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BAR REVIEW POINTERS FOR 2019


By:

HERNANDO B. PEREZ

CORPORATION

I. Mendez vs. People, 726 SCRA 203 (PP)

Sole or Single Proprietorship. – A sole proprietorship is a form of business organization


conducted for profit by a single individual, and requires the proprietor or owner hereof to secure
licenses and permits, register the business name, and pay taxes to the national government
without acquiring juridical or legal personality of its own. (Mendez vs. People, 726 SCRA 203)

II. Are corporations entitled to moral damages? A corporation is a mere artificial


being and it cannot be considered at par with a natural person. It has only the powers, attributes
and properties expressly provided by law or incident to its existence. 1 Thus, a corporation being
an artificial person has no feelings, emotions or senses and cannot experience physical suffering
and hence, corporation may not claim damages for besmirched reputation.2

A corporation is not as a general rule, entitled to moral damages. Being a mere artificial
being, it is incapable of experiencing physical suffering or sentiments like wounded feelings,
serious anxiety, mental anguish or moral shock. Although the Court has allowed the grant of
moral damages to corporations in certain situations, it must be remembered that the grant is not
automatic. The claimant must still prove the factual basis of the damage and the causal relation
to the defendant’s acts. In this case, there is a showing of bad faith on the part on the employer in
the commission of acts of unfair labor practice, there is no evidence establish factual damage on
the part of the corporate labor union. Thus, while refusal to bargain collectively is an unfair labor
practice, it does not justify the grant of moral damages to the corporate labor union.3

III. What is the meaning of the doctrine of legal entity of corporations?

It means that a corporation is a juridical person with a personality separate and distinct from that
of each shareholder. It also means that the stockholders of a corporation are different from the
corporation itself. (Section 2; Seaoil Petroleum Corp. vs. Autocorp Group, 569 SCRA 387, Oct.
17, 2008; SEC Opinions, Jan. 18, 1993 and June 18, 1993.)

III-A. Luzon Iron Dev. Group Corp. vs. Bridestone Mining and Dev. Corp., 813 SCRA 583,
Dec. 7, 2016.

May summons to the parent corporation be served on a subsidiary corporation? It is


an error to insist that Luzon Iron could be served with summons as an agent of Consolidated
Iron, it being a wholly-owned subsidiary of the latter. The allegations in the complaint must
clearly show a connection between the principal foreign corporation and its alleged agent
corporation with respect to the transaction in question as a general allegation of agency will not
suffice. In other words, the allegations of the complaint taken as a whole should be able to
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Ibid.
2
Mambulao Lumber Co. vs. Philippine National Bank, 22 SCRA 359; Asked, 1955,1978 and 1998 Bar Exams.
3
Ren Transport Corp. vs. NLRC, 794 SCRA 498, June 27, 2016.
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convey that the subsidiary is but a business conduit of the principal or that by reason of fraud,
their separate and distinct personality should be disregarded. A wholly-owned subsidiary is a
distinct and separate entity from its mother corporation and the fact that the latter exercises
control over the former does not justify disregarding their separate personality. (Luzon Iron Dev.
Group Corp. vs. Bridestone Mining and Dev. Corp., 813 SCRA 583, Dec. 7, 2016.)

FACTS: Consolidated Iron is a foreign corporation which is neither doing business nor
has transacted business in the Philippines. Consolidated Iron was served with summons through
Luzon Iron Dev. Group Corporation, a Philippine corporation which is a wholly-owned
subsidiary of Consolidated Iron. Was Consolidated Iron properly served with summons?
ANSWER: It is undisputed that Luzon Iron was never registered before the SEC as
Consolidated Iron’s resident agent. Thus, the service of summons to Consolidated Iron through
Luzon Iron cannot be deemed a service to a resident agent. Likewise, the respondents err in
insisting that Luzon Iron could be served summons as an agent of Consolidated Iron, it being a
wholly-owned subsidiary of the latter. The allegations in the complaint must clearly show a
connection between the principal foreign corporation and its alleged agent corporation with
respect to the transaction in question as a general allegation of agency will not suffice. In other
words, the allegations of the complaint taken as a whole should be able to convey that the
subsidiary is but a business conduit of the principal or that by reason of fraud, their separate and
distinct personality should be disregarded. A wholly-owned subsidiary is a distinct and separate
entity from its mother corporation and the fact that the latter exercises control over the former
does not justify disregarding their separate personality. (Luzon Iron Dev. Group Corp. vs.
Bridestone Mining and Dev. Corp., 813 SCRA 583, Dec. 7, 2016.)

IV. What are the consequences of the doctrine of legal entity?

The consequences of the doctrine of legal entity regarding the separate identity of the
corporation and its stockholders are as follows:

1. The stockholders are not personally liable for the debts of the
corporation and vice-versa.

2. The stockholders are not liable for corporate acts unless otherwise
provided by law. The stockholders are not the owners of corporate
properties and assets.

3. The stockholders cannot sell or maintain actions in their own name in


connection with corporation affairs, business or property. Neither do
stockholders have the right to recover possession of corporation
property or to recover damages for injury to properties belonging to the
corporation, and vice-versa.

4.  The property belonging to the corporation cannot be attached to satisfy


the debt of a stockholder and vice versa, the latter having only an
indirect interest in the assets and business of the former.

V. Lanuza vs. BF Corporation, 737 SCRA 275, October 1, 2014.

Separate personality: A stockholder, director, or representative does not became a party


to a contract just because a corporation executed a contract through that stockholder, director or
representative. Hence, a corporation’s representatives are generally not bound by the terms of the
contract executed by the corporation. They are not personally liable for obligations and liabilities
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incurred on or in behalf of the corporation. ( Lanuza vs. BF Corporation, 737 SCRA 275,
October 1, 2014.)

Illustration: BF Corporation entered into a contract with Shangri-la for the construction
for the latter of a mall and multi-level parking structure along EDSA. Shangri-la defaulted in the
payment of the construction of the said structure. Under the contract between the parties,
whenever a dispute should arise between them, the matter should be submitted to arbitration. BF
initiated arbitration proceedings between BF and Shangri-la. The directors of Shangri-la were
included in the arbitration proceedings. The Arbitral Tribunal rendered a decision finding that BF
failed to prove the existence of circumstances that render the directors of Shangri-la solidarily
liable. Was the decision correct? RULING: The decision is correct. Shangri-la’s directors are
not are not liable for the contractual obligations of Shangri-la to BF Corporation. A stockholder,
director, or representative does not became a party to a contract just because a corporation
executed a contract through that stockholder, director or representative. Hence, a corporation’s
representatives are generally not bound by the terms of the contract executed by the corporation.
They are not personally liable for obligations and liabilities incurred on or in behalf of the
corporation. ( Lanuza vs. BF Corporation, 737 SCRA 275, October 1, 2014.)

VI. Explain the doctrine of “piercing the veil of corporate fiction”. “Piercing the veil
of corporate fiction” means that while a corporation can not generally be made liable for acts or
liabilities of its stockholders or members, and vice versa because a corporation has a personality
separate and distinct from its stockholders or members, however, the corporate existence is
disregarded under this doctrine where the corporation is formed or used for illegitimate purposes
or justify wrong or evade a just and valid obligation. In such case, the corporation and the
stockholders shall be considered as one and the same. (Vicmar Development Corp. vs.
Elarcosa, 777 SCRA 239, Dec. 9, 2015)

The doctrine of piercing the corporate veil applies only in three (3) basic instances,
namely:

a) when the separate and distinct corporate personality defeats public convenience, as
when the corporate fiction is used as a vehicle for the evasion of an existing obligation;

b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud,
or defend a crime; or

c) is used in alter ego cases, i.e., where a corporation is essentially a farce, since it is a
mere alter ego or business conduit of a person, or where the corporation is so organized
and controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit, or adjunct of another corporation. In the absence of malice, bad faith,
such corporate officer cannot be made personally liable for corporate liabilities.  (Prisma
Construction & Dev. Corp. vs. Menchaves, 614 SCRA 590, March 9, 2010; Timoteo H.
Sarona vs. National Labor Relations Commission, Royale Security Agency, et al.,  G.R.
No. 185280, January 18, 2012. )

VII. Guillermo vs. Uson, G. R. No. 198967, March 7, 2016

Piercing the veil of corporate fiction. When the shield of a separate corporate identity is
used to commit wrongdoing and opprobriously elude responsibility, the courts and legal
authorities in a labor case have not hesitated to step in and shatter the said shield and deny the
usual protections to the offending party, even after final judgment. The key element is the
presence of fraud, malice or bad faith. (Guillermo vs. Uson, G. R. No. 198967, March 7, 2016)
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Illustration: Uson filed a complaint with the NLRC for illegal dismissal against his
employer, Royal Class Ventures. The Labor Arbiter ruled in favor of Uson and ordered Royal
Ventures to reinstate Uson to his former position. On the third Alias Writ of Execution to satisfy
judgment, Uson asked to hold Guillermo and other officers liable to satisfy the decision which
was granted. It appears that Guillermo was the owner of the said corporation which was alleged
to be dissolved. The Labor Arbiter ruled that it pierced the veil of the corporate fiction of Royal
Class Ventures and held Guillermo, in his personal capacity, jointly and severally liable with the
corporation for the enforcement of the claims of Uson. It was found that Guillermo caused the
dissolution of Royal Class Ventures to avoid the judgment of the Labor Arbiter. Was it proper to
pierce the veil of corporation fiction of Royal Class Ventures? Ruling: The veil of corporate
fiction can be pierced and responsible corporate directors and officers or even a separate but
related corporation may be made solidarily liable in a labor case, even after final judgment and
on execution, so long as it is established that such persons have deliberately used the corporate
vehicle to unjustly evade the judgment obligation, or have resorted to fraud, bad faith or malice
in doing so. Bad faith, to connote liability, shall mean a dishonest purpose, moral obliquity and a
conscious doing of wrong. Here, bad faith was evident on the part of Guillermo who appears to
be the person responsible with all the dealings of Royal Class Ventures and the malicious
dismissal of Uson. He was also the person responsible for the dissolution of the corporation to
avoid the judgment of the Labor Arbiter. (Guillermo vs. Uson, G. R. No. 198967, March 7,
2016)

VIII. Commissioner of Customs vs. Oilink International Corporation, 728 SCRA


471, July 2, 2014.

Alter Ego principle : Union Refinery Corporation (URC) was established on Sept. 15,
1966. It imported oil products. On January 11, 1996, Oilink was incorporated for manufacturing,
importing, exporting oil and gas. URC and Oilink has interlocking directorate. On July 8,
Customs Commissioner Tan made a final demand for the payment of P138 million plus from
URC and Oilink and assessed both corporations. Oilink formally protested the assessment on the
ground that it was not a party liable for the assessed deficiency taxes. Was the assessment on
Oilink valid? RULING: The doctrine of piercing the veil of corporate fiction has no
application here because of Commissioner of Customs did not establish that Oilink had been set
up to avoid the payment of taxes or duties, or for purposes that would defeat public convenience,
justify wrong, protest fraud, defend crime, confuse legitimate legal or juridical issues, or
circumvent the law. (Commissioner of Customs vs. Oilink International Corporation, 728 SCRA
471, July 2, 2014.)

IV. Bank of Commerce vs. Marilyn P. Nite, G. R. No. 211535, July 22, 2015;
763 SCRA 620

Doctrine of Separate Juridical Personality: The general rule is that a corporation is


invested by law with a personality separate and distinct from that of the persons composing it, or
from any other legal entity that it may be related to. The obligations of a corporation, acting
through its directors, officers and employees are its own sole liabilities. Therefore, the
corporation’s directors, officers, or employees are generally not personally liable for the
obligations of the corporation. (Bank of Commerce vs. Marilyn P. Nite, G. R. No. 211535, July
22, 2015; 763 SCRA 620).

Piercing the veil of corporate fiction: To hold a director or officer personally liable for
corporate obligations, two requisites must concur: (1) complainant must allege in the complaint
that the director or officer assented to patently unlawful acts of the corporation, or that the officer
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was guilty of gross negligence or bad faith; and (2) complainant must clearly and convincingly
prove such unlawful acts, negligence or bad faith. To hold a director personally liable for debts
of the corporation, and thus pierce the veil of corporate fiction, the bad faith or wrongdoing of
the director must be established clearly and convincingly. (Bank of Commerce vs. Marilyn P.
Nite, G. R. No. 211535, July 22, 2015; 763 SCRA 620)

Illustration: Respondent Nite was the president of Bancapital Development Corporation


(Bancap). Bancap sold treasury bills worth P250 M as a discounted price to Bank of Commerce
(Bancom). Prior to that Bancom and Bancap had been dealing with each other as buyer and
seller of treasury bills since 1991. Bancom fully paid the price but Bancap was able to deliver
only P88 million worth of treasury bills. Respondent Nite was prosecuted criminally for
violating Sec. 19 of BP Blg. 178 and estafa. Respondent was acquitted of both crtiminal charges
but was declared civilly liable to Bancom in the amount of P162, the difference between P250
which was sold and P88 which was delivered. Respondent filed a partial motion for
reconsideration and claimed that the rule on separate personality could not be disregarded absent
proof that Bancap was used as a tool to commit fraud, injustice, or crime against Bancom. The
motion was granted and so Bancom sought to have the ruling reversed. Issue: Could
respondent Nite be personally liable for Bancap’s failure to deliver the full amount of
treasury bills sold? Ruling: The transaction between Bancom and Bancap is an ordinary sale
and the liability of Bancap springs from its contractual obligation to Bancom. Respondent Nite,
in this case, cannot be held personally liable for Bancap’s obligation. Piercing the veil of
corporation fiction and holding a director personally liable for the debts of the corporation
require clear and convincing proof of the director’s bad faith or wrongdoing. The acquittal of
Nite from estafa has already resolved the issue of fraud with finality. Thus, the element of deceit
being non-existent in the case, such finding is held to be conclusive. Therefore, since the
prosecution failed to prove that Nite acted in bad faith, Bancap’s liability cannot be made the
former’s personal liability. (Bank of Commerce vs. Marilyn P. Nite, G. r. No. 211535, July 22,
2015; 763 SCRA 620).

V. Republic vs. Mega Pacific eSolutions, Inc., 794 SCRA 414, June 27, 2016).

Facts: R.A. 8436 authorized COMELEC to use automated election system for 2004
elections. It invited bidders for procurement of equipment. MPEI, as lead company purportedly
formed a joint venture – known as MPC together with several companies and submitted its bid
proposal on behalf of MPC to COMELEC. After evaluation by COMELEC and indorsement of
DOST, COMELEC awarded the automation project to MPC. Despite the award, COMELEC and
MPEI entered into the Automation Contract. MPEI was incorporated only 11 days before the
bidding. MPEI delivered to COMELEC 1,991 units of Automatic Counting Machines (ACM) as
agreed upon and COMELEC made partial payment to MPEI in the aggregate amount of P1.05
billion. The full implementation of the automation contract was rendered impossible because the
Supreme Court declared the contract null and void. Notwithstanding the nullification of the
contract, MPEI filed an action for damages against COMELEC and sought to collect the balance
of P200,165,681.89, representing the balance unpaid pursuant to their contract. By way of
counterclaim, COMELEC sought the return of the payments made pursuant to the voided
automation contract. COMELEC also claimed the incorporators should be impleaded and made
accountable for MPEI’s liabilities. COMELEC applied for attachment of the properties of the
respondents which the trial court denied. On appeal, the Court of Appeals reversed the ruling and
approved the issuance of a writ of preliminary attachment. Can the properties of the
incorporators of MPEI be attached?
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Answer: A preliminary attachment should issue in favor of the petitioner against the
properties of respondents MPEI and its incorporators on the ground of fraud which justifies
piercing the corporate veil. MPEI committed fraud by securing the election automation contract,
and to perpetrate the fraud IT misrepresented that the actual bidder was MPC and not MPEI,
which was only acting on behalf of MPC. MPEI perpetrated a scheme against COMELEC by
using MPC as supposed bidder and eventually succeeding in signing the automation contract as
MPEI alone. Worse, MPEI was ineligible to bid. Veil-piercing in fraud cases requires the legal
fiction of separate juridical personality is used for fraudulent or wrongful ends. There are red
flags of fraudulent scheme in this case, such as (1) overly narrow specifications; (2) unjustified
recommendations and unjustified winning bidder; (3) failure to meet the terms of the contract
and (4) shell or fictitious company. MPEI qualifies as a shell or fictitious company. It was
nonexistent at the time of the invitation to bid; to be precise, it was incorporated only 11 days
before the bidding. It was a newly formed corporation and, as such has no track record to speak
of. It is justified to pierce the corporate veil of MPEI and thus, it must be treated as a mere
association of persons whose assets are unshielded by corporate fiction. (Republic vs. Mega
Pacific eSolutions, Inc., 794 SCRA 414, June 27, 2016).

VI. Eric Godfrey Stanley Livesey vs. Binswanger Philippines, Inc., G.R. No. 177493,
March 19, 2014. J. Carpio ponente

Facts: Livesey was promoted as Managing Director by CBB Philippines Strategic


Property Services, Inc. (CBB). His salary was not paid. Livesey filed a case against CBB.
CBB’s President, Elliot entered into a compromise agreement with Livesey. CBB paid only the
first installment leaving two more installments unpaid. Livesey moved for the issuance of a writ
of execution but was not enforced because CBB ceased its operation and another corporation,
Binswanger Philippines, Inc. was organized. The key officers of CBB including its President,
Elliot transferred to Binswanger and CBB’s business assumed by Binswanger. CBB stands for
Chesterton Blumenauer Binswanger. Livesey asked that the writ of execution be served on
Binswanger, Phil., Inc. which raised the defense of separate personality from that of CBB’s.
May the veil of corporate fiction be pierced so that CBB and Binswanger may be considered as
one and the same?

` Answer: 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 obligation, or to justify a wrong, to
shield or perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable
aims or intentions, in which case, the fiction will be disregarded and the individuals composing it
and the two corporations will be treated as identical. There is a definite link between the CBB’s
closure and Binswanger Inc.’s establishment. CBB ceased to exist only in name and it was re-
connected with the Binswanger Philippines, Inc. It was not just coincidence that Binswanger is
engaged in the same line of business CBB embarked on: (1) it even holds office in the same
building and on the very same floor where CBB once stood; (2) CBB’s key officers, Elliot, no
less, and Catral moved over to Binswanger, performing the tasks they were doing at CVB; (3)
notwithstanding the CBB’s closure, Binswanger’s Web Editor in an e-mail supplied information
that Binswanger is “now known” as either CBB (Chesterton Bluemenauer Binsweanger or as
Chestreton Petty, Ltd.) in the Philippines; (4) Binswanger’s takeover of CBB’s project with
PNB. (Eric Godfrey Stanley Livesey vs. Binswanger Philippines, Inc., G.R. No. 177493, March
19, 2014. J. Carpio ponente)

VII. How may a corporation be established as a mere alter ego of another


corporation or person?
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The question of whether a corporation is a mere alter ego is one of fact. Piercing the veil
of corporation fiction may be allowed only if the following elements concur:

(1) control – not mere stock control, but complete domination- not only of finances, but
of policy and business practice in respect to the transaction attacked, must have been
such that the corporate entity as to this transaction had at the time no separate mind,
will or existence of its own;

(2) such control must have been used by the defendant to commit fraud or a wrong doing
to perpetuate the violation of a statutory or other positive legal duty, or a dishonest
and an unjust act in contravention of the plaintiffs legal right;

(3)   the said control and breach of duty must have proximately caused the injury or
unjust loss complained of.

VIII. WPM International Trading, Inc. vs. Labayen, 735 SCRA 297, Sept. 17,
2015

Alter Ego. Question: Manlapaz was the chairman, present and treasurer of WPM
International Trading (WPM). WPM entered into a contract for the renovation of its Quickbite
Divisoria store with CLN. Out of the P432,876 renovation cost only the amount of P320,000
was paid to CLN. CLN filed a case against WPM and Manlapaz, claiming that WPM was a
mere alter ego of Manlapaz. Should the veil of corporate fiction be pierced? Answer: The
plaintiff failed to prove that Manlapaz acting as president had absolute control over WPM. Even
granting that he exercised a certain degree of control over the finances, policies and practices of
WPM, in view of his position, as president, chairman and treasurer of the corporation, such
control does not necessarily warrant piercing the veil of corporate fiction since there was not a
single proof that WPM was formed to defraud CLN, or that Manlapaz was guilty of bad faith or
fraud. (WPM International Trading, Inc. vs. Labayen, 735 SCRA 297, Sept. 17, 2015).

IX. (PNB, et al vs. Hydro, G. R. 167530, March 13, 2013. Justice Leonardo-de
Castro).

Facts: DBP and PNB foreclosed the mortgages on the properties of Marinduque Mining
and Industrial Corp. (MMIC) as a result of which, DBP and PNB acquired substantially all the
assets of MMIC. DBP and PNB organized NMIC and resumed operations of MMIC. DBP and
PNB owned 67% and 43% of NMIC. All the directors of NMIC were nominated either by DBP
or PNB. Zosa, a director of NMIC was also Governor of DBP and was signing contracts in
behalf of NMIC. NMIC engaged services of Hercon for the former’s mine stripping and road
construction program. NMIC had unpaid balance in favor of Hercon which filed a case against
NMIC, DBP and PNB claiming that NMIC was a mere alter ego of DBP and PNB. Should the
action against DBP and PNB prosper?

Answer: Piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements: control of the corporation by the stockholder or parent
corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage
caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of
these elements prevents piercing the corporate veil. Nothing in the records shows that the
corporate finances, policies and practices of NMIC were dominated by DBP and PNB in such a
way that NMIC could be considered to have no separate mind, will or existence of its own but a
mere conduit for DBP or PNB. Hence, the action against DBP or PNB cannot prosper. (PNB, et
al vs. Hydro, G. R. 167530, March 13, 2013. Justice Leonardo-de Castro).
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X. Is the mere fact that a single person owns or controls one or more corporation
or substantial identity of incorporators of two corporations, sufficient to disregard the
separate personalities of the corporations?

Mere ownership by a single stockholder or by another corporation of all or nearly all of


the capital stocks of a corporation is not by itself a sufficient ground to disregard the separate
corporate personality. The substantial identity of the incorporators of two or more corporations
does not imply that there was fraud so as to justify the piercing of the writ of corporate fiction.
To disregard the said separate juridical personality, the wrong doing must be proven clearly and
convincingly. (Rosales, et al. vs. New A. N. J. H. Enterprises, 767 SCRA 149, August 18, 2015,
J. Velasco, ponente).

XI. (Rosales, et al. vs. New A. N. J. H. Enterprises, 767 SCRA 149, August 18,
2015, J. Velasco, ponente).

Respondent New ANJH Enterprises is a sole proprietorship owned by respondent


Noel Awayan. Allegedly due to dwindling capital, on Feb. 11, 2010 Noel informed Dole as well
as his employees of the impending cessation of operation effective March 5, 2010. On March
15, 2010 Noel assigned the equipment, tools and machines used by New ANJH to NH Oil, a new
corporation whose articles of incorporation was prepared on Jan. 27, 2010 with Noel owning
more than 2/3 of the subscribed capital stock. The remaining shares had been subscribed by
Noel’s sister, Heidi and other members of the Awayan family. Petitioners filed a case for illegal
dismissal on the ground that while New ANJ stopped operations, it resumed operation as NH
Oil using the same machineries with the same owners and management. Issue: Should the
corporate identity of NH Oil be pierced?

Ruling: The application of the doctrine of piercing the veil of corporate fiction is
frowned upon. However, this Court will not hesitate to disregard the corporate fiction if it is used
to such an extent that injustice, fraud, or crime is committed against another in disregard of his
rights. Petitioners were terminated from employment because of the impending permanent
closure of the business. However, the buyer of the assets of their employer was a corporation
owned by the same employer and members of his family. Furthermore, the business reopened in
less than a month under the same management. In this case, circumstances show that the buyer of
the assets of petitioners’ employer is none other than his alter ego. The court is compelled to
remove NH Oil’s corporate mask as it had become and was used as, a shield for fraud, illegality
and inequity against the petitioners. (Rosales, et al. vs. New A. N. J. H. Enterprises, 767 SCRA
149, August 18, 2015, J. Velasco, ponente).

Q. Is the principle of “piercing the veil of corporate fiction” applicable to non-


stock corporations and natural persons?

A. Since the law does not make a distinction between a stock and non-stock
corporation, neither should there be distinction in case the doctrine of piercing the veil of
corporate fiction has to be applied. The mere fact that the corporation is a non-stock corporation
does not by itself preclude the application of 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 non-stock, not-for-profit corporation, a person can be held
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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.4

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.”5

The principles of piercing the corporate veil applies with equal force to One Person
Corporations.6

Q. What is “reverse piercing of corporate fiction”?

A. Reverse-piercing flows in the opposite direction of traditional corporate veil-piercing


and makes the corporation liable for the debts of the shareholders. 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. 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.7

Q. 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.
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. 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. 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." 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. First, the Deed of Absolute Sale dated 31 August 1979
indicated that Santos, being the President, was representing I/AME as the
vendee. However, records show that it was only in 1985 that I/AME was organized as a
juridical entity. Obviously, Santos could not have been President of a non-existent
corporation at that time. Second, it was 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. Finally, 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. 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.
4
International Academy of Management and Economics vs. Litton and Company, Inc., G. R. No. 191525, Dec. 13,
2017, C. J. Sereno, ponente.
5
Ibid.
6
Section 130, last par.
7
International Academy of Management and Economics vs. Litton and Company, Inc., G. R. No. 191525,
Dec. 13, 2017, C. J. Sereno, ponente.
10

Petitioner raised two defenses: (1) I/AME argues that the doctrine of piercing the corporate
veil applies only to stock corporations, and not to non-stock, non-profit 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. (2) 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. Are the defenses of
petitioner I/AME valid?

A. (1) The mere fact that the corporation involved is a non-profit 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 non-stock, 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.

(2)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. 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 Me TC 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 ₱1,200,000.00 (One
Million Two Hundred Thousand Pesos) out of the ₱1,500,000.00 (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 Inte1national Tower").This Court deems I/AME and Santos as alter egos of each.8

(Magallanes Watercraft Association, Inc. vs. Auguis, et al., G. R. No. 211485, May
30, 2016).

What are the powers of a corporation? A corporation is not restricted to the exercise of
powers expressly conferred upon it by its charter, but has the power to do what is reasonably
necessary or proper to promote the interest of welfare of the corporation. (Magallanes Watercraft
Association, Inc. vs. Auguis, et al., G. R. No. 211485, May 30, 2016).

Illustration: Petitioner Magallanes Watercraft Association, Inc. (MWAI) is a local


association of motorized banca owners and operators ferrying cargoes and passengers from
Magallanes, Agusan del Norte to Butuan City. Respondents Auguis and Basnig were members
and officers of MWAI. For refusal of the respondents to pay the association dues and berthing
fees, petitioner suspended the rights and privileges of the respondents. Respondents claimed that
the petitioner did not have the power to suspend the respondents and hence, such suspension was
an ultra vires act of a corporation because neither the articles of incorporation or by-laws of the
petitioner vested it the power or authority to recommend disciplinary action on delinquent
8
International Academy of Management and Economics vs. Litton and Company, Inc., G. R. No. 191525, Dec. 13,
2017, C. J. Sereno, ponente.
11

officers and/or members. Ruling: A corporation is not restricted to the exercise of powers
expressly conferred upon it by its charter, but has the power to do what is reasonably necessary
or proper to promote the interest of welfare of the corporation. (Magallanes Watercraft
Association, Inc. vs. Auguis, et al., G. R. No. 211485, May 30, 2016).

XII. University of Mindanao, Inc. vs. Bangko Sentral Pilipinas, G. R. No.


194964-65, January 11, 2016, J. Leonen, ponente.

May an educational institution secure the loans of third persons? As a rule an


educational institution may not secure the loans of third persons. Securing loans of third persons
is not among the purposes for which an educational institution was established. (University of
Mindanao, Inc. vs. Bangko Sentral Pilipinas, G. R. No. 194964-65, January 11, 2016, J. Leonen,
ponente.)

Effect of act of a corporation which is not provided for in the articles of


incorporation or the law. Corporations are artificial entities granted legal personalities upon
their creation by their incorporators in accordance with law. Unlike natural persons, they have no
inherent powers. Third persons dealing with corporations cannot assume that corporations have
powers. It is up to those persons dealing with corporations to determine their competence as
expressly defined by law and their articles of incorporation. A corporation may exercise its
powers only within those definitions. Corporate acts that are outside those express definitions
under the law or articles of incorporation is created are ultra vires. The only exception is when
acts are necessary and incidental to carry out a corporation’s purposes, and to the exercise of
powers conferred by the Corporation Code and under a corporation’s articles of incorporation.
(University of Mindanao, Inc. vs. Bangko Sentral Pilipinas, G. R. No. 194964-65, January 11,
2016, J. Leonen, ponente.)

Q. What are the shares that may be deprived of the right to vote?

A. No share may be deprived of voting rights except those classified and issued as
“preferred” or “redeemable” shares, unless otherwise provided by this Code; Provided further,
That there shall always be a class or series of shares which have complete voting rights. 9Hence,
common shares cannot be deprived of the right to vote, and in the absence of restriction to vote,
preferred shares may also vote. To be deprived of the right to vote, it must be stated in the
articles of incorporation that preferred shares are non-voting.

The corporation cannot issue only preferred and redeemable non-voting shares without
issuing shares which are entitled to vote,10 such as common shares.

IV. What are the tests to determine the nationality of a corporation?

Nationality of a corporation is determined either by:

1. Incorporation test wherein the nationality of a corporation is determined by the state of


incorporation, regardless of the nationality of the stockholders, or

2. Domicile test wherein the nationality of a corporation is determined by the state where
it is domiciled, or

3. Control test wherein the nationality of the controlling stockholders or members


determines the nationality of the corporation. In the Philippines, the control test is being applied.
Thus, for purposes of determining compliance with the citizenship requirements of law, the
9
Section 6, par. 2.
10
Section 6, par. 2.
12

nationality of the controlling stockholders or members is the determining factor. (Narra Nickel
Mining, et al., vs. Redmont Consolidated Mines, G. R. No. 195580, April 21, 2014).

V. What is the “grandfather rule” in determining the nationality of a


corporation?

The “grandfather rule” of determining the nationality of a corporation traces the


nationality of the stockholders of investor corporations so as to ascertain the nationality of the
corporation where the investment is made.

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, of which belong to Filipino citizens, all of the 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 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. (Narra Nickel Mining, et
al., vs. Redmont Consolidated Mines, G. R. No. 195580, April 21, 2014).

The “grandfather rule” should be applied only when there is a problem on the nationality
of the investor-corporation itself. Thus, if the Filipino ownership in a corporation that invests in
another corporation engaged in the development or exploitation of natural resources is below the
legal requirement of 60%, its Filipino ownership is equivalent only to same extent or percentage.
However, if the investor corporation is at least 60% Filipino-owned, its entire shareholding in the
investee corporation is to be considered Filipino-owned. When the 60-40 Filipino- foreign equity
is not in doubt, the Grandfather Rule will not apply. (Narra Nickel Mining, et al., vs. Redmont
Consolidated Mines, G. R. No. 195580, April 21, 2014).

Jose M. Roy III, et al., vs. Teresita Herbosa, 810 SCRA 1, Nov. 22, 2016.

What are (a) Voting Control Test and (b) Beneficial Ownership Test to determine
whether a corporation is Philippine National or not? Which Test is applicable in the
Philippines? Voting Control Test is determined on the basis of outstanding capital stock whether
fully paid or not, but only such stocks which are generally entitled to vote are considered.

Beneficial Ownership Test means full beneficial ownership of stocks, coupled with
appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned
or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.
Thus, the term “full beneficial ownership” found in the FIA-IRR means that it is not sufficient
that a share is registered in the name of a Filipino citizen or national, i.e., he should also have full
beneficial ownership of the share. If the voting right of a share held in the name of a Filipino
citizen or national is assigned or transferred to an alien, that share is not to be counted in the
determination of the re1quired Filipino equity. In the same vein, if the dividends and other fruits
and accessions of the share do not accrue to a Filipino citizen or national, then that share is also
excluded or not counted. (Jose M. Roy III, et al., vs. Teresita Herbosa, 810 SCRA 1, 53-54, Nov.
22, 2016.)

Both the Voting Control Test and the Beneficial Ownership Test must be applied to
determine whether a corporation is a “Philippine national” and that a “Philippine national” as
defined in the Foreign Investment Act and all its predecessor statutes, is “a Filipino citizen, or a
domestic corporation “at least sixty percent (60%) of the capital stock outstanding and
13

entitled to vote,” is owned by Filipino citizens. A domestic corporation is a “Philippine


national” only if at least 60% of its voting stock is owned by Filipino citizens. (Jose M. Roy III,
et al., vs. Teresita Herbosa, 810 SCRA 1, 47, Nov. 22, 2016.)

Who is a Philippine National under the Foreign Investment Act of 1991 to


determine compliance with the required Filipino ownership of a corporation? Compliance
with the required Filipino ownership of a corporation shall be determined on the basis of
outstanding capital stock whether fully paid or not, but only such stocks which are generally
entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals,
mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of
stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens cannot be considered held by Philippine
citizens or Philippine nationals. (Jose M. Roy III, et al., vs. Teresita Herbosa, 810 SCRA 1, Nov.
22, 2016.)

Is mere legal title over the shares of stock sufficient to satisfy the 60 percent
requirement in the Constitution? Mere legal title is insufficient to meet the 60 percent
Filipino-owned “capital” required in the Constitution. Full beneficial ownership of 60 percent of
the outstanding capital, coupled with 60 percent of the voting rights is required. The legal and
beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the constitutional mandate. Otherwise, the corporation
considered as non-Philippine national.

The legal and beneficial ownership of 60 percent of the outstanding capital stock must
rest in the hands of Filipinos in accordance with the constitutional mandate. Full beneficial
ownership of 60 percent of the outstanding capital stock coupled with 60 percent of the voting
rights is constitutionally required for the State’s grant of authority to operate a public utility.
(Jose M. Roy III, et al., vs. Teresita Herbosa, 810 SCRA 1, Nov. 22, 2016.)

FACTS: On June 28, 2011, the Supreme Court in the case of Gamboa vs. Teves, 652
SCRA 690 rendered judgment, the dispositive portion of which reads:

WHEREFORE, we PARTLY GRANT the petition and rule that the term
“capital” in Section 11, Article XII of the 1987 Constitution refers only to shares
of stock entitled to vote in the election of directors, and thus in the present case
only to common shares, and not to the total outstanding capital stock (common
and nonvoting preferred shares). Respondent Chairperson of the Securities and
Exchange Commission is DIRECTED to apply this definition of the term
“capital” in determining the extent of allowable foreign ownership in respondent
Philippine Long Distance Telephone Company, and if there is a violation of
Section 11, Article XII of the Constitution, to impose the appropriate sanctions
under the law.

On November 6, 2012, SEC posted a Notice inviting the public to a public dialogue on the
guidelines to be followed in determining compliance with Filipino ownership requirement in
public utilities pursuant to the directive in the Gamboa decision. On May 20, 2013, SEC through
respondent Chairperson Teresita J. Herbosa issued SEC-MC No. 8, Section 2 of which provides:
“Section 2. All covered corporations shall, at all times, observe the constitutional or statutory
ownership requirement For purposes of determining compliance therewith, the required
percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding
14

shares if stock entitled to vote in the election of directors; AND (b) the total number of
outstanding shares of stock, whether or not entitled to vote in the election of
directors.”Petitioners assailed the validity of SEC-MC No. 8 for not conforming to the letter and
spirit of the Gamboa decision. Question: Is SEC-MC No. 8 valid and compliant with the
Gamboa decision? Answer: SEC Memorandum Circular No. 8 can be sustained as valid and
fully compliant with the Gamboa decision only (1) the stocks and voting rights and (2) the stocks
without voting rights, which comprise the capital of a corporation operating a public utility, have
equal par values. If the shares of stock have different par values, then applying SEC
Memorandum Circular No. 8 would contravene the Gamboa decision that the “legal and
beneficial ownership of 60 percent of the outstanding capital stock x x x rests in the hands
of Filipino nationals in accordance with the constitutional mandate.” Thus, SEC
Memorandum Circular No. 8 is valid and constitutional provided that the par values of the shares
with voting rights and shares without voting rights are equal. If the par values vary, then the 60
percent Filipino ownership requirement must be applied to each class of shares in order that the
“legal and beneficial ownership of 60 percent of the outstanding capital stock x x x rests in
the hands of Filipino nationals in accordance with the constitutional mandate,” as expressly
stated in the Gamboa decision. Finally, Section 11, Article XII of the Constitution is clear: “No
franchise, certificate, or any other form of authorization for the operation of a public utility shall
be granted except to citizens of the Philippines or to corporations or associations organized under
the laws of the Philippines at least sixty per centum of whose capital is owned by such
citizens. x x x.” . (Jose M. Roy III, et al., vs. Teresita Herbosa, 810 SCRA 1, Nov. 22, 2016.)

Q. What are generic names? May generic names be used as part of the corporate
name?

A. Generic terms are those which constitute “the common descriptive name of an article
or substance”, or comprise the “genus of which the particular product is a species”, or are
“commonly used as the name or description of a kind of goods”, or “characters”, or “refer to the
basic nature of the wares or services provided rather than to the more idiosyncratic
characteristics of a particular product”, and are not legally protectable. It has been held that if a
mark is so commonplace that it cannot be readily distinguished from others, then it is apparent
that it cannot identify a particular business; and he who first adopted it cannot be injured by any
subsequent appropriation ort imitation by others, and the public will not be deceived.11

A generic word has been allowed to be used by several entities in their corporate name
like the word “Lyceum” which refers to a school or institution of learning. It is as generic in
character as the word “university”.12 However, the name “De La Salle” is not merely a generic
name and therefore, the use of such name by anyone other than the first one which registered the
name may properly be regarded as fanciful, arbitrary and whimsical, and entitled to legal
protection.13

Q. When does a corporation by estoppel exist?

A. All persons who assume to act as a corporation knowing it to be without authority to


do so shall be liable as general partners for all debts, liabilities and damages incurred or arising
as a result thereof: Provided, however, That when such ostensible corporation is sued on any

11
De La Salle Montessori International of Malolos, Inc. Vs. De La Salle Brothers, Inc. G.R. No. 205548.
February 7, 2018.
12
In the Matter of Lyceum of the Philippines vs. Lyceum of Aparri, et al., SEC. Case No. 2611, June 25,
1990.
13
De La Salle Montessori International of Malolos, Inc. Vs. De La Salle Brothers, Inc., supra.
15

transaction entered by it as a corporation or on any tort committed by it as such, it shall not be


allowed to use as a defense its lack of corporate personality.14

One who assumes an obligation to an ostensible corporation as such, cannot resist


performance thereof on the ground that there was in fact no corporation.15

Q. The Missionary Sisters of Our Lady of Fatima is a religious and charitable group
established under the patronage of the Roman Catholic Bishop of San Pablo on May 30,
1989. Its primary mission is to take care of the abandoned and neglected elderly persons.
The respondents, on the other hand, are the legal heirs of the late Purificacion Y. Alzona
(Purificacion).
Purificacion, a spinster, is the registered owner of parcels of land which are located in
Calamba City, Laguna. In October 1999, Purificacion called Mother Concepcion and
handed her a handwritten letter dated October 1999 wherein she stated that she is
donating her house and lot at F. Mercado Street and Riceland at Banlic, both at Calamba,
Laguna, to the petitioner through Mother Concepcion. Upon advice of Atty. Arcillas,
Mother Concepcion went to SEC and filed the corresponding registration application on
August 28, 2001 for the petitioner. On August 29, 2001, Purificacion executed a Deed of
Donation Inter Vivas (Deed) in favor of the petitioner. The donation was accepted on even
date by Mother Concepcion for and in behalf of the petitioner.. However, the SEC issued
the corresponding Certificate of Incorporation only on August 31, 2001, two (2) days after
Purificacion executed a Deed of Donation on August 29, 2001.
On October 30, 2001, Purificacion died without any issue, and survived only by her
brother of full blood, Amando. On April 9, 2002, Amando filed a Complaint before the
RTC, seeking to annul the Deed executed between Purificacion and the petitioner, on the
ground that at the time the donation was made, the latter was not registered with the SEC
and therefore has no juridical personality and cannot legally accept the donation. The
petitioner contends that it is a de facto corporation and therefore possessed of the requisite
personality to enter into a contract of donation.
Assuming further that it cannot be considered as a de facto corporation, the petitioner
submits that the acceptance by Mother Concepcion while the religious organization is still
in the process of incorporation is valid as it then takes the form of a pre-incorporation
contract governed by the rules on agency. The petitioner argues that their subsequent
incorporation and acceptance perfected the subject contract of donation. Question: Can the
principle of estoppel bar the question of validity of the donation to a corporation before its
incorporation?

A. In this controversy, Purificacion dealt with the petitioner as if it were a corporation.


This is evident from the fact that Purificacion executed two (2) documents conveying her
properties in favor of the petitioner - first, on October 11, 1999 via handwritten letter, and
second, on August 29, 2001 through a Deed; the latter having been executed the day after the
petitioner filed its application for registration with the SEC.
The doctrine of corporation by estoppel rests on the idea that if the Court were to disregard
the existence of an entity which entered into a transaction with a third party, unjust enrichment
would result as some form of benefit have already accrued on the part of one of the parties. Thus,
in that instance, the Court affords upon the unorganized entity corporate fiction and juridical
personality for the sole purpose of upholding the contract or transaction.

14
Section 20, par. 1; Asked, 1973 and 1986 Bar Exams.; No. III (c ), 2004 Bar Exams.
15
Section 20, par. 2.
16

In this controversy, while the initial conveyance is defective, the genuine intent of
Purificacion to donate the subject properties in favor of the petitioner is indubitable. Also, while
the petitioner is yet to be incorporated, it cannot be said that the initial conveyance was tainted
with fraud or misrepresentation. Contrarily, Purificacion acted with full knowledge of
circumstances of the Petitioner. The Deed sought to be enforced having been validly entered
into by Purificacion, the respondents' predecessor-in-interest, binds the respondents who succeed
the latter as heirs.16

Q. What is the doctrine of apparent authority?

A. The doctrine of apparent authority provides that a corporation will be estopped from
denying the agent’s authority if it knowingly permits one of its officers or any other agent to act
within the scope of an apparent authority, and it holds him out to the public as possessing the
power to do these acts. The existence of apparent authority may be ascertained through: (1) the
general manner in which the corporation holds out an officer or agent as having the power to act
or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof,
whether within or beyond the scope of his ordinary powers. 17

Apparent authority is based on estoppel and can arise in any of the following instances:

First, when the principal knowingly permits the agent to so hold himself out as having
such authority, the principal is estopped to claim that the agent does not have such authority;

Second, when the principal clothes the agent with the indicia of authority so as to lead a
reasonably prudent person to believe that he actually has such authority, the principal is barred
by estoppel from denying such authority.

There can be no apparent authority without acts or conduct on the part of the principal
and such acts or conduct of the principal must have been known and relied upon in good faith
and despite the exercise of reasonable prudence by a third person as claimant, such act must have
produced a change of position to the latter’s detriment. The apparent authority of the agent is to
be determined by the acts of the principal and not by the acts of the agent.18

Apparent authority is derived not merely from practice. Its existence may be ascertained
through:

1.) general manner in which the corporation holds out an officer or agent as having
power to act or, in other words the apparent authority to act in general, with which it
clothes him; or

16
The Missionary Sisters of Our Lady of Fatima vs. Amanda V. Alzona, et al., G. R. No. 224307, August 6,
2018.
17
Georg vs. Holy Trinity College, Inc., 797 SCRA 551, July 20, 2016
18
Woodchild Holdings, Inc. vs. Roxas Electric and Construction Company, Inc., 436 SCRA 235.
17

2.) the acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, within or beyond the scope of his ordinary powers. It requires
presentation of evidence of similar act(s) executed either in its favor or in favor of
other parties. It is not the quantity of similar acts which establish apparent authority,
but the vesting of a corporate officer with the power to bind the corporation.19

Q. Ricarcen was a family corporation with Marilyn Soliman (Marilyn) as its


President. On October 15, 2001, Marilyn acting on Ricarcen's behalf as its president, took
out a P4,000,000.00 loan from Calubad. This loan was secured by a real estate mortgage
over Ricarcen's Quezon City property. On December 6, 2001 Ricarcen, through Marilyn,
and Calubad amended and increased the loan to P5,000,000.00 in the Amendment of Deed
of Mortgage. On May 8, 2002, Ricarcen, again acting through Marilyn, took out an
additional loan of 2,000,000.00 from Calubad.

To prove her authority to execute the three (3) mortgage contracts in Ricarcen's
behalf, Marilyn presented Calubad with a Board Resolution dated October 15, 2001.This
Resolution empowered her to borrow money and use the Quezon City property covered by
TCT No. RT-84937 (166018) as collateral for the loans. Marilyn also presented two (2)
Secretary's Certificates dated December 6, 2001and May 8, 2002, executed by Marilyn's
sister and Ricarcen's corporate secretary, Elizabeth.

Elizabeth later on denied signing any of these four (4) documents cited by petitioner,
saying that she regularly signed blank documents and left them with her sister Marilyn.
She opined that the Board Resolution and Secretary's Certificates, which purportedly gave
Marilyn the authority to transact with petitioner in Ricarcen's behalf, might have been
some of the blank documents she had earlier signed. However, petitioner asserts that the
fact that Elizabeth entrusted signed, blank documents to Marilyn proved that Ricarcen
authorized her to secure loans and use its properties as collateral for the loans.

Petitioner also points out that Marilyn had possession of the owner's duplicate copy of
TCT No. RT-84937 (166018), and thus, he had no reason but to believe that she was
authorized by Ricarcen to deal and transact in its behalf. Additionally, the loan proceeds
were issued through checks payable to Ricarcen, which were deposited in its bank account
and were cleared. As further evidence of Ricarcen's receipt of the loan proceeds, petitioner
presented several checks drawn and issued by Elizabeth or Erlinda, jointly with Marilyn,
representing loan payments.

Petitioner also presented several withdrawal slips signed by either Elizabeth or


Erlinda, jointly with Marilyn, authorizing a certain LilydaleOmbina to repeatedly
withdraw from Ricarcen's bank account. Petitioner likewise presented several checks
drawn from Ricarcen's bank account, issued by Elizabeth or Erlinda, jointly with Marilyn,
payable to third persons or to cash. Petitioner maintains that the foregoing evidence is
indubitable proof that the loan proceeds have been used by Ricarcen. Petitioner then
claims that Ricarcen, in a check drawn and issued by Erlinda and Marilyn, paid the 3%
monthly interest for the first loan of P4,000,000.00. Did Marilyn have authority to bind
Ricarcen?

A. As a corporation, Ricarcen exercises its powers and conducts its business through its
board of directors. However, the board of directors may validly delegate its functions and powers
to its officers or agents. The authority to bind the corporation is derived from law, its corporate
by-laws, or directly from the board of directors, "either expressly or impliedly by habit, custom
or acquiescence in the general course of business. "Actual authority can either be express or
implied. Express actual authority refers to the power delegated to the agent by the corporation,
while an agent's implied authority can be measured by his or her prior acts which have been
ratified by the corporation or whose benefits have been accepted by the corporation. On the
19
Ibid., citing People’s Aircargo and Warehousing Co.., Inc. vs. Court of Appeals, 297 SCRA 170.
18

other hand, apparent authority is based on the principle of estoppel. The Civil Code provides:
Article 1431. Through estoppel an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person relying thereon.

As the former president of Ricarcen, it was within Marilyn's scope of authority to act for
and enter into contracts in Ricarcen's behalf. Her broad authority from Ricarcen can be seen with
how the corporate secretary entrusted her with blank yet signed sheets of paper to be used at her
discretion. She also had possession of the owner's duplicate copy of the land title covering the
property mortgaged to Calubad, further proving her authority from Ricarcen.

The records show that on October 15, 2001, Calubad drew and issued two (2) checks
payable to Ricarcen representing the loan proceeds for the first mortgage. Both checks were
deposited in Ricarcen 's bank account with Banco de Oro, Banawe Branch, and were honored by
the drawee bank.

From December 15, 2001 to April 15, 2002, Ricarcen paid and issued several checks
payable to Calubad, which he claimed were the monthly interest payments of the mortgage loans.
Checks were drawn by Erlinda and Marilyn for Ricarcen.

Ricarcen claimed that it never granted Marilyn authority to transact with Calubad or use
the Quezon City property as collateral for the loans, but its actuations say otherwise. It appears as
if Ricarcen and its officers gravely erred in putting too much trust in Marilyn. However,
Calubad, as an innocent third party dealing in good faith with Marilyn, should not be made to
suffer because of Ricarcen's negligence in conducting its own business affairs. This finds support
in Yao Ka Sin Trading, G.R. No. L-53820 June 15, 1992:"if a private corporation intentionally or
negligently clothes its officers or agents with apparent power to perform acts for it, the
corporation will be estopped to deny that such apparent authority is real, as to innocent third
persons dealing in good faith with such officers or agents." Ricarcen cannot deny the authority of
Marilyn.20

VI. When are officers of a corporation solidarily liable with the corporation?

The solidary liability may be incurred, but only under the following exceptional
circumstances: 1) When directors and trustees or, in appropriate cases, the officers of a
corporation: (a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith
or with gross negligence in directing the corporate affairs; (c) are guilty of conflict of interest to
the prejudice of the corporation, its stockholders or members, and other persons; 2) When a
director or officer has consented to the issuance of watered stocks or who, having knowledge
thereof, did not forthwith file with the corporate secretary his written objection thereto; 3) When
a director, trustee or officers has contractually agreed or stipulated to hold himself personally and
solidarily liable with the corporation; 4) When a director, trustee or officer is made, by specific
provision of law, personally liable for his personal action. (Pioneer Insurance & Surety Corp. vs.
Morning Star Travel & Tours, Inc., 762 SCRA 283, July 8, 2015. )

VII. Pioneer Insurance & Surety Corporation vs. Morning Star Travel &
Tours, Inc., et al., 762 SCRA 283, July 8, 2015. (PP)

Piercing the veil of corporate fiction. Piercing the corporate veil in order to hold
corporate officers personally liable for the corporation’s debts requires that the “bad faith or
wrongdoing of the director must be established clearly and convincingly [as] bad faith is never

20
Calubad vs. Ricarcen Dev. Corp., G. R. No. 202364, Aug. 30, 2017.
19

presumed”. (Pioneer Insurance & Surety Corporation vs. Morning Star Travel & Tours, Inc., et
al., 762 SCRA 283, July 8, 2015.)

VIII. (Rivera vs. Genesis Transport Services, Inc., 764 SCRA, August 3, 2015;
Pioneer Insurance & Surety Corporation vs. Morning Star Travel & Tours, Inc., et al., 762
SCRA 283, July 8, 2015.)

Piercing the corporate veil in order to hold corporate officers personally liable for the
corporation’s debts requires that the “bad faith or wrongdoing of the director must be established
clearly and convincingly [as] bad faith is never presumed”. (Rivera vs. Genesis Transport
Services, Inc., 764 SCRA, August 3, 2015; Pioneer Insurance & Surety Corporation vs. Morning
Star Travel & Tours, Inc., et al., 762 SCRA 283, July 8, 2015.)

VIII A. Mactan Rock Industries, Inc. and Antonio Tompar vs. Benfrei S.
Germo, G. R. No. 228799, January 10, 2018, J. Perlas-Bernabe, ponente.

Q. Mactan Rock Industries, Inc. (MRII), a corporation engaged in supplying water


through its President/Chief Executive Officer, Tompar entered into a Technical
Consultancy Agreement (TCA) with plaintiff Germo whereby the parties agreed that: (a)
Germo shall stand as MRII’s marketing consultant who shall take charge of
negotiating, perfecting sales, orders, contracts, or services of MRII; (b) Germo shall be
paid on purely commission basis, including monthly allowance of P5,000. During the
effectivity of the TCA, Germo successfully negotiated and closed with International
Container Terminal Services, Inc. (ICTSI) a supply contract of 700 cubic meters of
purified water per day. Accordingly, MRII supplied water to ICTSI which religiously paid
the corresponding monthly fees. Despite the foregoing, MRII never paid Germo his rightful
commissions. Germo filed an action for sum of money against MRII and its President and
CEO, Tompar. The RTC found MRII and Tompar to be solidarily liable to pay plaintiff
Germo. The said decision was affirmed by the Court of Appeals. Can the President and
Chief Executive Officer of MRII be made liable?

A. The courts a quo erred in concluding that Tompar, in his capacity as then-
President/CEO of MRII, should be solidarily liable with MRII for the latter’s obligations to
Germo. It is a basic rule that a corporation is a juridical entity which is vested with legal
personality separate and distinct from those acting for and in behalf of, and from the people
comprising it. As a general rule, directors, officers, of employees of a corporation cannot be held
personally liable for the obligations incurred by the corporation, unless it can be shown that such
director/officer/employee is guilty of negligence or bad faith, and the same was clearly and
convincingly proven. Thus before a director or officer of a corporation can be held personally
liable for corporate obligations, the following requisites must concur: (1) the complainant must
allege in the complaint that the director or officer assented to patently unlawful acts of the
corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the
complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith. In
this case, Tompar’s assent to patently unlawful acts of the MRII or that his acts were tainted by
gross negligence or bad faith was not alleged in Germo’s complaint, much less proven in the
course of trial. Therefore, the deletion of Tompar’s solidary liability with MRII is in order.21

21
Mactan Rock Industries, Inc. and Antonio Tompar vs. Benfrei S. Germo, G. R. No. 228799, January 10,
2018, J. Perlas-Bernabe, ponente.
20

XIX. Republic vs. Mega Pacific eSolutions, Inc., 794 SCRA 414, June 27, 2016

R.A. 8436 authorized COMELEC to use automated election system for 2004
elections. It invited bidders for procurement of equipment. MPEI, as lead company purportedly
formed a joint venture – known as MPC together with several companies and submitted its bid
proposal on behalf of MPC to COMELEC. After evaluation by COMELEC and indorsement of
DOST, COMELEC awarded the automation project to MPC. Despite the award, COMELEC and
MPEI entered into the Automation Contract. MPEI was incorporated only 11 days before the
bidding. MPEI delivered to COMELEC 1,991 units of Automatic Counting Machines (ACM) as
agreed upon and COMELEC made partial payment to MPEI in the aggregate amount of P1.05
billion. The full implementation of the automation contract was rendered impossible because the
Supreme Court declared the contract null and void. Notwithstanding the nullification of the
contract, MPEI filed an action for damages against COMELEC and sought to collect the balance
of P200,165,681.89, representing the balance unpaid pursuant to their contract. By way of
counterclaim, COMELEC sought the return of the payments made pursuant to the voided
automation contract. COMELEC also claimed the incorporators should be impleaded and made
accountable for MPEI’s liabilities. COMELEC applied for attachment of the properties of the
respondents which the trial court denied. On appeal, the Court of Appeals reversed the ruling and
approved the issuance of a writ of preliminary attachment. Can the properties of the
incorporators of MPEI be attached?

A. A preliminary attachment should issue in favor of the petitioner against the


properties of respondents MPEI and its incorporators on the ground of fraud which
justifies piercing the corporate veil. MPEI committed fraud by securing the election
automation contract, and to perpetrate the fraud IT misrepresented that the actual bidder
was MPC and not MPEI, which was only acting on behalf of MPC. MPEI perpetrated a
scheme against COMELEC by using MPC as supposed bidder and eventually succeeding
in signing the automation contract as MPEI alone. Worse, MPEI was ineligible to bid. Veil-
piercing in fraud cases requires the legal fiction of separate juridical personality is used for
fraudulent or wrongful ends. There are red flags of fraudulent scheme in this case, such as
(1) overly narrow specifications; (2) unjustified recommendations and unjustified winning
bidder; (3) failure to meet the terms of the contract and (4) shell or fictitious company.
MPEI qualifies as a shell or fictitious company. It was nonexistent at the time of the
invitation to bid; to be precise, it was incorporated only 11 days before the bidding. It was a
newly formed corporation and, as such has no track record to speak of. It is justified to
pierce the corporate veil of MPEI and thus, it must be treated as a mere association of
persons whose assets are unshielded by corporate fiction.22

People’s Security, Inc. vs. Flores, 812 SCRA 260, Dec. 5, 2016.

When may an officer of a corporation be made liable for illegal dismissal of an


employee? The doctrine of piercing the corporate veil applies only when the corporate fiction is
used to defeat public convenience, justify wrong, protect fraud, or defend crime. In the absence
of malice, bad faith, nor a specific provision of law making a corporate officer liable, such
corporate officer cannot be made personally liable for corporate liabilities. In this case,
respondents failed to adduce any evidence to prove that Racho, as President and General
Manager of PSI, is hiding behind the veil of corporate fiction to defeat public convenience,
justify wrong, protect fraud, or defend crime. Thus, it is only the corporate employer which is
responsible for the respondents’ illegal dismissal. (People’s Security, Inc. vs. Flores, 812 SCRA
260, Dec. 5, 2016.)
22
Republic vs. Mega Pacific eSolutions, Inc., 794 SCRA 414, June 27, 2016.
21

Reyno C. Dimson vs. Gerry T. Chua, 811 SCRA 630, Dec. 5, 2016.

May a corporate officer be made liable for the corporation’s labor obligations? A
corporation is a juridical entity with a personality separate the distinct from those acting for an in
its behalf and, in general from the people comprising it. Thus, as a general rule, an officer may
not be held liable for the corporation’s labor obligations unless he acted with evident malice
and/or bad faith in dismissing an employee. Section 31 of the Corporation Code is the
governing law on personal liability of officers for the debts of the corporation. To hold a director
or officer personally liable for corporate obligations, two requisites must concur: (1) it must be
alleged in the complaint that the director or officer assented to patently unlawful acts of the
corporation or that the officer was guilty of gross negligence or bad faith; and (2) there must be
proof that the officer acted in bad faith. (Reyno C. Dimson vs. Gerry T. Chua, 811 SCRA 630,
Dec. 5, 2016.)

IX. (Y-I Leisure Philippines, Inc., vs. Yu, 770 SCRA 56, September 8, 2015, J.
Velasco, concurring).

Q. When is there a sale of all or substantially all of the assets of the corporation?

A. 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. (Concurring opinion of J.
Velasco in Y-I Leisure Philippines, Inc., vs. Yu, 770 SCRA 56, September 8, 2015, citing Sec.
40, par. 2 of the Corporation Code).

Nell Doctrine. The Nell Doctrine states the 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 except:
(1) Where the purchaser expressly or impliedly agrees to assume such debts; (2) Where the
transaction amounts to a consolidation or merger of 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. 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 except in the instances mentioned
above. (Y-I Leisure Philippines, Inc., vs. Yu, 770 SCRA 56, September 8, 2015, J. Velasco,
concurring).

Illustration: MADCI, a real estate development corporation offered for sale shares of
a golf and country club. Yu bought several shares. Upon full payment of the shares to MADCI,
Yu visited the supposed site of the golf and country club and discovered that it was nonexistent.
Despite demand for refund, Yu did not receive any refund. All the assets of MADCI consisting
of 120 hectares of land were sold to YIL, YILPI AND YICRI (YATS Group). Issue: Should
YATS Group be held jointly and severally liable to Yu despite the absence of fraud in the sale of
assets and bad faith on the YATS Group. RULING: 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
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 aforesaid principle is called the Nell Doctrine. YATS Group is liable jointly
and severally to Yu because it is merely a continuation of the business of MADCI, despite the
lack of fraud. (Y-I Leisure Philippines, Inc., vs. Yu, 770 SCRA 56, September 8, 2015, J.
Velasco, concurring). NOTE: In the concurring opinion of Justice Velasco, he stated – The
22

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, and to protect the creditors of the transferor since the alienation effectively
removes the transferor’s properties from its creditors’ reach. 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. (Ibid.)

Q. When the by-laws of a corporation provides that notice of the regular or special
meeting of the stockholders must be mailed to the registered address of each stockholder, is
the mere mailing of the notice sufficient even if it was not received on time?

A. Since the by-laws only mandates that the stockholders be notified of the meeting by
depositing in the mail the notice of the stockholders’ special meeting, with postage or costs of
transmission, deposit in the mail or delivery for transmission by any other usual means of
communication with postage or cost of transmission is sufficient provided it is properly
addressed. The meeting is valid even if notice of the meeting was not received by the stockholder
on time.23

Q. The by-laws of the GCI provides that – “Notice of meeting written or printed for
every regular or special meeting of the stockholders shall be prepared and mailed to the
registered post office address of each stockholder not less than five (5) days prior to the
date set for each meeting, and if for a special meeting, such notice shall state the object or
objects of the same.”

For the special meeting on September 7, 2004, notice of the meeting was prepared
and mailed to the registered stockholders. Notice of the meeting was sent by registered mail
to the petitioner on September 2, 2004 but the registry return card shows that the
petitioner received it only on September 22, 2004 or fifteen days after the meeting.
Petitioner questioned the validity of the meeting for lack of notice. He insists that actual
receipt of the notice was mandatory. Was the meeting valid?

A. Section 50 of the Corporation Code and the by-laws of the corporation only require
the sending/mailing of the notice of a stockholders’ meeting to the stockholders of the
corporation. Sending/mailing is different from filing or service under the Rules of Court. “Send”
should be understood in its plain meaning. “Send” means deposit in the mail or deliver for
transmission by any other usual means of communication with postage or cost of transmission
provided for and properly addressed. The receipt of any writing or notice within the time at
which it would have arrived if properly sent has the effect of proper sending. The by-laws only
mandates that the stockholders be notified of the meeting by depositing in the mail the notice of
the stockholders’ special meeting, with postage or costs of transmission provided and the name
and address of the stockholder properly specified. The meeting is valid.24

Determination of quorum at stockholders’ meeting. The right to vote is inherent in


and incidental to the ownership of corporate stocks. It is settled that unissued stocks may not be
voted or considered in determining whether a quorum is present in a stockholders' meeting. Only
stocks actually issued and outstanding may be voted. Thus, for stock corporations, the quorum is
based on the number of outstanding voting stocks. The distinction of undisputed or disputed
shares of stocks is not provided for in the law or the jurisprudence. Ubi lex non distinguit neenos
23
Guy vs. Guy, 790 SCRA 288, April 19, 2016
24
Guy vs. Guy, 790 SCRA 288, April 19, 2016
23

distinguere debemus -when the law does not distinguish we should not distinguish. ( Carolina Que
Villongco, et al., vs. Cecilia Que Yabut, et al., G. R. No. 225022, February 5, 2018.)

Facts: Phil-Ville is a corporation with 200,000 outstanding capital stock. The transfer of
3,142 shares of the late Geronima G. Que to some stockholders was questioned by the others.
During the pendency of the issue on the validity of the transfer of shares of Geronima, a
stockholders’ meeting was held at which only 98,428 voting shares out of the 200,000 outstanding
shares were represented. Carolina et. al., claimed that the basis for determining quorum should
have been the total number of undisputed shares of stocks of Phil-Ville due to the exceptional
nature of the case since the transfer lf 3,140 shares of the late Geronima was in dispute. Thus,
excluding the 3,142 shares from the 200,000 outstanding capital stock, the proper basis of
determining the presence of quorum should be 196,858 shares of stocks and not the total
outstanding capital stock of 200,000 shares. Question: Was a quorum present at the
meeting? Answer: For stock corporations, the quorum is based on the number of outstanding
voting stocks. The distinction of undisputed or disputed shares of stocks is not provided for in
the law or the jurisprudence. Ubi lex non distinguit neenos distinguere debemus -when the law
does not distinguish we should not distinguish. Since only 98,430 shares of stocks out of
200,000 shares were present during the January 25, 2014 stockholders meeting at Max's
Restaurant, therefore, no quorum had been established. ( Carolina Que Villongco, et al., vs. Cecilia
Que Yabut, et al., G. R. No. 225022, February 5, 2018.)

IV. Valley Golf & Country Club vs. Reyes, 774 SCRA 214, Nov. 10, 2015.

Nature of membership in non-stock corporation. Membership in a non-stock


corporation is a property right and as such, public policy demands that its termination must be
done in accordance with substantial justice. Since the termination of membership in a non-stock
corporation is linked to the deprivation of property rights over the share, the emergence of such
adverse consequences make legal and equitable standards come to fore. (Valley Golf & Country
Club vs. Reyes, 774 SCRA 214, Nov. 10, 2015)

Illustration: Valley Golf and Country Club is a non-stock, non-profit corporation which
operates a golf course. The members and their guests are entitled to play golf and avail of the
facilities and privileges provided by the golf club. The members are assessed monthly
membership dues. Reyes purchased one membership share in Valley Golf. Reyes became
delinquent in paying the membership dues. Desirous to transfer ownership of his share, Reyes
inquired with the Club the status of his membership. He learned that Valley Golf sold his share at
public auction due to delinquency in the payment of membership dues. Reyes claimed he was not
notified of the sale at public auction. Valley Golf maintained that it sent notice to Reyes by
registered mail but without any proof as to who received it. Was the sale of Reyes’ share valid?
Ruling: Termination of membership in a non-stock corporation constitutes an infringement of
property rights which one should not be deprived of without conforming with the demands of
substantial justice. A person’s share in a golf club is a property right which he cannot be
deprived of without affording him the benefit of due process. Hence, a delinquent member
should first be afforded the opportunity to settle his unpaid obligation by notifying him of the
delinquency before the penalty of termination of membership thru the sale of share in a public
auction can be meted out. In other words, no sale on public auction involving the share of unduly
notified shareholder can be validly conducted. The sale of Reyes’ share in Valley Golf was not
valid. (Valley Golf & Country Club vs. Reyes, 774 SCRA 214, Nov. 10, 2015)

V. GSIS Family Bank vs. BPI Family Bank. G. R. No. 175278, September 23,
2015. (PP)
24

Corporate name – No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or confusingly similar to that of any
existing corporation or to any other name already protected by law or is patently deceptive,
confusing or contrary to existing laws. When a change in the corporate name is approved, the
Commission shall issue an amended certificate of incorporation under the amended name.
Hence, Royal Savings Bank cannot change its name to “GSIS Family Bank” in 2002 since 17
years before, “Family Savings Bank” was incorporated and later changed to BPI Family Savings
Bank in 1985 and thus, the latter has the prior right over the use of the said corporate name.
(GSIS Family Bank vs. BPI Family Bank. G. R. No. 175278, September 23, 2015.)

USE OF GENERIC TERMS IN CORPORATE NAME. Generic terms are those


which constitute “the common descriptive name of an article or substance”, or comprise the
“genus of which the particular product is a species”, or are “commonly used as the name or
description of a kind of goods”, or “characters”, or “refer to the basic nature of the wares or
services provided rather than to the more idiosyncratic characteristics of a particular product”,
and are not legally protectable. It has been held that if a mark is so commonplace that it cannot
be readily distinguished from others, then it is apparent that it cannot identify a particular
business; and he who first adopted it cannot be injured by any subsequent appropriation ort
imitation by others, and the public will not be deceived.25

A generic word has been allowed to be used by several entities in their corporate name
like the word “Lyceum” which refers to a school or institution of learning. It is as generic in
character as the word “university”. 26 However, the phrase “De La Salle” is not merely a generic
term and therefore, the use of such phrase by anyone other than the first one which registered the
name may properly be regarded as fanciful, arbitrary and whimsical, and entitled to legal
protection.27

ILLUSTRATIVE CASES:

(1) Lyceum is generic word:

In the Matter of Lyceum of the Philippines vs. Lyceum of Aparri, et


al., SEC. Case No. 2611, June 25, 1990.

Lyceum of the Philippines, Inc. filed an action against Lyceum of Aparri,


Inc. and six other educational corporations using the word “Lyceum” as part of
their names. Petitioner Lyceum of the Philippines, Inc. had been using “Lyceum”
in its name for more than five years but it was not exclusive because other schools
were also using the word “Lyceum” as part of their names. In fact, there were
twelve educational institutions throughout the Philippines which used the word
“Lyceum” as part of their corporate names. Western Pangasinan Lyceum was
even the first to use “Lyceum”. The word “Lyceum” meant an institution of
learning, such as a university, college, school or institute. Question: Did the
word “Lyceum” acquire a secondary meaning so as to entitle the petitioner to the
exclusive right to use the word “Lyceum” in its name?

25
De La Salle Montessori International of Malolos, Inc. Vs. De La Salle Brothers, Inc. G.R. No. 205548.
February 7, 2018.
26
In the Matter of Lyceum of the Philippines vs. Lyceum of Aparri, et al., SEC. Case No. 2611, June 25,
1990.
27
De La Salle Montessori International of Malolos, Inc. Vs. De La Salle Brothers, Inc., supra.
25

Answer: “Lyceum” is a generic word which had not been exclusively


used by the petitioner as twelve schools were using such word. The public mind
had not associated such generic word with the corporate name of the petitioner.
Those belonging to a particular locality associate “Lyceum” with the school in the
particular locality and not “Lyceum of the Philippines”. Moreover, Western
Pangasinan Lyceum was incorporated ahead of the petitioner. Such generic word
cannot be appropriated either by the petitioner or by Western Pangasinan Lyceum
since it had not acquired a secondary meaning.28

(2) De La Salle is not generic name:

De La Salle Montessori International of Malolos, Inc. Vs. De La


Salle Brothers, Inc. G.R. No. 205548. February 7, 2018:

Petitioner registered with the SEC its articles of incorporation bearing the
name, De La Salle Montessori International Malolos, Inc. on July 5, 2007. After
SEC issued a certificate of incorporation to the petitioner, the DepEd Region III
granted the petitioner government recognition for its pre-elementary and
elementary courses on June 20, 2008 and for its secondary courses on February
15, 2010. On January 29, 2010, respondents De la Salle Brothers, Inc., De La
Salle University, Inc., La Salle Academy, Inc., De La Salle-Santiago Zobel
School, Inc. and De La Salle Canlubang, Inc. filed a petition with the SEC
seeking to compel petitioner to change its corporate name on the ground that it is
misleading or confusingly similar to that which respondents which have acquired
a prior right to use.Respondents which all belong to the La Salle group, were
registered with SEC in 1961, 1975, 1960, 1976 and 1998, respectively. SEC
issued an order directing petitioner to change its corporate name on the ground
that respondents have acquired the right to the exclusive use of the name “La
Salle” which is not generic. Petitioner asserts that it obtained the words “De La
Salle” from the French word meaning “classroom” while respondents obtained it
from the French priest named Saint Jean Baptiste de La Salle. Petitioner further
claims that the phrase “De La Salle” is a mere generic term over which
respondents do not have exclusive right to use. Question: May the petitioner be
allowed to use “De La Salle” as part of its corporate name?

Answer: The phrase “De La Salle” is not merely a generic term.


Petitioner’s use of the phrase “De La Salle” in its corporate name is patently
similar to that of respondents that even with reasonable care and observation,
confusion might arise. The Court notes that not only the similarity in the parties’
names but also the business they are engaged in. They are all private educational
institutions. Petitioner’s name gives the impression that it is a branch or affiliate
of respondents. It is settled that proof of actual confusion need not be shown. It
suffices that confusion is probable or likely to occur. Moreover, respondent De La
Salle Brothers, Inc. was registered in 1961 and the De La Salle group had been
using the name decades before petitioner’s corporate registration.29

28
In the Matter of Lyceum of the Philippines vs. Lyceum of Aparri, et al., SEC. Case No. 2611, June 25, 1990.
29
De La Salle Montessori International of Malolos, Inc. Vs. De La Salle Brothers, Inc., supra.
26

DIFFERENCE BETWEEN LYCEUM OF THE PHILIPPINES CASE AND DE LA


SALLE MONTESSORI CASE.30 Lyceum of the Philippines, Inc. an educational institution
registered with the SEC commenced proceedings to compel other educational institutions to
delete the word “Lyceum” from their corporate names. In that case, the Court held that the word
“Lyceum” generally refers to a school or institution of leaning. It is a generic in character as the
word “university”. Since “Lyceum” denotes a school or institution of learning, it is not unnatural
to use this word to designate an entity which is organized and operating as an education
institution. Moreover, the Lyceum of the Philippines, Inc.’s use of the word “Lyceum” for a
long period of time did not amount to mean that the word had acquired secondary meaning in its
favor because it failed to prove that it had been using the word all by itself to the exclusion of
others. More so, there was no evidence presented to prove that the word has been so identified
with Lyceum of the Philippines, Inc. as an educational institution that confusion will surely arise
if the same word were to be used by other educational institutions.

In De La Salle Montessori case, the Court ruled that the phrase “De la Salle” is not
generic in relation to respondents. It is not descriptive of respondents’ business as institutes of
learning, unlike the meaning ascribed to “Lyceum”. Moreover, respondent De La Sale Brothers,
Inc. was registered in 1961 and the De La Salle group has been using the name decades before
petitioner’s corporate registration. In contrast, there was no evidence of the Lyceum of the
Philippines, Inc.’s exclusive use of the word “Lyceum” as in fact another educational institution
had used the word 17 years before the former registered its corporate name with the SEC. Also,
at least nine other educational institutions included the word in their corporate names. There is
no similarity between the Lyceum of the Philippines case and the De La Salle Montessori case.31

VI. Georg vs. Holy Trinity College, Inc., 797 SCRA 551, July 20, 2016)

Apparent authority -- What is the doctrine of apparent authority in corporations?

A. The doctrine of apparent authority provides that a corporation will be estopped from
denying the agent’s authority if it knowingly permits one of its officers or any other agent to act
within the scope of an apparent authority, and it holds him out to the public as possessing the
power to do these acts. The existence of apparent authority may be ascertained through: (1) the
general manner in which the corporation holds out an officer or agent as having the power to act
or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof,
whether within or beyond the scope of his ordinary powers. (Georg vs. Holy Trinity College,
Inc., 797 SCRA 551, July 20, 2016)

VII. Nissan Car Lease Phils. Inc. vs. Lica Management, Inc., 780 SCRA 400,
412, Jan. 13, 2016.

Q. Who may sign verification for a corporation in a pleading even without authority
of the board of directors?

A. The following officials or employees of the corporation may sign the verification and
certification without need of a board resolution: (1) The Chairperson of the Board of Directors;
(2) The President of a corporation; (3) The General Manager or Acting General Manager; (4)

30
De La Salle Montessori International of Malolos, Inc. Vs. De La Salle Brothers, Inc., supra.
31
De La Salle Montessori International of Malolos, Inc. Vs. De La Salle Brothers, Inc., supra.
27

Personnel Officer, and (5) an Employment Specialist in a labor case. (Nissan Car Lease Phils.
Inc. vs. Lica Management, Inc., 780 SCRA 400, 412, Jan. 13, 2016).

VIII. Bernas, et al. vs. Cinco, , G. R. Nos. 163356-57, July 1, 2015, 761 SCRA 104
(PP)

Removal of Directors:

Q. How may a director be removed? A. Any director or trustee of a corporation may


be removed from office by a vote of the stockholders holding or representing at least two-thirds
(2/3) of the outstanding capital stock, or if the corporation is a non-stock corporation, by a vote
of at least two-thirds (2/3) of the members entitled to vote, provided that such removal shall take
place either at a regular or special meeting called for the purpose. Removal may be with or
without cause provided such removal may not be used to deprive minority representation.
Such meeting may be called by the (1) secretary on order of the president or (2) on written
demand of the stockholders representing or holding at least a majority of the outstanding
capital stock or if non-stock corporation on written demand of majority of the members.
(Sec. 28, Corporation Code; Bernas vs. Cinco, G. R. Nos. 163356-57, July 1, 2015, 761 SCRA
104).

Illustration:

As a result of alleged mishandling of corporate funds, stockholders of the Makati Sports


Club (MSC) representing at least 100 shares sought the assistance of the MSC Oversight
Committee (MSCOC) in calling for a special stockholders’ meeting for the purpose of electing a
new set of officers, thereby removing the Bernas Group from the Board of Directors and Officers
of the Corporation. The MSCOC thus called a special stockholders’ meeting wherein the
members of the Bernas Group were removed from office and replaced by the Cinco Group. The
term of the Bernas Group was supposed to expire in 1998 or 1999 but the Cinco Group took
office after they were elected on December 17, 1997. In the annual stockholders’ meeting
subsequently held on April 20, 1998, at which 2/3 of stockholders were present, the majority
approved and ratified the calling and holding of December 17, 1997 special stockholders’
meeting, including the removal of the Bernas Group and the election of their replacements. The
Bernas Group filed an action with the SEC claiming that the MSCOC is not vested with the
power to call for the corporate meetings as the authority lies with the corporate secretary.
Issues: (1) Was the removal of the Bernas Group valid? (2) Was the stockholders’
ratification of the removal of the directors valid? Ruling: (1) While directors may be
removed with or without cause, however the meeting for the removal of directors must be done
in accordance with the law or the by-laws of the corporation. Neither the Corporation Code nor
the MSC by-laws authorizes MSCOC to exercise the power to call a special meeting for the
purpose of removing directors of MSC. The defect goes into the very authority of the persons
who made the call for the meeting. The removal was not valid. (2) A distinction should be made
between corporate acts or contracts which are illegal and those which are merely ultra vires. The
former contemplates the doing of an act which is contrary to law, morals or public policy or
public duty, and are like similar transactions between individuals, void. They cannot serve as
basis of a court action nor acquire validity by performance, ratification or estoppel. Mere ultra
vires acts, on the other hand, or those which are not illegal or void ab initio, but are not merely
within the scope of the articles of incorporation, are merely voidable and may became binding
and enforceable when ratified by the stockholders. The December 1997 meeting is void ab initio
and cannot be validated. The removal of the Bernas Group is void. (Bernas vs. Cinco, G. R.
Nos. 163356-57, July 1, 2015, 761 SCRA 104).
28

IX. Guy vs. Guy, 790 SCRA 288, April 19, 2016

Facts: The by-laws of the GCI provides that – “Notice of meeting written or printed for
every regular or special meeting of the stockholders shall be prepared and mailed to the
registered post office address of each stockholder not less than five (5) days prior to the date set
for each meeting, and if for a special meeting, such notice shall state the object or objects of the
same.”

For the special meeting on September 7, 2004, notice of the meeting was prepared and
mailed to the registered stockholders. Notice of the meeting was sent by registered mail to the
petitioner on September 2, 2004 but the registry return card shows that the petitioner received it
only on September 22, 2004 or fifteen days after the meeting. Petitioner questioned the validity
of the meeting for lack of notice. He insists that actual receipt of the notice was mandatory. Was
the meeting valid?

Ruling: Section 50 of the Corporation Code and the by-laws of the corporation only
require the sending/mailing of the notice of a stockholders’ meeting to the stockholders of the
corporation. Sending/mailing is different from filing or service under the Rules of Court. “Send”
should be understood in its plain meaning. “Send” means deposit in the mail or deliver for
transmission by any other usual means of communication with postage or cost of transmission
provided for and properly addressed. The receipt of any writing or notice within the time at
which it would have arrived if properly sent has the effect of proper sending. The by-laws only
mandates that the stockholders be notified of the meeting by depositing in the mail the notice of
the stockholders’ special meeting, with postage or costs of transmission provided and the name
and address of the stockholder properly specified. The meeting is valid. (Guy vs. Guy, 790
SCRA 288, April 19, 2016)

X. Florete, Jr. vs. Florete, Sr., 781 SCRA 255, Jan. 20, 2016f

How a stockholder may sue on account of wrongful or fraudulent corporate actions


undertaken through directors, associates, officers, or other persons: A stockholder suing on
account of wrongful or fraudulent corporate actions undertaken through directors, associates,
officers, or other persons may sue in any of three (3) capacities: as an individual; as part of a
group or specific class of stockholders; or as a representative of the corporation.32

Distinguish individual suits of a stockholder from class or representative suits:


Individual suits are filed when the cause of action belongs to the individual 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. 33

Distinguish individual and class/representative suit on one hand and derivative suits
on the other hand.

A. The fact that stockholders suffer from a wrong done to or involving a corporation
does not vest in them a sweeping license to sue in their own capacity. The recognition of
derivative suits as a vehicle for redress distinct from individual and representative suits is an
acknowledgment that certain wrongs may be addressed only through acts brought for the
corporation. Although in most every case of wrong to the corporation, each stockholder is
necessarily affected because the value of his interest therein would be impaired, this fact of itself

32
Florete, Jr. vs. Florete, Sr., 781 SCRA 255, Jan. 20, 2016
33
Florete, Jr. vs. Florete, Sr., 781 SCRA 255, Jan. 20, 2016
29

is not sufficient to give him an individual cause action since the corporation is a person distinct
and separate from him, and can and should itself sue the wrongdoer.34

XI. Villamor, Jr. vs. Umale, 736 SCRA 325, September 24, 2014 (PP)

Derivative suit: A derivative suit is an action filed by stockholders to enforce a


corporate action. It is an exception to the general rule that the corporation’s power to sue is
exercised only by the board of directors or trustees. Individual stockholders may be allowed to
sue on behalf of the corporation whenever the directors or officers of the corporation refuse to
sue to vindicate the rights of the corporation. It is allowed when the “directors (or officers) are
guilty of breach of trust, not of mere error of judgment. In derivative suits, the real party-in-
interest is the corporation, and the suing stockholder is a mere nominal party. (Villamor, Jr. vs.
Umale, 736 SCRA 325, September 24, 2014).

A derivative suit is a remedy designed by equity as a principal defense of the minority


stockholders against the abuses of the majority. (J. del Castillo, Forest Hills Golf and Country
Club, Inc. vs. Fil-Estate Properties, Inc. 797 SCRA 655, July 20, 2016)

Requisites of Derivative suit: A stockholder or member may bring an action in the name
of a corporation or association, as the case may be, provided that: (1) He was a stockholder or
member at the time the acts or transactions subject of the action occurred and at the time of the
action was filed; (2) He exerted all reasonable efforts, and alleges the same with particularity in
the complaint, to exhaust all remedies available under the articles of incorporation, by-laws of
the corporation to obtain the relief he desires; (3) No appraisal rights are available for the acts
complained of and (4) The suit is not a nuisance or harassment suit, and (5) The action brought
by the stockholder or member must be in the name of the corporation or association. (Villamor,
Jr. vs. Umale, 736 SCRA 325, September 24, 2014).

Reasons for disallowing individual suits to enforce remedies for the corporation:
The reasons for disallowing direct individual suit are: (1) A stockholder in a corporation has no
title legal or equitable to the corporate property; to allow shareholders to sue separately would
conflict with the separate corporate entity principle; (2) Prior rights of the creditors may be
prejudiced; (3) Filing of such suit would conflict with the duty of the management to sue; (3)
Cause multiplicity of suits, and (5) would cause confusion in ascertaining the effect of partial
recovery by an individual on the damages recoverable by the corporation for the same act.
(Villamor, Jr. vs. Umale, 736 SCRA 325, September 24, 2014).

Illustration: Pasig Printing Corporation (PPC) obtained an option to lease Mid-Pasig’s


property which includes the Rockland area. PPC’s board of directors issued a resolution waiving
all its rights, interests and participation in the option to lease Mid-Pasig’s property in favor of
Villamor. PPC received no consideration for this waiver in favor of Villamor. PPC represented
by Villamor entered into a Memorandum of Agreement with MC Home Depot under which it
will continue to occupy the area as PPC’s sub-leasee for 4 years at monthly rental of P4.5 million
plus goodwill of P18 million. MC Home Depot issued postdated checks for the rentals and
goodwill and gave them to Villamor who did not turn over to PPC the amount of the checks upon
encashment. Balmores, a stockholder and director of PPC wrote a letter to the directors of PPC
informing them that Villamor should be made deliver to PPC the value of the checks issued by
MC Home Depot. Due to inaction of the directors, Balmores filed an intra-corporate controversy
complaint with the Regional Trial Court against the directors and Villamor. He prayed that a

34
Florete, Jr. vs. Florete, Sr., 781 SCRA 255, Jan. 20, 2016
30

receiver be appointed because PPC’s assets were not only in imminent danger, but actually been
dissipated, lost, wasted and destroyed. RTC ruled against Balmores who brought the case to the
Court of Appeals. The Court of Appeals ruled that the case filed by Balmores was a derivative
suit because there were allegations of fraud or ultra vires acts. Was the action filed by Balmores
a derivative suit? RULING: The action filed by Balmores was not a derivative suit. In
derivative suits, the real party-in-interest is the corporation, and the suing stockholder is a mere
nominal party. Balmores failed to show that he exhausted all administrative remedies. Though he
tried to communicate with PPC’s directors about the checks in Villamor’s possession before he
filed an action, Balmores was not able to show that this comprised all the remedies available
under the articles of incorporation, by-laws, laws or rules governing PPC. Balmores also did not
implead PPC as a party in the case nor did he allege that he was filing on behalf of the
corporation. (Villamor, Jr. vs. Umale, 736 SCRA 325, September 24, 2014).

XII. Ching vs. Subic Bay Golf and Country Club, Inc., 734 SCRA 569, Sept. 10.
2014. Leonardo-de Castro, ponente (PP)

Derivative suit. The legal standing of minority stockholders to bring derivative suits is
not a statutory right, there being no provision in the Corporation Code or related statutes
authorizing the same, but is instead a product of jurisprudence cased on equity. However, a
derivative suit cannot prosper without first complying with the legal requisites for its institution.
(Ching vs. Subic Bay Golf and Country Club, Inc., 734 SCRA 569, Sept. 10. 2014)

Question: What is the effect of the failure of the petitioners to state with particularity in
the Complaint that they had exerted all reasonable efforts to exhaust all remedies available under
the articles of incorporation, bylaws, and laws or rules governing the corporation to obtain the
relief they desire?

Answer: Where the complaint contained no allegation whatsoever of any effort to avail
of intra-corporate remedies, the case should be dismissed. Even if petitioners thought it was
futile to exhaust intra-corporate remedies, they should have stated the same in the Complaint and
specified the reasons for such opinion. Failure to do allows the court to dismiss the Complaint,
even motu propio. The requirement of this allegation in the Complaint is not a useless formality
which may be disregarded at will. (Ching vs. Subic Bay Golf and Country Club, Inc., 734 SCRA
569, Sept. 10. 2014)

XIII. Commissioner of Internal Revenue vs. Pilipinas Shell Petroleum


Corporation, 726 SCRA 623 (PP)

Merger: In a merger of two existing corporations, one of the corporations survives and
continues the business, while the other is dissolved, and all its rights, properties, and liabilities
are acquired by the surviving corporation. Although there is a dissolution of the absorbed or
merged corporations, there is no winding up of their affairs or liquidation of their assets because
the surviving corporation automatically acquires all their rights, privileges, and powers, as well
as their liabilities. (Commissioner of Internal Revenue vs. Pilipinas Shell Petroleum Corporation,
726 SCRA 623, Sept. 29, 2014).

XIV. Philippine Geothermal, Inc. Employees Union vs. Unocal Philippines, Inc.,
804 SCRA 286, Sept. 28, 2016
Effects of merger or consolidation. - The merger or consolidation shall have the
following effects: (1) The constituent corporations shall become a single corporation; (2) The
separate existence of the constituent corporations shall cease except that of the surviving
31

corporation or the consolidated corporation; (3) The surviving corporation or the consolidated
corporation shall possess all the rights, privileges, immunities and powers and shall be subject to
all the duties and liabilities of a corporation; (4) The surviving corporation or the consolidated
corporation shall acquire all property, and receivables of the constituent corporation; (5) The
surviving corporation or the consolidated corporation shall be responsible and liable for all the
liabilities and obligations of each of the constituent corporations. (Philippine Geothermal, Inc.
Employees Union vs. Unocal Philippines, Inc., 804 SCRA 286, Sept. 28, 2016.

Does the merger of two corporations carry with it the absorption of the employees of
non-surviving corporation by the surviving corporation? While it is true that in case of an
approved merger, all the assets and liabilities of the dissolved corporation are transferred to the
surviving corporation, however the employees are not automatically transferred to the surviving
corporation. “Human beings” are not included in the term “assets and liabilities”. The
Corporation Code does not mandate the absorption of the employees of the non-surviving
corporation by the surviving corporation in the case of merger. (Bank of the Philippine Islands
vs. BPI Employees Union, 627 SCRA 590, August 10, 2010).
However, in the case of Philippine Geothermal, Inc. Employees Union vs. Unocal
Philippines, Inc., 804 SCRA 286, Sept. 28, 2016, it was ruled that the absorbing or surviving
corporation becomes bound by the employment contracts entered into by the absorbed
corporation under its employment contracts entered into by the absorbed corporation. These
employment contracts are not terminated. They subsist unless their termination is allowed by
law. The acquisition of all assets, interests, and liabilities of the absorbed corporation necessarily
includes the rights and obligations of the absorbed corporation under its employment contracts.

Anna Teng vs. SEC, G. R. No. 184332, Feb. 17, 2016.

Must the stock certificate be required to be surrendered before the transfer thereof
can be recorded in the books of the corporation? Under Sec. 63 of the Corporation Code,
certain minimum requisites must be complied with before there could be a valid transfer of
stocks, to wit: (a) there must be delivery of the stock certificate; (b) the certificate must be
endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the
transfer; and (c) to be valid against third parties, the transfer must be recorded in the books of the
corporation.

It is the delivery of the certificate, coupled with the endorsement by the owner or his duly
authorized representative that is the operative act of transfer of shares from the original owner to
the transferees. The delivery contemplated in Section 63, however, pertains to the delivery of
the certificate of shares by the transferor to the transferee, that is, from the original
stockholder named in the certificate to the person or entitle the stockholder was transferring the
shares to, whether by sale or some other form of absolute conveyance of ownership. Shares of
stock may be transferred by delivery to the transferee of the certificate properly indorsed. Title
may be vested in the transferees by delivery of the duly indorsed certificate of stock. (Anna Teng
vs. SEC, G. R. No. 184332, Feb. 17, 2016.)

Illustration: Ting Ping purchased shares of stock in TCL Sales Corporation. Ting Ping
requested TCL’s Corporate Secretary to enter the said transfer in the Stock and Transfer Book of
the Corporation. When the Corporate Secretary refused despite repeated demands, Ting Ping
filed an action for Mandamus against TCL and its Corporate Secretary, Teng. Judgment was
rendered in favor of Ting Ping. Teng’s position is that Ting Ping must first surrender the
certificates of stock purchased before the transfer to Ting Ping may be transferred in the books of
the corporation. Ting Ping on the other hand, manifested his intention to surrender the subject
32

certificates of stock to facilitate the registration of the transfer and for the issuance of new
certificates in his name. Issue: Is the delivery or surrender of the stock certificate from Ting Ping
to TCL necessary before the conveyance may be recorded in its books? Ruling: The delivery or
surrender of the stock certificates from Ting Ping to TCL is not a requisite before the conveyance
may be recorded in it books. To compel Ting Ping to deliver to the corporation the certificates as
a condition for the registration of the transfer would amount to a restriction on the right of Ting
Ping to have the stocks transferred to his name, which is not sanctioned by law. The only
limitation imposed by Section 63 is when the corporation holds any unpaid claim against the
shares intended to be transferred. Besides Ting Ping manifested his intention to surrender the
subject certificates of stock to facilitate the registration of the transfer and for the issuance of
new certificates in his name. (Anna Teng vs. SEC, G. R. No. 184332, Feb. 17, 2016.)

XV. Interport Resources Corporation vs. Securities and Specialist, Inc., G. R.


No. 154069, June 6, 2016. (PP)

When will transfer of shares bind the corporation and third persons? A transfer of
shares of stock not recorded in the stock and transfer book of the corporation is non-existent as
far as the corporation is concerned. As between the corporation on one hand, and its shareholders
and third persons on the other, the corporation looks only to its books for the purpose of
determining who its shareholders are. It is only when the transfer has been recorded in the stock
and transfer book that a corporation may rightfully regard the transferee as one of its
stockholders. From this time, the consequent obligation on the part of the corporation to
recognize such rights as it is mandated by law to recognize arises. (Interport Resources
Corporation vs. Securities and Specialist, Inc., G. R. No. 154069, June 6, 2016.)

Exception when the corporation is bound by unrecorded transfer of shares.


However, Section 63 of the Corporation Code will not apply if it is the corporation itself who
unduly refused to accept the tender of payments of stocks and unduly refused to recognize the
assignment of rights based on Subscription Agreements it issued. This provision could not be
the source of rights of corporations who employed dubious machinations to justify their refusal.
(Interport Resources Corporation vs. Securities and Specialist, Inc., G. R. No. 154069, June 6,
2016.)

Illustration. Oceanic and respondent R. C. Lee entered into a subscription agreement


covering 5,000,000 shares of stock wherein the latter paid only 25% of the subscription. Later,
Oceanic merged with Interport, the latter as surviving corporation. R. C. Lee assigned to
respondent SSI the said Subscription Agreements outstanding in the name of R. C. Lee and the
Oceanic official receipts showing 25% has already been paid. Later, R. C. Lee requested
Interport for a list of subscription agreements and stock certificates issued in the name of R. C.
Lee and other individuals named in the request, which in turn, was provided. Upon finding no
record showing any transfer or assignment to SSI of the Oceanic subscription agreements, R. C.
Lee paid its unpaid subscription and was accordingly issued stock certificates corresponding
thereto. SSI, on the other hand, tried for several times to tender payment for the balance of the
5,000,000 shares covered by Oceanic subscription agreements. However, Interport consistently
refused to accept such tender. SSI later learned that Interport had issued the 5,000,000 shares to
R. C. Lee, relying on the latter’s registration as the owner of the subscription agreements in the
books of Interport, and on affidavits of R. C. Lee that no transfers or encumbrances of the shares
had been made. SSI filed an action to compel Interport to deliver the 5,000,000 shares and pay
damages, alleging collusion between Interport and R. C. Lee. Interport claimed that it is not
bound by the transfer of the subscription agreement from R. C. Lee to SSI because said transfer
was not recorded in the books of Interport. Is Interport bound by the said transfer of the
33

subscription to SSI? RULING: Section 63 of the Corporation Code which denies the validity of
the transfer of shares, except between the parties if such transfer is not recorded in the books of
the corporation is not applicable in the case at bar since it is Interport which unduly refused to
recognize the assignment of shares between R. C. Lee and SSI. Interport was duly notified of the
assignment when SSI tendered its payment of the 75% unpaid balance, and it could not anymore
refuse to recognize the transfer of the subscription. (Interport Resources Corporation vs.
Securities and Specialist, Inc., G. R. No. 154069, June 6, 2016.)

XVI. F & S Velasco, Inc. vs. Madrid, 774 SCRA 388, Nov. 10, 2015. Madrid
inherited the shares of stock of his wife, Angela in F & S Velasco Co., Inc. (FSVCI) as her sole
heir. As such Madrid may compel the issuance of certificates of shares in his favor as well as the
registration of his wife’s stock in his name. However, Madrid’s inheritance of Angela’s shares of
stock was not recorded in the books of the corporation. Issue: Will such inheritance entitle
Madrid to the powers and prerogatives appurtenant to the shares? Ruling: Madrid’s inheritance
of Angela’s shares does not ipso facto afford him the rights accorded to ownership of FSVCI’s
shares of stock. All transfers must be registered in the corporate books in order to be binding on
the corporation. (F & S Velasco, Inc. vs. Madrid, 774 SCRA 388, Nov. 10, 2015)

XVII. Tee Ling Kiat vs. Ayala Corporation, G. R. No. 192530, March 7, 2018

FACTS: Judgment was rendered against spouses Dewey and Lily Dee. The sheriff
attached the properties registered in the name of Vonnel Industrial Park, Inc. (VIP) of which
Dewey Dee was an incorporator and stockholder. A Third-pary claim was filed by Tee Ling
Kiat who claimed that the shares of Dewey Dee in VIP had been sold to him as evidence by the
cancelled checks he issued in favor of Dewey Dee and a photocopy of a Deed of Sale by Dewey
Dee in favor of Tee Ling Kiat. The alleged sale of shares of stock, however was not recorded in
the books of VIP. Questions: (a) Was it proper to attach the properties of VIP to satisfy the
judgment debt of Dewey Dee? (b) Does Tee Ling Kiat have the right to question the attachment
as unregistered buyer of Dewey Dee’s shares in VIP? Answers: (a) The judgment for a sum of
money dated obtained by Ayala Corporation was against the Spouses Dewey and Lily Dee in
their personal capacities as sureties in the money market line transaction. Yet, in the execution of
said judgment, the properties levied upon were registered in the name of VIP, a juridical entity
with personality separate and distinct from Dewey Dee. It is a basic principle of law that money
judgments are enforceable only against property incontrovertibly belonging to the judgment
debtor,80 and certainly, a person other than the judgment debtor who claims ownership over the
levied properties is not precluded from challenging the levy through any of the remedies
provided for under the Rules of Court. (b) Even if it could be assumed that the sale of shares of
stock contained in the photocopies had indeed transpired, such transfer is only valid as to the
parties thereto, but is not binding on the corporation if the same is not recorded in the books of
the corporation. Section 63 of the Corporation Code of the Philippines provides that: "No
transfer, x x x shall be valid, except as between the parties, until the transfer is recorded in the
books of the corporation showing the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates and the number of shares
transferred."79Here, the records show that the purported transaction between Tee Ling Kiat and
Dewey Dee has never been recorded in VIP's corporate books. Thus, the transfer, not having
been recorded in the corporate books in accordance with law, is not valid or binding as to the
corporation or as to third persons. The validity of the third-party claim would only be relevant if
the person instituting the same has established that he has a real interest in the levied property,
the Court will not belabor the merits of the third-party claim in view of the conclusive
determination that Tee Ling Kiat has not adduced evidence to prove that the shares of stock of
Dewey Dee were indeed sold to him. In the pursuit of such remedies, however, the third-party
34

must, to reiterate, unmistakably establish ownership over the levied property, which Tee Ling
Kiat failed to do. (Tee Ling Kiat vs. Ayala Corporation, G. R. No. 192530, March 7, 2018)

XVIII. Andaya vs. Rural Bank of Cabadbaran, Inc., et al., G. R. 188769, Aug. 3,
2016

(1) What is the nature of the function of the corporation to register transfer of
shares of stock? The registration of a transfer of shares of stock is a ministerial duty on the part
of the corporation.

(2) What is the remedy of the stockholder in case of wrongful or unjustifiable


refusal of the corporation to record the transfer of shares? Aggrieved parties may resort to
the remedy of mandamus to compel corporations that wrongfully or unjustifiably refuse to record
the transfer or to issue new certificates of stock. This legal right flows from the transferee’s
established ownership of the stocks.

Illustration: Chute sold to Andaya 2,200 shares of stock in the Rural Bank of
Cabadbaran for P220,000 as evidenced by the notarized Sale of Shares of Stocks. Then, Chute
endorsed and delivered the certificates of stock to Andaya and demanded that the bank register
the transaction and issue new stock certificates in the name of the buyer. The latter also asked the
corporate secretary, Ortiz to issue new stock certificates in favor of the buyer. The corporate
secretary informed Chute that he could not register the sale due to a resolution of the board
which mandates that existing stockholders are given priority to buy the shares of others in the
event that the latter offered their shares for sale. Andaya assailed the restriction on the transfer
of shares of stock because the bank’s Articles of Incorporation, by-laws, or certificates of stock
do not contain said restriction. Andaya filed an action for mandamus to compel the bank to
record the transfer of shares and to issue new stock certificates in his name. Will the action
prosper? RULING: The registration of a transfer of shares of stock is a ministerial duty on the
part of the corporation. Aggrieved parties may resort to the remedy of mandamus to compel
corporations that wrongfully or unjustifiably refuse to record the transfer or to issue new
certificates of stock. This legal right flows from the transferee’s established ownership of the
stocks. Andaya, as a bona fide transferee of the shares of stock of Chute, had the legal standing
to initiate an action for mandamus to compel the Rural Bank of Cabadbaran to record the transfer
of shares in its stock and transfer book and to issue new stock certificates in his name.

XIX. Ferro Chemicals, Inc. vs. Garcia, et al., 168134, Oct. 5, 2016

Must attachment of shares of stock be recorded in the books of the corporation


to be valid and binding? Attachment of shares of stock need not be recorded in the books of the
corporation.. Only absolute transfers are required to be recorded in the corporation’s stock and
transfer book in order to have force and effect to third persons. A transfer is the act by which the
owner of a thing delivers it to another with the intent of passing the rights which he has in it to
the latter. Thus, the requirement that the transfer shall be recorded in the books of the
corporation to be valid as against third persons has reference only to absolute conveyance of the
ownership or title to a share.

XX. Insigne vs. Abra Valley Colleges, Inc., 64 S7CRA 261, July 29, 2015.

What is the nature of Stock Certificate? Is the Stock Certificate the only proof that
a person is a stockholder? A stock certificate is prima facie evidence that the holder is a
shareholder of the corporation, but the possession of the certificate is not the sole determining
factor of one’s stock ownership. A certificate of stock is merely the paper representative or
tangible evidence of the stock itself and of the various interests therein. The certificate is not
35

stock in the corporation but is merely evidence of the holder’s interest and status in the
corporation, his ownership of the share represented thereby, but is not in law the equivalent of
such ownership. It expresses the contract between the corporation and the stockholder, but it is
not essential to the existence of a stock in stock or the creation of relation of shareholder to the
corporation. (Insigne vs. Abra Valley Colleges, Inc., 764 SCRA 261, July 29, 2015)

Illustration: Claiming to be stockholders, petitioners sought to examine the books and


records of Abra Valley Colleges, Inc. however, the latter claimed that petitioners were not
stockholders of the corporation and hence, had no right of inspection. Petitioners had no stock
certificates issued in their favor but they have official receipts of their payments for their
subscriptions of the shares of Abra Valley; certification of the Securities and Exchange
Commission stating that Abra Valley had issued shares in favor of the petitioners, such issuance
being part of the authorized and unissued capital stock as stated in the Secretary’s Certificate and
the general information sheet. Petitioners previously attended the annual stockholders’ meeting
as stockholders of Abra Valley, and participated in the election of the Board of Directors at
which some of them were chosen as members. Respondents allowed them to be elected and sit
in the Board of Directors as members. Are the petitioners entitled to the rights of a stockholder?
RULING: A person becomes a stockholder of a corporation by acquiring a share through either
purchase or subscription. The petitioners acquired their shares in Abra Valley by (1) subscribing
to 36 shares each from Abra Valley’s authorized and unissued capital stock, and (2) by
purchasing the shareholdings of existing stockholders, as borne out by the latter’s indorsement
on the stock certificates. A stock certificate is prima facie evidence that the holder is a
shareholder of the corporation, but the possession of the certificate is not the sole determining
factor of one’s stock ownership. Petitioners are stockholders of the corporation and may inspect
the books and records of the corporation. (Insigne vs. Abra Valley Colleges, Inc., 764 SCRA
261, July 29, 2015)

XXI. Terelay Investment and Development Corporation vs. Yulo, 765 SCRA 1,
August 5, 2015

May a stockholder with insignificant shareholding examine the books of the


corporation? The Corporation Code has granted to all stockholders the right to inspect the
corporate books and records, and in so doing has not required any specific amount of interest for
the exercise of the right to inspect. Ubi lex non distinguit nec nos distinguere debemos. When the
law has made no distinction, we ought not to recognize any distinction. Neither could the
petitioner arbitrarily deny the respondent’s right to inspect the corporate books and records on
the basis that her inspection would be used for a doubtful or dubious reason. Hence, the
petitioners submission that the respondent’s shareholding is “insignificant holding” of only .
001% of the petitioner’s stockholdings did not justify denial of respondent’s application for
inspection of the corporate books and records. (Terelay Investment and Development
Corporation vs. Yulo, 765 SCRA 1, August 5, 2015).

XXII. PASAR vs. Lim, 804 SCRA 600, October 5, 2016

Q. May a stockholder be enjoined from exercising his right of inspection of the


books of the corporation?

A. An action for injunction and consequently, a writ of preliminary injunction filed by a


corporation is generally unavailable to prevent stockholders from exercising their right of
inspection. Stockholders cannot be prevented from gaining access to the (a) records of all
business transactions of the corporation and, (b) minutes of the meeting of the stockholders or
36

the board of directors, including their various committees and subcommittees. Generally each
stockholder should be given reasonable access so that he can assess the management of the
corporation.
Good faith and a legitimate purpose are presumed. It is the duty of the corporation
to allege and prove with sufficient evidence the facts that give rise to a claim of bad faith as to
the existence of an illegitimate purpose. The confidentiality of business transactions is not a
magical incantation that will defeat the request of a stockholder to inspect the records. Bad faith
must be proven. (PASAR vs. Lim, 804 SCRA 600, October 5, 2016).

XXIII. Alabang Development Corporation vs. Alabang Hills Village Association, G.


R. No. 187456, June 2, 2014. J. Peralta ponente. (PP)

Capacity to sue. ADC’s corporate registration was revoked by SEC on May 26, 2003. It
filed a complaint against AHVA on October 19, 2006. May the action be allowed to continue?

Answer: ADC filed its complaint not only after its corporate existence was terminated but
also beyond the three-year period allowed for liquidation in Sec. 122 of the Corporation Code.
Thus, it is clear that the petitioner lacks the capacity to sue as a corporation at the time of the
filing of the complaint. (Alabang Development Corporation vs. Alabang Hills Village
Association, G. R. No. 187456, June 2, 2014. J. Peralta ponente.)

XXIV. What is the doctrine of Forum Non Conveniens? Under the doctrine of Forum
Non Convenience, a Philippine court in a conflict-of-laws case may assume jurisdiction if it
chooses to do so, provided, that the following requisites are met: (1) that the Philippine Court is
one to which the parties may conveniently resort to ; (2) that the Philippine Court is in a position
to make an intelligent decision as to the law and the facts; and (3) that the Philippine Court has
or is likely to have power to enforce its decision. (Continental Micronesia, Inc. vs. Basso, 771
SCRA 329, Sept. 23, 2015). (PP)

XXV. Air Canada vs. Commissioner of Internal Revenue, G. R. No. 169507,


January 11, 2016. (PP)

When an offline international air carrier is doing business in the Philippines. An


offline international air carrier selling passage tickets in the Philippines through a general sales
agent, is a resident foreign corporation doing business in the Philippines. (Air Canada vs.
Commissioner of Internal Revenue, G. R. No. 169507, January 11, 2016).

When subject to Gross Philippine Billings Tax. Question: Sec. 28 of the National
Internal Revenue Code provides, “International Air Carrier. ‘Gross Philippine Billings’ refers to
the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place
of sale or issue and the payment of payment of the ticket or passage document.” Air Canada was
engaged in business in the Philippines through a local agent that sells airline tickets on its behalf.
However, Air Canada does not have flights originating from or coming to the Philippines and
does not operate any airplane in the Philippines. Issue: Is it subject to ‘Gross Philippine
Billings’? Ruling: Section 28 of the NIRC attaches only when the carriage of persons, excess
baggage, cargo and mail originated from the Philippines in a continuous and uninterrupted flight,
regardless of where the passage documents were sold. Not having flights to and from the
Philippines, Air Canada is not liable for the ‘Gross Philippine Billings’ tax. (Air Canada vs.
Commissioner of Internal Revenue, G. R. No. 169507, January 11, 2016. J. Leonen, ponente).
37

IEMELIF vs. Bishop Nathaniel Lazaro, G.R. No. 184088 , July 6, 2010:

In 1909, Bishop Nicolas Zamora established the petitioner Iglesia Evangelica


Metodista En Las Islas Filipinas, Inc. (IEMELIF) as a corporation sole with Bishop
Zamora acting as its General Superintendent.  Apparently, although the IEMELIF
remained a corporation sole on paper (with all corporate powers theoretically lodged in
the hands of one member, the General Superintendent), it had always acted like a
corporation aggregate. The Consistory exercised IEMELIFs decision-making powers
without ever being challenged. Subsequently, during its 1973 General Conference, the
general membership voted to put things right by changing IEMELIFs organizational
structure from a corporation sole to a corporation aggregate. On May 7, 1973 the
Securities and Exchange Commission (SEC) approved the vote. For some reasons,
however, the corporate papers of the IEMELIF remained unaltered as a corporation sole.

Only in 2001, about 28 years later, did the issue reemerge. In answer to a query
from the IEMELIF, the SEC replied on April 3, 2001 that, although the SEC
Commissioner did not in 1948 object to the conversion of the IEMELIF into a
corporation aggregate, that conversion was not properly carried out and documented. The
SEC said that the IEMELIF needed to amend its articles of incorporation for that
purpose.

Acting on this advice, the Consistory resolved to convert the IEMELIF to a


corporation aggregate. Respondent Bishop Nathanael Lazaro, its General Superintendent,
instructed all their congregations to take up the matter with their respective members for
resolution. Subsequently, the general membership approved the conversion, prompting
the IEMELIF to file amended articles of incorporation with the SEC. Bishop Lazaro filed
an affidavit-certification in support of the conversion.

Petitioners claim that a complete shift from IEMELIFs status as a corporation sole
to a corporation aggregate required, not just an amendment of the IEMELIFs articles of
incorporation, but a complete dissolution of the existing corporation sole followed by a
re-incorporation. Question: Must the corporation sole be dissolved first, followed by re-
incorporation, to convert it to a corporation aggregate?

Answer: The Corporation Code provides no specific mechanism for amending


the articles of incorporation of a corporation sole. But Section 109 of the Corporation
Code allows the application to religious corporations of the general provisions governing
non-stock corporations.
 
For non-stock corporations, the power to amend its articles of incorporation lies in
its members. The code requires two-thirds of their votes for the approval of such an
amendment. So how will this requirement apply to a corporation sole that has technically
but one member (the head of the religious organization) who holds in his hands its broad
corporate powers over the properties, rights, and interests of his religious organization?
 
Although a non-stock corporation has a personality that is distinct from those of
its members who established it, its articles of incorporation cannot be amended solely
through the action of its board of trustees. The amendment needs the concurrence of at
least two-thirds of its membership. If such approval mechanism is made to operate in a
corporation sole, its one member in whom all the powers of the corporation technically
belongs, needs to get the concurrence of two-thirds of its membership. The one member,
38

here the General Superintendent, is but a trustee, according to Section 110 of the
Corporation Code, of its membership.
 
There is no point to dissolving the corporation sole of one member to enable the
corporation aggregate to emerge from it. The one member, with the concurrence of two-
thirds of the membership of the organization for whom he acts as trustee, can self-will the
amendment. He can, with membership concurrence, increase the technical number of the
members of the corporation from sole or one to the greater number authorized by its
amended articles.35
Q. May a foreign corporation doing business in the Philippines without a
license be sued in this country?

A. A foreign corporation doing business in the Philippines with or without license


is subject to process and jurisdiction of the local courts. If such corporation is properly
licensed, well and good. But it shall not be allowed, under any circumstances, to invoke
its lack of license to impugn the jurisdiction of our courts.36

Q. What are the instances when foreign corporation may sue in the
Philippines whether licensed or not?
A. In the following cases, a foreign corporation may sue in Philippine courts
whether or not it is licensed to do business in the Philippines:
1. Infringement of patent provided that the country of said foreign corporation
grants similar privilege to corporate or juristic citizens of the Philippines.37
2. Action for infringement, unfair competition, or false designation of origin and
false description, of mark or trade-name, provided that the country of such foreign
corporation grants a similar privilege to corporate or juristic persons of the Philippines.38
3. Action for tort that occurred in the Philippines.39
4. When the party sued is barred by the principle of estoppel from questioning the
capacity of the foreign corporation to file the action.40

SECURITIES REGULATIONS CODE


What is the “Howey Test”?

Howey test determines whether an investment contract exists or not. Under the
Howey test an investment contract exists when the following elements are present: (1) a contract,
transaction or scheme; (2) an investment of money; (3) investment is made in a common
enterprise; (4) expectation of profits; and (5) profits arising primarily from the efforts of others.
If all elements of the Howey test are present, there is an investment contract that requires
registration under RA 8799. (Securities and Exchange Commission vs. Prosperity Com., Inc., G.
R. No. 164197, January 25, 2012).

35
IEMELIF vs. Bishop Nathaniel Lazaro, G.R. No. 184088 , July 6, 2010.
36
Marubeni Nederland B. V. vs. Tensuan, 190 SCRA 105.
37
Section 41-A, R. A. 165, as amended by R. A. 637.
38
Section 21-A, R. A. 166, as amended by R. A. 638; Asked, 1984 Bar Exams.
39
Dampfs. Rhd. Union vs. Compania Transatlantica, 8 Phil. 766.
40
Communication Materials and Design, Inc. et al., vs. Court of Appeals et al., 260 SCRA 673.
39

For example, San Miguel Corporation offers commercial papers to the public for
raising funds that it needs for expansion. When an investor buys these papers or securities,
he invests his money, together with the others, in SMC with an expectation of profits
arising from the efforts of those who manage and operate the company. SMC has to
register these commercial papers with the SEC before offering them to investors. 41

FACTS: Wincorp offered what it purported to be “sans recourse” transactions wherein said
investment house would match investors with pre-screened corporate borrowers in need of financial
assistance. Ng Wee invested the aggregate amount of P213,290,410,36 in the “sans recourse”
transactions through his trustees. Prior to being matched with a corporate borrower, all the monies infused
by the investors were posted in an account maintained by Wincorp. This ensures that there are enough
funds to meet large drawbacks by single borrowers. The investors were induced to invest by Wincorp
with promises of high yield. In Ng Wee’s case, his Confirmation Advices reveal that his funds were
suppose4d to earn 13.5% at their respective maturity dates. The profitability of the enterprise depended
largely on whether or not Wincorp on best effort basis, would be able to match the investors with their
approved corporate borrowers. Question: Are these transactions investment contracts that must be
registered before being offered to the public? Answer: The case at bar satisfies the Howey test and
therefore, the transactions are actually investment contracts wherein investors pool their resources to meet
the financial needs of a borrowing company. In dealing securities Wincorp was under legal obligation to
comply with the statutory registration and disclosure requirements. The investment contracts cannot be
offered to the public unless registered as securities under Sec. 4 of BP 178. 42

(1) What is a public company? (2) Must it be listed publicly in the stock
exchange?

(1) A public company is any corporation with a class of equity securities listed on an
Exchange OR with assets in excess of P50 million and having two hundred (200) or more
holders, at least two hundred (200) of which are holding at least 100 shares of a class of its
equity securities.

(2) Public company is not limited to a company whose shares are publicly listed.
Even companies like banks whose shares are offered only to a specific group of people, are
considered public provided they meet the requirements mentioned above. (Phil. Veterans Bank
vs. SEC, Aug. 3, 2011).

I. Jardeleza vs. Sereno, 733 SCRA 279, August 19, 2014. (PP)

Insider Trading. Insider trading involves the trading of securities based on knowledge of
material information not disclosed to the public at the time. It is an offense that assaults the
integrity of our vital securities market. Manipulative devices and deceptive practices, including
insider trading, throw a monkey wrench right into the heart of the securities industry. When
someone trades in the market with unfair advance in the form of highly valuable secret inside
information, all other participants are defraud. All of the mechanisms become worthless. Given
enough of the stock market scandals, coupled with the related loss of faith in the market, such
abuses could presage a sever drain of capital. ( Jardeleza vs. Sereno, 733 SCRA 279, August 19,
2014).

II. What is a public company? Must the company be listed in the stock exchange to
be a public company?

(1) A public company is any corporation with a class of equity securities listed on an
Exchange OR with assets in excess of P50 million and having two hundred (200) or more
41
SEC vs. Prosperity Co., Inc., G. R. No. 164197, January 25, 2012.
42
Luis Virata, et al., vs. Alejandro Ng Wee, et al., G. R. 220926, July 5, 2017.
40

holders, at least two hundred (200) of which are holding at least 100 shares of a class of its
equity securities.

(2) Public company is not limited to a company whose shares are publicly listed. Even
companies like banks whose shares are offered only to a specific group of people, are considered
public provided they meet the requirements mentioned above. (Phil. Veterans Bank vs. SEC,
Aug. 3, 2011).

PRESIDENTIAL DECREE
NO. 902-A
(As amended by Securities Regulation Code)

I. Q. What are the guidelines to be followed in case a commercial case is filed with
an improper RTC which is not a Special Commercial Court? (PP)

A. Should a commercial case filed before a proper RTC is erroneously raffled to its
regular branch, the case shall be referred to the Executive Judge for re-docketing as a
commercial case, after which, the same shall be assigned to the sole special branch if the RTC
has only one Special Commercial Court or by referring it to the Executive Judge for re-docketing
as a commercial case and raffle the case among its special branches if the RTC has multiple
Special Commercial Courts or refer the case to the nearest RTC with a Special Commercial
Court within the judicial region and upon referral, and assign the same to the sole special branch
or raffle off the case among its Special Commercial Courts, as the case may be, when the RTC to
where the action was filed has no internal branch designated as Special Commercial Court.
( Gonzales, et al. vs. GJH Land, Inc., et al., G. R. No. 202664, November 10, 2015, J. Perlas-
Bernabe, ponente).

II. What is an intra-corporate controversy?


An intra-corporate controversy is one which “pertains to any of the following
relationships: (1) between the corporation, partnership or association and the public; (2) between
the corporation, partnership or association and the State in so far as its franchise, permit or
license to operate is concerned; (3) between the corporation, partnership or association and its
stockholders, partners, members or officers; and (4) among the stockholders, partners or
associates themselves. (Philip L. Go, Pacifico Q. Lim, et al. vs. Distinction Properties
Development and Construction, Inc., G.R. No. 194024, April 25, 2012.; Strategic Alliance Dev.
Corp. vs. Star Infrastructure Dev. Corp., 635 SCRA 380, Nov. 17, 2010. )

III. Wesleyan University Phil. Vs. Maglaya, G. R. 212774, Jan. 23, 2017

Q. Is the President of a corporation a corporate officer or a mere employee?


A. The President is a corporate officer. Corporate officers are those officers provided for
in the Corporation Code or by the corporation’s by-laws. An “office” is created by the charter of
the corporation and the officer is elected by the directors or stockholders, while an “employee”
usually occupies no office and generally is employed not by action of the directors or
stockholders but by the managing officer of the corporation who also determines the
compensation to be paid to such employee. In this case the president is one included in the by-
laws of the corporation in its roster of corporate officers. Hence, the president is an officer of the
corporation and not a mere employee. (Wesleyan University Phil. Vs. Maglaya, G. R. 212774,
Jan. 23, 2017.)
41

Q. Does NLRC have jurisdiction over the termination of the President who is an
officer of the corporation?
A. A corporate officer’s dismissal is always a corporate act, or an intra-corporate
controversy which arises between a stockholder and a corporation. Furthermore, the issue of the
termination of a corporate officer, not a mere employee, is not a simple labor problem but a
matter that comes within the area of corporate affairs and management and is a corporate
controversy. (Wesleyan University Phil. Vs. Maglaya, G. R. 212774, Jan. 23, 2017.)

III-A. Norma D. Cacho, et al., vs. Virginia Balagtas, G. R. No. 202974, Feb. 7, 2018.

Facts: The By-laws of International Travel, Inc. provides, “Immediately after their
election, the Board of Directors shall formally organize by electing the Chairman, the
President, one or more Vice-President (sic), the Treasurer, and the Secretary, at said meeting.”
Balagtas was elected as Executive Vice-President, the next question that begs to be asked
is whether or not the phrase "one or more vice president" in the above-cited provision of
the by-laws includes the Executive Vice President  position held by respondent Balagtas who
was removed from the said position. In ruling that respondent Balagtas was not a corporate
officer of petitioner North Star, the Court of Appeals pointed out that the NLRC should not have
assumed that the "Vice President" position is the same as the "Executive Vice President" position
that Balagtas admittedly occupied. In other words, that the exact and complete name of the
position must appear in the by-laws, otherwise it is an ordinary office whose occupant shall be
regarded as a regular employee rather than a corporate officer. Question: Is Balagtas included in
the phrase, “one or more vice-president”, so that her removal will be considered as an intra-
corporate controversy? Does NLRC have jurisdiction over the removal of Balagtas?
Answer: The use of the phrase "one or more" in relation to the establishment of vice president
positions without particular exception indicates an intention to give petitioner North Star's Board
ample freedom to make several vice-president positions available as it may deem fit and in
consonance with sound business practice. To require that particular designation/variation of each
vice-president (i.e., executive vice president) be specified and enumerated is to invalidate the by-
laws' true intention and to encroach upon petitioner North Star's inherent right and authority to
adopt its own set of rules and regulations to govern its internal affairs. Thus, by name, the
Executive Vice President position is embraced by the phrase "one or more vice president" in
North Star's by-laws. Balagtas's dismissal is an intra-corporate controversy, not a mere labor
dispute. All told, the issue in the present case is an intra-corporate controversy, a matter outside
the Labor Arbiter's jurisdiction. (Norma D. Cacho, et al., vs. Virginia Balagtas, G. R. No.
202974, Feb. 7, 2018.)

III-B. Belo Medical Group, Inc., vs. Jose L. Santos and Victoria Belo, G. R. No.
185894, August 30, 2017, J. Leonen, ponente.

Belo Medical Group, Inc. received a request from Santos for the inspection of its
corporate records. Santos claimed that he was a registered shareholder and a co-owner of
Victoria Belo's shares in Belo Medical Group, Inc., as these were acquired while they
cohabited as husband and wife.  Santos was unsuccessful in inspecting the corporate books
as Henares, the officer-in-charge of corporate records, was travelling. Belo Medical Group
asked for time in order for Henares to accommodate Santos' request. After the first
attempt to inspect, Belo wrote Belo Medical Group on May 14, 2007 to repudiate Santos'
co-ownership of her shares and his interest in the corporation. She claimed that Santos
42

held the 25 shares in his name merely in trust for her, as she, and not Santos, paid for these
shares. She informed Belo Medical Group that Santos already had a pending petition with
the Regional Trial Court to be declared as co-owner of her properties. She asserted that
unless a decision was rendered in Santos' favor, he could not exercise ownership rights over
her properties. A second inspection was attempted through a written demand by Santos on
May 15, 2008.Again, he was unsuccessful.

Belo Medical Group filed a Complaint for Interpleader with Branch 149, Regional
Trial Court, Makati City on May 21, 2008. Belo Medical Group alleged that while Santos
appeared to be a registered stockholder, there was nothing on the record to show that he
had paid for the shares under his name. The Complaint was filed "to protect its interest
and compel [Belo and Santos] to interplead and litigate their conflicting claims of
ownership of, as well as the corresponding right of inspection arising from, the twenty-five
(25) [Belo Medical Group] shares between themselves pursuant to Rule 62 of the 1997
Rules of Civil Procedure.

Santos, for the third time, sent a letter on May 22, 2008 to schedule an inspection of
the corporate books and warned that continued rejection of his request exposed the
corporation to criminal liability. Nothing came out of this last attempt as well. Belo and
Belo Medical Group wrote to Santos on May 27, 2008 to inform him that he was barred
from accessing corporate records because doing so would be inimical to Belo Medical
Group's interests. Through another letter on May 28, 2008, Santos was reminded of his
majority share in The Obagi Skin Health, Inc. the owner and operator of the House of
Obagi (House of Obagi) clinics. On May 29, 2008, Belo Medical Group filed a
Supplemental Complaint for declaratory relief under Rule 63 of the Rules of Court. In its
Supplemental Complaint, Belo Medical Group relied on Section 74 of the Corporation
Code to deny Santos' request for inspection. Belo filed her Answer Ad Cautelam with
Cross-Claim to put on record her defenses that Santos had no right to inspect the books as
he was not the owner of the 25 shares of stock in his name and that he was acting in bad
faith because he was a majority owner of House of Obagi.

Instead of filing an answer Santos filed a Motion to Dismiss. On October 29, 2008,
Belo Medical Group filed its Opposition and argued that the Motion to Dismiss was a
prohibited pleading under Section 8 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies. Santos filed his Reply to the Oppositions on November 18,
2008. He argued that the controversy was not intra-corporate but civil in nature, as it
involved ownership. Question: Was the case filed by Belo Medical Group an intra-
corporate controversy?

Answer: Belo Medical Group filed a case for interpleader, the proceedings of which are
covered by the Rules of Court. At its core, however, it is an intra-corporate controversy. Interim
Rules of Procedure Governing Intra-Corporate Controversies, enumerates the cases where the
rules will apply:

Section 1. (a) Cases Covered - These Rules shall govern the procedure to be observed in
civil cases involving the following:

1. Devices or schemes employed by, or any act of, the board of directors, business
associates, officers or partners, amounting to fraud or misrepresentation which may be
detrimental to the interest of the public and/or of the stockholders, partners, or members of any
corporation, partnership, or association;
43

2. Controversies arising out of intra-corporate, partnership, or association relations,


between and among stockholders, members, or associates; and between, any or all of them and
the corporation, partnership, or association of which they are stockholders, members, or
associates, respectively;

3. Controversies in the election or appointment of directors, trustees, officers, or


managers of corporations, partnerships, or associations;

4. Derivative suits; and

5. Inspection of corporate books.

The same rules prohibit the filing of a motion to dismiss.

This Court now uses both the relationship test and the nature of the controversy test to
determine if an intra-corporate controversy is present.

Applying the relationship test, this Court notes that both Belo and Santos are named
shareholders in Belo Medical Group's Articles of Incorporation and General Information Sheet
for 2007. The conflict is clearly intra-corporate as it involves two (2) shareholders although the
ownership of stocks of one stockholder is questioned. Unless Santos is adjudged as a stranger to
the corporation because he holds his shares only in trust for Belo, then both he and Belo, based
on official records, are stockholders of the corporation. Belo Medical Group argues that the case
should not have been characterized as intra-corporate because it is not between two shareholders
as only Santos or Belo can be the rightful stockholder of the 25 shares of stock. This may be true.
But this finding can only be made after trial where ownership of the shares of stock is decided.

The two defendants in that case are both stockholders on record. They continue to be
stockholders until a decision is rendered on the true ownership of the 25 shares of stock in
Santos' name. If Santos' subscription is declared fictitious and he still insists on inspecting
corporate books and exercising rights incidental to being a stockholder, then, and only then, shall
the case cease to be intra-corporate.

Applying the nature of the controversy test, this is still an intra-corporate dispute. The
Complaint for interpleader seeks a determination of the true owner of the shares of stock
registered in Santos' name. Ultimately, however, the goal is to stop Santos from inspecting
corporate books. This goal is so apparent that, even if Santos is declared the true owner of the
shares of stock upon completion of the interpleader case, Belo Medical Group still seeks his
disqualification from inspecting the corporate books based on bad faith. Therefore, the
controversy shifts from a mere question of ownership over movable property to the exercise of a
registered stockholder's proprietary right to inspect corporate books.

As an intra-corporate dispute, Santos should not have been allowed to file a Motion to
Dismiss. The trial court should have continued on with the case as an intra-corporate dispute
44

considering that it called for the judgments on the relationship between a corporation and its two
warring stockholders and the relationship of these two stockholders with each other.43

IV. Philcomsat vs. Sandiganbayan, et al., G. R. No. 203023, June 17, 2015.) (PP)

Intra-corporate controversy:

Q. What is the relationship test to determine whether the conflict is intra-corporate? A.


Under the relationship test, the existence of any of the following relationships makes the conflict
intra-corporate: (1) between the corporation, partnership or association and the public; (2)
between the corporation, partnership or association and the State insofar as its franchise, permit
or license to operate is concerned; (3) between the corporation, partnership or association and its
stockholders, partners, members or officers, and (4) among the stockholders, partners or
associates themselves. (Philcomsat vs. Sandiganbayan, et al., G. R. No. 203023, June 17, 2015.)

Q. What is the controversy test to determine whether the conflict is intra-corporate? A.


The nature of the controversy test dictates that the “controversy must not only be rooted in the
existence of an intra-corporate relationship, but must as well pertain to the enforcement of the
parties’ correlative rights and obligations under the Corporation Code and the internal and intra-
corporate regulatory rules of the corporation.” (Philcomsat vs. Sandiganbayan, et al., G. R. No.
203023, June 17, 2015.)

Illustration: LMI is a corporation listed in the Philippine Stock Exchange. LMI entered
into a Memorandum of Agreement with PHILCOMSAT for the latter to gain controlling interest
in LMI through an increase in its authorized capital stock. LMI increased its capital stock and
PHILCOMSAT subscribed to the agreed shares of LMI. LMI changed its name to PHC and
applied with the Philippine Stock Exchange (PSE) for listing of the shares representing the
increase in its capital stock which included the shares subscribed by PHILCOMSAT. PCGG
requested PSE to defer the listing of PHC shares. POTC, owner of 100% of PHILCOMSAT
asked PCGG to rescind its objection to the listing of the increase in PHC’s capital stock. The
Government owns 34.9% of POTC. PCGG failed to act on the request. PHILCOMSAT filed a
complaint before the Sandiganbayan against PCGG to compel the latter to withdraw its
opposition to the listing of the increase in PHC’s capital stock. The Sandiganbayan dismissed the
case for lack of jurisdiction. Issue: Was the dismissal the case correct? Ruling: The
Sandiganbayan has no jurisdiction over the case. The controversy in the present case stems from
the act of PCGG in requesting the PSE to suspend the listing of PHC’s increase in capital stock.
Such request was done in pursuit of protecting the interest of the Republic of the Philippines, a
legitimate stockholder in PHC’s controlling parent company, POTC. Therefore, applying the
relationship test and the nature of controversy test, the dispute is an intra-corporate controversy. (
Philcomsat vs. Sandiganbayan, et al., G. R. No. 203023, June 17, 2015.)

V. Is an action filed by a condominium unit owner against the condominium


corporation questioning the assessment made, an intra-corporate controversy?

There is no doubt that the controversy in this case is essentially intra-corporate in


character, for being between a condominium corporation and its members-unit owners. In the
43
Belo Medical Group, Inc., vs. Jose L. Santos and Victoria Belo, G. R. No. 185894, August 30, 2017, J. Leonen,
ponente.
45

recent case of Chateau De Baie Condominium Corporation v. Sps. Moreno, an action involving
the legality of assessment dues against the condominium owner/developer, the Court held that,
the matter being an intra-corporate dispute, the RTC had jurisdiction to hear the same pursuant to
R.A. No. 8799. Philip L. Go, Pacifico Q. Lim, et al. vs. Distinction Properties Development and
Construction, Inc., G.R. No. 194024, April 25, 2012.
Facts: Cullen purchased from MLHI a condominium unit in Medical Plaza Makati
Condominium Corp., Petitioner herein. Petitioner demanded from the Cullen payment of alleged
unpaid association dues. Cullen refused to pay and claimed that he had been paying association
dues. Petitioner claimed that the unpaid dues were carried over from the seller of the unit, MLHI.
Cullen was declared delinquent and was not allowed to run as director and vote at the election of
directors. On the other hand, MLHI claimed that the association dues had been paid in full.
Cullen filed an action with the regular Regional Trial Court for damages against MLHI and
Medical Plaza Makati Condominium Corp. which filed motions to dismiss on the ground of lack
of jurisdiction because it is HLURB that has jurisdiction over the case. Which entity has
jurisdiction over the case, (a) HLURB, (b) Regular Regional Trial Court, or (c) Regional Trial
Court sitting as a special commercial court?

Answer: HLURB does not have jurisdiction over the case because said entity has
jurisdiction only to hear and decide inter-association and/or intra-association controversies or
conflicts concerning homeowners’ association. The same cannot apply to the present case as it
involves a controversy between a condominium unit owner and a condominium corporation.
The intra-corporate dispute between Cullen and the condominium corporation is within
the jurisdiction of the RTC sitting as a special commercial court and not the HLURB. The case is
dismissed and remanded to the Executive Judge of the RTC of Makati for re-raffle among the
designated special commercial courts. (Medical Plaza Makati Condominium Corp, vs. Cullen, G.
No. 181416, Nov. 11, 2013, Justice Peralta, ponente).

VI. Forest Hills Gold and Country Club, Inc. vs. Fil-Estate Properties, Inc., 797
SCRA 655, July 20, 2016, del Castillo, ponente

Q. Is a derivative suit an intra-corporate controversy?

A. Considering its purpose, a derivative suit would necessarily touch upon the internal
affairs of a corporation. It is for this reason that a derivative is among the cases covered by the
Interim Rules of Procedure Governing Intra-Corporate Controversies and therefore, falls under
the jurisdiction of the Special Commercial Courts. (Forest Hills Gold and Country Club, Inc. vs.
Fil-Estate Properties, Inc., 797 SCRA 655, July 20, 2016, del Castillo, ponente).

VII. SEC vs. CA, 739 SCRA 99, October 22, 2014 (PP)

Validation of Proxy: Omico scheduled its annual stockholders’ meeting on November 3,


2008 and the validation of proxies on October 25, 2008. Astra objected to the validation of
proxies issued in favor of Tommy Kin Hing Tia representing 38% of the outstanding capital
stock of Omico. Despite the objections of Astra, Omico’s Board of Inspectors declared that the
proxies issued in favor of Tin were valid. Astra filed a complaint before the SEC praying for the
invalidation of the proxies issued in favor of Tin. Does SEC have jurisdiction over controversies
arising from the validation of proxies for the election of the directors of a corporation? RULING:
While the regular courts now had the power to hear and decide cases involving controversies in
the election of directors, it was not clear whether the Securities Regulations Code also
transferred to these courts the incidental and ancillary powers of the SEC as enumerated in
46

Section 6 of P.D. 902-A. In GSIS vs. CA, it was ruled that the jurisdiction of the regular courts
over so-called election contests or controversies under Section 5(c) does not extend to every
potential subject that may be voted on by the shareholders, but only to the election of directors or
trustees, in which stockholders are authorized to participate under Section 24 of the Corporation
Code. However, when proxies are solicited in relation to the election of corporate directors, the
resulting controversy, even if it ostensibly raised the violation of the SEC rules on proxy
solicitation, should be properly seen as an election controversy within the original and exclusive
jurisdiction of the trial courts by virtue of Secion 5.2 of the Securities Regulations Code in
relation to Section 5 (c) of Presidential Decree 902-A. (SEC vs. CA, 739 SCRA 99, October 22,
2014)

VIII. BPI Family Savings Bank, Inc. vs. St. Michael Medical Center, Inc., G. R.
No. 205469, March 25, 2015 (PP)

Corporate Rehabilitation: Rehabilitation means that a corporation has been operational


but for some reasons like economic crisis or mismanagement had become distressed or insolvent.
(BPI Family Savings Bank, Inc. vs. St. Michael Medical Center, Inc., G. R. No. 205469, March
25, 2015)

Corporate rehabilitation contemplates a continuance of corporate life and activities in an


effort to restore and reinstate the corporation to its former position of successful operation and
solvency, the purpose being to enable the company to gain a new lease on life and allow its
creditors to be paid their claims out of its earnings. (Philippine Asset Growth Two, Inc. vs.
Fastech Synergy Philippines, Inc., 794 SCRA 695, June 28, 2016).

Question: St. Michael Medical Center commenced the construction of a new hospital
building on the property of Spouses Rodil. To finance the construction, St. Michael Medical
Center which is incorporated with Spouses Rodil as incorporators, obtained a loan from BPI
Family Savings Bank (BPI Family) and secured the loan with a mortgage on the 3 parcels of land
belonging to Spouses Rodil. Lack of funds hampered the construction of the new hospital
building, and as of May 2006, St. Michael neither remained operational nor earning revenue. BPI
Family demanded payment of the loan and when no payment was made, proceeded with the
foreclosure of the mortgaged properties. St. Michael filed with the RTC a petition for Corporate
Rehabilitation with a prayer for a stay order to its creditor, BPI Family. May the rehabilitation
plan of St. Michael proper?

Answer: It is not proper. Rehabilitation means that a corporation has been operational
but for some reasons like economic crisis or mismanagement had become distressed or insolvent.
St. Michael admits that it has not formally operated nor earned any income since its
incorporation, hence there exists no viable concern to be restored, and such rehabilitation is
improper. The only proposed revenue of St. Michael was its negotiations with its potential
investors which were merely pending and speculative. Moreover, it also failed to include the
necessary liquidation analysis, thereby preventing the court to determine the value that its
creditors may recover. (BPI Family Savings Bank, Inc. vs. St. Michael Medical Center, Inc., G.
R. No. 205469, March 25, 2015)

IX. Viva Shipping Lines, Inc. vs. Keppel Phil. Marine, Inc., 784 SCRA 173, Feb. 17,
2016

What is the rationale in corporate rehabilitation? The rationale in corporate


rehabilitation is to resuscitate businesses in financial distress because “assets . . . are often more
valuable when so maintained than they would be when liquidated. Rehabilitation assumes that
47

assets are still serviceable to meet the purposes of the business. The corporation receives
sustenance from the court and a disinterested rehabilitation receiver to balance the interest to
recover and continue ordinary business. All the while attending to the interest of its creditors to
be paid equitably. These interests are also referred to as the rehabilitative and the equitable
purposes of rehabilitation. (Viva Shipping Lines, Inc. vs. Keppel Phil. Marine, Inc., 784 SCRA
173, Feb. 17, 2016).

What is the remedy when corporate rehabilitation can no longer be achieved?

There are instances when corporate rehabilitation can no longer be achieved. When
rehabilitation will not result in a better present value recovery for the creditors, the more
appropriate remedy is liquidation.

It does not make sense to hold, suspend or continue to devalue outstanding credits of a
business that has no chance of recovery. In such cases, the optimum economic welfare will be
achieved if the corporation is allowed to wind up its affairs in an orderly manner. Liquidation
allows the corporation to wind up its affairs and equitably distribute its assets among its
creditors. (Viva Shipping Lines, Inc. vs. Keppel Phil. Marine, Inc., 784 SCRA 173, Feb. 17,
2016).

IX. Balayan Bay Rural Bank, Inc. v s. National Livelihood Dev. Corp., 771 SCRA
141, September 21, 2015. (PP)

Is an insolvent bank dissolved when placed under conservatorship? The insolvent


bank’s legal personality is not dissolved by virtue of being placed under receivership by the
Monetary Board. It must be stressed that a bank retains its juridical personality even if placed
under conservatorship; it is neither replaced nor substituted by the conservator who shall only
take charge of the assets, liabilities and the management of the institution. It being the fact that
conservator PDIC should not be considered as a substitute or as a codefendant of the petitioner
bank but rather as a representative party or someone acting in fiduciary capacity, the insolvent
institution shall remain in the case and shall be deemed as the real party in interest. (Balayan Bay
Rural Bank, Inc. v s. National Livelihood Dev. Corp., 771 SCRA 141, September 21, 2015,
Justice Perez, ponente).

Are the properties of the insolvent corporation transferred to the


receiver/liquidator? The properties of an insolvent bank are not transferred by operation of law
to the statutory receiver/liquidator but rather these assets are just held in trust to be distributed to
its creditors after the liquidation proceedings in accordance with the rules on concurrence and
preference of credits. The debtor’s properties are then deemed to have been conveyed to the
Liquidator in trust for the benefit of creditors, stockholders and other persons-in-interest. This
notwithstanding, any lien or preference to any property shall be recognized by the Liquidator in
favor of the security or lienholder, to the extent allowed by law, in the implementation of the
liquidation plan. (Balayan Bay Rural Bank, Inc. v s. National Livelihood Dev. Corp., 771 SCRA
141, September 21, 2015, Justice Perez, ponente).

IX. What is the effect of the appointment of a rehabilitation receiver? What is the
purpose thereof? Upon appointment by the SEC (now, RTC Special Commercial Court) of a
rehabilitation receiver, all actions for claims against the corporation pending before any court,
tribunal or board shall ipso jure be suspended. (Garcia vs. Philippine Air Lines, Inc., 531
SCRA 574.)

What are the actions that are suspended during the process of rehabilitation? The
actions that are suspended cover all claims against the corporation whether for damages founded
48

on a breach of contract of carriage, labor cases, collection suits or any other claims of a
pecuniary nature. No exception in favor of labor claims is mentioned in the law. [1] No exception
either is made therein in favor of maritime claims. Thus, since the law does make any
exemptions or distinctions, neither should we. (Philippine Airlines, Inc. vs. Heirs of Bernardino
J. Zamora, 538 SCRA 456, November 23, 2007; Negros Navigation Co., Inc. vs. Court of
Appeals, 573 SCRA 434, December 10, 2008. )

X. Bank of the Philippine Islands vs. Co, 774 SCRA 28, November 9, 2015).

Jupiter Real Estate Ventures, Inc. and spouses Co obtained a loan from Far East
Bank and Trust Company (FEBTC) and to secure the loan mortgaged eight parcels of land.
FEBTC merged with Bank of the Philippine Islands with the latter as the surviving
corporation. Jupiter and Spouses Co defaulted in the payment of the loan. BPI foreclosed the
real estate mortgage. An auction sale was held on July 12, 2000 where the mortgaged
properties were sold to BPI as the highest bidder. The Certificate of Sale was registered and
annotated at the back of the certificates of title on August 22, 2000. After the expiration of
the period of redemption, BPI consolidated its ownership over the real properties and new
titles were issued in its name. On April 29, 2003, BPI filed a petition for the issuance of a
writ of possession before the Regional Trial Court. On September 22, 2003, Jupiter filed a
petition for corporate rehabilitation. The RTC issued a Stay Order. On October 6, 2003,
Spouses Co and Jupiter moved for suspension of the proceedings for the issuance of the writ
of possession on the ground that because of the Stay Order, the writ of possession cannot be
issued. On September 30, 2005, the RTC issued a writ of possession in favor of BPI. Issue:
Was the writ of possession validly issued considering that a petition for rehabilitation was
filed prior to the issuance of the writ of possession? RULING: The mere pendency of a
petition for corporate rehabilitation and the issuance of a stay order do not and cannot enjoin
the courts from the enforcement of claims. A stay order or the suspension of the enforcement
of all claims against the corporation shall commence only from the time the rehabilitation
receiver is appointed and a stay order is issued. In this case the auction sale on July 12, 2000,
the registration and annotation of the certificate of sale on August 22, 2000 and issuance of
new titles in favor of BPI in 2001, as well as the petition for the issuance of the writ of
possession were all completed before the filing of the petition for rehabilitation and the
issuance of the stay order in September 2003. Thus, after the redemption period expired
without respondent redeeming the foreclosed property, BPI became the absolute owner of the
property and it was within its right to move for the consolidation of title and the issuance of
new title; thus it is entitled to the possession and enjoyment of the property. (Bank of the
Philippine Islands vs. Co, 774 SCRA 28, November 9, 2015).

INSURANCE

I. What is microinsurance?

Microinsurance is a financial product or service that meets the risk protection needs of
the poor where:

“(a) The amount of contributions, premiums, fees or charges, computed on a daily basis,
does not exceed seven and a half percent (7.5%) of the current daily minimum wage rate for
nonagricultural workers in Metro Manila; and

“(b) The sum of guaranteed benefits is not more than one thousand (1,000) times of the
current daily minimum wage rate for nonagricultural workers in Metro Manila.
49

II. Distinguish microinsurance from industrial life insurance.

A. Industrial Life Insurance may be distinguished from Microinsurance as follows:

(1) The maximum amount of Industrial Life Insurance is 500 times that of the current
statutory daily wage in the City of Manila while Microinsurance’s maximum is 1,000 times of
the current daily minimum wage in Metro Manila. Thus, while Microinsurance is for the “risk
protection of the poor”, Industrial Life Insurance is for the protection of the poorer people.
(2) Industrial Life Insurance shall not lapse for non-payment of premium if such non-
payment was due to the failure of the insurer to send its representative or agent to the insured at
the residence of the insured or someplace indicated by him for the purpose of collecting such
premium,44 while failure to collect the premium of Microinsurance is not an excuse for non-
payment of premium and the policy will lapse if the premium is not paid;45

(3) In Industrial Life Insurance, the insured has a grace period of thirty days within which
to pay the succeeding premium46 while no such privilege is provided in Microinsurance.47

(4) Premiums of Industrial Life Insurance are payable monthly or oftener48 while such
scheme is not provided for in Microinsurance.

III. Bank of the Philippine Islands and FGU Insurance Corp. vs. Laingo, G. R.
No. 205206, March 16, 2016, J. Carpio, ponente

Question: Rheozel opened a “Platinum 1-in-1 Savings and Insurance” account with BPI.
Such account is one wherein depositors are automatically covered by an insurance policy against
disability or death issued by FGU. On Sept. 25, 2000, Rheozel died due to a vehicular accident.
On Sept. 27, 2000, Laingo, the beneficiary of the insurance policy instructed the family’s
secretary to go to BPI to inquire about the savings account of Rheozel. Laingo wanted to use the
money in the savings account for Rheozel’s burial and funeral expenses. BPI allowed withdrawal
from the account of Rheozel, More than two years later or on Jan. 21, 2003, Rheozel’s sister
while arranging Rheozel’s personal things in his room found the Personal Accident Insurance
Policy issued by FGU. Upon being informed of the existence of the insurance, Laingo sent two
letters of demand to FGU which denied the claim on the ground the policy provides that the
claim should have been filed within three calendar months from the death of Rheozel. Issue:
Whether or not Laingo, as named beneficiary who had no knowledge of the existence of the
insurance contract, is bound by the three calendar month deadline for filing a written notice of
claim upon the death of the insured. RULING: The Platinum 2–in-1 Savings and Insurance
account was BPI’s commercial product, offering the insurance coverage for free for every
deposit account opened. Rheozel directly communicated with BPI, the agent of FGU. BPI, as
agent of FGU had the primary responsibility to ensure that the 2-in-1 account be reasonably
carried out with full disclosure to the parties concerned, particularly the beneficiaries. Thus, it
was incumbent upon BPI to give proper notice of the existence of the insurance coverage and the
stipulation in the insurance contract for filing a claim to Laingo, as Rhoezel’s beneficiary, upon
the latter’s death. Since BPI is the agent of FGU then notice of death of Rhoezel to BPI is
considered as notice to FGU. Both BPI and FGU shall bear the loss and must compensate Laingo
44
Section 235, par. 2
45
See discussions under Section 77.
46
Section 77 in relation to Section 233 (a).
47
See Section 187
48
Section 235, par. 1
50

for actual damages and FGU must pay the proceeds of the policy. (Bank of the Philippine Islands
and FGU Insurance Corp. vs. Laingo, G. R. No. 205206, March 16, 2016, J. Carpio, ponente)

IV. Cahayag vs. Commercial Credit Corporation, 780 SCRA 255, January 13,
2016

Question: What is contra proferentem rule?

Answer: Contra proferentem rule provides that in the interpretation of documents,


ambiguities are to be construed against the drafter. By its very nature, the precept assumes the
existence of an ambiguity in the contract, which is why contra proferentem is also called the
ambiguity doctrine. (Cahayag vs. Commercial Credit Corporation, 780 SCRA 255, January 13,
2016).

V. The Insular Life Assur. Co., Ltd., vs. Khu, et al., G. R. No. 195176, April 18,
2016.

Question: Felipe obtained a life insurance policy from Insular Life. On June 23, 1999,
the policy lapsed due to non-payment of premiums. Felipe applied for reinstatement of the policy
which Insular Life approved with the following changes on the policy : (1) Extra premium and
(2) Waiver of the accidental death benefit and premium disability. Felipe agreed to the added
conditions. Insular Life issued an endorsement stating “This certifies that as agreed by the
Insured, the reinstatement of this policy has been approved by the Company on the
understanding that the following changes are made on the policy effective June 22, 1999.” Felipe
paid the adjusted premium on Dec. 27, 1999. Felipe died on Sept. 22, 2001. The beneficiaries
filed a claim with the insurer which the latter denied on the ground of concealment and
misrepresentation. The insurer claimed that the two-year period of incontestability should be
counted from Dec. 27, 1999 when the additional premium was paid and from such date to the
death of the insured on Sept. 22, 2001, less than 2 years had elapsed. On the other hand, the
beneficiaries claimed that in the letter of acceptance and endorsement made by the insurer, the
phrase “effective June 22, 1999” appeared. From June 22, 1999 to the death of the insured on
Sept. 22, 2001, more than 2 years had elapsed and hence the policy is already incontestable From
what time should the incontestability period be computed from, Dec. 27, 1999 when payment of
the adjusted premium was made or from June 22, 1999 as stated in the insurer’s endorsement?

Answer: In the first sentence of the Endorsement, it is not entirely clear whether the
phrase, “effective June 22, 1999” refers to the subject of the sentence, namely, “the reinstatement
of the this policy” or to the subsequent phrase, “changes are made on the policy.” Given the
obscurity of the language, the construction favorable to the insured will be adopted by the courts.
Accordingly, the subject policy is deemed reinstated as of June 22, 1999. Thus, the period of
contestability has lapsed. A contract of insurance being a contract of adhesion, par excellence,
any ambiguity therein should be resolved against the insurer. Indeed, more than two years had
elapsed from the time the subject insurance policy was reinstated on June 22, 1999 vis-à-vis
Felipe’s death on Sept. 11, 2001. As such, the subject insurance policy has already become
incontestable at the time of Felipe’s death. (The Insular Life Assur. Co., Ltd., vs. Paz y. Khu, G.
R. No. 195176, April 18, 2016, J. del Castillo, ponente).

VI. Alpha Insurance and Surety Co. vs. Arsenia Sonia Castor, G. R. No. 198174,
September 2, 2013, Justice Peralta, ponente.

Question: Castor insured her Toyota Revo against loss or damage. She instructed her
driver, Lanuza to bring the car to a repair shop. Lanuza did not return the car and despite diligent
efforts he could not be located anymore. Castor reported this to the police and notified the
51

insurer about the loss and demanded payment of the proceeds of the insurance. The insurer
refused to pay on the ground that the person who stole the car was her under her employ and
pursuant to the policy, the insurer is not liable for “any malicious damage caused by the insured,
any member of his family or by A PERSON IN THE INSURED’S SERVICE.” Is the refusal
correct?

Answer: The insurer is liable. The court finds it puzzling that the insurer after using the
word “loss” and “damage” in the entire policy, suddenly went specific by using the word
“damage” only in the policy’s exception regarding “malicious damage”. The court cannot
believe that the policy really intended the word “damage” in the term “malicious damage” to
include the theft of the insured vehicle. “Loss” and “damage” mean different things in common
ordinary usage. The word “loss” refers to the act or fact of losing, or failure to keep possession,
while the word “damage” means deterioration or injury to property”. When the terms of the
policy are ambiguous, equivocal or uncertain, the policy should be construed liberally in favor of
the assured and strictly against the insurer. Insurance is a contract of adhesion which must be
construed liberally in favor of the insured and strictly against the insurer. Loss is not included the
term “damage”. (Alpha Insurance and Surety Co. vs. Arsenia Sonia Castor, G. R. No. 198174,
September 2, 2013, Justice Peralta, ponente).

VII. Sun Life of Canada (Phils.), Inc. vs. Sibya, et al., G. R. No. 211212, June 8,
2016, citing Manila Bankers Life Insurance Corp. v. Aban, G. R. No. 175666, July 29, 2013,
J. Reyes, ponente with J. Velasco concurring). (PP)

Concealment:

Facts: Sibya, Jr. applied for life insurance with Sun Life. In his application for insurance,
he indicated that he had sought advice for kidney problems. He indicated in his application:
“Last 1987, had undergone lithoripsy due to kidney stone under Dr. Jesus Benjamin Mendoza at
National Kidney Institute, discharged after 3 days, no recurrence as claimed.” On February 5,
2001, Sun Life approved Sibya’s application and issued the life insurance policy. On May 11,
2001, Sibya died of gunshot wound. Sun Life sought to rescind the policy on the ground of
concealment. Sun Life claimed that Sibya did not disclose his previous medical treatment at the
NKI in May and August 1994.The beneficiaries claimed that the insured did not commit
concealment or misrepresentation and he even authorized Sun Life to inquire further into his
medical history for verification purposes. Issue: Was the insured guilty of concealment or
misrepresentation? Ruling: The insured did not commit concealment or misrepresentation.
Sibya admitted in his application his medical treatment for kidney ailment. He even executed an
authorization in favor of Sun Life to conduct investigation about his medical history. It cannot be
said that he concealed his medical history. .” (Sun Life of Canada (Phils.), Inc. vs. Sibya, et al.,
G. R. No. 211212, June 8, 2016, citing Manila Bankers Life Insurance Corp. v. Aban, G. R. No.
175666, July 29, 2013, J. Reyes, ponente with J. Velasco concurring).

Incontestable Clause:

“An insurer is given two years – from the effectivity of a life insurance contract and
while the insurer is alive to discover or prove that the policy is void ab initio or is rescindable by
reason of the fraudulent concealment or misrepresentation of the insured or his agent. After the
two-year period lapses, or when the insured dies within the period, the insurer must make
good on the policy, even though the policy was obtained by fraud, concealment, or
misrepresentation. This is not to say that insurance fraud must be rewarded, but that insurers
who recklessly and indiscriminately solicit and obtain business must be penalized, for such
recklessness and lack of discrimination ultimately work to the detriment of bona fide takers of
52

insurance and the public in general.” (Sun Life of Canada (Phils.), Inc. vs. Sibya, et al., G. R. No.
211212, June 8, 2016, citing Manila Bankers Life Insurance Corp. v. Aban, G. R. No. 175666,
July 29, 2013, J. Reyes, ponente with J. Velasco concurring).

Illustrations:
(1) Facts: On July 3, 1993 Sotero took out a life insurance policy from Manila Bankers
Life Insurance with Aban as beneficiary. On April 10, 1996 when the insurance policy had been
in force for more than two years and seven months, Sotero died. The beneficiary filed a claim
with the insurer. The insurer alleged that Sotero fraudulently obtained the policy and filed an
action to rescind the policy. May the policy be rescinded? Ruling: The insurer cannot rescind the
contract of insurance. “An insurer is given two years – from the effectivity of a life insurance
contract and while the insurer is alive to discover or prove that the policy is void ab initio or is
rescindable by reason of the fraudulent concealment or misrepresentation of the insured or his
12agent. After the two-year period lapses, or when the insured dies within the period, the
insurer must make good on the policy, even though the policy was obtained by fraud,
concealment, or misrepresentation. This is not to say that insurance fraud must be rewarded,
but that insurers who recklessly and indiscriminately solicit and obtain business must be
penalized, for such recklessness and lack of discrimination ultimately work to the detriment of
bona fide takers of insurance and the public in general.” (Manila Bankers Life Insurance Corp. v.
Aban, G. R. No. 175666, July 29, 2013, 702 SCRA 417)

(2) Facts: On February 5, 2001, Sun Life approved Atty. Jesus Sibya, Jr.’s (Sibya, Jr.)
application for life insurance. On May 11, 2001, Sibya., Jr. died as a result of a gunshot wound.
The beneficiaries filed a claim against the insurer, Sun Life. On August 27, 2001, Sun Life
denied the claim on the ground that the details of Sibya Jr.’s medical history were not revealed
in his application. Sun Life tendered a check representing the refund of the premiums paid. The
beneficiaries reiterated their claim which Sun Life refused and instead filed a complaint for
rescission of the insurance policy. Issue: May the insurer rescind the life insurance contract
after the death of the insured? Ruling: The insurer may not rescind the contract. After the
two-year period lapses, or when the insured dies within the period, the insurer must make
good on the policy, even though the policy was obtained by fraud, concealment, or
misrepresentation. (Sun Life of Canada (Phils.), Inc. vs. Sibya, et al., G. R. No. 211212, June 8,
2016, citing Manila Bankers Life Insurance Corp. v. Aban, G. R. No. 175666, July 29, 2013. J.
Reyes, ponente with J. Velasco concurring).

IV. (H. H. Hollero Construction, Inc. vs. GSIS, 736 SCRA 303, September 24, 2014).

Question: The policy provides that “if a claim is made and rejected and no action or suit
is commenced within twelve months after rejection” “all benefits under this policy shall be
forfeited”. After the claim was rejected in the first instance, the insured asked for
reconsideration. From what time should the period of twelve months from final rejection be
computed?

Answer: Final rejection means denial by the insurer of the claims of the insured and not
the rejection or denial by the insurer of the insured’s motion or request for reconsideration. The
rejection referred to should be construed as the rejection in the first instance”. (H. H. Hollero
Construction, Inc. vs. GSIS, 736 SCRA 303, September 24, 2014).

Facts: The insured obtained a Contractors’ All Risks (CAR) Policy from GSIS. The
policy provides that “all benefits thereunder shall be forfeited if no action is instituted within
twelve (12) months after the rejection of the claim for loss, damage or liability.” Because of
53

typhoons “Biring”, “Huaning” and “Saling”, the insured property was damaged and the insured
made several claims for indemnity on June 30, 1988, August 25, 1988 and October 18, 1988
from GSIS. In a letter dated April 26, 1990, GSIS rejected the claims for indemnity for
damages wrought by typhoons “Biring” and “Huaning”. In a letter dated June 21, 1990, GSIS
also denied the claim for damages caused by typhoon “Saling”. In a letter dated April 18, 1991,
the insured impugned the rejection of the claims and reiterated its demand for settlement of the
claims. On September 27, 1991, the insured filed a complaint against GSIS. The insured
claims that the GSIS letters dated April 26, 1990 and June 21, 1990 did not amount to a “final
rejection” of the claim. Has the action prescribed?

Answer: The insured’s causes of action accrued from its receipt of the letters dated April
26, 1990 and June 21, 1990, or the date the GSIS rejected its claims in the first instance. Since
the insured allowed more than twelve (12) months to lapse before filing the necessary action on
September 27, 1991, its causes of action had already prescribed. (H. H. Hollero Construction,
Inc. vs. GSIS, 736 SCRA 303, September 24, 2014).

XIV. When is the insurer entitled to the payment of premium and what is the
consequence of non-payment of premium?

An insurer is entitled to payment of the premium as soon as the thing insured is exposed
to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract
of insurance issued by an insurance company is valid and binding unless and until the premium
thereof has been paid, except in the case of a life or an industrial life policy whenever the grace
period provision applies, or whenever under the broker and agency agreements with duly
licensed intermediaries, a ninety (90)-day credit extension is given. No credit extension to a duly
licensed intermediary should exceed ninety (90) days from date of issuance of the policy.

V. What are the statutory exceptions to the rule that the insurer is entitled to the
payment of premium as soon as the thing insured is exposed to the peril insured against?

Unless the premium is paid, the policy shall not be valid and binding notwithstanding any
agreement to the contrary. The statutory exceptions are:

(1) In case the insurance coverage relates to life or industrial life (health) insurance when
grace period applies;

(2) Whenever a ninety-day credit extension is given for the premium due;

(3) When the insurer makes a written acknowledgement of the receipt of premium, this
acknowledgement being a conclusive evidence of payment of premium;

(4) Where the obligee has accepted the bond, in which case the bond becomes valid and
enforceable irrespective of whether or not the premium has been paid by the obligor to the
surety.

(5) In case of industrial life insurance, the policy shall not lapse for non-payment of
premium if such non-payment was due to the failure of the insurer to send its representative or
agent to the insured at the residence of the insured or some place indicated by him for the
purpose of collecting such premium. However, this does not apply when the premium on the
policy remains unpaid for a period of three months or twelve weeks after the grace period has
expired.

VI. Gaisano vs. Development Insurance and Surety Corporation, G. R. No. 190702,
February 17, 2017
54

Facts: Petitioner Gaisano insured his Mitsubishi Montero with respondent insurance
company which issued the corresponding insurance policy for September 27, 1996 to September
27, 1997. To collect the premiums, respondent’s agent, Trans-Pacific issued a statement of
account to petitioner’s company, Noah’s Ark which issued the corresponding check covering the
payment of the premium dated September 27, 1996. However, nobody from Trans-Pacific picked
up the check on that day and instead informed Noah’s Ark that its messenger will get the check
on the next day, September 28. In the evening of September 27, 1996, the Mitsubishi Montero
was stolen. Oblivious of the incident, Trans-Pacific picked up the check the next day, September
28. It issued an official receipt dated September 28, 1996 and deposited the check for
encashment on October 1, 1996. On October 1, 1996, respondent insurance company was
informed of the loss of the vehicle and petitioner demanded payment of the loss. The respondent
refused to pay on the ground that there was no insurance contract due to the non-payment of the
premium. Is the respondent insurance company liable for the loss?

Ruling: The respondent insurance company is not liable. Just like any other contract,
insurance requires a cause or consideration. The consideration is the premium, which must be
paid at the time and in the way and manner specified in the policy. If not so paid, the policy will
lapse and be forfeited by its own terms. The policy in this case does not fall under one of the
exceptions where the insurance policy takes effect even if the premium is not paid. It does not
fail either under the exceptions laid down in Makati Tuscany Condominium Corp. and UCPB
General Insurance Co., Inc. cases. Both contemplate situations where the insurers have
consistently granted the insured a credit extension or term for the payment of the premium. Here,
however, petitioner failed to establish the fact of a grant by respondent of a credit term in his
favor, or that the grant has been consistent. To rule otherwise would render nugatory the
requirement in Section 77 that “notwithstanding any agreement to the contrary, no policy or
contract of insurance issued by an insurance company is valid and binding unless and until the
premium thereof has been paid.” (Gaisano vs. Development Insurance and Surety Corporation,
G. R. No. 190702, February 17, 2017).

VII. In property insurance, what is the consequence of payment of the loss to the
insured?

In property insurance, after the insured has received payment from the insurer of the loss
covered by the policy, the insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who violated the contract. The insurer’s right to subrogation
accrues upon payment of the insurance claim.

Subrogation is the substitution of one person in the place of another with reference to a
lawful claim or right, so that he who is substituted succeeds to the rights of the other in relation
to a debt or claim, including its remedies or securities. The principle covers the situation where
the insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies
belonging to the insured against a third party with respect to any loss covered by the policy. It
contemplates full substitution such that it places the party subrogated in the shoes of the creditor,
and he may use all means which the creditor may employ to enforce payment.

SUBROGATION

EVIDENCE NEEDED IN SUBROGATION CASE. As a general rule, the insurance


policy needs to be presented in evidence before the insurer may recover the insured value of the
lost/damaged cargo in the exercise of its subrogatory right. The presentation of the contract
55

constitutive of the insurance relationship between the consignee and insurer is critical because it
is the legal basis of the right of subrogation.49

In an insurance suit, the actionable document is the policy which must be attached to the
complaint pursuant to Section 7, Rule 9 of the Rules of Court. However, there is no specific
provision in the Rules of Court which prohibits the admission in evidence of an actionable
document in the event a party fails to comply with the requirement of the rule on actionable
document under Section 7, Rule 9. But what must be presented as evidence is the policy itself
and not a mere Marine Risk Note.50

However, the rule is not inflexible.51 It has been held that the presentation in evidence of
the insurance policy is not indispensable before the insurer may recover from the common carrier
the insured value of the lost cargo in the exercise of its subrogatory right. The subrogation
receipt, by itself, is sufficient to establish not only the relationship of the insurer and the shipper
of the lost cargo but also of the amount paid to settle the insurance claim. The right of
subrogation accrues simply upon payment by the insurance company of the insurance claim. 52
Aside therefrom, in case the failure to submit the policy as evidence during the trial was never
presented as an issue before the trial court or it is not among the issues agreed upon by the
parties to be resolved during the pre-trial, then the non-presentation in evidence of the insurance
policy during the trial is not fatal to the cause of the insurer claiming subrogation.53

ILLUSTRATION:

(a) Insurance policy must be presented.

(1) 120 pieces of motors were air shipped from the US to ABB Koppel,
Inc. in Manila. At the NAIA, the cargo was discharged and forwarded to the
warehouse of Paircargo for temporary storage pending release by the Bureau of
Customs. Later, Regis Brokerage withdrew the cargo and delivered it to ABB
Koppel. However, it was discovered that only 65 of the 120 pieces of motors were
actually delivered and the remaining 55 motors could not be accounted for.
Paircargo and Regis both refused to pay the value of the missing motors. Thus,
Malayan Insurance with which ABB Koppel insured the cargo paid ABB Koppel
the insurance claim. Claiming subrogation to the right of ABB Koppel, Malayan
Insurance filed an action against Paircargo and Regis at the MeTC of Manila
where it presented Marine Risk Note as proof that Malayan Insurance insured the
cargo. The complaint was dismissed on the ground that the Marine Risk Note
presented as proof that the cargo was insured was invalid. Questions: (a) Was
the Marine Risk Note sufficient to prove the existence of the insurance contract?
(b) Was Malayan Insurance subrogated to the rights of ABB Koppel against the
party responsible for the loss of the shipment? Answers: The Marine Risk Note
was not the insurance contract itself, but merely a complementary or
supplementary document to the contract of insurance that may have existed

49
Equitable Insurance Corporation vs. Transmodal International, Inc., G. R. No. 223692, August 7, 2017.
50
Malayan Insurance Co., Inc. vs. Regis Brokerage Corporation, G. R. No. 172156, Nov. 23, 2007.
51
Equitable Insurance Corporation vs. Transmodal International, Inc., G. R. No. 223692, August 7, 2017.
52
Delsan Transport Lines, Inc. vs. Court of Appeals and American Home Assur. Corp., G. R. No. 127897, Nov. 15,
2001.
53
See Equitable Insurance Corporation vs. Transmodal International, Inc., G. R. No. 223692, August 7, 2017.
56

between Malayan and ABB Koppel. (b) Since Malayan failed to introduce in
evidence the Marine Insurance Policy itself as the main insurance contract, or
even advert to said document in the complaint, it failed to establish its cause of
action for restitution as a subrogee of ABB Koppel. Malayan’s right to recovery is
derived from contractual subrogation as an incident to an insurance relationship,
and not from any proximate injury to it inflicted by the defendants. It is critical
that Malayan establish the legal basis of such right to subrogation by presenting
the contract constitutive of the insurance relationship between it and ABB
Koppel. Without such legal basis, its cause of action cannot survive. The
dismissal of the complaint is correct.54

(2) Nestle was the consignee of two hydraulic engines shipped from the
United States. The cargo arrived in Manila on May 17, 1979. It was turned over to
E. Razon Arrastre which retained custody until July 20, 1979. It was later hauled
by Mabuhay Brokerage to its warehouse where it stayed until July 26, 1979. On
this date it was delivered to the consignee. One of the engines was found to be
damaged so the consignee refused to accept the unit. Nestle filed a claim against
E. Razon, Mabuhay, the Port Authority and its insurer, Home Insurance
Corporation. When the other companies refused to pay, Home Insurance paid the
claim and was issued a subrogation receipt. Mabuhay alone was sued by Home
Insurance for the recovery of the amount it paid to Nestle. Mabuhay again denied
liability. Home Insurance filed a case with the Regional Trial against Mabuhay.
The RTC dismissed the case and noted that the insurer failed to establish a valid
subrogation and prove the amount paid to Nestle. On appeal, the Court of Appeals
ruled that even if a valid subrogation could be established, Mabuhay was
nevertheless not an absolute insurer against all risks of the transport of the goods.
The petitioner Home Insurance assailed the decision and argued that the
subrogation receipt proves the existence of the insurance contract between Nestle
and Home Insurance and the amount paid by the latter to the former. Question:
Can Home Insurance obtain reimbursement from Mabuhay despite the failure to
present the insurance policy as evidence during the trial? Answer: Mabuhay is
not liable. The insurance contract was not presented. It may be assumed that the
subrogation receipt may establish the relationship between the petitioner and the
consignee and the amount paid to settle the claim. But by itself the subrogation
receipt is not sufficient to prove the petitioner Home Insurance’s claim holding
respondent Mabuhay liable for the damage to the engine. The shipment of the
cargo passed through several stages: first, from the shipper to the port of
departure; second, from the port of departure to the vessel; third from the vessel to
the port of arrival; fifth, from the port of arrival to the operator; sixth, from the
arrastre operator to the hauler; and lastly, from the hauler to the consignee. In the
absence of proof of stipulations to the contrary, the hauler can be liable only to
any damage that occurred from the time it received the cargo until it finally
delivered it to the consignee. As a mere subrogee of Nestle, Home Insurance can
exercise only such rights against the parties handling the cargo as were granted to
Nestle under the insurance contract. The insurance contract could have clearly
indicated the scope of the coverage but there is no evidence of this. It cannot
simply be supposed that the hauling was included in the coverage, it is possible
that the insurance coverage ended with the arrastre. In other words, the rights
transferred to Home Insurance by Nestle might night include the right to sue
54
Malayan Insurance Co., Inc. vs. Regis Brokerage Corporation, supra.
57

Mabuhay. The insurance contract might have proved that it covered the hauling
portion of the shipment and was not limited to the transport of the cargo while at
sea. It could have shown that the agreement was not only a marine transportation
insurance but covered all phases of the cargo’s shipment, from the time the cargo
was loaded on the vessel in the United States until it was delivered to the
consignee in the Philippines. But there is no acceptable evidence of these
stipulations because the original contract was not presented.55

(b) Insurance policy need not be presented.

(1) Sytengco hired Transmodal to clear from the customs authorities and
withdraw, transport and deliver to its warehouse cargoes consisting of 200 cartons
of gum Arabic valued at US $21,750.Transmodal withdrew the said cargoes from
the Bureau of Customs and delivered the same to Sytengco’s warehouse. It was
found that 187 cartons had water marks and the contents of 13 wet cartons were
partly hardened. Upon resurvey, it was found out that of the randomly opened 20
cartons, 40% to 60% hardened. The Surveyor computed the loss at P728,712.00
after adjustment of 50% loss allowance. Sytengco demanded payment from
Transmodal and on the same date, the insurer of the cargo, Equitable Insurance
paid Sytengco P728,712.00. Sytengco then signed a subrogation receipt and loss
receipt in favor of Equitable Insurance which in turn, demanded reimbursement
from Transmodal.Transmodal denied liability. Equitable Insurance filed a
complaint for damages invoking its right as subrogee and averred that
Transmodal”s fault and gross negligence were the causes of the damages
sustained by Sytengco. The RTC ruled in favor of Equitable Insurance. The RTC
decided that Equitable Insurance’s non-presentation of the insurance policy was
raised for the first time in the memorandum of Transmodal and noted that
Equitable had, in fact, submitted a copy of the insurance contract. Transmodal
appealed to the Court of Appeals which reversed the decision of the RTC on the
ground that the insurance contract was neither attached to the complaint nor
presented in evidence and what was presented was merely a marine risk note.
Because the findings of facts of the RTC and the CA are glaringly in contrast, the
Court deems it proper to review the case. It was found by the court that contrary
to decision of the CA, marine risk note and Equitable Insurance Corporation
Marine Policy No. MN-MOP-HO 0000099 were offered in evidence. Question:
Will the action of Equitable Insurance against Transmodal prosper? Answer: As a
general rule, the marine insurance policy needs to be presented in evidence before
the insurer may recover the insured value of the lost/damaged cargo in the
exercise of its subrogatory right. The presentation of the contract constitutive of
the insurance relationship between the consignee and insurer is critical because it
is the legal basis of the right of subrogation. However, the rule is not inflexible.
In Delsan Transport Lines, Inc. vs. Court of Appeals and American Home Assur.
Corp.,56 it was ruled that “the right of subrogation accrues simply upon payment
by the insurance company of the insurance claim. Hence, presentation in evidence
of the marine insurance policy is not indispensable before the insurer may recover
from the common carrier the insured value of the lost cargo in the exercise of its
subrogatory right. The subrogation receipt, by itself, was held sufficient to
establish not only the relationship between the insurer and the consignee, but also
55
Home Insurance Corporation vs. Court of Appeals and Mabuhay Brokerage Co., Inc., G. R. No. 109293, Aug. 18,
1993.
56
G. R. No. 127897, Nov. 15, 2001.
58

the amount paid to settle the insurance claim. The non-presentation of the
insurance contract was deemed not fatal to the insurer’s cause of action because
the loss of the cargo undoubtedly occurred while on board the petitioner’s vessel.”
“It was never presented as an issue before the RTC. In fact, it is not among the
issues agreed upon by the parties to be resolved during the pre-trial.”57

(2) Republic Asahi Glass Corporation (RAGC) was the consignee of a


shipment of 14 cardboards of 400 kgs. Of Silver Nitrate from Germany. The
shipment was insured with FGU. Upon arrival in the Port of Manila, the customs
broker of RAGC claimed the shipment from International Container Terminal
Services, Inc. (ICTSI) but the shipment could not be found. As insurer, FGU paid
RAGC and demanded reimbursement from ICTSI which refused to pay. FGU
filed an action against ICTSI with the RTC which rendered judgment in favor of
FGU. On appeal, the Court of Appeals (CA) affirmed the decision of the RTC.
Petitioner ICTSI assailed the decision of the CA on the ground, among others that
the CA erred in failing to dismiss the case on the ground that FGU did not offer
the insurance policy in evidence. Petitioner insists that Marine Open Policy No.
MOP-12763 under which the ship was insured was no longer in force at the time
it was loaded on board the vessel. FGU, on the other hand insists that it was under
Marine Risk Note No., 9798 that the shipment was covered. Question: Is
Petitioner ICTSI liable? Answer: There is no doubt that the loss of the cargo
occurred while in petitioner’s custody. Moreover, there is no issue as regards the
provisions of Marine Open Policy No. MOP-12763, such that the presentation of
the contract itself is necessary for perusal, not to mention that its existence was
already admitted by the petitioner in open court. And even though it was not
offered in evidence, it still can be considered by the court for as long as they have
been properly identified by testimony duly recorded and they have themselves
been incorporated in the records of the case.58

(3) Caltex entered into a contract with Delsan Transport whereby the latter
agreed to transport industrial fuel from Batangas-Bataan refinery to different parts
of the country. Pursuant to the contract, Petitioner Delsan took on board its vessel
2,277,314 kiloliters of industrial fuel of Caltex to be delivered to the Caltex Oil
Terminal in Zamboanga City. The shipment was insured with respondent
American Home Assurance Corporation. The vessel sank near Panay Gulf taking
with it the entire cargo of fuel oil. Respondent American Home Assurance paid
Caltex P5,096,635.57, the insured value of the lost cargo. Exercising its right of
subrogation, respondent American Home Assurance demanded from Delsan the
amount it paid to Caltex. Due to its failure to collect from Delsan, respondent
American Home Assurance filed a complaint with the RTC which dismissed the
case on the ground that the vessel on which the cargo was loaded was seaworthy
and the loss was caused by force majeure. During the trial, American Home
Assurance presented in evidence the subrogation receipt signed by Caltex
attesting to the receipt of payment and subrogation of the insurer in its right.
However, American Home Assurance failed to present the marine insurance
policy covering the cargo lost. On appeal, the Court of Appeals reversed the
decision. Petitioner Delsan assailed the decision of the Court of Appeals, on the
ground among others that American Home Assurance failed to present in

57
Equitable Insurance Corporation vs. Transmodal International, Inc., G. R. No. 223692, August 7, 2017.
58
International Container Terminal Services, Inc. vs. FGU Insurance Corporation, G.R. No. 161539, June 27, 2008.
59

evidence during the trial the marine cargo insurance policy it entered into with
Caltex. Question: May American Home Assurance claim subrogatory right from
Delsan? Answer: The right of subrogation has its roots in equity. It is not
dependent upon, nor does it grow out of, any privity of contract or upon written
assignment of claim. It accrues simply upon payment by the insurance company
of the insurance claim. It accrues simply upon payment by the insurance company
of the insurance claim. Consequently, the payment made by the insurer to Caltex
operates as an equitable assignment to the former of all the remedies which the
latter may have against petitioner Delsan. The presentation in evidence of the
marine insurance policy is not indispensable in this case before the insurer may
recover from the common carrier the insured value of the lost cargo in the
exercise of its subrogatory right. The subrogation receipt, by itself, is sufficient to
establish not only the relationship of herein private respondent as insurer and
Caltex, as the assured shipper of the lost cargo of industrial fuel oil, but also the
amount paid to settle the insurance claim. The right of subrogation accrues simply
upon payment by the insurance company of the insurance claim. The presentation
of the insurance policy in the case of Home Insurance Corporation vs. CA59 was
necessary because the shipment therein passed through several stages with
different parties and the insurance contract which was not presented in evidence
would have indicated the scope of the insurer’s liability. The case of Home
Insurance is not applicable in this case where there is no doubt that the cargo of
industrial fuel oil belonging to Caltex was lost while on board petitioner’s vessel
which sank while in transit.60

IX. Loadstar Shipping Company, et al vs. Malayan Insurance Company, G. R.


No. 185565, Novermber 26, 2014)

The right of subrogation is not dependent upon, nor does it grow out of, privity of
contract or upon written assignment of claim. It accrues simply upon payment of the insurance
claim by the insurer. The right of subrogation is however, not absolute. And where the insurer
pays the assured for a loss which is not a risk covered by the policy, thereby effecting voluntary
payment, the former has no right of subrogation against the third party for the loss.” (Loadstar
Shipping Company, et al vs. Malayan Insurance Company, G. R. No. 185565, November 26,
2014)

The rights of the subrogee cannot be superior to the rights possessed by the subrogor.
“Subrogation is the substitution of one person in the place of another with reference to a lawful
claim or right sot that he who is substituted succeeds to the rights of the other in relation to a debt
or claim, including its remedies or securities. The rights to which the subrogee succeeds are the
same as but not greater than, those of the person for whom he is substituted, that is, he cannot
acquire any claim, security or remedy the subrogor did not have. In other words, a subrogee
cannot succeed to a right not possessed by the subrogor. A subrogee in effect steps into the shoes
of the insured and can recover only if the insured likewise could have recovered. (Loadstar
Shipping Company, et al vs. Malayan Insurance Company, G. R. No. 185565, Novermber 26,
2014)

Illustration: Loadstar Shipping (Loadstar) and Philippine Associated Smelting and


Refining Corporation (PASAR) entered into a contract of Affreigment for domestic transport of
59
Home Insurance Corporation vs. Court of Appeals and Mabuhay Brokerage Co., Inc., G. R. No. 109293, Aug. 18,
1993.
60
Delsan Transport Lines, Inc. vs. Court of Appeals and American Home Assur. Corp., G. R. No. 127897, Nov. 15,
2001.
60

the latter’s copper concentrates. The shipper, Philex Mining loaded the cargo of copper
concentrates on the vessel of Loadstar for delivery to the consignee, PASAR. The cargo was
insured with Malayan Insurance Co. (Malayan). On routine inspection, a crack on the starboard
side of the vessel which caused seawater to enter the cargo hold was discovered during the
voyage. Upon arrival, PASAR and Philex Mining found that the copper concentrates were
contaminated by seawater. PASAR demanded payment of P32 million plus from Loadstar and
Malayan. Malayan paid PASAR the amount of P32 million plus and PASAR signed a
subrogation receipt in favor of Malayan. Malayan demanded reimbursement from Loadstar
which refused to pay. During the trial, the Trial Court found that although contaminated by
seawater, the copper concentrates can still be used. Aside therefrom, the damage was attributable
to perils of the sea and not due to the fault or negligence of Loadstar. May Malayan as subrogee
recover from Loadstar?

Malayan cannot recover because PASAR could not also recover from Loadstar. In other
words, a subrogee cannot succeed to a right not possessed by the subrogor. A subrogee in effect
steps into the shoes of the insured and can recover only if the insured likewise could have
recovered. (Loadstar Shipping Company, et al vs. Malayan Insurance Company, G. R. No.
185565, November 26, 2014)

X. Stronghold Insurance Co., Inc. vs. Container Services, et al., G. R. No. 194328,
July 1, 2015, J. Perez, ponente (PP)

Exempting Insurer: In exempting insurers from liability under the contract, proof
thereof must be clear, credible and convincing. Fundamental is the rule that the contract is the
law between the parties and, that absent any showing that its provisions are wholly or in part
contrary to law, morals, good customs, public order or public policy, it shall be enforced to the
letter by the courts. (Stronghold Insurance Co., Inc. vs. Container Services, et al., G. R. No.
194328, July 1, 2015, J. Perez, ponente).
Illustration: The vehicle owned by respondent Gloria Dee Chong was insured with
petitioner insurance company. The vehicle insured met an accident where four persons died and
three were seriously injured. The vehicle was also heavily damaged. The insurer refused to pay
the claim of the insured on the ground that the driver of the vehicle insured was heavily drunk at
the time of the accident which exempts the insurer from liability pursuant to the provisions of the
policy. At the trial, the allegation of the insurer that the driver of the vehicle insured was drunk
was based on a Pagpapatunay and a medico-legal certificate which contained alterations. The
police blotter did not also contain any report of the driver’s intoxication. Issue: May the insurer
be exempted from liability? Ruling: In exempting insurers from liability under the contract,
proof thereof must be clear, credible and convincing. Fundamental is the rule that the contract is
the law between the parties and, that absent any showing that its provisions are wholly or in part
contrary to law, morals, good customs, public order or public policy, it shall be enforced to the
letter by the courts. (Stronghold Insurance Co., Inc. vs. Container Services, et al., G. R. No.
194328, July 1, 2015, J. Perez, ponente).
XI. Asian Terminals, Inc. vs. First Lepantro-Taisho Insurance Corporation, 726
SCRA 415, June 16, 2014

Subrogation. Question: 3,000 bags of sodium tripolyphosphate contained in 100 jumbo


bags were loaded on a vessl owned by COSCO, in favor of its consignee GASI. The shipment
was insured against all risk with First Lepanto. When the shipment arrived, it discharged into the
possession of ATI, a corporation engaged in arrastre business. Upon receipt of the shipment,
GASI found that the delivered goods incurred shortages of 8,600 kilograms and spillage of
3,315 kg. valued at P166,772.41. First Lepanto paid GASI the amount of P166,772.40 as
insurance indemnity. GASI executed a Release of Claim discharging First Lepanto from and all
61

liabilities and subrogating it to all the rights of recovery. As subrogee, First Lepanto demanded
from COSCO and ATI reimbursement of the amount paid to GASI. ATI denied liability and
claimed that upon arrival of the shipment, one jumbo bag sustained loss/damage while in the
custody of COSCO. Aside therefrom, ATI asserted that during the trial, the insurance contract
was not presented by First Lepanto and only the Certificate of Insurance and Subrogation
Receipt were presented. Is the failure to present the contract of insurance during the trial fatal to
the claim of First Lepanto?

Answer: The non-presentation of the insurance contract is not fatal to First Lepanto’s
cause of action for reimbursement as subrogee. The general rule is that the marine insurance
policy needs to be presented in evidence before the insurer may recover the insured value of the
lost/damaged cargo in the exercise of its subrogatory right. However, such rule is not inflexible
and there are exceptions to such rule. The subrogation receipt, by itself is sufficient to establish
not only the relationship between the insurer and consignee, but also the amount paid to settle the
insurance claim. An arrastre operator is liable for the lost shipment despite the failure of the
insurance company to offer in evidence the insurance contract or policy as it was certain that the
loss of the cargo occurred while in ATI’s custody. (Asian Terminals, Inc. vs. First Lepantro-
Taisho Insurance Corporation, 726 SCRA 415, June 16, 2014)

XII. AFQ Shipmanagement Co., Ltd. vs. Casenas, 725 SCRA 108, June 4, 2014.
(DONE)

Seaworthiness : While seaworthiness is commonly equated with the physical aspect and
condition of the vessel for voyage as its ability to withstand the rigors of the sea, it must not be
forgotten that a vessel should be armed with the necessary documents required by the maritime
rules and regulations, both local and international. It has been written that vessel seaworthiness
further extends to cover the documents required to ensure that the vessel can enter and leave
ports without problems. (AFQ Shipmanagement Co., Ltd. vs. Casenas, 725 SCRA 108, June 4,
2014)

NEGOTIABLE INSTRUMENTS

I. What is a trust receipt transaction? A trust receipt transaction is one where the
entrustee has the obligation to deliver to the entruster the price of the sale, or if the merchandise
is not sold, to return the merchandise to the entruster. There are, therefore, two obligations in a
trust receipt transaction: the first refers to money received under the obligation involving the
duty to turn it over (entregarla) to the owner of the merchandise sold, while the second refers to
the merchandise received under the obligation to “return” it (devolvera) to the owner. (Hur Tin
Yang v. People of the Philippines, G.R. No. 195117, August 14, 2013)

II. Hongkong and Shanghai Banking Corporatioin vs. Commissioner of Internal


Revenue, 724 SCRA 499, June 4, 2014, Ponente – J. Leonardo-de Castro.
(DONE)

Question: Are electronic messages of the HSBC’S investor-clients containing


instructions to debit their respective local or foreign currency accounts in the Philippines and pay
a certain named recipient negotiable instruments that are subject to Documentary Stamp Tax
under Sec. 181 of the Tax Code which provides that: Upon any acceptance or payment of any
bill of exchange or order for the payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be collected a documentary stamp tax . . .” ?
62

Answer: The instructions given through electronic messages are not negotiable
instruments as they do not comply with the requisites of negotiability under Section 1 of the
Negotiable Instruments Law. The electronic messages are not signed by the investor-clients as
supposed drawers of a bill of exchange, they do not contain an unconditional order to pay a sum
certain in money as the payment is supposed to come from a specific fund or account of the
investor-clients; and, they are not payable to order or bearer but to a specifically designated third
party. Thus, the electronic messages are not bills of e4xdchange. As there was no bill of
exchange or order for the payment drawn abroad and made payable here in the Philippines, they
could have no acceptance or payment that will trigger the imposition of the DST under Section
181 of the Tax Code. (Hongkong and Shanghai Banking Corporation vs. Commissioner of
Internal Revenue, 724 SCRA 499, June 4, 2014, Ponente – J. Leonardo-de Castro.)

Question: Are electronic messages of the HSBC’S investor-clients containing


instructions to debit their respective local or foreign currency accounts in the Philippines and pay
a certain named recipient considered as acceptance or payment of any bill of exchange that are
subject to Documentary Stamp Tax under Sec.230 of the Tax Code which provides that: Upon
any acceptance or payment of any bill of exchange or order for the payment of money
purporting to be drawn in a foreign country but payable in the Philippines, there shall be
collected a documentary stamp tax . . . .”

Answer: The electronic messages received by HSBC from its investor-clients abroad
instructing the former to debit the latter’s local and foreign currency accounts and to pay the
purchase price of shares of stock or investment in securities do not properly qualify as either
presentment for acceptance or presentment for payment. There being neither presentment for
acceptance nor presentment for payment then there was no acceptance or payment that could
have subjected to DST to speak of. There was no bill of exchange or order for the payment
drawn abroad and made payable here in the Philippines. Thus, there was no acceptance as the
electronic messages did not constitute the written and signed manifestation of HSBC to a
drawer’s order to pay money. As HSBC could not have been an acceptor, then it could not have
made any payment of a bill or e4xchange or order for the payment of money drawn abroad but
payable in the Philippines. There was no liability for DST. (Hongkong and Shanghai Banking
Corporation vs. Commissioner of Internal Revenue, 724 SCRA 499, June 4, 2014, Ponente – J.
Leonardo-de Castro.)

II-A. Luis Virata, et al., vs. Alejandro Ng Wee, et al., G. R. 220926, July 5, 2017.

Luis Virata in behalf of Power Merge signed promissory notes. The amount of the
promissory notes were not received by Luis Virata or Power Merge and instead given to
Wincorp. Virata claimed that neither he nor Power Merge received any pecuniary benefit from
the credit facility. Virata claimed that he and Power Merge could not be made liable for the
promissory notes that were executed and that they merely accommodated Wincorp. Question:
Are Virata and Power Merge liable?

Answer: Virata and Power Merge are accommodation makers who are liable on the notes to a
holder for value notwithstanding such holder knew him only to be an accommodation maker.
The basis for the liability under Section 29 is the underlying relation between the accommodated
party and the accommodation party, which is one of principal and surety. The accommodation
party cum surety in a negotiable instrument is deemed an original promisor and debtor from the
beginning; he is considered in law as the same party as the debtor in relation to whatever is
adjudged touching the obligation of the latter since their liabilities are so interwoven as to be
inseparable.
63

III.Patrimonio vs. Gutierrez, et al., 724 SCRA 636, June 4, 2014. (DONE)

Question: Suppose the maker or drawer delivers a pre-signed blank paper to another
person for the purpose of converting it into a negotiable instrument, (a) what is the presumed
authority of the latter? (b) Who may enforce it?

Answer: (a) The person to whom a pre-signed blank paper is delivered for the purpose of
converting it into a negotiable instrument has prima facie authority to fill it up. It merely requires
that the instrument be in the possession of a person other than the drawer or maker and from such
possession, together with the fact that the instrument is wanting in a material particular, the law
presumes agency to up the blanks.

(b) In order that one who is not a holder in due course can enforce the instrument against
a party prior to the instrument’s completion, two requisites must exists: (1) that the blank must
be filled strictly in accordance with the authority given; and (2) it must be filled up within a
reasonable time. If it was proven that the instrument had not been filed up strictly in accordance
with the authority given and within a reasonable timer, the maker can set this up as a personal
defense and avoid liability. However, if the holder is a holder in due course, there is conclusive
presumption that authority to fill it up had been given and that the same was not in excess of
authority. (Patrimonio vs. Gutierrez, et al., 724 SCRA 636, June 4, 2014).

Facts: Patrimonio and Gutierrez entered into a business venture under the name of Slam
Dunk. In the course of their business, Patrimonio pre-signed several checks to answer for the
expenses of Slam Dunk. Although signed, these checks had no payee’s name, date or amount.
The checks were entrusted to Gutierrez with the specific instruction not to fill them out without
previous notification to and approval by Patrimonio. Without Patrimonio’s knowledge and
consent, Gutierrez secured a personal loan from Marasigan. In February, 1994, Gutierrez
delivered to Marasigan one of the blank checks Patrimonio pre-signed, with all the blank filled-
up. On May 24, 1994, Marasigan deposited the check but it was dishonored for the reason
“ACCOUNT CLOSED”. It was revealed that Patrimonio’s account had been closed since May
28, 1993. Marasigan sued Patrimonio. (a) Is Marasigan a holder in due course? (b) Can
Marasigan enforce the instrument against Patrimonio?

(a) Marasigan was not a holder in due course because his knowledge that the petitioner is
not a party or a privy to the contract of loan, and correspondingly had no obligation or liability to
him, renders him dishonest, hence, in bad faith. “A holder in due course is a holder who has
taken the instrument under the following conditions: x x x (c) That he took it in good faith, and
for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.” Gutierrez was limited to the use the
checks for the operation of their business, and on the condition that Patrimonio’s prior approval
be first secured. Gutierrez has exceeded the authority to fill up the blanks and use the checks.
Patrimonio gave Gutierrez pre-signed checks to be used in their business provided he could only
use them upon his approval.

(b) Marasigan cannot hold Patrimonio liable. In order that one like Marasigan who is not
a holder in due course can enforce the instrument against a party prior to the instrument’s
completion, two requisites must exists: (1) that the blank must be filled strictly in accordance
with the authority given; and (2) it must be filled up within a reasonable time. The check was not
filled up strictly in accordance with the authority given. (Patrimonio vs. Gutierrez, et al., 724
SCRA 636, June 4, 2014).

IV. Land Bank vs. Kho, 796 SCRA 21, July 7, 2016 – Forgery
64

Facts: Respondent Kho entered into a contract for the purchase of lubricants from Red
Orange represented by Medel. Red Orange insisted that it would only accept a Land Bank
manager’s check payment. On Dec. 28, 2005, Kho accompanied by Medel opened a Savings
account with Land Bank and deposited a total of P25,993,537.37 which was scheduled for
clearance on January 2, 2006. Kho purchased Land Bank Manager’s Check for P25,000,000
postdated to January 2, 2006, against his savings deposit, payable to Red Orange. Kho requested
a photocopy of a manager’s check to prove to Red Orange that he had available funds. Kho gave
the photocopy of the check to Medel. On January 2, Kho picked up the Manager’s check from
Land Bank and so the amount of P25M was debited from Kho’s saving’s account. The deal of
Kho with Red Orange did not materialize. On January 3, 2006 BPI informed Land Bank that Red
Orange deposited the Manager’s check and sent a fax copy of the check. Land Bank confirmed
the deposited check. On January 5, 2006, Land Bank informed Kho that the Manager’s check
was cleared and debited against his savings account. Kho was shocked because the Manager’s
check was still in his possession and what was deposited was a spurious manager’s check. Kho
demanded payment from Land Bank which refused. Question: May Land Bank be held liable?
Answer: Land Bank is liable. The genuine Manager’s check remained in Kho’s
possession and Land Bank admits that the check cleared was a fake. Land Bank had every
opportunity to recognize the forgery of their signatures or the falsity of the check. The bank
failed to do so, which led to the withdrawal and eventual loss of the P25M. This is the proximate
cause of the loss. Land Bank breached its duty of diligence and assumed the risk of incurring a
loss on account of a forged counterfeit check. Hence, it should suffer the resulting damage. Kho
is precluded from invoking forgery if the drawee bank can prove his failure to exercise ordinary
care and if this negligence substantially contributed to the forgery or the perpetration of the
fraud, which the bank failed to do. (Land Bank vs. Kho, 796 SCRA 21, July 7, 2016)

IV-A. Metropolitan Bank v. Junnel’s Marketing Coporation, G. R. No. 235511, June


20, 2018. Crossed checks and forgery.
Facts: Respondent Junnel’s Marketing Corporation (JMC) discovered an anomaly
involving eleven (11) checks crossed checks it issued to the orders of its suppliers, Jardine and
Premiere. The said checks had already been charged against JMC’s current account by the
drawee bank, Metrobank but were, for some reason, not covered by any official receipt from
Jardine or Premiere. Examination of the dorsal portion of the checks revealed that all had been
deposited with Bankcom under Account No. 0015-32987-7. Upon verification with Jardine and
Premiere, JMC confirmed that neither of said suppliers owns said Bankcom account. Delizo, a
former accountant of JMC confessed in a letter to the President of JMC that she stole the said
checks and forwarded them to Lita Bituin who colluded with an unknown bank manager to cause
the deposit and encashing the stolen checks and shared in the proceeds thereof. JMC filed an
action against Delizo, Bankcom,the collecting bank and Metrobank, the drawee bank. Question:
What are the liabilities of the collecting bank, Bankcom and drawee, Metrobank? Answer:
We rule: (1) Metrobank liable to return to JMC the entire amount of the subject checks plus
interest and (2) Bankcom liable to reimburse Metrobank the same amount plus interest.
Metrobank, as drawee bank, is liable to return to JMC the amount of the subject checks.
A drawee bank is contractually obligated to follow the explicit instructions of its drawer-clients
when paying checks issued by them. The drawer's instructions-including the designation of the
payee or to whom the check should be paid-are reflected on the face and by the terms
thereof. When a drawee bank pays a person other than the payee named on the check, it
essentially commits a breach of its obligation and renders the payment it made unauthorized. In
such cases and under normal circumstances, the drawee bank may be held liable to the drawer
for the amount charged against the latter's account.
Metrobank may seek reimbursement from Bankcom-the collecting bank. A collecting or
presenting bank-i.e., the bank that receives a check for deposit and that presents the same to the
drawee bank for payment-is an indorser of such check. When a collecting bank presents a check
to the drawee bank for payment, the former thereby assumes the same warranties assumed by an
65

indorser of a negotiable instrument pursuant to Section 66 of the Negotiable Instruments Law.


These warranties are: (1) that the instrument is genuine and in all respects what it purports to be;
(2) that the indorser has good title to it; (3) that all prior parties had capacity to contract; and (4)
that the instrument is, at the time of the indorsement, valid and subsisting. If any of the foregoing
warranties turns out to be false, a collecting bank becomes liable to the drawee bank for
payments made under such false warranty. Here, it is clear that Bankcom had assumed the
warranties of an indorser when it forwarded the subject checks to PCHC for presentment to
Metrobank. By such presentment, Bankcom effectively guaranteed to Metrobank that the subject
checks had been deposited with it to an account that has good title to the same.
This guaranty, however, is a complete falsity because the subject checks were, in truth,
deposited to an account that neither belongs to the payees of the subject checks nor to their
indorsees. Hence, as the subject checks were paid under Bankcom's false guaranty, the latter-as
collecting bank-stands liable to return the value of such checks to Metrobank. (Metropolitan
Bank v. Junnel’s Marketing Coporation, G. R. No. 235511, June 20, 2018.)

Facts: Roxas sold to Rodrigo and Marissa Cawili vegetable oil. As payment therefore,
spouses Cawili issued a personal check in the amount of P348,805.50. However, when Roxas
tried to encash the check, it was dishonored by the drawee bank. Spouses Cawili assured him that
they would replace the bounced check with a cashier’s check from BPI. Rodrigo Cawili and
Roxas went to BPI branch in Mandaluyong and upon instructions of the Branch Manager, BPI
Cashier’s Check in the amount of P348,805.50 was issued, drawn against the account of Marissa
Cawili, payable to Roxas. Rodrigo then handed the cashier’s check to Roxas. The following day,
Roxas returned to BPI’s branch in Mandaluyong to encash the cashier’s check but it was
dishonored on the ground that Marissa’s account was closed on that date. Upon being sued, BPI
claimed that Roxas was not a holder in due course because the latter was not a holder for value.
(a) Was Roxas a holder for value and hence, a holder in due course?

(b) May BPI be relieved of its liability under the cashier’s check it issued?

Answer: (a) Roxas was a holder for value and a holder in due course. Roxas received the
cashier’s check as payment for the vegetable oil he sold to Cawili. The fact that Rodrigo was the
one who purchased the cashier’s check from BPI will not affect Roxas’ status as a holder for
value since the check was delivered to him as payment for the vegetable oil he sold to spouses
Cawili. Roxas is presumed to be a holder in due course and the one who claims otherwise must
prove that one or more of the conditions required to constitute a holder in due course are lacking.
BPI failed to prove that Roxas was not a holder for value.

(b) BPI cannot be relived of its liability under the cashier’s check it issued. A cashier’s
check is really the bank’s own check and may be treated as a promissory note with the bank as
maker. The check becomes the primary obligation of the bank which issues it and constitutes a
written promise to pay upon demand. It is of judicial notice that a cashier’s check is deemed as
cash. This is because the mere issuance of a cashier’s check is considered acceptance thereof.
Hence, a bank becomes liable to the payee the moment it issued the cashier’s check.

V. Areza vs. Express Savings Bank, Inc., 734 SCRA 588, September 10, 2014 (DONE)

Material Alteration: Question: Areza maintained two bank accounts with Express
Savings Bank. Areza received an order from Mambuay for secondhand Pajero and brand new
Honda. Mambuay paid Areza with nine Philippine Veterans Affairs Office checks drawn against
Philippine Veterans Bank each valued at P200,000 for a total of P1,800,000. Areza deposited the
said checks in their savings account with Express Savings Bank. Express in turn deposited the
checks with Equitable PCI Bank which presented the checks to Philippine Veterans Bank, which
66

honored the checks. Upon being informed by Express Bank that the checks have been honored,
Areza released the two cars to Mambuay. Later, the checks were returned by PVAO to the
drawee on the ground that the checks were altered from its original amount of P4,000 to
P200,000. The drawee returned the checks to Equitable PCI Bank which in turn debited the
account of Express Bank. Express Bank withdrew the amount of P1,800,000 from the account of
Areza. In the meantime Areza issued a check for P500,000 which was dishonored by Express
Bank. What are the liabilities of the parties?

Answer: The drawee bank, Philippine Veterans Bank is liable only to the extent of the
amount of the check prior to its alteration. Under Section 124 of the Negotiable Instruments
Law, the party prior to alteration is liable to a holder in due course according to its original tenor.
The Philippine Veterans Bank may in turn, pass on its liability to Equitable PCI Bank, the
collecting Bank. The collecting bank and Express arfe ultimately liable to Areza since there is no
showing of negligence on the part of Areza which substantially contributed to the loss from
alteration. (Areza vs. Express Savings Bank, Inc., 734 SCRA 588, September 10, 2014)

TIME TO PRESENT CHECK FOR PAYMENT. A check must be presented for


payment within a reasonable time after its issue or the drawer will be discharged from liability
thereon to the extent of the loss caused by the delay.

In case of delay in making presentment of the check for payment, the drawer will be
discharged from liability on the check only to the extent of the loss caused by the delay and
therefore, mere delay, without damage to the drawer shall not relieve the latter of liability.

The instances the drawer will suffer a loss if the check is not presented for payment
within a reasonable time after its issue are: (a) when the drawee bank became insolvent during
the period of delay (b) when the debtor is prejudiced by the creditor’s unreasonable delay in
presentment.

Hence acceptance of a check implies an undertaking of due diligence in presenting it for


payment. If no such presentment is made despite the lapse of more than three years, the drawer
cannot be held liable irrespective of loss or injury sustained by the payee. Payment will be
deemed effected and the obligation for which the check was given as conditional payment will
be discharged.

ILLUSTRATIVE CASES:

(1) Evangelista vs. Screenex, Inc., G. R. No. 211564, November 20, 2017:

Facts: Sometime in 1991, Evangelista issued 2 checks to Screenex, Inc. as security for
the payment of a loan. These checks were kept for safe keeping by Philip Gotuaco, Sr., father-in-
law of Alexander Yu, the representative of Screenex, Inc., until the death of Gotuaco in 19
November 2004. Demand for payment of the loan was made on Evangelista and when no
payment was made, the checks were deposited on December 12, 2004 or more than ten years
from the time the checks were issued. The checks were dishonored on the ground that -
“Account Closed”. Evangelista was prosecuted for violation of BP 22. Evangelista claimed to
have paid the loan but no evidence of payment was presented. Evangelista was acquitted of
violation of BP 22 on the ground that the elements of the crime such as knowledge of
insufficiency of fund on the part of Evangelista was not proven but he was made civilly liable to
pay for the total amount of the two checks issued by him . Evangelista claimed that he was not
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liable because: (a) he already paid his obligation; and (b) the action had prescribed. Question:
Were the contentions of Evangelista correct?

Answer: (a) It is a settled rule that the creditor’s possession of the evidence of debt is
proof that the debt has not been discharged by payment. It is likewise established that a
negotiable instrument is only a substitute for money and not money, and the delivery of such an
instrument does not, by itself operate as payment. Therefore, the amount of the check has not yet
been paid since the checks remained in the possession of the creditor.

(b) Payment is deemed effected and the obligation for which the check was given as
conditional payment is treated discharged, if a period of 10 years or more has elapsed from the
date indicated on the check until the date of encashment or presentment for payment. The failure
to encash the checks within a reasonable time after issue, or more than 10 years in this instance,
not only results in the checks becoming stale but also in the obligation to pay being deemed
fulfilled by operation of law.

Granting that petitioner had never encashed the check, his failure to do so for more than ten (10)
years undoubtedly resulted in the impairment of the check through his unreasonable and
unexplained delay.

While it is true that the delivery of a check produces the effect of payment only when it is
cashed, pursuant to Art 1249 of the Civil Code, the rule is otherwise if the debtor is prejudiced
by the creditor’s unreasonable delay in presentment. The acceptance of a check implies an
undertaking of due diligence in presenting it for payment, and if he from whom it is received
sustains loss by want of such diligence, it will be held to operate as actual payment of the debt or
obligation for which it was given. It has, likewise, been held that if no presentment is made at all,
the drawer cannot be held liable irrespective of loss or injury unless presentment is otherwise
excused. This is in harmony with Article 1249 of the Civil Code under which payment by way of
check or other negotiable instrument is conditioned on its being cashed, except when through the
fault of the creditor, the instrument is impaired. The payee of a check would be a creditor under
this provision and if its non payment is caused by his negligence, payment will be deemed
effected and the obligation for which was given as conditional payment will be discharged.
Evangelista vs. Screenex, Inc., G. R. No. 211564, November 20, 2017:

VI. Wesleyan University Philippines vs. Reyes, 731 SCRA 516 (DONE)

Crossed checks: The crossing of a check means that the check may not be encashed but
only deposited in the bank. As Treasurer, respondent knew or is at least expected to be aware of
and abide by this basic banking practice and commercial custom. Clearly, the issuance of a
crossed check reflects management’s intention to safeguard the funds covered thereby, its special
instruction to have the same deposited to another account and its restriction on its encashment.
(Wesleyan University Philippines vs. Reyes, 731 SCRA 516, July 30, 2014).

BDO vs. Engr. Selwyn Lao, et al., G. R. No. 227005, June 19, 2017.

Lao issued two BDO crossed checks payable to Everlink: No. 0127-242249 and 0127-
242250, as down-payment for “HGC saniwares”. Check No. 0127-242249 was deposited in the
account of Everlink with Union Bank while Check No. 0127-242250 even without indorsement
by Everlink to New Wave was deposited in the latter’s account with Union Bank. The two
checks were presented by Union Bank as collecting bank to BDO for collection. BDO paid the
said checks to Union Bank. When Everlink did not deliver the sanitary wares, Lao filed an action
68

against BDO and Union Bank. The RTC absolved BDO from liability but held Union Bank
liable for check no. 0127-242250. Question: What is the liability of BDO and Union Bank to
Lao?

Answer: BDO paid the value of 0127-242250 to Union Bank which in turn, credited the
amount to New Wave’s account. The payment by BDO was in violation of Lao’s instruction
because the same was not issued in favor of Everlink, the payee named in the check. It must be
pointed out that the subject check was not even endorsed by Everlink to New Wave. Clearly,
BDO violated its duty to charge to Lao’s account only those payables authorized by him.
Nevertheless, even with such clear violation by BDO of its duty, the loss would have ultimately
pertained to Union Bank. Union Bank was clearly negligent when it allowed the check to be
presented by, and deposited in the account of New Wave, despite knowledge that it was not the
payee named therein. Further, it could not have escaped its attention that the subject checks were
crossed checks.

The effects of crossing a check are: (1) that the check may not be encashed but only
deposited in the bank; (2) that the check may be negotiated only once – to one who has an
account with a bank; and (3) that the act of crossing the check serves as a warning to the holder
that the check has been issued for a definite purpose so that he must inquire if he has received the
check pursuant to that purpose. The effects of crossing check, thus, relate to the mode of
payment, meaning that the drawer had intended the check for deposit only by the rightful person,
i.e., the payee named therein.

It is undisputed that Check No. 0127-242250 had been crossed generally as nothing was written
between the parallel lines appearing on the face of the instrument. This indicated that Lao, the
drawer, had intended the same for deposit only to the account of Everlink, the payee named
therein. Despite this clear intention, however, Union Bank negligently allowed the deposit of the
proceeds of the said check in the account of New Wave.

Generally, BDO must be ordered to pay Lao the value of the subject check; whereas, Union
Bank would be ordered to reimburse BDO the amount of the check. The aforesaid sequence of
recovery, however, is not applicable in the present case due to the presence of certain factual
peculiarities. No appeal was made from judgment absolving BDO from liability hence, the
judgment absolving BDO was already final and cannot be disturbed on appeal. BDO vs. Engr.
Selwyn Lao, et al., G. R. No. 227005, June 19, 2017

VII. What are manager’s checks? A manager’s check is a bill of exchange drawn by
a bank upon itself, and is accepted by its issuance. It is an order of the bank to pay, drawn upon
itself, committing in effect its total resources, integrity, and honor behind its issuance. The check
is signed by the manager or some other authorized office for the bank. (Land Bank vs. Kho, 796
SCRA 21, July 7, 2016).

VIII. Question: Are Cashier’s or Manager’s checks subject to clearing? May payment
of a Cashier’s or Manager’s check be countermanded? DONE
69

Answer: Manager’s and cashier’s checks are still subject to clearing to ensure that the
same have not been materially altered or otherwise completely counterfeited. However,
manager’s and cashier’s check are pre-accepted by the mere issuance thereof by the bank, which
is both its drawer and drawee. Thus, while manager’s and cashier’s check are still subject to
clearing they cannot be countermanded for being drawn against a closed account, for being
drawn against insufficient funds, or for similar reasons such as a condition not appearing on the
face of the check. Long standing and accepted banking practices do not countenance the
countermanding of manager’s and cashier’s checks on the basis of a mere allegation of failure of
the payee to comply with its obligations towards the purchaser. On the contrary, the accepted
banking practice is that such checks are as good as cash. (Metropolitan Bank and Trust Co. vs.
Wilfred N. Chiok, G. R. 172652, and Global Business Bank, Inc. v s. Wilfred N. Chiok, G. R.
No. 175394, Nov. 26, 2014.)
Facts: Chiok had been engaged in dollar trading for about 6 to 8 years with Nuguid. The
practice between Chiok and Nuguid was that Chiok pays Nuguid either in cash or manager’s
check to be picked up by the latter or deposited in the latter’s bank account. Nuguid in turn
delivers the dollars purchased either on the same day or on a later date as may be agreed upon by
them. On July 5, 1995, Chiok purchased three Manager’s checks from Metropolitan Bank and
Global Business Bank and deposited the same in the Nuguid’s account with the Bank of the
Philippine Islands. Nuguid was supposed to deliver $1,022,288.50, the equivalent of the three
checks. Nuguid failed to deliver the dollar equivalent of the checks. Chiok requested that
payment on the three checks be stopped, and was advised to secure a court order within 24-hour
clearing period. He filed a complaint for damages and restraining order/preliminary injunction.
Issue: Is payment of the manager’s or cashier’s check subject to the condition that the payee
thereof must comply with his obligations to the purchaser of the checks, or that the payment of
the cashier’s or manager’s check be countermanded.
Ruling: Long standing and accepted banking practices do not countenance the
countermanding of manager’s and cashier’s checks on the basis of a mere allegation of failure of
the payee to comply with its obligations towards the purchaser. On the contrary, the accepted
banking practice is that such checks are as good as cash. (Metropolitan Bank and Trust Co. vs.
Wilfred N. Chiok, G. R. 172652, and Global Business Bank, Inc. v s. Wilfred N. Chiok, G. R.
No. 175394, Nov. 26, 2014.)
TRANSPORTATION

I. Philam Insurance Company, Inc. vs. Heung A Shipping Corporation

Charter Party has been defined as a contract by which an entire ship, or some principal
part thereof, is let by the owner to another person for a specified time or use; a contract of
affreightment by which the owner of a ship or other vessel lets the whole or a part of her to a
merchant or other person for the conveyance of goods, on a particular voyage, in consideration
of the payment of freight. (Philam Insurance Company, Inc. vs. Heung A Shipping Corporation,
730 SCRA 512, July 23, 2014).

II. Will charter party of a vessel belonging to a common carrier necessarily convert
the carrier into a private carrier?

Answer: The public or common carrier shall remain as such, notwithstanding the charter of
the whole or portion of a vessel by one or more persons, provided the charter is limited to the
ship only, as in the case of a time-charter or voyage-charter. It is only when the charter includes
both the vessel and its crew, as in a bare-boat or demise that a common carrier becomes private,
at least insofar as the particular voyage covering the charter-party is concerned. The reason is
that a shipowner in a time or voyage-charter retains possession and control of the ship, although
her holds may, for the moment, be the property of the charterer. Planters Products, Inc. vs. Court
of Appeals, 226 SCRA 476.
70

III. Will a common carrier’s liability be extinguished by reason of fire?

Answer: The common carrier’s liability will not be extinguished by reason of fire.
Article 1734 of the Civil Code provides, common carriers are responsible for the loss,
destruction, or deterioration of the goods, unless the same is due to any of the following causes
only:

1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

2) Act of the public enemy in war, whether international or civil;

3) Act or omission of the shipper or owner of the goods;

4) The character of the goods or defects in the packing or in the containers;

5) Order or act of competent public authority.

Fire is not one of those enumerated under the above provision which exempts a carrier
from liability for loss or destruction of the cargo. Even if fire were to be considered a natural
disaster within the purview of Article 1734, it is required under Article 1739 of the same Code
that the natural disaster must have been the proximate and only cause of the loss, and that the
carrier has exercised due diligence to prevent or minimize the loss before, during or after the
occurrence of the disaster. (DSR-Senator Lines vs. Federal Phoenix Assurance Co., Inc., 413
SCRA 14. October 7, 2003.)

IV. G. V. Florida Transport, Inc. vs. Heirs of Romeo Battung, G. R. No. 208802,
October 14, 2015, J. Perlas-Bernabe, ponente.

Question: Is a common carrier always liable for all kinds of injuries sustained by a
passenger?

Answer: While the law requires the highest degree of diligence from common carriers in
the safe transport of their passengers and creates a presumption of negligence against them, it
does not however, make the carrier an insurer of the absolute safety of its passengers. Where the
injury sustained by the passenger was (1) in no way due to any defect in the means of transport
or in the method of transporting, or (2) to the negligent or willful acts of the common carrier’s
employees with respect to the foregoing – such as when the injury arises wholly from causes
created by strangers which the carrier had no control of or prior knowledge to prevent – there
would be no issue regarding the common carrier’s negligence in its duty to provide safe and
suitable care, as well as competent employees in relation to its transport business, as such, the
presumption of fault negligence foisted under Article 1756 of the Civil Code does not apply. (G.
V. Florida Transport, Inc. vs. Heirs of Romeo Battung, G. R. No. 208802, October 14, 2015, J.
Perlas-Bernabe, ponente).

Facts: Battung was shot by a co-passenger while riding petitioner’s bus. While on their
way, the bus driver stopped the vehicle, alighted and checked the tires. It is at that moment when
a co-passenger shot the victim who was sitting at the first row and immediately went down the
bus. The conductor informed the driver and they immediately brought Battung to the hospital but
was declared dead on arrival. The heirs of Battung filed an action against the bus company, its
driver and conductor for breach of the contract of carriage. Issue: Is the bus company liable for
breach of contract of carriage ?

Answer: The carrier is not liable. While the law requires the highest degree of diligence
from common carriers in the safe transport of their passengers and creates a presumption of
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negligence against them, it does not however, make the carrier an insurer of the absolute safety
of its passengers. Where the injury sustained by the passenger was (1) in no way due to any
defect in the means of transport or in the method of transporting, or (2) to the negligent or willful
acts of the common carrier’s employees with respect to the foregoing – such as when the injury
arises wholly from causes created by strangers which the carrier had no control of or prior
knowledge to prevent – there would be no issue regarding the common carrier’s negligence in its
duty to provide safe and suitable care, as well as competent employees in relation to its transport
business, as such, the presumption of fault negligence foisted under Article 1756 of the Civil
Code does not apply. (G. V. Florida Transport, Inc. vs. Heirs of Romeo Battung, G. R. No.
208802, October 14, 2015, J. Perlas-Bernabe, ponente).

Q. As a general rule, may moral damages be recovered in breach of contract of


transportation?

A. Moral damages are not recoverable in damage actions predicated on a breach of


contract of transportation in view of the provisions of Articles 2219 and 2220 of the New Civil
Code. The said provisions limited the award of moral damages to those enumerated therein and
“analogous cases.” A breach of contract cannot be considered included in the descriptive term
“analogous cases” used in Article 2219 of the New Civil Code, not only because Article 2220
specifically provided for the damages that are caused by contractual breach, but because the
definition of quasi-delict in Article 2176 of the Code expressly excludes the cases where there is
a “pre-existing contractual relation between the parties.”61

Q. What are the exceptions to the foregoing rule when moral damages may be
recovered in breach of contract of transportation?

A. Moral damages may be recovered in an action for breach of contract of transportation


in the following cases:

(1) Where the mishap results in the death of a passenger;62

(2) Where it is proved that the carrier was guilty of fraud or bad faith, even if death does
not result.63

Under Article 2219 of the Civil Code, moral damages, as a general rule, are not
recoverable in actions for damages predicated on breach of contract. As an exception, such
damages are recoverable (in an action for breach of contract): (1) in cases in which the mishap
results in the death of a passenger, as provided in Article 1764 in relation to Article 2206(3) of
the Civil Code; and (2) in cases in which the carrier is guilty of fraud or bad faith, as provided in
Article 2220.64

Fraud has been defined to include an inducement through insidious machination.


Insidious machination refers to a deceitful scheme or plot with an evil or devious purpose. Deceit
exists where the party, with intent to deceive, conceals or omits to state material facts and, by
reason of such omission or concealment, the other party was induced to give consent that not
otherwise have been given.65

61
Verzosa vs. Baytan, et al., 107 Phil. 1010; Martinez vs. Gonzales, 6 SCRA 331.
62
M. Ruiz Highway Transit, Inc. vs. Court of Appeals, 11 SCRA 98; Asked, 1962 Bar Exams.
63
Rex Taxicab Co., Inc. vs. Bautista, L-15392, Sept. 30, 1960; Martinez vs. Gonzales, 6 SCRA 331; Singson vs.
Court of Appeals, 282 SCRA 149.
64
Spouses Dionisio Estrada and Jovita R. Estrada vs. Philippine Rabbit Bus Lines, Inc. and Eduardo R. Saylan, G.
R. No. 203902, July 19, 2017, J. del Castillo, ponente.
65
Ibid.
72

Bad faith on the other hand, does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious doing of wrong, a breach of
a known duty through some motive or interest or ill will that partakes of the nature of fraud.66

Bad faith means a breach of a known duty through some motive of interest or ill-will.
Self enrichment or fraternal interest, and not personal ill-will, may have been the motive, but it is
malice nevertheless which may be the ground for awarding moral damages for breach of contract
of carriage.67 The bad faith referred to may be bad faith in the securing and in the execution of
the contract and in the enforcement of its terms or any other kind of deceit which may have been
used by the carrier.68

Q. May moral damages be granted in case of breach of contract of transportation


which merely causes physical injuries to passengers?

A. In case of breach of contract of carriage resulting only to physical injuries of


passengers, moral damages are not recoverable,69 unless the carrier acted fraudulently or with
malice or in bad faith.70

Q. Petitioner Dionisio Estrada was a passenger of the Philippine Rabbit Bus which
was going the north direction when it collided with the Isuzu truck which was travelling
towards the south direction. Petitioner was injured and his right arm was amputated. The
Court of Appeals found Philippine Rabbit Bus Lines liable for breach of contract of
carriage. However, Philippine Rabbit Bus Lines is not liable for moral damages in the
absence of evidence of fraud or bad faith on its part. Questions: (1) Is the carrier liable for
moral damages in this case when petitioner merely suffered an injury? (2) Is the carrier
liable for moral damages in absence of clear and convincing proof of bad faith on its part?

A. (1) Under Article 2219 of the Civil Code, moral damages, as a general rule, are not
recoverable in actions for damages predicated on breach of contract. As an exception, such
damages are recoverable (in an action for breach of contract:) (1) in cases in which the mishap
results in the death of a passenger, as provided in Article 1764 in relation to Article 2206(3) of
the Civil Code; and (2) in cases in which the carrier is guilty of fraud or bad faith, as provided in
Article 2220. It is obvious that this case does not come under the first of the abovementioned
exceptions since Dionisio did not die in the mishap but merely suffered an injury.

(2) Petitioners contend that it falls under the second category since they aver that
Philippine Rabbit is guilty of fraud or bad faith. In this case, the fraud or bad faith that must be
convincingly proved by petitioners should be one which was committed by Philippine Rabbit in
breaching its contract of carriage with Dionisio. Fraud has been defined to include an
inducement through insidious machination. Insidious machination refers to a deceitful scheme or
plot with an evil or devious purpose. Deceit exists where the party, with intent to deceive,
conceals or omits to state material facts and, by reason of such omission or concealment, the
other party was induced to give consent that not otherwise have been given. Bad faith on the
other hand, does not simply connote bad judgment or negligence; it imports a dishonest purpose
or some moral obliquity and conscious doing of wrong, a breach of a known duty through some
motive or interest or ill will that partakes of the nature of fraud. There is no showing that
Philippine Rabbit induced Dionisio to enter into a contract of carriage with the former through
insidious machination. Neither is there any indication or even an allegation of deceit or
concealment or omission of material facts by reason of which Dionisio boarded the bus owned
by Philippine Rabbit. Likewise, it was not shown that Philippine Rabbit’s breach of its known
duty, which was to transport Dionisio from Urdaneta to La Union was attended by some motive,

66
Ibid.
67
Lopez, et al., Pan American World Airways, 16 SCRA 431.
68
Tamayo vs. Aquino, L-12634 & 12720, May 29, 1959; For more discussion on moral damages in air
transportation, see Part II, Air Transportation.
69
Laguna Tayabas Bus Co. vs. Cornista, 11 SCRA 182.
70
Roque vs. Buan, 21 SCRA 651; Bulante vs. Chu Liante, 23 SCRA 604.
73

interest, or ill will. From these, no fraud or bad faith could be attributed to Philippine Rabbit. The
Court finds no persuasive proof of fraud or bad faith, hence moral damages are not recoverable
in this case.71

Q. Petitioners Judith and Joyce Darines were passengers of Amianan Bus Line
enroute from Carmen, Rosales, Pangasinan to Baguio City, driven by respondent Quitan.
While travelling on Camp 3, Tuba, Benguet along Kennon Road, the bus crashed into a
truck which was parked on the shoulder of Kennon Road. As a result, both vehicles were
damaged, two passengers of the bus died while Joyce suffered cerebral concussion and
Judith had an eye wound which required an operation. Petitioners argued that
respondents Quitan, the driver and Quiñones, the operator breached their contract of
carriage as they failed to bring them safely to their destination. They also contended that
Quitan’s reckless and negligent driving caused the collision. Consequently they prayed for
actual, moral, exemplary and temperate damages, and costs of suit. Respondents claimed
that Quitain was driving in a careful, prudent manner at the normal speed of 40 kilometers
per hour. They claimed that the proximate cause of the accident was the negligence of the
truck driver who parked the truck at the roadside right after the curve without any early
warning device. To prove moral damages, petitioner Judith claimed she suffered sleepless
nights since she worried about the result and possible effect of her operation. Are the
petitioners entitled to moral and exemplary damages?

A. The Court fully agrees with the CA ruling that in an action for breach of contract,
moral damages may be recovered only when: a) death of a passenger results; or b) the carrier
was guilty of fraud and bad faith even if death does not result; and that neither of these
circumstances were present in the case at bar. Since no moral damages were awarded then there
is no basis to grant exemplary damages and attorney’s fees to petitioners. The principle that in an
action for breach of contract of carriage, moral damages may be awarded only in case: (1) an
accident results in the death of a passenger; or (2) the carrier is guilty of fraud or bad faith, is
pursuant to Article 1764, in relation to Article 2206(3) of the Civil Code, and Article 2220
thereof. Clearly, unless it is fully established that negligence in an action for breach of contract is
so gross as to amount to malice, then the claim of moral damages is without merit. 72

V. What is the registered owner rule? In registered owner rule, the registered owner of
a motor vehicle is liable for the consequences which the motor vehicle may be involved. This
rule is further elucidated by the ruling in the case of Filcar Transport vs. Espinas, which states
that it is well settled that in case of motor vehicle mishaps, the registered owner of the motor
vehicle is considered as the employer of the tortfeasor driver, and is made primarily liable for the
tort committed by the latter. (Metro Manila Transit Corporation vs. Reynaldo Cuevas, et al., G.R.
No. 167797, June 15, 2015).

VI. Philam Insurance Company, Inc. vs. Heung A Shipping Corporation, 730 SCRA
512, July 23, 2014).

Prescriptive period under COGSA – The prescriptive period for filing an action for
lost/damaged goods governed by contracts of carriage by sea to and from Philippine ports in
foreign trade is governed by paragraph 6, section 3 of the COGSA which states: Unless notice of
loss or damage and the general nature of such loss or damage be given in writing to the carrier or
his agent at the port of discharge before or at the time of the removal of the goods into the
custody of the person entitled to delivery under the contract of carriage, such removal shall be

71
Spouses Dionisio Estrada and Jovita R. Estrada vs. Philippine Rabbit Bus Lines, Inc. and Eduardo R. Saylan, G.
R. No. 203902, July 19, 2017, J. del Castillo, ponente.

72
Judith D. Darines and Joyce D. Darines vs. Eduardo Quiñones and Rolando Quitan, G. R. No. 206468, Aug. 2,
2017, J. Del Castillo, ponente.
74

prima facie evidence of delivery by the carrier of the goods as described in the bill of lading. If
the loss or damage is not apparent, the notice must be given within three days of the delivery.
(Philam Insurance Company, Inc. vs. Heung A Shipping Corporation, 730 SCRA 512, July 23,
2014).

VII. Pioneer Insurance and Surety Corp., vs. APL Co., Pte., Ltd., G. R. No. 226345,
August 2, 2017.

Q. May the one year period of prescription under COGSA be shortened by


stipulation of the parties?

A. In Philippine American General Insurance Co., Inc. v. Sweet Lines, Inc. 73 it was ruled
that stipulated prescriptive periods shorter than their statutory counterparts are generally valid
because they do not affect the liability of the carrier but merely affects the shipper’s remedy.
However said rule does not apply where the stipulation itself provides that when the stipulated
period is contrary to any law, the period prescribed by law shall apply. 74 Thus, where the bill of
lading provides that action thereon should be filed within a period of nine months after delivery
of the goods, unless another period is prescribed law, the stipulated period is subservient to the
one-year prescriptive period provided under the COGSA.75

Q. A shipment of chili pepper was transported from Chennai, India to Manila. The
shipment arrived in Manila on February 2, 2012 and withdrawn and delivered on
February 6, 2012. It was discovered upon delivery that 76 bags were wet and heavily
infested with molds. The shipment was declared unfit for human consumption and
declared a total loss. The consignee, BSFIL filed a claim against the shipper and the
insurer. The insured paid the claim and demanded payment from the shipper on the basis
of subrogation. The shipper refused to pay. The insurer filed an action against the shipper
on February 1, 2013. The shipper claimed that the action has prescribed because under the
Bill of Lading, action thereon should be filed within a period of nine months after delivery
of the goods or the date they should have been delivered, unless another period is
prescribed law. From the date of delivery on February 6, 2012 to the date of filing of the
case on February 1, 2013, more than nine months had elapsed but less than one year.
Question: Has the action prescribed?

A. The action has not prescribed. While the Bill of Lading provides that the action
thereon should be filed within a period of nine months after delivery of the goods or the date they
should have been delivered, the same however, is qualified that when the said nine-month period
is contrary to any law, the period prescribed by the said law shall apply. The present case
involves lost or damaged goods. It has long been settled that in case of loss or damage of
cargoes, the one-year prescriptive period under the COGSA applies. Pioneer Insurance claims
that the one-year prescriptive period under the COGSA governs while APL insists that the nine-
month prescriptive period under the bill of lading applies. A reading of the Bill of Lading
reveals that the nine-month prescriptive period is not applicable in all actions or claims. As an
exception, the nine-month period is inapplicable when there is a different period provided by
law. Hence, strictly applying the terms of the Bill of Lading, the one-year prescriptive period
under the COGSA should govern.76

73
G. R. No. 87434, August 5, 1992.
74
Pioneer Insurance and Surety Corp., vs. APL Co., Pte., Ltd., G. R. No. 226345, August 2, 2017.
75
Ibid.
76
Pioneer Insurance and Surety Corp., vs. APL Co., Pte., Ltd., G. R. No. 226345, August 2, 2017.
75

VII. Phil-Nippon Kyoei, Corp. vs. Gudelosao, 796 SCRA 508, July 13, 2016

Limited liability rule. - In all cases when the shipowner or agent may be properly held liable
for the negligent or illicit acts of the captain, such liability is limited to the value of the vessel, its
appurtenances and freightage earned in the voyage, provided the owner or agent abandons the
vessel. Where the vessel is totally lost, in which case abandonment is not required because there
is no vessel to abandon, the liability of the shipowner or agent for damages is extinguished.
However, this limited liability does not apply in cases: (1) where the injury or death to a
passenger is due either to the fault of the shipowner, or to the concurring negligence of the
shipowner and the captain; (2) where the vessel is insured; and (3) in workmen’s compensation
claims. (Phil-Nippon Kyoei, Corp. vs. Gudelosao, 796 SCRA 508, July 13, 2016).

VIII. Designer Baskets, Inc. vs. Air Sea Transport, Inc., G. R. No. 184513, March 9,
2016.

Bill of lading defined. A bill of lading is defined as a “written acknowledgement of the


receipt of goods and an agreement to transport and to deliver them at a specified place to a
person named in the order”. It may also be defined as an instrument in writing, signed by a
carrier or his agent, describing the freight so as to identify it, stating the name of the consignor,
the terms of the contract of carriage and agreeing or dire4cting that the freight be delivered to
bearer, to order, or to a specified person at a specified place. (Designer Baskets, Inc. vs. Air Sea
Transport, Inc., G. R. No. 184513, March 9, 2016, J. Jardeleza, ponente).

May the common carrier release the goods to the consignee even without the
surrender of the bill of lading? A carrier is allowed by law to release the goods to the
consignee even without the latter’s surrender of the bill of lading. Article 363 of the Code of
Commerce provides that - The legal evidence of the contract between the shipper and the carrier
shall be the bills of lading, by the contents of which the disputes which may arise regarding their
execution and performance shall be decided, no exceptions being admissible other than those of
falsity and material error in the drafting. In case the consignee, upon receiving the goods,
cannot return the bill of lading subscribed by the carrier, because of its loss or any other
cause, he must give the latter a receipt for the goods delivered, this receipt producing the
same effects as the return of the bill of lading.

The general rule is that upon receipt of the goods, the consignee surrenders the bill of
lading to the carrier and their respective obligations are considered cancelled. The law however,
provides two exceptions where the goods may be released without the surrender of the bill of
lading because the consignee can no longer return it. These exceptions are when the bill of lading
gets lost or for other cause. In either case, the consignee must issue a receipt to the carrier upon
the release of the goods. Such receipt shall produce the same effect as the surrender of the bill of
lading. (Designer Baskets, Inc. vs. Air Sea Transport, Inc., G. R. No. 184513, March 9, 2016, J.
Jardeleza, ponente).

INTELLECTUAL PROPERTY

I. Shang Properties Realty Corporation vs. St. Francis Development Corporation,


730 SCRA 275, July 21, 2014(DONE)
76

Passing off – Passing off or palming off takes place where the defendant, by imitative
devices on the general appearance of the goods, misleads prospective purchasers into buying his
merchandise under the impression that they were buying that of this competitors. In other words,
the defendant gives his goods the general appearance of the goods of his competitor with the
intention of deceiving the public that the goods are those of his competitor. Shang Properties
(Realty Corporation vs. St. Francis Development Corporation, 730 SCRA 275, July 21, 2014)

II. GSIS Family Bank, etc., vs. BPI Family Bank, 771 SCRA 285, September 23,
2015 (PP) DON E

Effect of registration of a mark. The certificate of registration, of a mark shall be prima


facie evidence of the validity of the registration of a mark, the registrant’s ownership of the
mark, and of the registrant’s exclusive right to use the same in connection with the goods or
services and those that are related thereto specified in the certificate. (GSIS Family Bank, etc.,
vs. BPI Family Bank, 771 SCRA 285, September 23, 2015)

III.Where should an action involving trademarks, including charges of unfair


competition, cancellation of trademark and damages for violation of intellectual property
rights be filed?

A complaint involving trademarks, including charges of unfair competition, cancellation


of trademark and damages for violation of intellectual property rights fall within the jurisdiction
of the Intellectual Property Office Director of Legal Affairs and must therefore be filed in the
said office. Any appeal therefrom should be filed with the Intellectual Property Office Director
General. (In-N-Out Burger, Inc. vs. Sehwani, Inc., 575 SCRA 535, December 24, 2008.)

V. UFC Phil. Vs. Barrio Fiesta, 781 SCRA 424, Jan. 20, 2016 - There are two tests to
determine likelihood of confusion, namely the Dominancy Test and the Holistic or Totality test.

The Dominancy Test focuses on the similarity of the prevalent or dominant features of
the competing trademarks that might cause confusion, mistake, and deception in the mind of the
purchasing public. Duplication or imitation is not necessary; neither is it required that the mark
sought to be registered suggest6s an effort to imitate. Given more considerations are the aural
and visual impressions created by the marks on the buyer of goods, giving little weight to factors
like prices, quality, sales outlets, and the market segments.

The Holistic or Totality Test takes into consideration the entirety of the marks in question
to be considered in resolving confusing similarity.

The Dominancy Test has been adopted by the Court and hence, PAPA is the dominant
feature of PAPA KETSARAP which could not be adopted because PAPA has been in
commercial use as PAPA BANANA CATSUP. (UFC Phil. Vs. Barrio Fiesta, 781 SCRA 424,
Jan. 20, 2016).

IV. Intellectual Property Association of the Philippines vs. Ochoa, 797 SCRA 145, July
19, 2016, J. Bersamin, ponente.

Q. What are the Madrid system for the International Registration of Marks, and the
Madrid Protocol? Is the Philippines bound by the Madrid Protocol?

A. The Madrid System for the International Registration of Marks (Madrid System) is the
centralized system providing a one-stop solution for registering and managing marks worldwide,
allows the trademark owner to file application in one language, and to pay one set of fees to
77

protect his mark in the territories of the 97 member-states. The Madrid System is governed by
the Madrid Agreement concluded in 1891, and the Madrid Protocol, concluded in 1989.

The Madrid Protocol was adopted in order to remove the challenges deterring some
countries from acceding to the Madrid Agreement and has two objectives, namely: (1) to
facilitate securing protection for marks; and (2) to make the management of the registered marks
easier in different countries.

The Philippines acceded to the Madrid Protocol having been entered into by virtue of an
Executive Agreement which does not require the concurrence of the Senate. (Intellectual
Property Association of the Philippines vs. Ochoa, 797 SCRA 145, July 19, 2016, J. Bersamin,
ponente).

TRUST RECEIPT LAW


I. Are letters of credit and trust receipts negotiable instruments?

Answer: Letters of credit and trust receipts are not negotiable instruments because they
do not conform to the requirements of a negotiable instrument stated in Section 1 of the
Negotiable Instruments Law. However, drafts issued in connection with letters of credit are
negotiable instruments if they comply with the requirements of Section 1 of the Negotiable
Instruments Law.

A trust receipt is a security transaction intended to aid in financing the importers and
retail dealers who do not have sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire credit except through the
utilization, as collateral of the merchandise imported or purchased.[281] A trust receipt
therefore, is a document of security pursuant to which a bank acquires a “security interest” in the
goods under trust receipt. Under a letter of credit-trust receipt arrangement, a bank extends a loan
covered by a letter of credit, with the trust receipt as a security for the loan. The transaction
involves a loan feature represented by a letter of credit, a security feature which is in the
covering trust receipt which secures indebtedness. ( Vintola vs. Insular Bank of Asia and
America, 150 SCRA 578, 583-584 citing Samo vs. People, 5 SCRA 354, 356-357; Lee vs. Court
of Appeals, 375 SCRA 579, 598)

BANKING
I. Land Bank of the Philippines, Belle Corporation, G. R. No. 205271, September
2, 2015).

Question: When the purchaser or the mortgagee is a bank, what is the rule on
innocent purchasers or mortgagees for value to be applied?

Answer: When the purchaser or the mortgagee is a bank, the rule on innocent purchasers
or mortgagees for value is applied more strictly. Being in the business of extending loans secured
by real estate mortgage, banks are presumed to be familiar with the rules on land registration.
Since the banking business is impressed with public interest, they are expected to be more
cautious, to exercise a higher degree of diligence, care and prudence, than private individuals in
78

their dealings, even those involving registered lands. Banks may not simply rely on the face of
the certificate of title. (Land Bank of the Philippines, Belle Corporation, G. R. No. 205271,
September 2, 2015).

Facts: Belle was involved in the development and creation of leisure and recreational
areas in Tagaytay area known as Tagaytay Highlands. Bautista claimed to be the owner of part of
the land in possession of Belle. Bautista wrote a letter to Belle asking the latter to vacate the
subject area and stop its operation therein. Belle filed a suit for quieting of title. During the
pendency of the case, Belle was informed that Bautista is no longer the registered owner of the
disputed area as it was foreclosed by petitioner bank. Apparently, Bautista mortgaged the
property to petitioner bank without informing Belle. Petitioner bank claimed to be a mortgagee
in good faith having observed due diligence and prudence. Petitioner verified the status of the
collateral and found that the land was registered in the name of Bautista. It turned out that the
property in question was part of the ingress and egress of Tagaytay Highlands several years
before it was accepted as collateral from Bautista, and the latter’s title was questionable. Issue:
Was the bank a mortgagee in good faith?

Ruling: Petitioner bank was not a mortgagee in good faith as it failed to inquire further
on the identity of possible adverse claimants and status of their occupancy. Had there been an
inquiry with Bautista or any of the occupants of the nearby area of the existence of the traversing
access road, it could easily show that there is indeed defect in the title of Bautista. There should
have been an exhaustive investigation but none was made. The acceptance of the collateral
despite the existing facts constitutes gross negligence on the part of the bank. Since the banking
business is impressed with public interest, they are expected to be more cautious, to exercise a
higher degree of diligence, care and prudence, than private individuals in their dealings, even
those involving registered lands. Banks may not simply rely on the face of the certificate of title.
Hence, the bank could not be considered a mortgagee in good faith. (Land Bank of the
Philippines, Belle Corporation, G. R. No. 205271, September 2, 2015).

USURY LAW
I. Limso vs. Philippine National Bank, 782 SCRA 137, January 27, 2017

Suspension of the Usury Law. – The Usury Law was suspended by Central Bank
Circular No. 905, Series of 1982. However, the suspension of the Usury Law did not give
creditors an unbridled right to impose arbitrary interest rates. Interest rates need to be reasonable.
It ought not be a supine mechanism for the creditor’s unjust enrichment at the expense of
another.

Thus, a provision in the contract that authorizes the lender to set the interest rates upon
mere notice to the borrower violated the principle of mutuality of contracts.
79

Thank you and good


luck !!!