HOLDING THAT RESPONDENTS ARE NOT LIABLE FOR ATTORNEY'S FEES. 22

The resolution of the petition hinges, in the main, on whether the advice in the letter of Atty. Doce that
Yamamoto may retrieve the machineries and equipment, which admittedly were part of his investment,
bound the corporation. The Court holds in the negative.

Indeed, without a Board Resolution authorizing respondent Nishino to act for and in behalf of the
corporation, he cannot bind the latter. Under the Corporation Law, unless otherwise provided,
corporate powers are exercised by the Board of Directors. 23

Urging this Court to pierce the veil of corporate fiction, Yamamoto argues, viz:

During the negotiations, the issue as to the ownership of the Machiner[ies] never came up. Neither did
the issue on the proper procedure to be taken to execute the complete take-over of the Company come
up since Ikuo, Yoshinobu, and Yamamoto were the owners thereof, the presence of other stockholders
being only for the purpose of complying with the minimum requirements of the law.

What course of action the Company decides to do or not to do depends not on the "other members of
the Board of Directors". It depends on what Ikuo and Yoshinobu decide. The Company is but a mere
instrumentality of Ikuo [and] Yoshinobu.24

xxx
x x x The Company hardly holds board meetings. It has an inactive board, the directors are directors in
name only and are there to do the bidding of the Nish[i]nos, nothing more. Its minutes are paper
minutes. x x x 25

xxx

The fact that the parties started at a 70-30 ratio and Yamamoto's percentage declined to 10% does not
mean the 20% went to others. x x x The 20% went to no one else but Ikuo himself. x x x Yoshinobu is the
younger brother of Ikuo and has no say at all in the business. Only Ikuo makes the decisions. There
were, therefore, no other members of the Board who have not given their approval.26 (Emphasis and
underscoring supplied)cralawlibrary

While the veil of separate corporate personality may be pierced when the corporation is merely an
adjunct, a business conduit, or alter ego of a person, 27 the mere ownership by a single stockholder of
even all or nearly all of the capital stocks of a corporation is not by itself a sufficient ground to disregard
the separate corporate personality.28

The elements determinative of the applicability of the doctrine of piercing the veil of corporate fiction
follow:

"1.  Control, not mere majority or complete stock control, but  complete domination, not only of finances
but of policy and business practice in respect to the transaction attacked so that the corporate entity as
to this transaction had at the time no separate mind, will or existence of its own;

2.  Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of the
plaintiff's legal rights; andcralawlibrary

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

The absence of any one of these elements prevents "piercing the corporate veil ."  In applying the
'instrumentality' or 'alter ego' doctrine, the courts are concerned with reality and not form, with how the
corporation operated and the individual defendant's relationship to that operation." 29 (Italics in the
original; emphasis and underscoring supplied)

In relation to the second element, to disregard the separate juridical personality of a corporation, the
wrongdoing or unjust act in contravention of a plaintiff's legal rights must be clearly and convincingly
established; it cannot be presumed.30 Without a demonstration that any of the evils sought to be
prevented by the doctrine is present, it does not apply. 31

In the case at bar, there is no showing that Nishino used the separate personality of NLII to unjustly act
or do wrong to Yamamoto in contravention of his legal rights.

Yamamoto argues, in another vein, that promissory estoppel lies against respondents, thus:

Under the doctrine of promissory estoppel, x x x estoppel may arise from the making of a promise, even
though without consideration, if it was intended that the promise should be relied upon and in fact it
was relied upon, and if a refusal to enforce it would be virtually to sanction the perpetration of fraud or
would result in other injustice.

x x x Ikuo and Yoshinobu wanted Yamamoto out of the Company. For this purpose negotiations were
had between the parties. Having expressly given Yamamoto, through the Letter and through a
subsequent meeting at the Manila Peninsula where Ikuo himself confirmed that Yamamoto may take
out the Machinery from the Company anytime, respondents should not be allowed to turn around and
do the exact opposite of what they have represented they will do.

In paragraph twelve (12) of the Letter, Yamamoto was expressly advised that he could take out the
Machinery if he wanted to so, provided that the value of said machines would be deducted from his
capital contribution x x x.

xxx

Respondents cannot now argue that they did not intend for Yamamoto to rely upon the Letter. That was
the purpose of the Letter to begin with. Petitioner[s] in fact, relied upon said Letter and such reliance
was further strengthened during their meeting at the Manila Peninsula.

To sanction respondents' attempt to evade their obligation would be to sanction the perpetration of
fraud and injustice against petitioner.32 (Underscoring supplied)cralawlibrary

It bears noting, however, that the aforementioned paragraph 12 of the letter is followed by a request for
Yamamoto to give his "comments on all the above, soonest."33

What was thus proffered to Yamamoto was not a promise, but a mere offer, subject to his acceptance.
Without acceptance, a mere offer produces no obligation. 34

Thus, under Article 1181 of the Civil Code, "[i]n conditional obligations, the acquisition of rights, as well
as the extinguishment or loss of those already acquired, shall depend upon the happening of the event
which constitutes the condition." In the case at bar, there is no showing of compliance with the
condition for allowing Yamamoto to take the machineries and equipment, namely, his agreement to the
deduction of their value from his capital contribution due him in the buy-out of his interests in NLII.
Yamamoto's allegation that he agreed to the condition 35 remained just that, no proof thereof having
been presented.

The machineries and equipment, which comprised Yamamoto's investment in NLII, 36 thus remained part
of the capital property of the corporation. 37

It is settled that the property of a corporation is not the property of its stockholders or
members.38 Under the trust fund doctrine, the capital stock, property, and other assets of a corporation
are regarded as equity in trust for the payment of corporate creditors which are preferred over the
stockholders in the distribution of corporate assets. 39 The distribution of corporate assets and property
cannot be made to depend on the whims and caprices of the stockholders, officers, or directors of the
corporation unless the indispensable conditions and procedures for the protection of corporate
creditors are followed.40

WHEREFORE, the petition is DENIED.

Costs against petitioner.

SO ORDERED.