G.R. No.

170689

March 17, 2009

In 1985, NIDC sold PNEI to North Express Transport, Inc. (NETI), a company owned by Gregorio
Araneta III. In 1986, PNEI was among the several companies placed under sequestration by the
Presidential Commission on Good Government (PCGG) shortly after the historic events in EDSA. In
January 1988, PCGG lifted the sequestration order to pave the way for the sale of PNEI back to the
private sector through the Asset Privatization Trust (APT). APT thus took over the management of
PNEI.

PANTRANCO EMPLOYEES ASSOCIATION (PEA-PTGWO) and PANTRANCO RETRENCHED

EMPLOYEES ASSOCIATION (PANREA), Petitioners, vs. NATIONAL LABOR RELATIONS
COMMISSION (NLRC), PANTRANCO NORTH EXPRESS, INC. (PNEI), PHILIPPINE
NATIONAL BANK (PNB), PHILIPPINE NATIONAL BANK-MANAGEMENT AND
DEVELOPMENT CORPORATION (PNB-MADECOR), and MEGA PRIME REALTY AND
HOLDINGS CORPORATION (MEGA PRIME), Respondents.

In 1992, PNEI applied with the Securities and Exchange Commission (SEC) for suspension of
payments. A management committee was thereafter created which recommended to the SEC the
sale of the company through privatization. As a cost-saving measure, the committee likewise
suggested the retrenchment of several PNEI employees. Eventually, PNEI ceased its operation.
Along with the cessation of business came the various labor claims commenced by the former
employees of PNEI where the latter obtained favorable decisions.

x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 170705

March 17, 2009

On July 5, 2002, the Labor Arbiter issued the Sixth Alias Writ of Execution 10 commanding the NLRC
Sheriffs to levy on the assets of PNEI in order to satisfy the P722,727,150.22 due its former
employees, as full and final satisfaction of the judgment awards in the labor cases. The sheriffs
were likewise instructed to proceed against PNB, PNB-Madecor and Mega Prime.11 In implementing
the writ, the sheriffs levied upon the four valuable pieces of real estate located at the corner of
Quezon and Roosevelt Avenues, on which the former Pantranco Bus Terminal stood. These
properties were covered by Transfer Certificate of Title (TCT) Nos. 87881-87884, registered under
the name of PNB-Madecor.12 Subsequently, Notice of Sale of the foregoing real properties was
published in the newspaper and the sale was set on July 31, 2002. Having been notified of the
auction sale, motions to quash the writ were separately filed by PNB-Madecor and Mega Prime, and
PNB. They likewise filed their Third-Party Claims.13 PNB-Madecor anchored its motion on its right as
the registered owner of the Pantranco properties, and Mega Prime as the successor-in-interest. For
its part, PNB sought the nullification of the writ on the ground that it was not a party to the labor
case.14 In its Third-Party Claim, PNB alleged that PNB-Madecor was indebted to the former and
that the Pantranco properties

PHILIPPINE NATIONAL BANK, Petitioner, vs. PANTRANCO EMPLOYEES ASSOCIATION, INC.

(PEA-PTGWO), PANTRANCO RETRENCHED EMPLOYEES ASSOCIATION (PANREA) AND
PANTRANCO ASSOCIATION OF CONCERNED EMPLOYEES (PACE), ET AL., PHILIPPINE
NATIONAL BANK-MANAGEMENT DEVELOPMENT CORPORATION (PNB-MADECOR), and
MEGA PRIME REALTY HOLDINGS, INC., Respondents.
DECISION
NACHURA, J.:
Before us are two consolidated petitions assailing the Court of Appeals (CA) Decision 1 dated June
3, 2005 and its Resolution2 dated December 7, 2005 in CA-G.R. SP No. 80599.
In G.R. No. 170689, the Pantranco Employees Association (PEA) and Pantranco Retrenched
Employees Association (PANREA) pray that the CA decision be set aside and a new one be entered,
declaring the Philippine National Bank (PNB) and PNB Management and Development Corporation
(PNB-Madecor) jointly and solidarily liable for the P722,727,150.22 National Labor Relations
Commission (NLRC) judgment in favor of the Pantranco North Express, Inc. (PNEI)
employees;3 while in G.R. No. 170705, PNB prays that the auction sale of the Pantranco properties
be declared null and void.4

would answer for such debt. As such, the scheduled auction sale of the aforesaid properties was
not legally in order.15
On September 10, 2002, the Labor Arbiter declared that the subject Pantranco properties were
owned by PNB-Madecor. It being a corporation with a distinct and separate personality, its assets
could not answer for the liabilities of PNEI. Considering, however, that PNB-Madecor executed a
promissory note in favor of PNEI forP7,884,000.00, the writ of execution to the extent of the said
amount was concerned was considered valid.16

The facts of the case, as found by the CA,5 and established in Republic of the Phils. v.
NLRC,6 Pantranco North Express, Inc. v. NLRC,7 and PNB MADECOR v. Uy,8 follow:

PNBs third-party claim to nullify the writ on the ground that it has an interest in the Pantranco
properties being a creditor of PNB-Madecor, on the other hand, was denied because it only had
an inchoate interest in the properties.17

The Gonzales family owned two corporations, namely, the PNEI and Macris Realty Corporation
(Macris). PNEI provided transportation services to the public, and had its bus terminal at the
corner of Quezon and Roosevelt Avenues in Quezon City. The terminal stood on four valuable
pieces of real estate (known as Pantranco properties) registered under the name of Macris. 9 The
Gonzales family later incurred huge financial losses despite attempts of rehabilitation and loan
infusion. In March 1975, their creditors took over the management of PNEI and Macris. By 1978,
full ownership was transferred to one of their creditors, the National Investment Development
Corporation (NIDC), a subsidiary of the PNB.

The dispositive portion of the Labor Arbiters September 10, 2002 Resolution is quoted hereunder:
WHEREFORE, the Third Party Claim of PNB Madecor and/or Mega Prime Holdings, Inc. is hereby
GRANTED and concomitantly the levies made by the sheriffs of the NLRC on the properties of PNB
Madecor should be as it (sic) is hereby LIFTED subject to the payment by PNB Madecor to the
complainants the amount of P7,884,000.00.

Macris was later renamed as the National Realty Development Corporation (Naredeco) and
eventually merged with the National Warehousing Corporation (Nawaco) to form the new PNB
subsidiary, the PNB-Madecor.

The Motion to Quash and Third Party Claim of PNB is hereby DENIED.

The Motion to Quash of PNB Madecor and Mega Prime Holdings, Inc. is hereby PARTIALLY
GRANTED insofar as the amount of the writ exceeds P7,884,000.00.

PNB-Madecor and Mega Prime likewise filed their separate petition before the CA which was
docketed as CA-G.R. SP No. 80737, but the same was dismissed. 22

The Motion for Recomputation and Examination of Judgment Awards is hereby DENIED for want of
merit.

In view of the P7,884,000.00 debt of PNB-Madecor to PNEI, on June 23, 2004, an auction sale was
conducted over the Pantranco properties to satisfy the claim of the PNEI employees, wherein CPAR
Realty was adjudged as the highest bidder.23

The Motion to Expunge from the Records claimants/complainants Opposition dated August 3, 2002
is hereby DENIED for lack of merit.

On June 3, 2005, the CA rendered the assailed decision affirming the NLRC resolutions.

SO ORDERED.18

The appellate court pointed out that PNB, PNB-Madecor and Mega Prime are corporations with
personalities separate and distinct from PNEI. As such, there being no cogent reason to pierce the
veil of corporate fiction, the separate personalities of the above corporations should be maintained.
The CA added that the Pantranco properties were never owned by PNEI; rather, their titles were
registered under the name of PNB-Madecor. If PNB and PNB-Madecor could not answer for the
liabilities of PNEI, with more reason should Mega Prime not be held liable being a mere successorin-interest of PNB-Madecor.

On appeal to the NLRC, the same was denied and the Labor Arbiters disposition was
affirmed.19 Specifically, the NLRC concluded as follows:
(1) PNB-Madecor and Mega Prime contended that it would be impossible for them to comply
with the requirement of the labor arbiter to pay to the PNEI employees the amount of P7.8
million as a condition to the lifting of the levy on the properties, since the credit was already
garnished by Gerardo Uy and other creditors of PNEI. The NLRC found no evidence that Uy
had satisfied his judgment from the promissory note, and opined that even if the credit was in
custodia legis, the claim of the PNEI employees should enjoy preference under the Labor
Code.

Unsatisfied, PEA-PTGWO and PANREA filed their motion for reconsideration; 24 while PNB filed its
Partial Motion for Reconsideration.25 PNB pointed out that PNB-Madecor was made to answer
for P7,884,000.00 to the PNEI employees by virtue of the promissory note it (PNB-Madecor) earlier
executed in favor of PNEI. PNB, however, questioned the June 23, 2004 auction sale as the P7.8
million debt had already been satisfied pursuant to this Courts decision in PNB MADECOR v. Uy.26

(2) The PNEI employees contested the finding that PNB-Madecor was indebted to the PNEI for
only P7.8 million without considering the accrual of interest. But the NLRC said that there was
no evidence that demand was made as a basis for reckoning interest.

Both motions were denied by the appellate court.27

In two separate petitions, PNB and the former PNEI employees come up to this Court assailing the
CA decision and resolution. The former PNEI employees raise the lone error, thus:

(3) The PNEI employees further argued that the labor arbiter may not properly conclude from
a decision of Judge Demetrio Macapagal Jr. of the RTC of Quezon City that PNB-Madecor was
the owner of the properties as his decision was reconsidered by the next presiding judge, nor
from a decision of the Supreme Court that PNEI was a mere lessee of the properties, the fact
being that the transfer of the properties to PNB-Madecor was done to avoid satisfaction of the
claims of the employees with the NLRC and that as a result of a civil case filed by Mega
Prime, the subsequent sale of the properties by PNB to Mega Prime was rescinded. The NLRC
pointed out that while the Macapagal decision was set aside by Judge Bruselas and hence, his
findings could not be invoked by the labor arbiter, the titles of PNB-Madecor are conclusive
and there is no evidence that PNEI had ever been an owner. The Supreme Court had
observed in its decision that PNEI owed back rentals of P8.7 million to PNB-Madecor.

The Honorable Court of Appeals palpably departed from the established rules and jurisprudence in
ruling that private respondents Pantranco North Express, Inc. (PNEI), Philippine National Bank
(PNB), Philippine National Bank Management and Development Corporation (PNB-MADECOR),
Mega Prime Realty and Holdings, Inc. (Mega Prime) are not jointly and severally answerable to
the P722,727,150.22 Million NLRC money judgment awards in favor of the 4,000 individual
members of the Petitioners.28
They claim that PNB, through PNB-Madecor, directly benefited from the operation of PNEI and had
complete control over the funds of PNEI. Hence, they are solidarily answerable with PNEI for the
unpaid money claims of the employees.29 Citing A.C. Ransom Labor Union-CCLU v. NLRC,30 the
employees insist that where the employer corporation ceases to exist and is no longer able to
satisfy the judgment awards in favor of its employees, the owner of the employer corporation
should be made jointly and severally liable.31 They added that malice or bad faith need not be
proven to make the owners liable.

(4) The PNEI employees faulted the labor arbiter for not finding that PNEI, PNB, PNB-Madecor
and Mega Prime were all jointly and severally liable for their claims. The NLRC underscored
the fact that PNEI and Macris were subsidiaries of NIDC and had passed through and were
under the Asset Privatization Trust (APT) when the labor claims accrued. The labor arbiter was
correct in not granting PNBs third-party claim because at the time the causes of action
accrued, the PNEI was managed by a management committee appointed by the PNB as the
new owner of PNRI (sic) and Macris through a deed of assignment or transfer of ownership.
The NLRC says at length that the same is not true with PNB-Madecor which is now the
registered owner of the properties.20

On the other hand, PNB anchors its petition on this sole assignment of error, viz.:
THE AUCTION SALE OF THE PROPERTY COVERED BY TCT NO. 87884 INTENDED TO PARTIALLY
SATISFY THE CLAIMS OF FORMER WORKERS OF PNEI IN THE AMOUNT OFP7,884,000.00 (THE
AMOUNT OF PNB-MADECORS PROMISSORY NOTE IN FAVOR OF PNEI) IS NOT IN ORDER AS THE
SAID PROPERTY IS NOT OWNED BY PNEI. FURTHER, THE SAID PROMISSORY NOTE HAD ALREADY
BEEN GARNISHED IN FAVOR OF GERARDO C. UY WHICH LED TO THREE (3) PROPERTIES UNDER
THE NAME OF PNB-MADECOR, NAMELY TCT NOS. 87881, 87882 AND 87883, BEING LEVIED AND

The parties separate motions for reconsideration were likewise denied. 21 Thereafter, the matter
was elevated to the CA by PANREA, PEA-PTGWO and the Pantranco Association of Concerned
Employees. The latter group, however, later withdrew its petition. The former employees petition
was docketed as CA-G.R. SP No. 80599.

SOLD ON EXECUTION IN THE "PNB-MADECOR VS. UY" CASE (363 SCRA 128 [2001]) AND
"GERARDO C. UY VS. PNEI" (CIVIL CASE NO. 95-72685, RTC MANILA, BRANCH 38).32

another corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities
of the transferor.42

PNB insists that the Pantranco properties could no longer be levied upon because the promissory
note for which the Labor Arbiter held PNB-Madecor liable to PNEI, and in turn to the latters former
employees, had already been satisfied in favor of Gerardo C. Uy. It added that the properties were
in fact awarded to the highest bidder. Besides, says PNB, the subject properties were not owned by
PNEI, hence, the execution sale thereof was not validly effected. 33

Lastly, while we recognize that there are peculiar circumstances or valid grounds that may exist to
warrant the piercing of the corporate veil, 43 none applies in the present case whether between
PNB and PNEI; or PNB and PNB-Madecor.
Under the doctrine of "piercing the veil of corporate fiction," the court looks at the corporation as a
mere collection of individuals or an aggregation of persons undertaking business as a group,
disregarding the separate juridical personality of the corporation unifying the group. 44 Another
formulation of this doctrine is that when two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary to protect the rights of
third parties, disregard the legal fiction that two corporations are distinct entities and treat them
as identical or as one and the same.45

Both petitions must fail.

G.R. No. 170689
Stripped of the non-essentials, the sole issue for resolution raised by the former PNEI employees is
whether they can attach the properties (specifically the Pantranco properties) of PNB, PNBMadecor and Mega Prime to satisfy their unpaid labor claims against PNEI.

Whether the separate personality of the corporation should be pierced hinges on obtaining facts
appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with
caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or
when necessary in the interest of justice. After all, the concept of corporate entity was not meant
to promote unfair objectives.46

We answer in the negative.

First, the subject property is not owned by the judgment debtor, that is, PNEI. Nowhere in the
records was it shown that PNEI owned the Pantranco properties. Petitioners, in fact, never alleged
in any of their pleadings the fact of such ownership. What was established, instead, in PNB
MADECOR v. Uy34 and PNB v. Mega Prime Realty and Holdings Corporation/Mega Prime Realty and
Holdings Corporation v. PNB35 was that the properties were owned by Macris, the predecessor of
PNB-Madecor. Hence, they cannot be pursued against by the creditors of PNEI.

As between PNB and PNEI, petitioners want us to disregard their separate personalities, and insist
that because the company, PNEI, has already ceased operations and there is no other way by
which the judgment in favor of the employees can be satisfied, corporate officers can be held
jointly and severally liable with the company. Petitioners rely on the pronouncement of this Court
in A.C. Ransom Labor Union-CCLU v. NLRC47 and subsequent cases.48
This reliance fails to persuade. We find the aforesaid decisions inapplicable to the instant case.

We would like to stress the settled rule that the power of the court in executing judgments extends
only to properties unquestionably belonging to the judgment debtor alone. 36 To be sure, one mans
goods shall not be sold for another mans debts.37 A sheriff is not authorized to attach or levy on
property not belonging to the judgment debtor, and even incurs liability if he wrongfully levies
upon the property of a third person.38

For one, in the said cases, the persons made liable after the companys cessation of operations
were the officers and agents of the corporation. The rationale is that, since the corporation is an
artificial person, it must have an officer who can be presumed to be the employer, being the
person acting in the interest of the employer. The corporation, only in the technical sense, is the
employer.49 In the instant case, what is being made liable is another corporation (PNB) which
acquired the debtor corporation (PNEI).

Second, PNB, PNB-Madecor and Mega Prime are corporations with personalities separate and
distinct from that of PNEI. PNB is sought to be held liable because it acquired PNEI through NIDC
at the time when PNEI was suffering financial reverses. PNB-Madecor is being made to answer for
petitioners labor claims as the owner of the subject Pantranco properties and as a subsidiary of
PNB. Mega Prime is also included for having acquired PNBs shares over PNB-Madecor.

Moreover, in the recent cases Carag v. National Labor Relations Commission 50 and McLeod v.
National Labor Relations Commission,51 the Court explained the doctrine laid down in AC Ransom
relative to the personal liability of the officers and agents of the employer for the debts of the
latter. In AC Ransom, the Court imputed liability to the officers of the corporation on the strength
of the definition of an employer in Article 212(c) (now Article 212[e]) of the Labor Code. Under the
said provision, employer includes any person acting in the interest of an employer, directly or
indirectly, but does not include any labor organization or any of its officers or agents except when
acting as employer. It was clarified in Carag and McLeod that Article 212(e) of the Labor Code, by
itself, does not make a corporate officer personally liable for the debts of the corporation. It added
that the governing law on personal liability of directors or officers for debts of the corporation is
still Section 3152 of the Corporation Code.

The general rule is that a corporation has a personality separate and distinct from those of its
stockholders and other corporations to which it may be connected. 39 This is a fiction created by law
for convenience and to prevent injustice.40 Obviously, PNB, PNB-Madecor, Mega Prime, and PNEI
are corporations with their own personalities. The "separate personalities" of the first three
corporations had been recognized by this Court in PNB v. Mega Prime Realty and Holdings
Corporation/Mega Prime Realty and Holdings Corporation v. PNB41 where we stated that PNB was
only a stockholder of PNB-Madecor which later sold its shares to Mega Prime; and that PNBMadecor was the owner of the Pantranco properties. Moreover, these corporations are registered as
separate entities and, absent any valid reason, we maintain their separate identities and we cannot
treat them as one.

More importantly, as aptly observed by this Court in AC Ransom, it appears that Ransom,
foreseeing the possibility or probability of payment of backwages to its employees, organized
Rosario to replace Ransom, with the latter to be eventually phased out if the strikers win their
case. The execution could not be implemented against Ransom because of the disposition
posthaste of its leviable assets evidently in order to evade its just and due obligations. 53 Hence,

Neither can we merge the personality of PNEI with PNB simply because the latter acquired the
former. Settled is the rule that where one corporation sells or otherwise transfers all its assets to

the Court sustained the piercing of the corporate veil and made the officers of Ransom personally
liable for the debts of the latter.

6. The parent corporation pays the salaries and other expenses or losses of the subsidiary;
7. The subsidiary has substantially no business except with the parent corporation or no
assets except those conveyed to or by the parent corporation;

Clearly, what can be inferred from the earlier cases is that the doctrine of piercing the corporate
veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the
corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or
when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter
ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of
a person, or where the corporation is so organized and controlled and its affairs are so conducted
as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. 54 In the
absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such
corporate officer cannot be made personally liable for corporate liabilities. 55

8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporations own;
9. The parent corporation uses the property of the subsidiary as its own;
10. The directors or executives of the subsidiary do not act independently in the interest of
the subsidiary, but take their orders from the parent corporation;

Applying the foregoing doctrine to the instant case, we quote with approval the CA disposition in
this wise:

11. The formal legal requirements of the subsidiary are not observed.
It would not be enough, then, for the petitioners in this case, the PNEI employees, to rest on their
laurels with evidence that PNB was the owner of PNEI. Apart from proving ownership, it is
necessary to show facts that will justify us to pierce the veil of corporate fiction and hold PNB liable
for the debts of PNEI. The burden undoubtedly falls on the petitioners to prove their affirmative
allegations. In line with the basic jurisprudential principles we have explored, they must show that
PNB was using PNEI as a mere adjunct or instrumentality or has exploited or misused the
corporate privilege of PNEI.

None of the foregoing circumstances is present in the instant case. Thus, piercing of PNBMadecors corporate veil is not warranted. Being a mere successor-in-interest of PNB-Madecor, with
more reason should no liability attach to Mega Prime.
G.R. No. 170705

We do not see how the burden has been met. Lacking proof of a nexus apart from mere
ownership, the petitioners have not provided us with the legal basis to reach the assets of
corporations separate and distinct from PNEI.56

In its petition before this Court, PNB seeks the annulment of the June 23, 2004 execution sale of
the Pantranco properties on the ground that the judgment debtor (PNEI) never owned said lots. It
likewise contends that the levy and the eventual sale on execution of the subject properties was
null and void as the promissory note on which PNB-Madecor was made liable had already been
satisfied.

Assuming, for the sake of argument, that PNB may be held liable for the debts of PNEI, petitioners
still cannot proceed against the Pantranco properties, the same being owned by PNB-Madecor,
notwithstanding the fact that PNB-Madecor was a subsidiary of PNB. The general rule remains that
PNB-Madecor has a personality separate and distinct from PNB. The mere fact that a corporation
owns all of the stocks of another corporation, taken alone, is not sufficient to justify their being
treated as one entity. If used to perform legitimate functions, a subsidiarys separate existence
shall be respected, and the liability of the parent corporation as well as the subsidiary will be
confined to those arising in their respective businesses.57

It has been repeatedly stated that the Pantranco properties which were the subject of execution
sale were owned by Macris and later, the PNB-Madecor. They were never owned by PNEI or PNB.
Following our earlier discussion on the separate personalities of the different corporations involved
in the instant case, the only entity which has the right and interest to question the execution sale
and the eventual right to annul the same, if any, is PNB-Madecor or its successor-in-interest.
Settled is the rule that proceedings in court must be instituted by the real party in interest.

In PNB v. Ritratto Group, Inc.,58 we outlined the circumstances which are useful in the
determination of whether a subsidiary is but a mere instrumentality of the parent-corporation, to
wit:

A real party in interest is the party who stands to be benefited or injured by the judgment in the
suit, or the party entitled to the avails of the suit.59 "Interest" within the meaning of the rule
means material interest, an interest in issue and to be affected by the decree, as distinguished
from mere interest in the question involved, or a mere incidental interest.60 The interest of the
party must also be personal and not one based on a desire to vindicate the constitutional right of
some third and unrelated party.61 Real interest, on the other hand, means a present substantial
interest, as distinguished from a mere expectancy or a future, contingent, subordinate, or
consequential interest.62

1. The parent corporation owns all or most of the capital stock of the subsidiary;
2. The parent and subsidiary corporations have common directors or officers;
3. The parent corporation finances the subsidiary;

Specifically, in proceedings to set aside an execution sale, the real party in interest is the person
who has an interest either in the property sold or the proceeds thereof. Conversely, one who is not
interested or is not injured by the execution sale cannot question its validity.63

4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation;

In justifying its claim against the Pantranco properties, PNB alleges that Mega Prime, the buyer of
its entire stockholdings in PNB-Madecor was indebted to it (PNB). Considering that said

5. The subsidiary has grossly inadequate capital;

indebtedness remains unpaid, PNB insists that it has an interest over PNB-Madecor and Mega
Primes assets.

The factual antecedents, as summarized by the CA, are as follows:

On September 24, 1994, defendant-appellant Seaoil Petroleum Corporation (Seaoil, for brevity)
purchased one unit of ROBEX 200 LC Excavator, Model 1994 from plaintiff-appellee Autocorp Group
(Autocorp for short). The original cost of the unit was P2,500,000.00 but was increased
toP3,112,519.94 because it was paid in 12 monthly installments up to September 30, 1995. The
sales agreement was embodied in the Vehicle Sales Invoice No. A-0209 and Vehicle Sales
Confirmation No. 258. Both documents were signed by Francis Yu (Yu for short), president of
Seaoil, on behalf of said corporation. Furthermore, it was agreed that despite delivery of the
excavator, ownership thereof was to remain with Autocorp until the obligation is fully settled. In
this light, Seaoils contractor, Romeo Valera, issued 12 postdated checks. However, Autocorp
refused to accept the checks because they were not under Seaoils name. Hence, Yu, on behalf of
Seaoil, signed and issued 12 postdated checks for P259,376.62 each with Autocorp as payee.

Again, the contention is bereft of merit. While PNB has an apparent interest in Mega Primes assets
being the creditor of the latter for a substantial amount, its interest remains inchoate and has not
yet ripened into a present substantial interest, which would give it the standing to maintain an
action involving the subject properties. As aptly observed by the Labor Arbiter, PNB only has an
inchoate right to the properties of Mega Prime in case the latter would not be able to pay its
indebtedness. This is especially true in the instant case, as the debt being claimed by PNB is
secured by the accessory contract of pledge of the entire stockholdings of Mega Prime to PNBMadecor.64
The Court further notes that the Pantranco properties (or a portion thereof ) were sold on
execution to satisfy the unpaid obligation of PNB-Madecor to PNEI. PNB-Madecor was thus made
liable to the former PNEI employees as the judgment debtor of PNEI. It has long been established
in PNB-Madecor v. Uy and other similar cases that PNB-Madecor had an unpaid obligation to PNEI
amounting to more or less P7 million which could be validly pursued by the creditors of the latter.
Again, this strengthens the proper parties right to question the validity of the execution sale,
definitely not PNB.

The excavator was subsequently delivered on September 26, 1994 by Autocorp and was received
by Seaoil in its depot in Batangas.
The relationship started to turn sour when the first check bounced. However, it was remedied when
Seaoil replaced it with a good check. The second check likewise was also good when presented for
payment. However, the remaining 10 checks were not honored by the bank since Seaoil requested
that payment be stopped. It was downhill from thereon.

Besides, the issue of whether PNB has a substantial interest over the Pantranco properties has
already been laid to rest by the Labor Arbiter.65 It is noteworthy that in its Resolution dated
September 10, 2002, the Labor Arbiter denied PNBs Third-Party Claim primarily because PNB only
has an inchoate right over the Pantranco properties.66 Such conclusion was later affirmed by the
NLRC in its Resolution dated June 30, 2003.67Notwithstanding said conclusion, PNB did not elevate
the matter to the CA via a petition for review. Hence it is presumed to be satisfied with the
adjudication therein.68 That decision of the NLRC has become final as against PNB and can no
longer be reviewed, much less reversed, by this Court. 69 This is in accord with the doctrine that a
party who has not appealed cannot obtain from the appellate court any affirmative relief other
than the ones granted in the appealed decision.70

Despite repeated demands, Seaoil refused to pay the remaining balance of P2,593,766.20. Hence,
on January 24, 1995, Autocorp filed a complaint for recovery of personal property with damages
and replevin in the Regional Trial Court of Pasig. The trial court ruled for Autocorp. Hence, this
appeal.
Seaoil, on the other hand, alleges that the transaction is not as simple as described above. It
claims that Seaoil and Autocorp were only utilized as conduits to settle the obligation of one
foreign entity named Uniline Asia (herein referred to as Uniline), in favor of another foreign entity,
Focus Point International, Incorporated (Focus for short). Paul Rodriguez (Rodriguez for brevity) is
a stockholder and director of Autocorp. He is also the owner of Uniline. On the other hand, Yu is
the president and stockholder of Seaoil and is at the same time owner of Focus. Allegedly, Uniline
chartered MV Asia Property (sic) in the amount of $315,711.71 from its owner Focus. Uniline was
not able to settle the said amount. Hence, Uniline, through Rodriguez, proposed to settle the
obligation through conveyance of vehicles and heavy equipment. Consequently, four units of
Tatamobile pick-up trucks procured from Autocorp were conveyed to Focus as partial payment. The
excavator in controversy was allegedly one part of the vehicles conveyed to Focus. Seaoil claims
that Rodriguez initially issued 12 postdated checks in favor of Autocorp as payment for the
excavator. However, due to the fact that it was company policy for Autocorp not to honor postdated
checks issued by its own directors, Rodriguez requested Yu to issue 12 PBCOM postdated checks in
favor of Autocorp. In turn, said checks would be funded by the corresponding 12 Monte de Piedad
postdated checks issued by Rodriguez. These Monte de Piedad checks were postdated three days
prior to the maturity of the PBCOM checks.

WHEREFORE, premises considered, the petitions are hereby DENIED for lack of merit.
SO ORDERED.
-------------------------------------------------------------------------------------------------------------G.R. No. 164326

October 17, 2008

SEAOIL PETROLEUM CORPORATION, petitioners, vs. AUTOCORP GROUP and PAUL Y.

RODRIGUEZ, respondents.
DECISION
NACHURA, J.:

Seaoil claims that Rodriguez issued a stop payment order on the ten checks thus constraining the
former to also order a stop payment order on the PBCOM checks.

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing
the Decision1of the Court of Appeals (CA) dated May 20, 2004 in CA-G.R. CV No. 72193, which
had affirmed in toto the Decision2 of the Regional Trial Court (RTC) of Pasig City, Branch 157, dated
September 10, 2001 in Civil Case No. 64943.

In short, Seaoil claims that the real transaction is that Uniline, through Rodriguez, owed money to
Focus. In lieu of payment, Uniline instead agreed to convey the excavator to Focus. This was to be
paid by checks issued by Seaoil but which in turn were to be funded by checks issued by Uniline. x
x x3

As narrated above, respondent Autocorp filed a Complaint for Recovery of Personal Property with
Damages and Replevin4 against Seaoil before the RTC of Pasig City. In its September 10, 2001
Decision, the RTC ruled that the transaction between Autocorp and Seaoil was a simple contract of
sale payable in installments.5 It also held that the obligation to pay plaintiff the remainder of the
purchase price of the excavator solely devolves on Seaoil. Paul Rodriguez, not being a party to the
sale of the excavator, could not be held liable therefor. The decretal portion of the trial courts
Decision reads, thus:

Whether or not the dismissal of the third-party complaint would have the legal effect of res
judicata as would unjustly preclude petitioner from enforcing its claim against respondent
Rodriguez (third-party defendant) in a separate action.
IV
Whether or not, given the facts in evidence, the lower courts should have pierced the corporate
veil.

WHEREFORE, judgment is hereby rendered in favor of plaintiff Autocorp Group and against
defendant Seaoil Petroleum Corporation which is hereby directed to pay plaintiff:

The Petition lacks merit. We sustain the ruling of the CA.

- P2,389,179.23 plus 3% interest from the time of judicial demand until full payment; and
We find no fault in the trial courts appreciation of the facts of this case. The findings of fact of the
trial court are conclusive upon this Court, especially when affirmed by the CA. None of the
exceptions to this well-settled rule has been shown to exist in this case.

- 25% of the total amount due as attorneys fees and cost of litigation.
The third-party complaint filed by defendant Seaoil Petroleum Corporation against third-party
defendant Paul Rodriguez is hereby DISMISSED for lack of merit.

Petitioner does not question the validity of the vehicle sales invoice but merely argues that the
same does not reflect the true agreement of the parties. However, petitioner only had its bare
testimony to back up the alleged arrangement with Rodriguez.

SO ORDERED.
The Monte de Piedad checks the supposedly "clear and obvious link" 7 between the documentary
evidence and the true transaction between the parties are equivocal at best. There is nothing in
those checks to establish such link. Rodriguez denies that there is such an agreement.

Seaoil filed a Petition for Review before the CA. In its assailed Decision, the CA dismissed the
petition and affirmed the RTCs Decision in toto.6 It held that the transaction between Yu and
Rodriguez was merely verbal. This cannot alter the sales contract between Seaoil and Autocorp as
this will run counter to the parol evidence rule which prohibits the introduction of oral and parol
evidence to modify the terms of the contract. The claim that it falls under the exceptions to the
parol evidence rule has not been sufficiently proven. Moreover, it held that Autocorps separate
corporate personality cannot be disregarded and the veil of corporate fiction pierced. Seaoil was
not able to show that Autocorp was merely an alter ego of Uniline or that both corporations were
utilized to perpetrate a fraud. Lastly, it held that the RTC was correct in dismissing the third-party
complaint since it did not arise out of the same transaction on which the plaintiffs claim is based,
or that the third partys claim, although arising out of another transaction, is connected to the
plaintiffs claim. Besides, the CA said, such claim may be enforced in a separate action.

Unsubstantiated testimony, offered as proof of verbal agreements which tends to vary the terms of
a written agreement, is inadmissible under the parol evidence rule. 8
Rule 130, Section 9 of the Revised Rules on Evidence embodies the parol evidence rule and states:
SEC. 9. Evidence of written agreements.When the terms of an agreement have been reduced to
writing, it is considered as containing all the terms agreed upon and there can be, between the
parties and their successors-in-interest, no evidence of such terms other than the contents of the
written agreement.

Seaoil now comes before this Court in a Petition for Review raising the following issues:
However, a party may present evidence to modify, explain or add to the terms of the written
agreement if he puts in issue in his pleading:

I
Whether or not the Court of Appeals erred in partially applying the parol evidence rule to prove
only some terms contained in one portion of the document but disregarded the rule with respect to
another but substantial portion or entry also contained in the same document which should have
proven the true nature of the transaction involved.

(a) An intrinsic ambiguity, mistake or imperfection in the written agreement;

(b) The failure of the written agreement to express the true intent and agreement of the parties
thereto;

II

(c) The validity of the written agreement; or

Whether or not the Court of Appeals gravely erred in its judgment based on misapprehension of
facts when it declared absence of facts which are contradicted by presence of evidence on record.

(d) The existence of other terms agreed to by the parties or their successors-in-interest after the
execution of the written agreement.

III

The term "agreement" includes wills.

The parol evidence rule forbids any addition to, or contradiction of, the terms of a written
agreement by testimony or other evidence purporting to show that different terms were agreed
upon by the parties, varying the purport of the written contract.9

Uniline to Focus Point arose out of a transaction completely different from the subject of the
instant case.

This principle notwithstanding, petitioner would have the Court rule that this case falls within the
exceptions, particularly that the written agreement failed to express the true intent and agreement
of the parties. This argument is untenable.

It is settled that a corporation has a personality separate and distinct from its individual
stockholders or members, and is not affected by the personal rights, obligations and transactions
of the latter.21 The corporation may not be held liable for the obligations of the persons composing
it, and neither can its stockholders be held liable for its obligation. 22

Although parol evidence is admissible to explain the meaning of a contract, it cannot serve the
purpose of incorporating into the contract additional contemporaneous conditions which are not
mentioned at all in the writing unless there has been fraud or mistake.10 Evidence of a prior or
contemporaneous verbal agreement is generally not admissible to vary, contradict or defeat the
operation of a valid contract.11

Of course, this Court has recognized instances when the corporations separate personality may be
disregarded. However, we have also held that the same may only be done in cases where the
corporate vehicle is being used to defeat public convenience, justify wrong, protect fraud, or
defend crime.23 Moreover, the wrongdoing must be clearly and convincingly established. It cannot
be presumed.24

The Vehicle Sales Invoice12 is the best evidence of the transaction. A sales invoice is a commercial
document. Commercial documents or papers are those used by merchants or businessmen to
promote or facilitate trade or credit transactions.13 Business forms, e.g., order slip, delivery charge
invoice and the like, are commonly recognized in ordinary commercial transactions as valid
between the parties and, at the very least, they serve as an acknowledgment that a business
transaction has in fact transpired.14 These documents are not mere scraps of paper bereft of
probative value, but vital pieces of evidence of commercial transactions. They are written
memorials of the details of the consummation of contracts.15

To reiterate, the transaction under the Vehicle Sales Invoice is separate and distinct from that
under the Lease Purchase Agreement. In the former, it is Seaoil that owes Autocorp, while in the
latter, Uniline incurred obligations to Focus. There was never any allegation, much less any
evidence, that Autocorp was merely an alter ego of Uniline, or that the two corporations separate
personalities were being used as a means to perpetrate fraud or wrongdoing.
Moreover, Rodriguez, as stockholder and director of Uniline, cannot be held personally liable for the
debts of the corporation, which has a separate legal personality of its own. While Section 31 of the
Corporation Code25 lays down the exceptions to the rule, the same does not apply in this case.
Section 31 makes a director personally liable for corporate debts if he willfully and knowingly votes
for or assents to patently unlawful acts of the corporation. Section 31 also makes a director
personally liable if he is guilty of gross negligence or bad faith in directing the affairs of the
corporation.26 The bad faith or wrongdoing of the director must be established clearly and
convincingly. Bad faith is never presumed.27

The terms of the subject sales invoice are clear. They show that Autocorp sold to Seaoil one unit
Robex 200 LC Excavator paid for by checks issued by one Romeo Valera. This does not, however,
change the fact that Seaoil Petroleum Corporation, as represented by Yu, is the customer or buyer.
The moment a party affixes his or her signature thereon, he or she is bound by all the terms
stipulated therein and is subject to all the legal obligations that may arise from their breach. 16
Oral testimony on the alleged conditions, coming from a party who has an interest in the outcome
of the case, depending exclusively on human memory, is not as reliable as written or documentary
evidence.17

The burden of proving bad faith or wrongdoing on the part of Rodriguez was, on petitioner, a
burden which it failed to discharge. Thus, it was proper for the trial court to have dismissed the
third-party complaint against Rodriguez on the ground that he was not a party to the sale of the
excavator.

Hence, petitioners contention that the document falls within the exception to the parol evidence
rule is untenable. The exception obtains only where "the written contract is so ambiguous or
obscure in terms that the contractual intention of the parties cannot be understood from a mere
reading of the instrument. In such a case, extrinsic evidence of the subject matter of the contract,
of the relations of the parties to each other, and of the facts and circumstances surrounding them
when they entered into the contract may be received to enable the court to make a proper
interpretation of the instrument."18

Rule 6, Section 11 of the Revised Rules on Civil Procedure defines a third-party complaint as a
claim that a defending party may, with leave of court, file against a person not a party to the
action, called the third-party defendant, for contribution, indemnity, subrogation or any other
relief, in respect of his opponents claim.
The purpose of the rule is to permit a defendant to assert an independent claim against a third
party which he, otherwise, would assert in another action, thus preventing multiplicity of
suits.28 Had it not been for the rule, the claim could have been filed separately from the original
complaint.29

Even assuming there is a shred of truth to petitioners contention, the same cannot be made a
basis for holding respondents liable therefor.
As pointed out by the CA, Rodriguez is a person separate and independent from Autocorp.
Whatever obligations Rodriguez contracted cannot be attributed to Autocorp 19 and vice versa. In
fact, the obligation that petitioner proffers as its defense under the Lease Purchase Agreement
was not even incurred by Rodriguez or by Autocorp but by Uniline.

Petitioners claim against Rodriguez was fully ventilated in the proceedings before the trial court,
tried and decided on its merits. The trial courts ruling operates as res judicata against another suit
involving the same parties and same cause of action. This is rightly so because the trial court
found that Rodriguez was not a party to the sale of the excavator. On the other hand, petitioner
Seaoils liability has been successfully established by respondent.

The Lease Purchase Agreement20 clearly shows that the parties thereto are two corporations not
parties to this case: Focus Point and Uniline. Under this Lease Purchase Agreement, it is Uniline, as
lessee/purchaser, and not Rodriguez, that incurred the debt to Focus Point. The obligation of

A last point. We reject Seaoils claim that "the ownership of the subject excavator, having been
legally and completely transferred to Focus Point International, Inc., cannot be subject of replevin

and plaintiff [herein respondent Autocorp] is not legally entitled to any writ of replevin." 30 The
claim is negated by the sales invoice which clearly states that "[u]ntil after the vehicle is fully paid
inclusive of bank clearing time, it remains the property of Autocorp Group which reserves the right
to take possession of said vehicle at any time and place without prior notice." 31

From March 1, 1994 to February 28, 1995 P7,320.50/P14,641.00

From March 1, 1995 to February 28, 1996 P8,052.55/P16,105.10
From March 1, 1996 to February 29, 1997 P8,857.81/P17,715.61

Considering, first, that Focus Point was not a party to the sale of the excavator and, second, that
Seaoil indeed failed to pay for the excavator in full, the same still rightfully belongs to Autocorp.
Additionally, as the trial court found, Seaoil had already assigned the same to its contractor for the
construction of its depot in Batangas.32Hence, Seaoil has already enjoyed the benefit of the
transaction even as it has not complied with its obligation. It cannot be permitted to unjustly
enrich itself at the expense of another.

From March 1, 1997 to February 28, 1998 P9,743.59/P19,487.17

From March 1, 1998 to February 28, 1999 P10,717.95/P21,435.89
From March 1, 1999 to February 28, 2000 P11,789.75/P23,579.484

WHEREFORE, the foregoing premises considered, the Petition is hereby DENIED. The Decision of
the Court of Appeals dated May 20, 2004 in CA-G.R. CV No. 72193 is AFFIRMED.

For Rooms 22 and 24:

SO ORDERED.
Effective July 1, 1992 P10,000.00 with an increment of 10% every two years. 5
-------------------------------------------------------------------------------------------------------------For Rooms 33 and 34:
G.R. No. 136409

March 14, 2008

Effective April 1, 1992 P5,000.00 with an increment of 10% every two years.6

SUBHASH C. PASRICHA and JOSEPHINE A. PASRICHA, Petitioners, vs. DON LUIS DISON
REALTY, INC., Respondent.

For Rooms 36, 37 and 38:

DECISION

Effective when tenants vacate said premises P10,000.00 with an increment of 10% every two
years.7

NACHURA, J.:
Petitioners were, likewise, required to pay for the cost of electric consumption, water bills and the
use of telephone cables.8

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking the reversal
of the Decision1of the Court of Appeals (CA) dated May 26, 1998 and its Resolution 2 dated
December 10, 1998 in CA-G.R. SP No. 37739 dismissing the petition filed by petitioners Josephine
and Subhash Pasricha.

The lease of Rooms 36, 37 and 38 did not materialize leaving only Rooms 22, 24, 32, 33, 34 and
35 as subjects of the lease contracts.9 While the contracts were in effect, petitioners dealt with
Francis Pacheco (Pacheco), then General Manager of private respondent. Thereafter, Pacheco was
replaced by Roswinda Bautista (Ms. Bautista).10 Petitioners religiously paid the monthly rentals
until May 1992.11 After that, however, despite repeated demands, petitioners continuously refused
to pay the stipulated rent. Consequently, respondent was constrained to refer the matter to its
lawyer who, in turn, made a final demand on petitioners for the payment of the accrued rentals
amounting to P916,585.58.12 Because petitioners still refused to comply, a complaint for ejectment
was filed by private respondent through its representative, Ms. Bautista, before the Metropolitan
Trial Court (MeTC) of Manila.13 The case was raffled to Branch XIX and was docketed as Civil Case
No. 143058-CV.

The facts of the case, as culled from the records, are as follows:
Respondent Don Luis Dison Realty, Inc. and petitioners executed two Contracts of Lease 3 whereby
the former, as lessor, agreed to lease to the latter Units 22, 24, 32, 33, 34, 35, 36, 37 and 38 of
the San Luis Building, located at 1006 M.Y. Orosa cor. T.M. Kalaw Streets, Ermita, Manila.
Petitioners, in turn, agreed to pay monthly rentals, as follows:
For Rooms 32/35:

Petitioners admitted their failure to pay the stipulated rent for the leased premises starting July
until November 1992, but claimed that such refusal was justified because of the internal squabble
in respondent company as to the person authorized to receive payment. 14 To further justify their
non-payment of rent, petitioners alleged that they were prevented from using the units (rooms)
subject matter of the lease contract, except Room 35. Petitioners eventually paid their monthly
rent for December 1992 in the amount of P30,000.00, and claimed that respondent waived its
right to collect the rents for the months of July to November 1992 since petitioners were prevented
from using Rooms 22, 24, 32, 33, and 34.15 However, they again withheld payment of rents
starting January 1993 because of respondents refusal to turn over Rooms 36, 37 and 38.16 To
show good faith and willingness to pay the rents, petitioners alleged that they prepared the check

From March 1, 1991 to August 31, 1991 P5,000.00/P10,000.00

From September 1, 1991 to February 29, 1992 P5,500.00/P11,000.00
From March 1, 1992 to February 28, 1993 P6,050.00/P12,100.00
From March 1, 1993 to February 28, 1994 P6,655.00/P13,310.00

vouchers for their monthly rentals from January 1993 to January 1994.17 Petitioners further
averred in their Amended Answer18 that the complaint for ejectment was prematurely filed, as the
controversy was not referred to the barangay for conciliation.

obviously dilatory.29 As to the motion for inhibition of the Honorable Justice Reyes, the same was
denied, as the appellate court justice stressed that the decision and the resolution were not
affected by extraneous matters.30 Lastly, the appellate court granted respondents motion for
execution and directed the RTC to issue a new writ of execution of its decision, with the exception
of the award of attorneys fees which the CA deleted. 31

For failure of the parties to reach an amicable settlement, the pre-trial conference was terminated.
Thereafter, they submitted their respective position papers.

Petitioners now come before this Court in this petition for review on certiorari raising the following
issues:

On November 24, 1994, the MeTC rendered a Decision dismissing the complaint for ejectment. It
considered petitioners non-payment of rentals as unjustified. The court held that mere willingness
to pay the rent did not amount to payment of the obligation; petitioners should have deposited
their payment in the name of respondent company. On the matter of possession of the subject
premises, the court did not give credence to petitioners claim that private respondent failed to
turn over possession of the premises. The court, however, dismissed the complaint because of Ms.
Bautistas alleged lack of authority to sue on behalf of the corporation.
19

I.
Whether this ejectment suit should be dismissed and whether petitioners are entitled to
damages for the unauthorized and malicious filing by Rosario (sic) Bautista of this ejectment
case, it being clear that [Roswinda] whether as general manager or by virtue of her
subsequent designation by the Board of Directors as the corporations attorney-in-fact had
no legal capacity to institute the ejectment suit, independently of whether Director Pacanas
Order setting aside the SEC revocation Order is a mere scrap of paper.

Deciding the case on appeal, the Regional Trial Court (RTC) of Manila, Branch 1, in Civil Case No.
94-72515, reversed and set aside the MeTC Decision in this wise:
WHEREFORE, the appealed decision is hereby reversed and set aside and another one is rendered
ordering defendants-appellees and all persons claiming rights under them, as follows:

II.
Whether the RTCs and the Honorable Court of Appeals failure and refusal to resolve the most
fundamental factual issues in the instant ejectment case render said decisions void on their
face by reason of the complete abdication by the RTC and the Honorable Justice Ruben Reyes
of their constitutional duty not only to clearly and distinctly state the facts and the law on
which a decision is based but also to resolve the decisive factual issues in any given case.

(1) to vacate the leased premised (sic) and restore possession thereof to plaintiff-appellant;
(2) to pay plaintiff-appellant the sum of P967,915.80 representing the accrued rents in
arrears as of November 1993, and the rents on the leased premises for the succeeding
months in the amounts stated in paragraph 5 of the complaint until fully paid; and

III.
(3) to pay an additional sum equivalent to 25% of the rent accounts as and for attorneys
fees plus the costs of this suit.

Whether the (1) failure and refusal of Honorable Justice Ruben Reyes to inhibit himself,
despite his admission by reason of his silence of petitioners accusation that the said
Justice enjoyed a $7,000.00 scholarship grant courtesy of the uncle-in-law of respondent
"corporations" purported general manager and (2), worse, his act of ruling against the
petitioners and in favor of the respondent "corporation" constitute an unconstitutional
deprivation of petitioners property without due process of law.32

SO ORDERED.20
The court adopted the MeTCs finding on petitioners unjustified refusal to pay the rent, which is a
valid ground for ejectment. It, however, faulted the MeTC in dismissing the case on the ground of
lack of capacity to sue. Instead, it upheld Ms. Bautistas authority to represent respondent
notwithstanding the absence of a board resolution to that effect, since her authority was implied
from her power as a general manager/treasurer of the company.21

In addition to Ms. Bautistas lack of capacity to sue, petitioners insist that respondent company has
no standing to sue as a juridical person in view of the suspension and eventual revocation of its
certificate of registration.33 They likewise question the factual findings of the court on the bases of
their ejectment from the subject premises. Specifically, they fault the appellate court for not
finding that: 1) their non-payment of rentals was justified; 2) they were deprived of possession of
all the units subject of the lease contract except Room 35; and 3) respondent violated the terms of
the contract by its continued refusal to turn over possession of Rooms 36, 37 and 38. Petitioners
further prayed that a Temporary Restraining Order (TRO) be issued enjoining the CA from
enforcing its Resolution directing the issuance of a Writ of Execution. Thus, in a Resolution 34 dated
January 18, 1999, this Court directed the parties to maintain the status quo effective immediately
until further orders.

Aggrieved, petitioners elevated the matter to the Court of Appeals in a petition for review on
certiorari.22 On March 18, 1998, petitioners filed an Omnibus Motion 23 to cite Ms. Bautista for
contempt; to strike down the MeTC and RTC Decisions as legal nullities; and to conduct hearings
and ocular inspections or delegate the reception of evidence. Without resolving the aforesaid
motion, on May 26, 1998, the CA affirmed24 the RTC Decision but deleted the award of attorneys
fees.25
Petitioners moved for the reconsideration of the aforesaid decision. 26 Thereafter, they filed several
motions asking the Honorable Justice Ruben T. Reyes to inhibit from further proceeding with the
case allegedly because of his close association with Ms. Bautistas uncle-in-law.27

The petition lacks merit.

We uphold the capacity of respondent company to institute the ejectment case. Although the
Securities and Exchange Commission (SEC) suspended and eventually revoked respondents
certificate of registration on February 16, 1995, records show that it instituted the action for

In a Resolution28 dated December 10, 1998, the CA denied the motions for lack of merit. The
appellate court considered said motions as repetitive of their previous arguments, irrelevant and

ejectment on December 15, 1993. Accordingly, when the case was commenced, its registration
was not yet revoked.35 Besides, as correctly held by the appellate court, the SEC later set aside its
earlier orders of suspension and revocation of respondents certificate, rendering the issue moot
and academic.36

Unlawful detainer cases are summary in nature. In such cases, the elements to be proved and
resolved are the fact of lease and the expiration or violation of its terms.48 Specifically, the
essential requisites of unlawful detainer are: 1) the fact of lease by virtue of a contract, express or
implied; 2) the expiration or termination of the possessors right to hold possession; 3) withholding
by the lessee of possession of the land or building after the expiration or termination of the right to
possess; 4) letter of demand upon lessee to pay the rental or comply with the terms of the lease
and vacate the premises; and 5) the filing of the action within one year from the date of the last
demand received by the defendant.49

We likewise affirm Ms. Bautistas capacity to sue on behalf of the company despite lack of proof of
authority to so represent it. A corporation has no powers except those expressly conferred on it by
the Corporation Code and those that are implied from or are incidental to its existence. In turn, a
corporation exercises said powers through its board of directors and/or its duly authorized officers
and agents. Physical acts, like the signing of documents, can be performed only by natural persons
duly authorized for the purpose by corporate by-laws or by a specific act of the board of
directors.37 Thus, any person suing on behalf of the corporation should present proof of such
authority. Although Ms. Bautista initially failed to show that she had the capacity to sign the
verification and institute the ejectment case on behalf of the company, when confronted with such
question, she immediately presented the Secretarys Certificate 38 confirming her authority to
represent the company.

It is undisputed that petitioners and respondent entered into two separate contracts of lease
involving nine (9) rooms of the San Luis Building. Records, likewise, show that respondent
repeatedly demanded that petitioners vacate the premises, but the latter refused to heed the
demand; thus, they remained in possession of the premises. The only contentious issue is whether
there was indeed a violation of the terms of the contract: on the part of petitioners, whether they
failed to pay the stipulated rent without justifiable cause; while on the part of respondent, whether
it prevented petitioners from occupying the leased premises except Room 35.

There is ample jurisprudence holding that subsequent and substantial compliance may call for the
relaxation of the rules of procedure in the interest of justice.39 In Novelty Phils., Inc. v. Court of
Appeals,40 the Court faulted the appellate court for dismissing a petition solely on petitioners
failure to timely submit proof of authority to sue on behalf of the corporation. In Pfizer, Inc. v.
Galan,41 we upheld the sufficiency of a petition verified by an employment specialist despite the
total absence of a board resolution authorizing her to act for and on behalf of the corporation.
Lastly, in China Banking Corporation v. Mondragon International Philippines, Inc, 42 we relaxed the
rules of procedure because the corporation ratified the managers status as an authorized
signatory. In all of the above cases, we brushed aside technicalities in the interest of justice. This
is not to say that we disregard the requirement of prior authority to act in the name of a
corporation. The relaxation of the rules applies only to highly meritorious cases, and when there is
substantial compliance. While it is true that rules of procedure are intended to promote rather than
frustrate the ends of justice, and while the swift unclogging of court dockets is a laudable
objective, we should not insist on strict adherence to the rules at the expense of substantial
justice.43 Technical and procedural rules are intended to help secure, not suppress, the cause of
justice; and a deviation from the rigid enforcement of the rules may be allowed to attain that
prime objective, for, after all, the dispensation of justice is the core reason for the existence of
courts.44

This issue involves questions of fact, the resolution of which requires the evaluation of the
evidence presented. The MeTC, the RTC and the CA all found that petitioners failed to perform their
obligation to pay the stipulated rent. It is settled doctrine that in a civil case, the conclusions of
fact of the trial court, especially when affirmed by the Court of Appeals, are final and conclusive,
and cannot be reviewed on appeal by the Supreme Court.50 Albeit the rule admits of exceptions,
not one of them obtains in this case.51
To settle this issue once and for all, we deem it proper to assess the array of factual findings
supporting the courts conclusion.
The evidence of petitioners non-payment of the stipulated rent is overwhelming. Petitioners,
however, claim that such non-payment is justified by the following: 1) the refusal of respondent to
allow petitioners to use the leased properties, except room 35; 2) respondents refusal to turn over
Rooms 36, 37 and 38; and 3) respondents refusal to accept payment tendered by petitioners.
Petitioners justifications are belied by the evidence on record. As correctly held by the CA,
petitioners communications to respondent prior to the filing of the complaint never mentioned
their alleged inability to use the rooms.52 What they pointed out in their letters is that they did not
know to whom payment should be made, whether to Ms. Bautista or to Pacheco.53 In their July 26
and October 30, 1993 letters, petitioners only questioned the method of computing their electric
billings without, however, raising a complaint about their failure to use the rooms. 54 Although
petitioners stated in their December 30, 1993 letter that respondent failed to fulfill its part of the
contract,55 nowhere did they specifically refer to their inability to use the leased rooms. Besides, at
that time, they were already in default on their rentals for more than a year.

As to the denial of the motion to inhibit Justice Reyes, we find the same to be in order. First, the
motion to inhibit came after the appellate court rendered the assailed decision, that is, after
Justice Reyes had already rendered his opinion on the merits of the case. It is settled that a
motion to inhibit shall be denied if filed after a member of the court had already given an opinion
on the merits of the case, the rationale being that "a litigant cannot be permitted to speculate on
the action of the court x x x (only to) raise an objection of this sort after the decision has been
rendered."45 Second, it is settled that mere suspicion that a judge is partial to one of the parties is
not enough; there should be evidence to substantiate the suspicion. Bias and prejudice cannot be
presumed, especially when weighed against a judges sacred pledge under his oath of office to
administer justice without regard for any person and to do right equally to the poor and the rich.
There must be a showing of bias and prejudice stemming from an extrajudicial source, resulting in
an opinion on the merits based on something other than what the judge learned from his
participation in the case.46 We would like to reiterate, at this point, the policy of the Court not to
tolerate acts of litigants who, for just about any conceivable reason, seek to disqualify a judge (or
justice) for their own purpose, under a plea of bias, hostility, prejudice or prejudgment. 47

If it were true that they were allowed to use only one of the nine (9) rooms subject of the contract
of lease, and considering that the rooms were intended for a business purpose, we cannot
understand why they did not specifically assert their right. If we believe petitioners contention
that they had been prevented from using the rooms for more than a year before the complaint for
ejectment was filed, they should have demanded specific performance from the lessor and
commenced an action in court. With the execution of the contract, petitioners were already in a
position to exercise their right to the use and enjoyment of the property according to the terms of
the lease contract.56 As borne out by the records, the fact is that respondent turned over to
petitioners the keys to the leased premises and petitioners, in fact, renovated the rooms. Thus,
they were placed in possession of the premises and they had the right to the use and enjoyment of
the same. They, likewise, had the right to resist any act of intrusion into their peaceful possession

We now come to the more substantive issue of whether or not the petitioners may be validly
ejected from the leased premises.

10

of the property, even as against the lessor itself. Yet, they did not lift a finger to protect their right
if, indeed, there was a violation of the contract by the lessor.

Notably, instead of availing of the above remedies, petitioners opted to refrain from making
payments.

What was, instead, clearly established by the evidence was petitioners non-payment of rentals
because ostensibly they did not know to whom payment should be made. However, this did not
justify their failure to pay, because if such were the case, they were not without any remedy. They
should have availed of the provisions of the Civil Code of the Philippines on the consignation of
payment and of the Rules of Court on interpleader.

Neither can petitioners validly invoke the non-delivery of Rooms 36, 37 and 38 as a justification for
non-payment of rentals. Although the two contracts embraced the lease of nine (9) rooms, the
terms of the contracts - with their particular reference to specific rooms and the monthly rental for
each - easily raise the inference that the parties intended the lease of each room separate from
that of the others.lavvphil There is nothing in the contract which would lead to the conclusion that
the lease of one or more rooms was to be made dependent upon the lease of all the nine (9)
rooms. Accordingly, the use of each room by the lessee gave rise to the corresponding obligation
to pay the monthly rental for the same. Notably, respondent demanded payment of rentals only for
the rooms actually delivered to, and used by, petitioners.

Article 1256 of the Civil Code provides:

Article 1256. If the creditor to whom tender of payment has been made refuses without just cause
to accept it, the debtor shall be released from responsibility by the consignation of the thing or
sum due.

It may also be mentioned that the contract specifically provides that the lease of Rooms 36, 37
and 38 was to take effect only when the tenants thereof would vacate the premises. Absent a clear
showing that the previous tenants had vacated the premises, respondent had no obligation to
deliver possession of the subject rooms to petitioners. Thus, petitioners cannot use the nondelivery of Rooms 36, 37 and 38 as an excuse for their failure to pay the rentals due on the other
rooms they occupied.1avvphil

Consignation alone shall produce the same effect in the following cases:
xxxx

In light of the foregoing disquisition, respondent has every right to exercise his right to eject the
erring lessees. The parties contracts of lease contain identical provisions, to wit:

(4) When two or more persons claim the same right to collect;
x x x x.

In case of default by the LESSEE in the payment of rental on the fifth (5th) day of each month, the
amount owing shall as penalty bear interest at the rate of FOUR percent (4%) per month, to be
paid, without prejudice to the right of the LESSOR to terminate his contract, enter the premises,
and/or eject the LESSEE as hereinafter set forth;62

Consignation shall be made by depositing the things due at the disposal of a judicial authority,
before whom the tender of payment shall be proved in a proper case, and the announcement of
the consignation in other cases.57

Moreover, Article 167363 of the Civil Code gives the lessor the right to judicially eject the lessees in
case of non-payment of the monthly rentals. A contract of lease is a consensual, bilateral, onerous
and commutative contract by which the owner temporarily grants the use of his property to
another, who undertakes to pay the rent therefor.64 For failure to pay the rent, petitioners have no
right to remain in the leased premises.

In the instant case, consignation alone would have produced the effect of payment of the rentals.
The rationale for consignation is to avoid the performance of an obligation becoming more onerous
to the debtor by reason of causes not imputable to him. 58 Petitioners claim that they made a
written tender of payment and actually prepared vouchers for their monthly rentals. But that was
insufficient to constitute a valid tender of payment. Even assuming that it was valid tender, still, it
would not constitute payment for want of consignation of the amount. Well-settled is the rule that
tender of payment must be accompanied by consignation in order that the effects of payment may
be produced.59

WHEREFORE, premises considered, the petition is DENIED and the Status Quo Order dated
January 18, 1999 is hereby LIFTED. The Decision of the Court of Appeals dated May 26, 1998 and
its Resolution dated December 10, 1998 in CA-G.R. SP No. 37739 are AFFIRMED.

Moreover, Section 1, Rule 62 of the Rules of Court provides:

SO ORDERED.

Section 1. When interpleader proper. Whenever conflicting claims upon the same subject matter
are or may be made against a person who claims no interest whatever in the subject matter, or an
interest which in whole or in part is not disputed by the claimants, he may bring an action against
the conflicting claimants to compel them to interplead and litigate their several claims among
themselves.

-------------------------------------------------------------------------------------------------------------G.R. No. 149237

June 11, 2006

CHINA BANKING CORPORATION, petitioner, vs. DYNE-SEM ELECTRONICS

CORPORATION, respondent.

Otherwise stated, an action for interpleader is proper when the lessee does not know to whom
payment of rentals should be made due to conflicting claims on the property (or on the right to
collect).60 The remedy is afforded not to protect a person against double liability but to protect him
against double vexation in respect of one liability.61

DECISION
CORONA, J.:

11

On June 19 and 26, 1985, Dynetics, Inc. (Dynetics) and Elpidio O. Lim borrowed a total
of P8,939,000 from petitioner China Banking Corporation. The loan was evidenced by six
promissory notes.1

5.4 [respondent] acquired most of its present machineries and equipment as second-hand
items to keep costs down;
5.5 [t]he present plant site is under lease from Food Terminal, Inc., a government-controlled
corporation, and is located inside the FTI Complex in Taguig, Metro Manila, where a number
of other firms organized in 1986 and also engaged in the same or similar business have
likewise established their factories; practical convenience, and nothing else, was behind
[respondents] choice of plant site;

The borrowers failed to pay when the obligations became due. Petitioner consequently instituted a
complaint for sum of money2 on June 25, 1987 against them. The complaint sought payment of
the unpaid promissory notes plus interest and penalties.
Summons was not served on Dynetics, however, because it had already closed down. Lim, on the
other hand, filed his answer on December 15, 1987 denying that "he promised to pay [the
obligations] jointly and severally to [petitioner]." 3

5.6 [respondent] operates its own bonded warehouse under authority from the Bureau of
Customs which has the sole and absolute prerogative to authorize and assign customs
bonded warehouses; again, practical convenience played its role here since the warehouse in
question was virtually lying idle and unused when said Bureau decided to assign it to
[respondent] in June 1986.6

On January 7, 1988, the case was scheduled for pre-trial with respect to Lim. The case against
Dynetics was archived.

On February 28, 1989, the trial court issued an order archiving the case as to Chuidian, Garcia and
Ratinoff since summons had remained unserved.

On September 23, 1988, an amended complaint4 was filed by petitioner impleading respondent
Dyne-Sem Electronics Corporation (Dyne-Sem) and its stockholders Vicente Chuidian, Antonio
Garcia and Jacob Ratinoff. According to petitioner, respondent was formed and organized to be
Dynetics alter ego as established by the following circumstances:

After hearing, the court a quo rendered a decision on December 27, 1991 which read:

Dynetics, Inc. and respondent are both engaged in the same line of business of
manufacturing, producing, assembling, processing, importing, exporting, buying, distributing,
marketing and testing integrated circuits and semiconductor devices;

xxx [T]he Court rules that Dyne-Sem Electronics Corporation is not an alter ego of Dynetics,
Inc. Thus, Dyne-Sem Electronics Corporation is not liable under the promissory notes.
xxx

[t]he principal office and factory site of Dynetics, Inc. located at Avocado Road, FTI
Complex, Taguig, Metro Manila, were used by respondent as its principal office and factory
site;

xxx

xxx

xxx

Anent the complaint against Dyne-Sem and the latters counterclaim, both are hereby
dismissed, without costs.

[r]espondent retained some of the officers of Dynetics, Inc. 5

xxx

xxx

WHEREFORE, judgment is hereby rendered ordering Dynetics, Inc. and Elpidio O. Lim, jointly
and severally, to pay plaintiff.

[r]espondent acquired some of the machineries and equipment of Dynetics, Inc. from banks
which acquired the same through foreclosure;

xxx

xxx

xxx

SO ORDERED.7

On December 28, 1988, respondent filed its answer, alleging that:

From this adverse decision, petitioner appealed to the Court of Appeals 8 but the appellate court
dismissed the appeal and affirmed the trial courts decision. 9 It found that respondent was indeed
not an alter ego of Dynetics. The two corporations had different articles of incorporation. Contrary
to petitioners claim, no merger or absorption took place between the two. What transpired was a
mere sale of the assets of Dynetics to respondent. The appellate court denied petitioners motion
for reconsideration.10

5.1 [t]he incorporators as well as present stockholders of [respondent] are totally different
from those of Dynetics, Inc., and not one of them has ever been a stockholder or officer of
the latter;
5.2 [n]ot one of the directors of [respondent] is, or has ever been, a director, officer, or
stockholder of Dynetics, Inc.;

Hence, this petition for review11 with the following assigned errors:

5.3 [t]he various facilities, machineries and equipment being used by [respondent] in its
business operations were legitimately and validly acquired, under arms-length transactions,
from various corporations which had become absolute owners thereof at the time of said
transactions; these were not just "taken over" nor "acquired from Dynetics" by [respondent],
contrary to what plaintiff falsely and maliciously alleges;

VI.
Issues

12

What is the quantum of evidence needed for the trial court to determine if the veil of
corporat[e] fiction should be pierced?

In this case, petitioner failed to prove that Dyne-Sem was organized and controlled, and its affairs
conducted, in a manner that made it merely an instrumentality, agency, conduit or adjunct of
Dynetics, or that it was established to defraud Dynetics creditors, including petitioner.

[W]hether or not the Regional Trial Court of Manila Branch 15 in its Decision dated December
27, 1991 and the Court of Appeals in its Decision dated February 28, 2001 and Resolution
dated July 27, 2001, which affirmed en toto [Branch 15, Manila Regional Trial Courts
decision,] have ruled in accordance with law and/or applicable [jurisprudence] to the extent
that the Doctrine of Piercing the Veil of Corporat[e] Fiction is not applicable in the case at
bar?12

The similarity of business of the two corporations did not warrant a conclusion that respondent was
but a conduit of Dynetics. As we held in Umali v. Court of Appeals,19 "the mere fact that the
businesses of two or more corporations are interrelated is not a justification for disregarding their
separate personalities, absent sufficient showing that the corporate entity was purposely used as a
shield to defraud creditors and third persons of their rights."

We find no merit in the petition.

Likewise, respondents acquisition of some of the machineries and equipment of Dynetics was not
proof that respondent was formed to defraud petitioner. As the Court of Appeals found, no
merger20 took place between Dynetics and respondent Dyne-Sem. What took place was a sale of
the assets21 of the former to the latter. Merger is legally distinct from a sale of assets. 22 Thus,
where one corporation sells or otherwise transfers all its assets to another corporation for value,
the latter is not, by that fact alone, liable for the debts and liabilities of the transferor.

The question of whether one corporation is merely an alter ego of another is purely one of fact. So
is the question of whether a corporation is a paper company, a sham or subterfuge or whether
petitioner adduced the requisite quantum of evidence warranting the piercing of the veil of
respondents corporate entity. This Court is not a trier of facts. Findings of fact of the Court of
Appeals, affirming those of the trial court, are final and conclusive. The jurisdiction of this Court in
a petition for review on certiorari is limited to reviewing only errors of law, not of fact, unless it is
shown, inter alia, that: (a) the conclusion is grounded entirely on speculations, surmises and
conjectures; (b) the inference is manifestly mistaken, absurd and impossible; (c) there is grave
abuse of discretion; (d) the judgment is based on a misapplication of facts; (e) the findings of fact
of the trial court and the appellate court are contradicted by the evidence on record and (f) the
Court of Appeals went beyond the issues of the case and its findings are contrary to the
admissions of both parties.13

Petitioner itself admits that respondent acquired the machineries and equipment not directly from
Dynetics but from the various corporations which successfully bidded for them in an auction sale.
The contracts of sale executed between the winning bidders and respondent showed that the
assets were sold for considerable amounts.23 The Court of Appeals thus correctly ruled that the
assets were not "diverted" to respondent as an alter ego of Dynetics. 24 The machineries and
equipment were transferred and disposed of by the winning bidders in their capacity as owners.
The sales were therefore valid and the transfers of the properties to respondent legal and not in
any way in contravention of petitioners rights as Dynetics creditor.

We have reviewed the records and found that the factual findings of the trial and appellate courts
and consequently their conclusions were supported by the evidence on record.

Finally, it may be true that respondent later hired Dynetics former Vice-President Luvinia Maglaya
and Assistant Corporate Counsel Virgilio Gesmundo. From this, however, we cannot conclude that
respondent was an alter ego of Dynetics. In fact, even the overlapping of incorporators and
stockholders of two or more corporations will not necessarily lead to such inference and justify the
piercing of the veil of corporate fiction.25 Much more has to be proven.

The general rule is that a corporation has a personality separate and distinct from that of its
stockholders and other corporations to which it may be connected. 14 This is a fiction created by law
for convenience and to prevent injustice.15

Premises considered, no factual and legal basis exists to hold respondent Dyne-Sem liable for the
obligations of Dynetics to petitioner.

Nevertheless, being a mere fiction of law, peculiar situations or valid grounds may exist to warrant
the disregard of its independent being and the piercing of the corporate veil. 16 In Martinez v. Court
of Appeals,17 we held:

WHEREFORE, the petition is hereby DENIED.The assailed Court of Appeals decision and
resolution in CA-G.R. CV No. 40672 are hereby AFFIRMED.

The veil of separate corporate personality may be lifted when such personality is used to
defeat public convenience, justify wrong, protect fraud or defend crime; or used as a shield to
confuse the legitimate issues; or when the corporation is merely an adjunct, a business
conduit or an alter ego of another corporation 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; or when the corporation is used as a cloak or cover
for fraud or illegality, or to work injustice, or where necessary to achieve equity or for the
protection of the creditors. In such cases, the corporation will be considered as a mere
association of persons. The liability will directly attach to the stockholders or to the other
corporation.

Costs against petitioner.

SO ORDERED.
-------------------------------------------------------------------------------------------------------------G.R. No. 170782

June 22, 2009

SIAIN ENTERPRISES, INC., Petitioner, vs. CUPERTINO REALTY CORP. and EDWIN R.
CATACUTAN, Respondents.

To disregard the separate juridical personality of a corporation, the wrongdoing must be proven
clearly and convincingly.18

DECISION
NACHURA, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the
decision of the Court of Appeals in CA-G.R. CV No. 71424 1 which affirmed the decision of the
Regional Trial Court, Branch 29, Iloilo City in Civil Case No. 23244.2

13

On April 10, 1995, petitioner Siain Enterprises, Inc. obtained a loan of P37,000,000.00 from
respondent Cupertino Realty Corporation (Cupertino) covered by a promissory note signed by both
petitioners and Cupertinos respective presidents, Cua Le Leng and Wilfredo Lua. The promissory
note authorizes Cupertino, as the creditor, to place in escrow the loan proceeds of P37,000,000.00
with Metropolitan Bank & Trust Company to pay off petitioners loan obligation with Development
Bank of the Philippines (DBP). To secure the loan, petitioner, on the same date, executed a real
estate mortgage over two (2) parcels of land and other immovables, such as equipment and
machineries.

We submit to the jurisdiction of the Courts of the City of Manila or of the place of execution of this
note, at the option of CUPERTINO REALTY CORPORATION without divesting any other court of the
its jurisdiction, for any legal action which may arise out of this note. In case of judical execution of
this obligation, or any part of it, we hereby waive all our rights under the provisions of Rule 39,
section 12 of the Rules of Court.
We, who are justly indebted to CUPERTINO REALTY CORPORATION, agree to execute respectively a
real estate mortgage and a pledge or a chattel mortgage covering securities to serve as collaterals
for this loan and to execute likewise an irrevocable proxy to allow representatives of the creditor to
be able to monitor acts of management so as to prevent any premature call of this loan. We
further undertake to execute any other kind of document which CUPERTINO REALTY
CORPORATION may solely believe is necessary in order to effect any security over any collateral.

Two (2) days thereafter, or on April 12, 1995, the parties executed an amendment to promissory
note which provided for a seventeen percent (17%) interest per annum on the P37,000,000.00
loan.3 The amendment to promissory note was likewise signed by Cua Le Leng and Wilfredo Lua on
behalf of petitioner and Cupertino, respectively.

For this purpose, Ms. LELENG CUA, upon the foregoing promissory note, has this 16th day of Aug
1995, pledged her shares of stocks in SIAIN ENTERPRISES, INC., worth PHP 1,800,000.00 which
she hereby confesses as representing 80% of the total outstanding shares of the said company.

On August 16, 1995, Cua Le Leng signed a second promissory note in favor of Cupertino
for P160,000,000.00. Cua Le Leng signed the second promissory note as maker, on behalf of
petitioner, and as co-maker, liable to Cupertino in her personal capacity. This second promissory
note provides:

In default of payment of said note or any part thereof at maturity, Ms. LELENG CUA hereby
authorizes CUPERTINO REALTY CORPORATION or its assigns, to dispose of said security or any part
thereof at public sale. The proceeds of such sale or sales shall, after payment of all expenses and
commissions attending said sale or sales, be applied to this promissory note and the balance, if
any, after payment of this promissory note and interest thereon, shall be returned to the
undersigned, her heirs, successors and administrators; it shall be optional for the owner of the
promissory note to bid for and purchase the securities or any part thereof.

PROMISSORY NOTE
AMOUNT

DATE: AUGUST 16, 1995

ONE HUNDRED SIXTY MILLION PESOS

(PHP 160,000,000.00)
FOR VALUE RECEIVED, after one (1) year from this date on or August 16, 1996, WE, SIAIN
ENTERPRISES INC. with Metro Manila office address at 306 J.P. Rizal St., Mandaluyong City,
represented herein by its duly authorized President, Ms. LELENG CUA, (a copy of her authority is
hereto attached as Annex "A") and Ms. LELENG CUA in her personal capacity, a resident of ILOILO
CITY, jointly and severally, unconditionally promise to pay CUPERTINO REALTY CORPORATION, or
order, an existing corporation duly organized under Philippine laws, the amount/sum of ONE
HUNDRED SIXTY MILLION PESOS (PHP 160,000,000.00), Philippine Currency, without further need
of any demand, at the office of CUPERTINO REALTY CORPORATION;

SIAIN ENTERPRISES, INC.

(signed)
LELENG CUA
In her personal capacity
CO-MAKER

By:
(signed)
LELENG CUA
MAKER

The amount/sum of ONE HUNDRED SIXTY MILLION PESOS (PHP 160,000,000.00) shall earn a
compounding interest of 30% per annum which interest shall be payable to CUPERTINO REALTY
CORPORATION at its above given address ON THE FIRST DAY OF EVERY MONTH WITHOUT THE
NEED OF DEMAND.

WITNESSES:
(signed)
EDGARDO LUA

In case We fail to pay the principal amount of this note at maturity or in the event of bankruptcy or
insolvency, receivership, levy of execution, garnishment or attachment or in case of conviction for
a criminal offense carrying with it the penalty of civil interdiction or in any of the cases covered by
Article 1198 of the Civil Code of the Philippines, then the entire principal of this note and other
interests and penalties due thereon shall, at the option of CUPERTINO REALTY CORPORATION,
immediately become due and payable and We jointly and severally agree to pay additionally a
penalty at the rate of THREE PERCENT (3%) per month on the total amount/sum due until fully
paid. Furthermore, We jointly and severally agree to pay an additional sum equivalent to 20% of
the total amount due but in no case less than PHP 100,000.00 as and for attorneys fees in
addition to expenses and costs of suit.

(signed)
ROSE MARIE RAGODON4
Parenthetically, on even date, the parties executed an amendment of real estate mortgage,
providing in pertinent part:
WHEREAS, on 10 April 1995, the [petitioner] executed, signed and delivered a Real Estate
Mortgage to and in favor of [Cupertino] on certain real estate properties to secure the payment to
[Cupertino] of a loan in the amount of THIRTY SEVEN MILLION PESOS (P37,000,000.00) Philippine
Currency, granted by [Cupertino] was ratified (sic) on 10 April 1995 before Constancio Mangoba,
Jr., Notary Public in Makati City, as Doc. No. 242; in Page No. 50; Book No., XVI; Series of 1995,
and duly recorded in the Office of the Register of Deeds for the said City of Iloilo;

We hereby authorize and empower CUPERTINO REALTY CORPORATION at its option at any time,
without notice, to apply to the payment of this note and or any other particular obligation or
obligations of all or any one of us to CUPERTINO REALTY CORPORATION, as it may select,
irrespective of the dates of maturity, whether or not said obligations are then due, any and all
moneys, checks, securities and things of value which are now or which may hereafter be in its
hand on deposit or otherwise to the credit of, or belonging to, both or any one of us, and
CUPERTINO REALTY CORPORATION is hereby authorized to sell at public or private sale such
checks, securities, or things of value for the purpose of applying the proceeds thereof to such
payments of this note.

WHEREAS, the [petitioner] has increased its loan payable to [Cupertino] which now amounts to
ONE HUNDRED NINETY SEVEN MILLION PESOS (197,000,000.00); and
WHEREAS, the [petitioner] and [Cupertino] intend to amend the said Real Estate Mortgage in order
to reflect the current total loan secured by the said Real Estate Mortgage;
NOW, THEREFORE, for and in consideration of the foregoing premises, the parties hereto have
agreed and by these presents do hereby agree to amend said Real Estate Mortgage dated 10 April
1995 mentioned above by substituting the total amount of the loan secured by said Real Estate
Mortgage from P37,000,000.00 toP197,000,000.00.

We hereby expressly consent to any extension and/or renewals hereof in whole or in part and/or
partial payment on account which may be requested by and granted to us or any one of us for the
payment of this note as long as the remaining unpaid balance shall earn an interest of THREE
percent (3%) a month until fully paid. Such renewals or extensions shall, in no case, be
understood as a novation of this note or any provision thereof and We will thereby continue to be
liable for the payment of this note.

It is hereby expressly understood that with the foregoing amendment, all other terms and
conditions of said Real Estate Mortgage dated 10 April 1995 are hereby confirmed, ratified and
continued to be in full force and effect, and that this agreement be made an integral part of said
Real Estate Mortgage.5
Curiously however, and contrary to the tenor of the foregoing loan documents, petitioner, on March
11, 1996, through counsel, wrote Cupertino and demanded the release of the P160,000,000.00

14

loan increase covered by the amendment of real estate mortgage.6 In the demand letter,
petitioners counsel stated that despite repeated verbal demands, Cupertino had yet to release
the P160,000,000.00 loan. On May 17, 1996, petitioner demanded anew from Cupertino the
release of the P160,000,000.00 loan.7

"[Respondents] finally filed an answer to the complaint, alleging that the loan have (sic) an
interest of 17% per annum: that no payment was ever made by [petitioner], that [petitioner] has
already received the amount of the loan prior to the execution of the promissory note and
amendment of Real Estate Mortgage, xxx.

In complete refutation, Cupertino, likewise through counsel, responded and denied that it had yet
to release theP160,000,000.00 loan. Cupertino maintained that petitioner had long obtained the
proceeds of the aforesaid loan. Cupertino declared petitioners demand as made to "abscond from
a just and valid obligation," a mere afterthought, following Cupertinos letter demanding payment
of the P37,000,000.00 loan covered by the first promissory note which became overdue on March
5, 1996.

"[Petitioner] filed a supplemental complaint alleging subsequent acts made by defendants causing
the subsequent auction sale and registering the Certificates of Auction Sale praying that said
auction sale be declared null and void and ordering the Register of Deeds to cancel the registration
and annotation of the Certificate of Notarial Sale."
Thereafter, the Pre-Trial conference was set. Both parties submitted their respective Brief and the
following facts were admitted, viz:

Not surprisingly, Cupertino instituted extrajudicial foreclosure proceedings over the properties
subject of the amended real estate mortgage. The auction sale was scheduled on October 11,
1996 with respondent Notary Public Edwin R. Catacutan commissioned to conduct the same. This
prompted petitioner to file a complaint with a prayer for a restraining order to enjoin Notary Public
Catacutan from proceeding with the public auction.

1. Execution of the mortgage dated April 10, 1995;

The following are the parties conflicting claims, summarized by the RTC, and quoted verbatim by
the CA in its decision:

5. Existence but not the contents of the demand letter March 11, 1996 addressed to Mr.
Wilfredo Lua and receipt of the same by [Cupertino]; and

2. Amendment of Real Estate Mortgage dated August 16, 1995;

3. Execution of an Extra-Judicial Foreclosure by the [Cupertino];
4. Existence of two (2) promissory notes;

"The verified complaint alleges that [petitioner] is engaged in the manufacturing and
retailing/wholesaling business. On the other hand, Cupertino is engaged in the realty business.
That on April 10, 1995, [petitioner] executed a Real Estate Mortgage over its real properties
covered by Transfer Certificates of title Nos. T-75109 and T-73481 ("the mortgage properties") of
the Register of Deeds of Iloilo in favor of Cupertino to secure the formers loan obligation to the
latter in the amount of Php37,000,000.00. That it has been the agreement between [petitioner]
and Cupertino that the aforesaid loan will be non-interest bearing. Accordingly, the parties saw to
it that the promissory note (evidencing their loan agreement) did not provide any stipulation with
respect to interest. On several occasions thereafter, [petitioner] made partial payments to
Cupertino in respect of the aforesaid loan obligation by the former to the latter in the total amount
of Php7,985,039.08, thereby leaving a balance of Php29,014,960.92. On August 16, 1995,
[petitioner] and Cupertino executed an amendment of Real Estate Mortgage (Annex "C")
increasing the total loan covered by the aforesaid REM from Php37,000,000.00 to
P197,000,000.00. This amendment to REM was executed preparatory to the promised release by
Cupertino of additional loan proceeds to [petitioner] in the total amount of Php160,000,000.00.
However, despite the execution of the said amendment to REM and its subsequent registration with
the Register of Deeds of Iloilo City and notwithstanding the clear agreement between [petitioner]
and Cupertino and the latter will release and deliver to the former the aforesaid additional loan
proceeds of P160,000,000.00 after the signing of pertinent documents and the registration of the
amendment of REM, Cupertino failed and refused to release the said additional amount for no
apparent reason at all, contrary to its repeated promises which [petitioner] continuously relied on.
On account of Cupertinos unfulfilled promises, [petitioner] repeatedly demanded from Cupertino
the release and/or delivery of the said Php160,000,000.00 to the former. However, Cupertino still
failed and refused and continuously fails and refuses to release and/or deliver the
Php160,000,000.00 to [petitioner]. When [petitioner] tendered payment of the amount of
Php29,014,960.92 which is the remaining balance of the Php37,000,000.00 loan subject of the
REM, in order to discharge the same, Cupertino unreasonably and unjustifiably refused acceptance
thereof on the ground that the previous payment amounting to Php7,985,039.08, was applied by
Cupertino to alleged interests and not to principal amount, despite the fact that, as earlier stated,
the aforesaid loan by agreement of the parties, is non-interest bearing. Worst, unknown to
[petitioner], Cupertino was already making arrangements with [respondent] Notary Public for the
extrajudicial sale of the mortgage properties even as [petitioner] is more than willing to pay the
Php29,014,960.92 which is the remaining balance of the Php37,000,000.00 loan and
notwithstanding Cupertinos unjustified refusal and failure to deliver to [petitioner] the amount of
Php160,000,000.00. In fact, a notarial sale of the mortgaged properties is already scheduled on 04
October 1996 by [respondent] Notary Public at his office located at Rm. 100, Iloilo Casa Plaza, Gen
Luna St., Iloilo City. In view of the foregoing, Cupertino has no legal right to foreclose the
mortgaged properties. In any event, Cupertino cannot extrajudicially cause the foreclosure by
notarial sale of the mortgage properties by [respondent] Notary Public as there is nothing in the
REM (dated 10 April 1995) or in the amendment thereto that grants Cupertino the said right.

6. Notice of Extra-Judicial Foreclosure Sale."

For failing to arrive at an amicable settlement, trial on the merits ensued. The parties presented
oral and documentary evidence to support their claims and contentions. [Petitioner] insisted that
she never received the proceeds of Php160,000,000.00, thus, the foreclosure of the subject
properties is null and void. [Cupertino] on the other hand claimed otherwise.8
After trial, the RTC rendered a decision dismissing petitioners complaint and ordering it to pay
CupertinoP100,000.00 each for actual and exemplary damages, and P500,000.00 as attorneys
fees. The RTC recalled and set aside its previous order declaring the notarial foreclosure of the
mortgaged properties as null and void. On appeal, the CA, as previously adverted to, affirmed the
RTCs ruling.
In dismissing petitioners complaint and finding for Cupertino, both the lower courts upheld the
validity of the amended real estate mortgage. The RTC found, as did the CA, that although the
amended real estate mortgage fell within the exceptions to the parol evidence rule under Section
9, Rule 130 of the Rules of Court, petitioner still failed to overcome and debunk Cupertinos
evidence that the amended real estate mortgage had a consideration, and petitioner did receive
the amount of P160,000,000.00 representing its incurred obligation to Cupertino. Both courts ruled
that as between petitioners bare denial and negative evidence of non-receipt of
theP160,000,000.00, and Cupertinos affirmative evidence on the existence of the consideration,
the latter must be given more weight and value. In all, the lower courts gave credence to
Cupertinos evidence that theP160,000,000.00 proceeds were the total amount received by
petitioner and its affiliate companies over the years from Wilfredo Lua, Cupertinos president. In
this regard, the lower courts applied the doctrine of "piercing the veil of corporate fiction" to
preclude petitioner from disavowing receipt of the P160,000,000.00 and paying its obligation under
the amended real estate mortgage.
Undaunted, petitioner filed this appeal insisting on the nullity of the amended real estate
mortgage. Petitioner is adamant that the amended real estate mortgage is void as it did not
receive the agreed consideration therefor i.e.P160,000,000.00. Petitioner avers that the amended
real estate mortgage does not accurately reflect the agreement between the parties as, at the time
it signed the document, it actually had yet to receive the amount ofP160,000,000.00. Lastly,
petitioner asseverates that the lower courts erroneously applied the doctrine of "piercing the veil of
corporate fiction" when both gave credence to Cupertinos evidence showing that petitioners
affiliates were the previous recipients of part of the P160,000,000.00 indebtedness of petitioner to
Cupertino.
We are in complete accord with the lower courts rulings.
Well-entrenched in jurisprudence is the rule that factual findings of the trial court, especially when
affirmed by the appellate court, are accorded the highest degree of respect and are considered
conclusive between the parties.9A review of such findings by this Court is not warranted except
upon a showing of highly meritorious circumstances, such as: (1) when the findings of a trial court
are grounded entirely on speculation, surmises or conjectures; (2) when a lower courts inference
from its factual findings is manifestly mistaken, absurd or impossible; (3) when there is grave
abuse of discretion in the appreciation of facts; (4) when the findings of the appellate court go

xxxx

15

beyond the issues of the case, or fail to notice certain relevant facts which, if properly considered,
will justify a different conclusion; (5) when there is a misappreciation of facts; (6) when the
findings of fact are conclusions without mention of the specific evidence on which they are based,
are premised on the absence of evidence, or are contradicted by evidence on record. 10 None of
these exceptions necessitating a reversal of the assailed decision obtains in this instance.

opportunities accorded to it. By such failure to present rebutting evidence, [Cupertinos] testimony
on the existence of the consideration of the amended real estate mortgage does not only become
impliedly admitted by the [petitioner], more significantly, to the mind of this Court, it is a clear
indication that [petitioner] has no counter evidence to overcome and defeat the [Cupertinos]
evidence on the matter. Otherwise, there is no logic for [petitioner] to withhold it if available.
Assuming that indeed it exists, it may be safely assumed that such evidence having been willfully
suppressed is adverse if produced.

Conversely, we cannot subscribe to petitioners faulty reasoning.

First. All the loan documents, on their face, unequivocally declare petitioners indebtedness to
Cupertino:

The presentation by [petitioner] of its cash Journal Receipt Book as proof that it did not receive the
proceeds of the Php160,000,000.00 promissory note does not likewise persuade the Court. In the
first place, the subject cash receipt journal only contained cash receipts for the year 1995. But as
appearing from the various checks and debit memos issued by Wilfredo Lua and his wife, Vicky Lua
and from the formers unrebutted testimony in Court, the issuance of the checks, debit memos,
pledges of jewelries, condominium units, trucks and the other components of the
Php197,000,000.00 amended real estate mortgage had all taken place prior to the year 1995,
hence, they could not have been recorded therein. What is more, the said cash receipt journal
appears to be prepared solely at the behest of the [petitioner], hence, can be considered as
emanating from a "poisonous tree" therefore self-serving and cannot be given any serious
credibility.11

1. Promissory Note dated April 10, 1995, prefaced with a "[f]or value received," and the
escrow arrangement for the release of the P37,000,000.00 obligation in favor of DBP, another
creditor of petitioner.
2. Mortgage likewise dated April 10, 1995 executed by petitioner to secure
its P37,000,000.00 loan obligation with Cupertino.
3. Amendment to Promissory Note for P37,000,000.00 dated April 12, 1995 which tentatively
sets the interest rate at seventeen percent (17%) per annum.
4. Promissory Note dated August 16, 1995, likewise prefaced with "[f]or value received," and
unconditionally promising to pay Cupertino P160,000,000.00 with a stipulation on
compounding interest at thirty percent (30%) per annum. The Promissory Note requires,
among others, the execution of a real estate mortgage to serve as collateral therefor. In case
of default in payment, petitioner, specifically, through its president, Cua Le Leng, authorizes
Cupertino to "dispose of said security or any part thereof at [a] public sale."

Significantly, petitioner asseverates that the parol evidence rule, which excludes other evidence,
apart from the written agreement, to prove the terms agreed upon by the parties contained
therein,12 is not applicable to the Amended Real Estate Mortgage. Both the trial and appellate
courts agreed with petitioner and did not apply the parol evidence rule. Yet, despite the allowance
to present evidence and prove the invalidity of the Amended Real Estate Mortgage, petitioner still
failed to substantiate its claim of non-receipt of the proceeds of theP160,000,000.00 loan increase.

5. Amendment of Real Estate Mortgage also dated August 16, 1995 with a recital that the
mortgagor, herein petitioner, has increased its loan payable to the mortgagee, Cupertino,
from P37,000,000.00 toP197,000,000.00. In connection with the increase in loan obligation,
the parties confirmed and ratified the Real Estate Mortgage dated April 10, 1995.

Moreover, petitioner was the plaintiff in the trial court, the party that brought suit against
respondent. Accordingly, it had the burden of proof, the duty to present a preponderance of
evidence to establish its claim.13 However, petitioners evidence consisted only of a barefaced
denial of receipt and a vaguely drawn theory that in their previous loan transaction with
respondent covered by the first promissory note, it did not receive the proceeds of
the P37,000,000.00. Petitioner conveniently ignores that this particular promissory note secured
by the real estate mortgage was under an escrow arrangement and taken out to pay its obligation
to DBP. Thus, petitioner, quite obviously, would not be in possession of the proceeds of the loan.
Contrary to petitioners contention, there is no precedent to explain its stance that respondent
undertook to release the P160,000,000.00 loan only after it had first signed the Amended Real
Estate Mortgage.1avvphi1

Unmistakably, from the foregoing chain of transactions, a presumption has arisen that the loan
documents were supported by a consideration.
Rule 131, Section 3 of the Rules of Court specifies that a disputable presumption is satisfactory if
uncontradicted and not overcome by other evidence. Corollary thereto, paragraphs (r) and (s)
thereof and Section 24 of the Negotiable Instruments Law read:
SEC. 3. Disputable presumptions. The following presumptions are satisfactory if uncontradicted,
but may be contradicted and overcome by other evidence:
xxxx

Third. Petitioner bewails the lower courts application of the doctrine of "piercing the veil of
corporate fiction."

(r) That there was sufficient consideration for a contract;

(s) That a negotiable instrument was given or indorsed for a sufficient consideration;

As a general rule, a corporation will be deemed a separate legal entity until sufficient reason to the
contrary appears.14 But the rule is not absolute. A corporations separate and distinct legal
personality may be disregarded and the veil of corporate fiction pierced when the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime. 15

xxx
SEC. 24. Presumption of consideration. Every negotiable instrument is deemed prima facie to
have been issued for a valuable consideration; and every person whose signature appears thereon
to have become a party thereto for value.

In this case, Cupertino presented overwhelming evidence that petitioner and its affiliate
corporations had received the proceeds of the P160,000,000.00 loan increase which was then
made the consideration for the Amended Real Estate Mortgage. We quote with favor the RTCs and
the CAs disquisitions on this matter:

Second. The foregoing notwithstanding, petitioner insists that the Amended Real Estate Mortgage
was not supported by a consideration, asserting non-receipt of the P160,000,000.00 loan increase
reflected in the Amended Real Estate Mortgage. However, petitioners bare-faced assertion does
not even dent, much less, overcome the aforesaid presumptions on consideration for a contract. As
deftly pointed out by the trial court:

That the checks, debit memos and the pledges of the jewelries, condominium units and trucks
were constituted not exclusively in the name of [petitioner] but also either in the name of Yuyek
Manufacturing Corporation, Siain Transport, Inc., Cua Leleng and Alberto Lim is of no moment. For
the facts established in the case at bar has convinced the Court of the propriety to apply the
principle known as "piercing the veil of the corporate entity" by virtue of which, the juridical
personalities of the various corporations involved are disregarded and the ensuing liability of the
corporation to attach directly to its responsible officers and stockholders. x x x

x x x In this case, this Court finds that the [petitioner] has not been able to establish its claim of
non-receipt by a preponderance of evidence. Rather, the Court is inclined to give more weight and
credence to the affirmative and straightforward testimony of [Cupertino] explaining in plain and
categorical words that the Php197,000,000.00 loan represented by the amended REM was the
total sum of the debit memo, the checks, the real estate mortgage and the amended real estate
mortgage, the pledges of jewelries, the trucks and the condominiums plus the interests that will be
incurred which all in all amounted to Php197,000,000.00. It is a basic axiom in this jurisdiction
that as between the plaintiffs negative evidence of denial and the defendants affirmative evidence
on the existence of the consideration, the latter must be given more weight and value. Moreover,
[Cupertinos] foregoing testimony on the existence of the consideration of the Php160,000,000.00
promissory note has never been refuted nor denied by the [petitioner], who while initially having
manifested that it will present rebuttal evidence eventually failed to do so, despite all available

xxxx
The conjunction of the identity of the [petitioner] corporation in relation to Siain Transport, Inc.
(Siain Transport), Yuyek Manufacturing Corp. (Yuyek), as well as the individual personalities of Cua
Leleng and Alberto Lim has been indubitably shown in the instant case by the following established
considerations, to wit:

16

1. Siain and Yuyek have [a] common set of [incorporators], stockholders and board of
directors;

DECISION

2. They have the same internal bookkeeper and accountant in the person of Rosemarie
Ragodon;

QUISUMBING, J.:

3. They have the same office address at 306 Jose Rizal St., Mandaluyong City;

This petition for review on certiorari assails the Decision 1 dated August 10, 2004 of the Court of
Appeals in CA-G.R. CR No. 28464 and the Resolution2 dated October 29, 2004, which denied
petitioner's motion for reconsideration. The Court of Appeals affirmed the February 24, 2004
Decision and May 11, 2004 Order of the Regional Trial Court (RTC), Davao City, Branch 16, in
Criminal Case Nos. 52633-03 and 52634-03.

4. They have the same majority stockholder and president in the person of Cua Le Leng; and
5. In relation to Siain Transport, Cua Le Leng had the unlimited authority by and on herself,
without authority from the Board of Directors, to use the funds of Siain Trucking to pay the
obligation incurred by the [petitioner] corporation.
Thus, it is crystal clear that [petitioner] corporation, Yuyek and Siain Transport are characterized
by oneness of operations vested in the person of their common president, Cua Le Leng, and unity
in the keeping and maintenance of their corporate books and records through their common
accountant and bookkeeper, Rosemarie Ragodon. Consequently, these corporations are proven to
be the mere alter-ego of their president Cua Leleng, and considering that Cua Leleng and Alberto
Lim have been living together as common law spouses with three children, this Court believes that
while Alberto Lim does not appear to be an officer of Siain and Yuyek, nonetheless, his receipt of
certain checks and debit memos from Willie Lua and Victoria Lua was actually for the account of
his common-law wife, Cua Leleng and her alter ego corporations. While this Court agrees with
Siain that a corporation has a personality separate and distinct from its individual stockholders or
members, this legal fiction cannot, however, be applied to its benefit in this case where to do so
would result to injustice and evasion of a valid obligation, for well settled is the rule in this
jurisdiction that the veil of corporate fiction may be pierced when it is used as a shield to further
an end subversive of justice, or for purposes that could not have been intended by the law that
created it; or to justify wrong, or for evasion of an existing obligation. Resultantly, the obligation
incurred and/or the transactions entered into either by Yuyek, or by Siain Trucking, or by Cua
Leleng, or by Alberto Lim with Cupertino are deemed to be that of the [petitioner] itself.

The antecedent facts are as follows:

Petitioner Claude P. Bautista, in his capacity as President and Presiding Officer of Cruiser Bus Lines
and Transport Corporation, purchased various spare parts from private respondent Auto Plus
Traders, Inc. and issued two postdated checks to cover his purchases. The checks were
subsequently dishonored. Private respondent then executed an affidavit-complaint for violation
ofBatas Pambansa Blg. 223 against petitioner. Consequently, two Informations for violation of BP
Blg. 22 were filed with the Municipal Trial Court in Cities (MTCC) of Davao City against the
petitioner. These were docketed as Criminal Case Nos. 102,004-B-2001 and 102,005-B-2001. The
Informations4 read:
Criminal Case No. 102,004-B-2001:

The same principle equally applies to Cupertino. Thus, while it appears that the issuance of the
checks and the debit memos as well as the pledges of the condominium units, the jewelries, and
the trucks had occurred prior to March 2, 1995, the date when Cupertino was incorporated, the
same does not affect the validity of the subject transactions because applying again the principle
of piercing the corporate veil, the transactions entered into by Cupertino Realty Corporation, it
being merely the alter ego of Wilfredo Lua, are deemed to be the latters personal transactions and
vice-versa.16

The undersigned accuses the above-named accused for violation of Batas Pambansa Bilang
22, committed as follows:
That on or about December 15, 2000, in the City of Davao, Philippines, and within the
jurisdiction of this Honorable Court, the above-mentioned accused, knowing fully well that he
had no sufficient funds and/or credit with the drawee bank, wilfully, unlawfully and feloniously
issued and made out Rural Bank of Digos, Inc. Check No. 058832, dated December 15, 2000,
in the amount of P151,200.00, in favor of Auto Plus Traders, Inc., but when said check was
presented to the drawee bank for encashment, the same was dishonored for the reason
"DRAWN AGAINST INSUFFICIENT FUNDS" and despite notice of dishonor and demands upon
said accused to make good the check, accused failed and refused to make payment to the
damage and prejudice of herein complainant.

xxxx
x x x Firstly. As can be viewed from the extant record of the instant case, Cua Leleng is the
majority stockholder of the three (3) corporations namely, Yuyek Manufacturing Corporation, Siain
Transport, Inc., and Siain Enterprises Inc., at the same time the President thereof. Second. Being
the majority stockholder and the president, Cua Le leng has the unlimited power, control and
authority without the approval from the board of directors to obtain for and in behalf of the
[petitioner] corporation from [Cupertino] thereby mortgaging her jewelries, the condominiums of
her common law husband, Alberto Lim, the trucks registered in the name of [petitioner]
corporations sister company, Siain Transport Inc., the subject lots registered in the name of
[petitioner] corporation and her oil mill property at Iloilo City. And, to apply the proceeds thereof in
whatever way she wants, to the prejudice of the public.

CONTRARY TO LAW.
Criminal Case No. 102,005-B-2001:

As such, [petitioner] corporation is now estopped from denying the above apparent authorities of
Cua Le Leng who holds herself to the public as possessing the power to do those acts, against any
person who dealt in good faith as in the case of Cupertino. 17

The undersigned accuses the above-named accused for violation of Batas Pambansa Bilang
22, committed as follows:

WHEREFORE, premises considered, the petition is DENIED. The Decision of the Court of Appeals in
CA-G.R. CV No. 71424 is AFFIRMED. Costs against the petitioner.

That on or about October 30, 2000, in the City of Davao, Philippines, and within the
jurisdiction of this Honorable Court, the above-mentioned accused, knowing fully well that he
had no sufficient funds and/or credit with the drawee bank, wilfully, unlawfully and feloniously
issued and made out Rural Bank of Digos, Inc. Check No. 059049, dated October 30, 2000, in
the amount of P97,500.00, in favor of Auto Plus Traders, [Inc.], but when said check was
presented to the drawee bank for encashment, the same was dishonored for the reason
"DRAWN AGAINST INSUFFICIENT FUNDS" and despite notice of dishonor and demands upon

SO ORDERED.
-------------------------------------------------------------------------------------------------------------G.R. No. 166405

August 6, 2008

CLAUDE P. BAUTISTA, petitioner, vs. AUTO PLUS TRADERS, INCORPORATED and COURT OF
APPEALS (Twenty-First Division),respondents.

17

said accused to make good the check, accused failed and refused to make payment, to the
damage and prejudice of herein complainant.

Private respondent counters that petitioner should be held personally liable for both checks. Private
respondent alleged that petitioner issued two postdated checks: a personal check in his name for
the amount of P151,200 and a corporation check under the account of Cruiser Bus Lines and
Transport Corporation for the amount of P97,500. According to private respondent, petitioner, by
issuing his check to cover the obligation of the corporation, became an accommodation party.
Under Section 299of the Negotiable Instruments Law, an accommodation party is liable on the
instrument to a holder for value. Private respondent adds that petitioner should also be liable for
the value of the corporation check because instituting another civil action against the corporation
would result in multiplicity of suits and delay.

CONTRARY TO LAW.
Petitioner pleaded not guilty. Trial on the merits ensued. After the presentation of the prosecution's
evidence, petitioner filed a demurrer to evidence. On April 21, 2003, the MTCC granted the
demurrer, thus:

At the outset, we note that private respondent's allegation that petitioner issued a personal check
disputes the factual findings of the MTCC. The MTCC found that the two checks belong to Cruiser
Bus Lines and Transport Corporation while the RTC found that one of the checks was a personal
check of the petitioner. Generally this Court, in a petition for review on certiorari under Rule 45 of
the Rules of Court, has no jurisdiction over questions of facts. But, considering that the findings of
the MTCC and the RTC are at variance,10 we are compelled to settle this issue.

WHEREFORE, the demurrer to evidence is granted, premised on reasonable doubt as to the

guilt of the accused. Cruiser Bus Line[s] and Transport Corporation, through the accused is
directed to pay the complainant the sum of P248,700.00 representing the value of the two
checks, with interest at the rate of 12% per annum to be computed from the time of the filing
of these cases in Court, until the account is paid in full; ordering further Cruiser Bus Line[s]
and Transport Corporation, through the accused, to reimburse complainant the expense
representing filing fees amounting to P1,780.00 and costs of litigation which this Court hereby
fixed at P5,000.00.

A perusal of the two check return slips11 in conjunction with the Current Account
Statements12 would show that the check for P151,200 was drawn against the current account of
Claude Bautista while the check for P97,500 was drawn against the current account of Cruiser Bus
Lines and Transport Corporation. Hence, we sustain the factual finding of the RTC.

SO ORDERED.5
Petitioner moved for partial reconsideration but his motion was denied. Thereafter, both parties
appealed to the RTC. On February 24, 2004, the trial court ruled:

Nonetheless, we find the appellate court in error for affirming the decision of the RTC holding
petitioner liable for the value of the checks considering that petitioner was acquitted of the crime
charged and that the debts are clearly corporate debts for which only Cruiser Bus Lines and
Transport Corporation should be held liable.

WHEREFORE, the assailed Order dated April 21, 2003 is hereby MODIFIED to read as follows:
Accused is directed to pay and/or reimburse the complainant the following sums:
(1)P248,700.00 representing the value of the two checks, with interest at the rate of 12% per
annum to be computed from the time of the filing of these cases in Court, until the account is
paid in full; (2) P1,780.00 for filing fees and P5,000.00 as cost of litigation.

Juridical entities have personalities separate and distinct from its officers and the persons
composing it.13 Generally, the stockholders and officers are not personally liable for the obligations
of the corporation except only when the veil of corporate fiction is being used as a cloak or cover
for fraud or illegality, or to work injustice.14 These situations, however, do not exist in this case.
The evidence shows that it is Cruiser Bus Lines and Transport Corporation that has obligations to
Auto Plus Traders, Inc. for tires. There is no agreement that petitioner shall be held liable for the
corporation's obligations in his personal capacity. Hence, he cannot be held liable for the value of
the two checks issued in payment for the corporation's obligation in the total amount of P248,700.

SO ORDERED.6
Petitioner moved for reconsideration, but his motion was denied on May 11, 2004. Petitioner
elevated the case to the Court of Appeals, which affirmed the February 24, 2004 Decision and May
11, 2004 Order of the RTC:

Likewise, contrary to private respondent's contentions, petitioner cannot be considered liable as an

accommodation party for Check No. 58832. Section 29 of the Negotiable Instruments Law defines
an accommodation party as a person "who has signed the instrument as maker, drawer, acceptor,
or indorser, without receiving value therefor, and for the purpose of lending his name to some
other person." As gleaned from the text, an accommodation party is one who meets all the three
requisites, viz: (1) he must be a party to the instrument, signing as maker, drawer, acceptor, or
indorser; (2) he must not receive value therefor; and (3) he must sign for the purpose of lending
his name or credit to some other person.15 An accommodation party lends his name to enable the
accommodated party to obtain credit or to raise money; he receives no part of the consideration
for the instrument but assumes liability to the other party/ies thereto.16 The first two elements are
present here, however there is insufficient evidence presented in the instant case to show the
presence of the third requisite. All that the evidence shows is that petitioner signed Check No.
58832, which is drawn against his personal account. The said check, dated December 15, 2000,
corresponds to the value of 24 sets of tires received by Cruiser Bus Lines and Transport
Corporation on August 29, 2000.17 There is no showing of when petitioner issued the check and in
what capacity. In the absence of concrete evidence it cannot just be assumed that petitioner
intended to lend his name to the corporation. Hence, petitioner cannot be considered as an
accommodation party.

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Decision of
the Regional Trial Court, Branch 16, Davao City, dated February 24, 2004 and its Order dated
May 11, 2004 are AFFIRMED.
SO ORDERED.7
Petitioner now comes before us, raising the sole issue of whether the Court of Appeals erred in
upholding the RTC's ruling that petitioner, as an officer of the corporation, is personally and civilly
liable to the private respondent for the value of the two checks. 8
Petitioner asserts that BP Blg. 22 merely pertains to the criminal liability of the accused and that
the corporation, which has a separate personality from its officers, is solely liable for the value of
the two checks.

18

Cruiser Bus Lines and Transport Corporation, however, remains liable for the checks especially
since there is no evidence that the debts covered by the subject checks have been paid.

"bearer" promissory note for P2,000,000.00 with a one-year maturity date, at 18% interest per
annum, with provisions for damages and litigation costs in case of default.6

WHEREFORE, the petition is GRANTED. The Decision dated August 10, 2004 and the Resolution
dated October 29, 2004 of the Court of Appeals in CA-G.R. CR No. 28464 are REVERSED and SET
ASIDE. Criminal Case Nos. 52633-03 and 52634-03 are DISMISSED, without prejudice to the
right of private respondent Auto Plus Traders, Inc., to file the proper civil action against Cruiser Bus
Lines and Transport Corporation for the value of the two checks.

Some four years later, the Alcantara family assigned its rights and interests over the bearer note to
ALSONS which thenceforth became the holder thereof.7 But even before the execution of the
assignment deal aforestated, letters of demand for interest payment were already sent to EQUITY,
through its President, Wilfredo Labayen, who pleaded inability to pay the stipulated interest,
EQUITY no longer then having assets or property to settle its obligation nor being extended
financial support by GCC.

No pronouncement as to costs.
What happened next, as narrated in the assailed Decision of the CA, may be summarized, as
follows:

SO ORDERED.

1. On January 14, 1986, before the RTC of Makati, ALSONS, having failed to collect on the
bearer note aforementioned, filed a complaint for a sum of money 8 against EQUITY and GCC.
The case, docketed as Civil Case No. 12707, was eventually raffled to Branch 58 of the court.
As stated in par. 4 of the complaint, GCC is being impleaded as party-defendant for any
judgment ALSONS might secure against EQUITY and, under the doctrine of piercing the veil of
corporate fiction, against GCC, EQUITY having been organized as a tool and mere conduit of
GCC.

-------------------------------------------------------------------------------------------------------------G.R. No. 154975

January 29, 2007

GENERAL CREDIT CORPORATION (now PENTA CAPITAL FINANCE

CORPORATION), Petitioner, vs. ALSONS DEVELOPMENT and INVESTMENT CORPORATION
and CCC EQUITY CORPORATION,Respondents.

2. Answering with a cross-claim against GCC, EQUITY stated by way of special and affirmative
defenses that it (EQUITY):

DECISION

a) was purposely organized by GCC for the latter to avoid CB Rules and Regulations on
DOSRI (Directors, Officers, Stockholders and Related Interest) limitations, and that it
acted merely as intermediary or bridge for loan transactions and other dealings of GCC
to its franchises and the investing public; and

GARCIA, J.:
In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner General
Credit Corporation, now known as Penta Capital Finance Corporation, seeks to annul and set aside
the Decision1 and Resolution2dated April 11, 2002 and August 20, 2002, respectively, of the Court
of Appeals (CA) in CA-G.R. CV No. 31801,affirming the November 8, 1990 decision of the Regional
Trial Court (RTC) of Makati City in its Civil Case No. 12707, an action for a sum of money thereat
instituted by the herein respondent Alsons Development and Investment Corporation against the
petitioner and respondent CCC Equity Corporation.

b) is solely dependent upon GCC for its funding requirements, to settle, among others,
equity purchases made by investors on the franchises; hence, GCC is solely and directly
liable to ALSONS, the former having failed to provide EQUITY the necessary funds to
meet its obligations to ALSONS.
3. GCC filed its ANSWER to Cross-claim, stressing that it is a distinct and separate entity from
EQUITY and alleging, in essence that the business relationships with each other were always
at arms length. And following the denial of its motion to dismiss ALSONS complaint, on the
ground of lack of jurisdiction and want of cause of action, GCC filed its Answer thereto and
set up affirmative defenses with counterclaim for exemplary damages and attorneys fees.

The facts:
Shortly after its incorporation in 1957 as a finance and investment company, petitioner General
Credit Corporation (GCC, for short), then known as Commercial Credit Corporation (CCC),
established CCC franchise companies in different urban centers of the country.3 In furtherance of
its business, GCC had, as early as 1974, applied for and was able to secure license from the then
Central Bank (CB) of the Philippines and the Securities and Exchange Commission (SEC) to engage
also in quasi-banking activities.4 On the other hand, respondent CCC Equity Corporation (EQUITY,
for brevity) was organized in November 1994 by GCC for the purpose of, among other things,
taking over the operations and management of the various franchise companies. At a time material
hereto, respondent Alsons Development and Investment Corporation (ALSONS, hereinafter) and
Conrado, Nicasio, Editha and Ladislawa, all surnamed Alcantara, and Alfredo de Borja (hereinafter
the Alcantara family, for convenience), each owned, just like GCC, shares in the aforesaid GCC
franchise companies, e.g., CCC Davao and CCC Cebu.

Issues having been joined, trial ensued. Presented by ALSONS, but testifying as adverse
witnesses, were CB and GCC officers. Among other things, ALSONS evidence, which included the
EQUITY-issued "bearer" promissory note marked as Exhibit "K" and over sixty (60) other marked
and subsequently admitted documents,9 were to the effect that five (5) incorporators, each
contributing P100,000.00 as the initial paid up capital of the company, organized EQUITY to
manage, as it did manage, various GCC franchises through management contracts. Before
EQUITYs incorporation, however, GCC was already into the financing business as it was in fact
managing and operating various CCC franchises. Presented in evidence, too, was the September
29, 1982 letter-reply of one G. Villanueva, then GCC President, to EQUITY President Wilfredo
Labayen, bearing on the sale of EQUITY shares to third parties, part of the proceeds of which the
Alcantaras wanted applied to liquidate the promissory note in question. In said letter, Mr.
Villanueva explained that the GCC Board denied the Alcantaras request to be paid out of such

In December 1980, ALSONS and the Alcantara family, for a consideration of Two Million
(P2,000,000.00) Pesos, sold their shareholdings a total of 101,953 shares, more or less in the
CCC franchise companies to EQUITY.[5] On January 2, 1981, EQUITY issued ALSONS et al., a

19

proceeds, but nonetheless authorized EQUITY to pay them interest out of EQUITYs operation
income, in preference over what was due GCC.10

On April 11, 2002, the appellate court rendered the herein assailed Decision, 11 affirming that of the
trial court, thus:

Albeit EQUITY presented its president, it opted to adopt the testimony of some of ALSONS
witnesses, inclusive of the documentary exhibits testified to by each of them, as its evidence.

WHEREFORE, premises considered, the Decision of the Regional Trial Court, Branch 58, Makati in
Civil Case No. 12707 is hereby AFFIRMED.

For its part, GCC called only Wilfredo Labayen to testify. It stuck to its underlying defense of
separateness and presented documentary evidence detailing the organizational structures of both
GCC and EQUITY. And in a bid to negate the notion that it was conducting its business illegally,
GCC presented CB and SEC-issued licenses authoring it to engage in financing and quasi-banking
activities. It also adduced evidence to prove that it was never a party to any of the actionable
documents ALSONS and its predecessors-in-interest had in their possession and that the
November 27, 1985 deed of assignment of rights over the promissory note was unenforceable.

SO ORDERED.
In time, GCC moved for reconsideration followed by a motion for oral argument, but both motions
were denied by the CA in its equally assailed Resolution of August 20, 2002.12
Hence, GCCs present recourse anchored on the following arguments, issues and/or submissions:

Eventually, the trial court, on its finding that EQUITY was but an instrumentality or adjunct of GCC
and considering the legal consequences and implications of such relationship, came out with its
decision on November 8, 1990, rendering judgment for ALSONS, to wit:

1. The motion for oral argument with motion for reconsideration and its supplement were
perfunctorily denied by the CA without justifiable basis;
2. There is absolutely no basis for piercing the veil of corporate fiction;

WHEREFORE, the foregoing premises considered, judgment is hereby rendered in favor of plaintiff
[ALSONS] and against the defendants [EQUITY and GCC] who are hereby ordered, jointly and
severally, to pay plaintiff:

3. Respondent Alsons is not a real party-in-interest as the promissory note payable to bearer
subject of the collection suit is but a simulated document and/or refers to another party.
Moreover, the subject promissory note is not admissible in evidence because it has not been
duly authenticated and it is an altered document;

1. the principal sum of Two Million Pesos (P2,000,000.00) together with the interest due
thereon at the rate of eighteen percent (18%) annually computed from Jan. 2, 1981 until the
obligation is fully paid;

4. The fact of full payment stated in the ten (10) deeds of sale of the shares of stock is
conclusive on the sellers, and by the patrol evidence rule, the alleged fact of its non-payment
cannot be introduced in evidenced; and

2. liquidated damages due thereon equivalent to three percent (3%) monthly computed from
January 2, 1982 until the obligation is fully paid;

5. The counter-claim filed by GCC against Alsons should be granted in the interest of justice.
3. attorneys fees in an amount equivalent to twenty four percent (24%) of the total
obligation due; and

The petition and the arguments and/or issues holding it together are without merit. The desired
reversal of the assailed decision and resolution of the appellate court is accordingly DENIED.

4. the costs of suit.

Instead of raising distinctly formulated questions of law, as is expected of one seeking a review
under Rule 45 of the Rules of Court of a final CA judgment,13 petitioner GCC starts off by voicing
disappointment over the "perfunctory" denial by the CA of its twin motions for reconsideration and
oral argument. Petitioner, to be sure, cannot plausibly expect a reversal action premised on the
cursory way its motions were denied, if such indeed were the case. Such manner of denial, while
perhaps far from ideal, is not even a recognized ground for appeal by certiorari, unless a denial of
due process ensues, which is not the case here. And lest it be overlooked, the CA prefaced its
assailed denial resolution with the clause: "[F]inding no reversible error committed to warrant the
modification and/or reversal of the April 11, 2002 Decision," suggesting that the appellate court
gave the petitioners motion for reconsideration the attention it deserved. At the very least, the
petitioner was duly apprised of the reasons why reconsideration could not be favorably considered.
An extended resolution was not really necessary to dispose of the motion for reconsideration in
question.

IT IS SO ORDERED. (Words in brackets added.)

Therefrom, GCC went on appeal to the CA where its appellate recourse was docketed as CA-G.R.
CV No. 31801, ascribing to the trial court the commission of the following errors:
1. In holding that there is a "Parent-Subsidiary" corporate relationship between EQUITY and
GCC;
2. In not holding that EQUITY and GCC are distinct and separate corporate entities;
3. In applying the doctrine of "Piercing the Veil of Corporate Fiction" in the case at bar; and

Petitioners lament about being deprived of procedural due process owing to the denial of its
motion for oral argument is simply specious. Under the CA Internal Rules, the appellate court may
tap any of the three (3) alternatives therein provided to aid the court in resolving appealed cases
before it. It may rely on available records alone, require the submission of memoranda or set the
case for oral argument. The option the Internal Rules thus gives the CA necessarily suggests that

4. In not holding ALSONS in estoppel to question the corporate personality of EQUITY.

20

the appellate court may, at its sound discretion, dispense with a tedious oral argument exercise.
Rule VI, Section 6 of the 2002 Internal Rules of the CA, provides:

questions of law. Stated otherwise, it is not the function of the Court to analyze and weigh all over
again the evidence or premises supportive of the factual holdings of lower courts. 19

SEC. 6 Judicial Action on Certain Petitions.- (a) In petitions for review, after the receipt of the
respondents comment on the petition, the Court [of Appeals] may dismiss the petition if it finds
the same to be patently without merit , otherwise, it shall give due course to it.

As nothing in the record indicates any of the exceptions adverted to above, the factual conclusion
of the CA that the P2 Million promissory note in question was authentic and was issued at the first
instance to respondent ALSONS and the Alcantara family for the amount stated on its face, must
be affirmed. It should be stressed in this regard that even the issuing entity, i.e., respondent
EQUITY, never challenged the genuineness and due execution of the note.

xxx xxx xxx

This brings us to the remaining but core issue tendered in this case and aptly raised by the
petitioner, to wit: whether there is absolutely no basis for piercing GCCs veil of corporate identity.

If the petition is given due course, the Court may consider the case submitted for decision or
require the parties to submit their memorandum or set the case for oral argument. xxx. After the
oral argument or upon submission of the memoranda the case shall be deemed submitted for
decision.

A corporation is an artificial being vested by law with a personality distinct and separate from
those of the persons composing it20 as well as from that of any other entity to which it may be
related.21 The first consequence of the doctrine of legal entity of the separate personality of the
corporation is that a corporation may not be made to answer for acts and liabilities of its
stockholders or those of legal entities to which it may be connected or vice versa. 22

In the case at bench, records reveal that the appellate court, in line with the prescription of its own
rules, required the parties to just submit, as they did, their respective memoranda to properly
ventilate their separate causes. Under this scenario, the petitioner cannot be validly heard, having
been deprived of due process.

The notion of separate personality, however, may be disregarded under the doctrine "piercing the
veil of corporate fiction" as in fact the court will often look at the corporation as a mere collection
of individuals or an aggregation of persons undertaking business as a group, disregarding the
separate juridical personality of the corporation unifying the group. Another formulation of this
doctrine is that when two (2) business enterprises are owned, conducted and controlled by the
same parties, both law and equity will, when necessary to protect the rights of third parties,
disregard the legal fiction that two corporations are distinct entities and treat them as identical or
one and the same.23

Just like the first, the last three (3) arguments set forth in the petition will not carry the day for
the petitioner. In relation therewith, the Court notes that these arguments and the issues behind
them were not raised before the trial court. This appellate maneuver cannot be allowed. For, wellsettled is the rule that issues or grounds not raised below cannot be resolved on review in higher
courts.14 Springing surprises on the opposing party is antithetical to the sporting idea of fair play,
justice and due process; hence, the proscription against a party shifting from one theory at the
trial court to a new and different theory in the appellate level. On the same rationale, points of
law, theories, issues not brought to the attention of the lower court or, in fine, not interposed
during the trial cannot be raised for the first time on appeal. 15

Whether the separate personality of the corporation should be pierced hinges on obtaining facts,
appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with
caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or
when necessary in the interest of justice.24 After all, the concept of corporate entity was not meant
to promote unfair objectives.

There are, to be sure, exceptions to the rule respecting what may be raised for the first time on
appeal. Lack of jurisdiction over when the issues raised present a matter of public policy 16 comes
immediately to mind. None of the well-recognized exceptions obtain in this case, however.

Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law
covers and isolates the corporation from any other legal entity to which it may be related, is
allowed.25 These are: 1) defeat of public convenience,26 as when the corporate fiction is used as
vehicle for the evasion of an existing obligation;27 2) fraud cases or when the corporate entity is
used to justify a wrong, protect fraud, or defend a crime;28 or 3) alter ego cases, where a
corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where
the corporation is so organized and controlled and its affairs are so conducted as to make it merely
an instrumentality, agency, conduit or adjunct of another corporation. 29

Lest it be overlooked vis--vis the same last three arguments thus pressed, both the trial court
and the CA, based on the evidence adduced, adjudged the petitioner and respondent EQUITY
jointly and severally liable to pay what respondent ALSONS is entitled to under the "bearer"
promissory note. The judgment argues against the notion of the note being simulated or altered or
that respondent ALSONS has no standing to sue on the note, not being the payee of the "bearer"
note. For, the declaration of liability not only presupposes the duly established authenticity and due
execution of the promissory note over which ALSONS, as the holder in due course thereof, has
interest, but also the untenability of the petitioners counterclaim for attorneys fees and exemplary
damages against ALSONS. At bottom, the petitioner predicated such counter-claim on the
postulate that respondent ALSONS had no cause of action, the supposed promissory note being,
according to the petitioner, either a simulated or an altered document.

The CA found valid grounds to pierce the corporate veil of petitioner GCC, there being justifiable
basis for such action. When the appellate court spoke of a justifying factor, the reference was to
what the trial court said in its decision, namely: the existence of "certain circumstances [which],
taken together, gave rise to the ineluctable conclusion that [respondent] EQUITY is but an
instrumentality or adjunct of [petitioner] GCC."

In net effect, the definitive conclusion of the appellate court affirmatory of that of the trial court
was that the bearer promissory note (Exh. "K") was a genuine and authentic instrument payable
to the holder thereof. This factual determination, as a matter of long and sound appellate practice,
deserves great weight and shall not be disturbed on appeal, save for the most compelling
reasons,17 such as when that determination is clearly without evidentiary support or when grave
abuse of discretion has been committed.18 This is as it should be since the Court, in petitions for
review of CA decisions under Rule 45 of the Rules of Court, usually limits its inquiry only to

The Court agrees with the disposition of the appellate court on the application of the piercing
doctrine to the transaction subject of this case. Per the Courts count, the trial court enumerated
no less than 20 documented circumstances and transactions, which, taken as a package, indeed
strongly supported the conclusion that respondent EQUITY was but an adjunct, an instrumentality
or business conduit of petitioner GCC. This relation, in turn, provides a justifying ground to pierce

21

petitioners corporate existence as to ALSONS claim in question. Foremost of what the trial court
referred to as "certain circumstances" are the commonality of directors, officers and stockholders
and even sharing of office between petitioner GCC and respondent EQUITY; certain financing and
management arrangements between the two, allowing the petitioner to handle the funds of the
latter; the virtual domination if not control wielded by the petitioner over the finances, business
policies and practices of respondent EQUITY; and the establishment of respondent EQUITY by the
petitioner to circumvent CB rules. For a perspective, the following are some relevant excerpts from
the trial courts decision setting forth in some detail the tipping circumstances adverted to therein:

an instrumentality or adjunct of GCC. With the view we take of this case, GCC did not adduce any
evidence, let alone rebut the testimonies and documents presented by ALSONS, to establish the
prevailing circumstances adverted to that provided the justifying occasion to pierce the veil of
corporate fiction between GCC and EQUITY. We quote the trial court:
Verily, indeed, as the relationships binding herein [respondent EQUITY and petitioner GCC] have
been that of "parent-subsidiary corporations" the foregoing principles and doctrines find suitable
applicability in the case at bar; and, it having been satisfactorily and indubitably shown that the
said relationships had been used to perform certain functions not characterized with legitimacy,
this Court feels amply justified to "pierce the veil of corporate entity" and disregard the separate
existence of the percent (sic) and subsidiary the latter having been so controlled by the parent
that its separate identity is hardly discernible thus becoming a mere instrumentality or alter ego of
the former. Consequently, as the parent corporation, [petitioner] GCC maybe (sic) held responsible
for the acts and contracts of its subsidiary [respondent] EQUITY - most especially if the latter
(who had anyhow acknowledged its liability to ALSONS) maybe (sic) without sufficient property
with which to settle its obligations. For, after all, GCC was the entity which initiated and benefited
immensely from the fraudulent scheme perpetrated in violation of the law. (Words in parenthesis in
the original; emphasis and bracketed words added).

It must be noted that as characterized by their business relationship, [respondent] EQUITY and
[petitioner] GCC had common directors and/or officers as well as stockholders. This is revealed by
the proceedings recorded in SEC Case No. 25-81 entitled "Avelina Ramoso, et al., vs. GCC, et al.,
where it was established, thru the testimony of EQUITYs own President that more than 90% of
the stockholders of EQUITY were also stockholders of GCC .. Disclosed likewise is the fact
that when [EQUITYs President] Labayen sold the shareholdings of EQUITY in said franchise
companies, practically the entire proceeds thereof were surrendered to GCC, and not received by
EQUITY (EXHIBIT "RR") xxx.
It was likewise shown by a preponderance of evidence that not only had GCC financed EQUITY
and that the latter was heavily indebted to the former but EQUITY was, in fact, a wholly owned
subsidiary of GCC. Thus, as affirmed by EQUITYs President, the funds invested by EQUITY in
the CCC franchise companies actually came from CCC Phils. or GCC (Exhibit "Y-5"). that, as
disclosed by the Auditors report for 1982, past due receivables alone of GCC exceeded
P101,000,000.00 mostly to GCC affiliates especially CCC EQUITY. ; that [CBs] Report of
Examination dated July 14, 1977 shows that EQUITY which has a paid-up capital of only
P500,000.00 was the biggest borrower of GCC with a total loan of P6.70 Million .

Given the foregoing considerations, it behooves the petitioner, as a matter of law and equity, to
assume the legitimate financial obligation of a cash-strapped subsidiary corporation which it
virtually controlled to such a degree that the latter became its instrument or agent. The facts, as
found by the courts a quo, and the applicable law call for this kind of disposition. Or else, the Court
would be allowing the wrong use of the fiction of corporate veil.
WHEREFORE, the instant petition is DENIED and the appealed Decision and Resolution of the Court
of Appeals are accordingly AFFIRMED.

xxx xxx xxx

Costs against the petitioner.
It has likewise been amply substantiated by [respondent ALSONS] evidence that not only did
GCC cause the incorporation of EQUITY, but, the latter had grossly inadequate capital for the
pursuit of its line of business to the extent that its business affairs were considered as GCCs own
business endeavors. xxx.

SO ORDERED.
--------------------------------------------------------------------------------------------------------------

xxx xxx xxx

G.R. No. 164846
ALSONS has likewise shown that the bonuses of the officers and directors of EQUITY was
based on its total financial performance together with all its affiliates both firms were sharing one
and the same office when both were still operational and that the directors and executives of
EQUITY never acted independently but took their orders from GCC.

June 18, 2008

STA. MONICA INDUSTRIAL AND DEVELOPMENT CORPORATION, petitioner, vs. THE

DEPARTMENT OF AGRARIAN REFORM REGIONAL DIRECTOR FOR REGION III,
PROVINCIAL AGRARIAN REFORM OFFICER OF BULACAN, MUNICIPAL AGRARIAN
REFORM OFFICER OF CALUMPIT, BULACAN, and BASILIO DE GUZMAN, respondent.

The evidence has also indubitably established that EQUITY was organized by GCC for the
purpose of circumventing [CB] rules and regulations and the Anti-Usury Law. Thus, as disclosed by
the Advance Report on the result of Central Banks Operations Examination conducted on GCC
as of March 31, 1977 (EXHIBITS "FFF" etc.), the latter violated [CB] rules and regulations by : (a)
using as a conduit its non-quasi bank affiliates . (b) issuing without recourse facilities to enable
GCC to extend credit to affiliates like EQUITY which go beyond the single borrowers limit
without the need of showing outstanding balance in the book of accounts. (Emphasis over words in
brackets added.)

REYES, R.T., J.:

It bears to stress at this point that the facts and the inferences drawn therefrom, upon which the
two (2) courts below applied the piercing doctrine, stand, for the most part, undisputed. Among
these is, to reiterate, the matter of EQUITY having been incorporated to serve, as it did serve, as

Kapag ang kathang-isip na korporasyon ay ginamit na tabing sa katulad na pyudal na

pang-aalipin, ang matayog na hangarin ng batas pambukid ay nabibigo at ang mismong
suliranin na nais lunasan nito ay nananatili.

DECISION

ANG Malawak na Batas sa Repormang Pangsakahan ay binuo upang makalaya ang mga
magsasaka mula sa tali ng kahirapan at paghahari ng may-ari ng lupa.

22

Ang belo ng kathang-isip na korporasyon ay pupunitin kapag ito ay ginamit sa maling

hangarin at di-tapat na layunin.

A year later, petitioner Sta. Monica filed a petition for certiorari and prohibition with the CA
assailing the order of the Regional Director. In its petition, Sta. Monica claimed that while it is true
that Asuncion Trinidad was the former registered owner of a parcel of land with an area of 83,689
square meters, the said landholding was sold on January 27, 1986.12

The Comprehensive Agrarian Reform Law1 was designed precisely to liberate peasant-farmers
from the clutches of landlordism and poverty.

Petitioner was able to acquire 39,547 square meters of the Trinidad property. After the sale,
petitioner sought the registration of the portion pertaining to it before the Register of Deeds of the
Province of Bulacan. Consequently, a corresponding Transfer Certificate of Title, with No. 301408
(now TCT No. RT 70512) was issued in favor of petitioner.13

When corporate fiction is used as a mere smokescreen to the same form of feudal servitude, the
lofty aim of the agrarian law is thwarted and the very problem which the law seeks to solve is
perpetrated.

It was asserted that there was a denial of due process of law because it was not furnished a notice
of coverage under the CARP law.14

The veil of corporate fiction will be pierced when used for improper purposes and unfair objectives.
Before Us is a petition for review on certiorari of the Decision2 of the Court of Appeals (CA)
dismissing the petition of Sta. Monica Industrial and Development Corporation (Sta. Monica) to
annul the Order3 of the Regional Director, Region III, Department of Agrarian Reform (DAR) placing
the landholdings of Asuncion Trinidad under the Comprehensive Agrarian Reform Program (CARP). 4

In his comment on the petition, De Guzman argued that the alleged sale of the landholding is
illegal due to the lack of requisite clearance from the DAR. The said clearance is required under
P.D. No. 27,15 the Tenant Emancipation Decree, which prohibits transfer of covered lands except to
tenant-beneficiaries. According to De Guzman, since no clearance was sought from, and granted
by, the DAR, the sale in favor of petitioner by Trinidad is inexistent and void. Hence, Trinidad
remained the owner of the disputed property.

The Facts

CA Disposition

Trinidad is the owner of five parcels of land with a total area of 4.69 hectares in Iba Este,
Calumpit, Bulacan. Private respondent Basilio De Guzman is the agricultural leasehold tenant of
Trinidad.

On May 26, 2004, the CA rendered a decision dismissing the petition of Sta. Monica, disposing as
follows:

On April 29, 1976, a leasehold contract denominated as "Kasunduan ng Buwisan sa Sakahan" was
executed between Trinidad and De Guzman.5 As an agricultural leasehold tenant, De Guzman was
issued Certificates of Land Transfer on July 22, 1981.6

WHEREFORE, premises considered, the instant petition is hereby DENIED for lack of merit.
SO ORDERED.16

Desiring to have an emancipation patent over the land under his tillage, De Guzman filed a petition
for the issuance of patent in his name with the Office of the Regional Director of the DAR. 7 The
Legal Services Division of the DAR duly sent notices to Trinidad requiring her to comment. Instead
of complying, Trinidad filed a motion for bill of particulars.8

The CA held that Sta. Monica is not a real party-in-interest because it cannot be considered as an
owner of the land it bought from Trinidad, thus:17

After due proceedings, the Regional Director issued the Order9 granting the petition of De Guzman,
with the following disposition:

It appears from the records of this case that the sale between Trinidad and the petitioner is
enjoined by Department Memorandum Circular No. 2-A, implementing the provisions of
Presidential Decree (P.D.) No. 27, which prohibits the transfer of ownership of landholdings
covered by P.D. No. 27 after 21 October 1972 without the requisite clearance from the DAR
except to the tenant-beneficiary. Thus, the title to the subject landholding remained with the
previous owner, Asuncion Trinidad. This effectively deprives the petitioner of interest to
question the orders of the Regional Director of the DAR relative to the latters directive
placing the subject landholding under the coverage of Operation Land Transfer and the
subsequent issuance of an Emancipation Patent in favor of private respondent De Guzman.
One having no right or interest to protect cannot invoke the jurisdiction of the court as a
party plaintiff (in this case petitioner) in an action. A real party in interest is the party who
stands to be benefited or injured by the judgment in the suit, or the party entitled to the
avails of the suit.18 (Citations omitted)

WHEREFORE, in light of the foregoing analysis and the reasons indicated thereon, an ORDER
is hereby issued as follows:
1. PLACING under the coverage of Operation Land Transfer (OLT) pursuant to PD
27/Executive Order No. 228 the landholdings of Asuncion Trinidad with an area of 10.6800
hectares, more or less, located at Iba Este, Calumpit, Bulacan, without prejudice to the
exercise of her retention rights if qualified under the law.
2. DIRECTING the MARO of Calumpit, Bulacan and the PARO of Baliuag, Bulacan to cause the
generation and issuance of Emancipation Patent in favor of the petitioner and other qualified
farmer-beneficiaries over the said landholding in accordance with the actual area of tillages. 10

The CA added that even assuming that Sta. Monica is a real party-in-interest, it was not denied
due process because it had constructive notice of the proceeding which involved its property:

Trinidad filed a motion for reconsideration but her motion was denied. 11
Even assuming, without admitting, that petitioner is the real party in interest by reason of the
sale of the subject landholding in its favor, it cannot be said that petitioner was denied due

23

process because of lack of notice of the proceedings before the DAR. It is significant to note
that Asuncion Trinidad is the treasurer of petitioner, based on the corporations General
Information Sheet. While it cannot be said that there was proper notice to the corporation,
being a corporate officer of the petitioner, there was at least constructive notice of the fact
that there was a proceeding which involved the property of the corporation of which it may be
deprived should an adverse decision be rendered by the DAR.19

There is no dispute that a notice of coverage was duly sent to Trinidad. Records show that she
participated in the DAR proceedings. As to her, the constitutional requirement of due process was
met and satisfied.
Petitioner Sta. Monica, however, claims that it is the owner of the agricultural land awarded to De
Guzman. It acquired the land from Trinidad by sale in 1986 and it was issued a transfer certificate
of title. Sta. Monica claims denial of due process of law because it was not furnished the required
notice of coverage under the CARP law.

The CA also ruled that the assailed orders of the Regional Director have already attained finality
because it was not appealed to the DAR Secretary.

Respondent De Guzman, on the other hand, contends that the sale between Trinidad and Sta.
Monica is null and void because it is a prohibited transaction under Presidential Decree No. 27 (P.D.
No. 27), as amended.24 De Guzman also claims that Trinidad is a corporate officer of Sta. Monica.
It was her duty to inform Sta. Monica of the pending proceeding with the DAR. 25 He maintains that
Sta. Monica was not denied due process because there was constructive notice. Sta. Monica was
sufficiently informed of the pending DAR proceedings. 26

Furthermore, the assailed orders have long become final and executory, there being no
appeal undertaken to the Secretary of the Department of Agrarian Reform. Citing Fortich vs.
Corona, et al., the Supreme Court aptly ruled in this wise:
"The orderly administration of justice requires that the judgments/resolutions of a court
or quasi-judicial body must reach a point of finality set by law, rules and regulations. The
noble purpose is to write finis to disputes once and for all. This is a fundamental
principle in our justice system, without which there would be no end to litigations.
Utmost respect and adherence to this principle must always be maintained by those who
wield the power of adjudication. Any act which violates such principle must immediately
be struck down."

Records disclose that there was indeed a deed of sale between Trinidad and Sta. Monica over the
agricultural land awarded to De Guzman. Sta. Monica was also issued a new transfer certificate of
title over the land. If We rely solely on the sale, it is a foregone conclusion that Sta. Monica was
denied due process of law. As the owner on record of the agricultural land, it should have been
given a notice of coverage.

The rule on finality of decisions, orders or resolutions of a judicial, quasi-judicial, or

administrative body is not a question of technicality but of substance and merit, the
underlying consideration therefore being the protection of the substantive rights of the
winning party. Just as a losing party has the right to file an appeal within the prescribed
period, the winning party also has the correlative right to enjoy the finality of the
resolution of his/her case.20

However, there is much to be said of the attendant circumstances that lead Us to conclude that
notice of coverage to Trinidad is also sufficient notice to Sta. Monica. Moreover, We find that the
sale between Trinidad and Sta. Monica was a mere ruse to frustrate the implementation of the
agrarian law.
First, the sale to Sta. Monica is prohibited. P.D. No. 27, as amended, forbids the transfer or
alienation of covered agricultural lands after October 21, 1972 except to the tenant-beneficiary.
The agricultural land awarded to De Guzman is covered by P.D. No. 27. He was awarded a
certificate of land transfer in July 22, 1981. The sale to Sta. Monica in 1986 is void for being
contrary to law.27 Trinidad remained the owner of the agricultural land.

Sta. Monica sought reconsideration but it was denied. Hence, the present recourse. 21
Issue

In Heirs of Batongbacal v. Court of Appeals,28 involving the similar issue of sale of a covered
agricultural land under P.D. No. 27, this Court held:

Sta. Monica seeks reversal of the CA decision on the lone ground that THE ASSAILED DECISION
AND RESOLUTION OF THE COURT OF APPEALS ARE CONTRARY TO EXISTING LAWS, RELEVANT
JURISPRUDENCE ON THE MATTER AND THE FACTUAL CIRCUMSTANCES.22

Clearly, therefore, Philbanking committed breach of obligation as an agricultural lessor. As the

records show, private respondent was not informed about the sale between Philbanking and
petitioner, and neither was he privy to the transfer of ownership from Juana Luciano to
Philbanking. As an agricultural lessee, the law gives him the right to be informed about
matters affecting the land he tills, without need for him to inquire about it.

Our Ruling
The petition is bereft of merit.

xxxx

Trinidad is still deemed the owner of the agricultural land sold to Sta. Monica; no need
for separate notice of coverage under the CARP law.

In other words, transfer of ownership over tenanted rice and/or corn lands after October 21,
1972 is allowed only in favor of the actual tenant-tillers thereon. Hence, the sale executed by
Philbanking on January 11, 1985 in favor of petitioner was in violation of the aforequoted
provision of P.D. 27 and its implementing guidelines, and must thus be declared null and
void.29 (Underscoring supplied)

The crux of the petition lies in the requirement of notice of coverage under the CARP law. The
statute requires a notice of coverage to be furnished and sent to the landowner.23 Notice is part of
the constitutional right to due process of law. It informs the landowner of the States intention to
acquire a private land upon payment of just compensation and gives him the opportunity to
present evidence that his landholding is not covered or is otherwise excused from the agrarian law.

Second, buyer Sta. Monica is owned and controlled by Trinidad and her family. Records show that
Trinidad, her husband and two sons own more than 98%30 of the outstanding capital stock of Sta.

24

Monica. They are all officers of the corporation.31 There are only two non-related incorporators who
own less than one percent of the outstanding capital stock of Sta. Monica and who are not officers
of the corporation.

It is incredible that Trinidad would still continue to collect lease rentals from De Guzman if she had
long sold the agricultural land to Sta. Monica in 1986. The continued payment of lease rentals
indicates that Trinidad never sold the agricultural land to Sta. Monica. Evidently, the sale was a
mere ruse to skirt coverage under the comprehensive agrarian reform law.

To be sure, Trinidad and her family exercise absolute control of the corporate affairs of Sta.
Monica. As owners of 98% of the outstanding capital stock, they are the beneficial owners of all
the assets of the company, including the agricultural land sold by Trinidad to Sta. Monica.

All these circumstances indicate that Trinidad has remained as the real owner of the agricultural
land sold to Sta. Monica. The sale to Sta. Monica is not valid because it is prohibited under P.D. No.
27. More importantly, it must be deemed as a mere ploy to evade the applicable provisions of the
agrarian law.

Third, Trinidad and her counsel failed to notify the DAR of the prior sale to Sta. Monica during the
administrative proceedings. Worse, Trinidad feigned ignorance of the sale by filing a motion for bill
of particulars seeking specifics from De Guzman of her alleged landholdings which are subject of
his petition with the DAR.

But it is a fiat that the corporate vehicle cannot be used as a shield to protect fraud or justify
wrong. Thus, the veil of corporate fiction will be pierced when it is used to defeat public
convenience and subvert public policy.

It is highly unusual and unbelievable for her not to know, or at least be aware, of the sale to Sta.
Monica. She herself signed the deed of sale as seller. She is also a stockholder and officer of Sta.
Monica. More importantly, she cannot feign ignorance of De Guzmans claim because he was her
agricultural tenant since the 1970s. She knows, or at least ought to know, that the subject matter
of the petition with the DAR was her own landholding, which she sold to Sta. Monica in direct
violation of P.D. No. 27.

Considering that Trinidad remained to be the true and legal owner of the agricultural land, there is
no need for another notice of coverage to be sent or furnished to Sta. Monica. At the very least,
the notice to her is already notice to Sta. Monica because the corporation acted as a mere conduit
of Trinidad. The CA correctly dismissed the petition of Sta. Monica to annul the orders of the
Regional Director placing the agricultural land of Trinidad under the agrarian reform law.

The apparent lack of candor is heightened by the fact that both Trinidad and Sta. Monica are
represented by the same counsel, Atty. Ramon Gutierrez. We cannot stretch Our credulity on how
Trinidad filed a motion for bill of particulars with the DAR seeking specifics on the sale to Sta.
Monica when she herself signed for the vendor as a party to the transaction.

Final Note
This case can be viewed as a microcosm of the persistent agrarian reform problem in Our country.
For one, it illustrates the arduous legal battle that tenant-farmers have to endure in order to be
finally freed from the bondage of the soil. De Guzman battled for almost eight years to acquire the
agricultural land from Trinidad. Others are not as equally lucky. For another, it shows the subtle but
illegal measures taken by landowners to evade coverage under the CARP law.

It is the duty of Atty. Gutierrez to inform the DAR, at the very first opportunity, of the sale to Sta.
Monica. He was utterly remiss of this duty. Instead of informing the DAR, Trinidad and her counsel
engaged in wild goose chase and stonewalling, feigning ignorance when they ought to have
informed the DAR of the sale to Sta. Monica. Atty. Gutierrez is reminded that, as an officer of the
court, he owes it the duty of candor, honesty and fairness. 32

Of course, there are also tales of landowners who unduly suffer either the abuse of some farmers
or the harsh consequences of the law.

Fourth, it was only after an adverse decision against Trinidad that Sta. Monica suddenly filed a
petition forcertiorari with the CA questioning the lack of notice of coverage under the CARP law. It
is highly unlikely that Sta. Monica, an artificial being acting only through its duly authorized
representatives, was not sufficiently informed or had no constructive knowledge of the DAR
proceedings.

In hindsight, it is quite ironic that We are still faced with the same agrarian reform problem which
We have sought to eradicate several years ago when the CARP law was first introduced. Feudal
system of land ownership still persists in the countryside and most farmers are still tied to their
bondage. It is more ironic when the problem is taken in its historical context, the CARP law being
the fifth land reform law passed since President Quezon.

Trinidad and by extension, her family members, were informed or should be sufficiently aware of
the DAR proceedings. They are all stockholders and corporate officers of Sta. Monica. They knew,
they ought to know, that Sta. Monica would suffer damage should the DAR award, as it awarded,
the agricultural land to De Guzman.

To Our mind, part of the problem lies with the CARP law itself. As crafted, the law has its own
loopholes. It provides for a long list of exclusions. Some landowners used these exclusions to go
around the law. There is now a growing trend of land conversion in the countryside suspiciously to
evade coverage under the CARP law. Of course, the solution to this problem lies with Congress. It
is high time We sounded the call for a more realistic, rational comprehensive agrarian reform law.

As directors and corporate officers, they owe a duty of care to the corporation to inform it of the
pending proceedings with the DAR.

The dubious use of seemingly legal means to sidestep the CARP law persists. Corporate law is
resorted to by way of circling around the agrarian law. As this case illustrates, agricultural lands
are being transferred, simulated or otherwise, to corporations which are fully or at least
predominantly controlled by former landowners, now called stockholders. Through this strategy, it
is anticipated that the corporation, by virtue of its corporate fiction, will shield the landowners from
agricultural claims of tenant-farmers.

Fifth, the ultimate factor that betrays Trinidad and Sta. Monica is the continued payment of lease
rentals by De Guzman. Records show that De Guzman paid and continued to pay lease rentals to
Trinidad even after she sold the land to Sta. Monica. The receipt 33 dated May 30, 2002 discloses
that De Guzman paid 40 cavans of palay to Clodinaldo dela Cruz, the authorized representative of
Trinidad, as lease rentals for the agricultural land.

The use of corporate fiction as a means to evade legal liability is not new. This scheme or device
has long been perceived to be used in other fields of law, notably taxation to minimize payment of

25

tax with varying degrees of success and acceptability. But the continued employment of the
scheme in agrarian cases is not only deplorable; it is alarming. It is time to put a lid on the cap.

completed. Petitioner had to engage the services of sub-contractors whose workers performed the
functions of private respondents.

WHEREFORE, the petition is DENIED. The appealed Decision of the Court of Appeals
is AFFIRMED.

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

SO ORDERED.

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

-------------------------------------------------------------------------------------------------------------G.R. No. 108734

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

May 29, 1996

CONCEPT BUILDERS, INC., petitioner, vs. THE NATIONAL LABOR RELATIONS

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

On October 16, 1986, the NLRC Research and Information Department made the finding that
private respondents' back wages amounted to P199,800.00. 3
On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute
the Decision, dated December 19, 1984. The writ was partially satisfied through garnishment of
sums from petitioner's debtor, the Metropolitan Waterworks and Sewerage Authority, in the
amount of P81,385.34. Said amount was turned over to the cashier of the NLRC.

HERMOSISIMA, JR., J.:p

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

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

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

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

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

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

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

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

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

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

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

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

Public respondent found it to be, the fact, however, that at the time of the termination of private
respondent's employment, the project in which they were hired had not yet been finished and

26

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

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

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

Elisa O. Lim Treasurer

Virgilio O. Casino Corporate Secretary
4. Principal Office

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

355 Maysan Road

Valenzuela, Metro Manila. 5

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

On the other hand, the General Information Sheet of HPPI revealed the following:

1. Breakdown of Subscribed Capital

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

Name of Stockholder Amount Subscribed

HPPI P 6,999,500.00

Antonio W. Lim P 400,000.00

Antonio W. Lim 2,900,000.00

Elisa C. Lim 57,700.00

Dennis S. Cuyegkeng 300.00

AWL Trading 455,000.00

Elisa C. Lim 100,000.00

Dennis S. Cuyegkeng 40,100.00

Teodulo R. Dino 100.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

2. Board of Directors

Antonio W. Lim Chairman

Antonio W. Lim Chairman

Dennis S. Cuyegkeng Member

Elisa C. Lim Member

Elisa C. Lim Member

Dennis S. Cuyegkeng Member

Teodulo R. Dino Member

Virgilio O. Casino Member

Virgilio O. Casino Member

Teodulo R. Dino Member

3. Corporate Officers

3. Corporate Officers

27

Antonio W. Lim President

The conditions under which the juridical entity may be disregarded vary according to the peculiar
facts and circumstances of each case. No hard and fast rule can be accurately laid down, but
certainly, there are some probative factors of identity that will justify the application of the
doctrine of piercing the corporate veil, to wit:

Dennis S. Cuyegkeng Assistant to the President

Elisa C. Lim Treasurer

1. Stock ownership by one or common ownership of both corporations.

Virgilio O. Casino Corporate Secretary

2. Identity of directors and officers.

4. Principal Office

3. The manner of keeping corporate books and records.

355 Maysan Road, Valenzuela, Metro Manila.

4. Methods of conducting the business. 13

On February 1, 1990, HPPI filed an Opposition to private respondents' motion for issuance of a
break-open order, contending that HPPI is a corporation which is separate and distinct from
petitioner. HPPI also alleged that the two corporations are engaged in two different kinds of
businesses, i.e., HPPI is a manufacturing firm while petitioner was then engaged in construction.

The SEC en banc explained the "instrumentality rule" which the courts have applied in disregarding
the separate juridical personality of corporations as follows:

Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the order of
the Labor Arbiter, issued a break-open order and directed private respondents to file a bond.
Thereafter, it directed the sheriff to proceed with the auction sale of the properties already levied
upon. It dismissed the third-party claim for lack of merit.

Where one corporation is so organized and controlled and its affairs are conducted so that it
is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of
the "instrumentality" may be disregarded. The control necessary to invoke the rule is not
majority or even complete stock control but such domination of instances, policies and
practices that the controlled corporation has, so to speak, no separate mind, will or existence
of its own, and is but a conduit for its principal. It must be kept in mind that the control must
be shown to have been exercised at the time the acts complained of took place. Moreover, the
control and breach of duty must proximately cause the injury or unjust loss for which the
complaint is made.

Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution, dated
December 3, 1992.

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

On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents' motion for
break-open order.

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

Hence, the resort to the present petition.

Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the
execution of its decision despite a third-party claim on the levied property. Petitioner further
contends, that the doctrine of piercing the corporate veil should not have been applied, in this
case, in the absence of any showing that it created HPPI in order to evade its liability to private
respondents. It also contends that HPPI is engaged in the manufacture and sale of steel, concrete
and iron pipes, a business which is distinct and separate from petitioner's construction business.
Hence, it is of no consequence that petitioner and HPPI shared the same premises, the same
President and the same set of officers and subscribers. 7

2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty or dishonest and unjust act
in contravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.

We find petitioner's contention to be unmeritorious.

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

It is a fundamental principle of corporation law that a corporation is an entity separate and distinct
from its stockholders and from other corporations to which it may be connected. 8 But, this
separate and distinct personality of a corporation is merely a fiction created by law for convenience
and to promote justice. 9 So, when the notion of separate juridical personality is used to defeat
public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat
the labor laws, 10 this separate personality of the corporation may be disregarded or the veil of
corporate fiction pierced. 11 This is true likewise when the corporation is merely an adjunct, a
business conduit or an alter ego of another corporation. 12

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

28

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

Furthermore, our perusal of the records shows that the twin requirements of due notice and
hearing were complied with. Petitioner and the third-party claimant were given the opportunity to
submit evidence in support of their claim.
Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open
order issued by the Labor Arbiter.

Furthermore, the NLRC stated that:

Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial agencies
supported by substantial evidence are binding on this Court and are entitled to great respect, in
the absence of showing of grave abuse of a discretion. 18

Both information sheets were filed by the same Virgilio O. Casio as the corporate secretary
of both corporations. It would also not be amiss to note that both corporations had
the same president, thesame board of directors, the same corporate officers, and
substantially the same subscribers.

WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April 23,
1992 and December 3, 1992, are AFFIRMED.

From the foregoing, it appears that, among other things, the respondent (herein petitioner)
and the third-party claimant shared the same address and/or premises. Under this
circumstances, (sic) it cannot be said that the property levied upon by the sheriff were not of
respondents. 16

SO ORDERED.
-------------------------------------------------------------------------------------------------------------G.R. No. 142936

Clearly, petitioner ceased its business operations in order to evade the payment to private
respondents of back wages and to bar their reinstatement to their former positions. HPPI is
obviously a business conduit of petitioner corporation and its emergence was skillfully orchestrated
to avoid the financial liability that already attached to petitioner corporation.

April 17, 2002

PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT

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

The facts in this case are analogous to Claparols v. Court of Industrial Relations, 17 where we had
the occasion to rule:
Respondent court's findings that indeed the Claparols Steel and Nail Plant, which ceased
operation of June 30, 1957, was SUCCEEDED by the Claparols Steel Corporation effective the
next day, July 1, 1957, up to December 7, 1962, when the latter finally ceased to operate,
were not disputed by petitioner. It is very clear that the latter corporation was a continuation
and successor of the first entity . . . . Both predecessors and successor were owned and
controlled by petitioner Eduardo Claparols and there was no break in the succession and
continuity of the same business. This "avoiding-the-liability" scheme is very patent,
considering that 90% of the subscribed shares of stock of the Claparols Steel Corporation (the
second corporation) was owned by respondent . . . Claparols himself, and all the assets of the
dissolved Claparols Steel and Nail plant were turned over to the emerging Claparols Steel
Corporation.

Statement of the Case

Before us is a Petition for Review assailing the April 17, 2000 Decision 1 of the Court of Appeals
(CA) in CA-GR CV No. 57610. The decretal portion of the challenged Decision reads as follows:
"WHEREFORE, the judgment appealed from is hereby AFFIRMED." 2
The Facts
The factual antecedents of the case are summarized by the Court of Appeals as follows:
"In its complaint, the plaintiff [herein respondent] alleged that it is a partnership duly
organized, existing, and operating under the laws of the Philippines, with office and principal
place of business at Nos. 794-812 Del Monte [A]venue, Quezon City, while the defendant
[herein petitioner] Philippine National Bank (herein referred to as PNB), is a semi-government
corporation duly organized, existing and operating under the laws of the Philippines, with
office and principal place of business at Escolta Street, Sta. Cruz, Manila; whereas, the other
defendant, the National Sugar Development Corporation (NASUDECO in brief), is also a semigovernment corporation and the sugar arm of the PNB, with office and principal place of
business at the 2nd Floor, Sampaguita Building, Cubao, Quezon City; and the defendant
Pampanga Sugar Mills (PASUMIL in short), is a corporation organized, existing and operating
under the 1975 laws of the Philippines, and had its business office before 1975 at Del
Carmen, Floridablanca, Pampanga; that the plaintiff is engaged in the business of general
construction for the repairs and/or construction of different kinds of machineries and
buildings; that on August 26, 1975, the defendant PNB acquired the assets of the defendant
PASUMIL that were earlier foreclosed by the Development Bank of the Philippines (DBP)
under LOI No. 311; that the defendant PNB organized the defendant NASUDECO in
September, 1975, to take ownership and possession of the assets and ultimately to
nationalize and consolidate its interest in other PNB controlled sugar mills; that prior to
October 29, 1971, the defendant PASUMIL engaged the services of plaintiff for electrical

It is very obvious that the second corporation seeks the protective shield of a corporate fiction
whose veil in the present case could, and should, be pierced as it was deliberately and
maliciously designed to evade its financial obligation to its employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of
the execution, private respondents had no other recourse but to apply for a break-open order after
the third-party claim of HPPI was dismissed for lack of merit by the NLRC. This is in consonance
with Section 3, Rule VII of the NLRC Manual of Execution of Judgment which provides that:
Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his
representative entry to the place where the property subject of execution is located or kept,
the judgment creditor may apply to the Commission or Labor Arbiter concerned for a breakopen order.

29

rewinding and repair, most of which were partially paid by the defendant PASUMIL, leaving
several unpaid accounts with the plaintiff; that finally, on October 29, 1971, the plaintiff and
the defendant PASUMIL entered into a contract for the plaintiff to perform the following, to
wit

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

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

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

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

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

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

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

That the complaint does not state a sufficient cause of action against the defendant
NASUDECO because: (a) NASUDECO is not x x x privy to the various electrical
construction jobs being sued upon by the plaintiff under the present complaint; (b) the
taking over by NASUDECO of the assets of defendant PASUMIL was solely for the
purpose of reconditioning the sugar central of defendant PASUMIL pursuant to martial
law powers of the President under the Constitution; (c) nothing in the LOI No. 189-A (as
well as in LOI No. 311) authorized or commanded the PNB or its subsidiary corporation,
the NASUDECO, to assume the corporate obligations of PASUMIL as that being involved
in the present case; and, (d) all that was mentioned by the said letter of instruction
insofar as the PASUMIL liabilities [were] concerned [was] for the PNB, or its subsidiary
corporation the NASUDECO, to make a study of, and submit [a] recommendation on the
problems concerning the same.

(e) Installation of turbine and diesel generating sets including transformer, switchboard,
electrical wirings and pipe provided those stated units are completely supplied with their
accessories;
(f) Relocating of 2,400 V transmission line, demolition of all existing concrete foundation
and drainage canals, excavation, and earth fillings all for the total amount of
P543,500.00 as evidenced by a contract, [a] xerox copy of which is hereto attached as
Annex A and made an integral part of this complaint;
that aside from the work contract mentioned-above, the defendant PASUMIL required the
plaintiff to perform extra work, and provide electrical equipment and spare parts, such as:
(a) Supply of electrical devices;
(b) Extra mechanical works;

"By way of counterclaim, the NASUDECO averred that by reason of the filing by the plaintiff of
the present suit, which it [labeled] as unfounded or baseless, the defendant NASUDECO was
constrained to litigate and incur litigation expenses in the amount of P50,000.00, which
plaintiff should be sentenced to pay. Accordingly, NASUDECO prayed that the complaint be
dismissed and on its counterclaim, that the plaintiff be condemned to pay P50,000.00 in
concept of attorneys fees as well as exemplary damages.

(c) Extra fabrication works;

(d) Supply of materials and consumable items;
(e) Electrical shop repair;
(f) Supply of parts and related works for turbine generator;

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

(g) Supply of electrical equipment for machinery;

(h) Supply of diesel engine parts and other related works including fabrication of parts.
that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only
P250,000.00, leaving an unpaid balance, as of June 27, 1973, amounting to P527,263.80, as
shown in the Certification of the chief accountant of the PNB, a machine copy of which is
appended as Annex C of the complaint; that out of said unpaid balance of P527,263.80, the
defendant PASUMIL made a partial payment to the plaintiff of P14,000.00, in broken
amounts, covering the period from January 5, 1974 up to May 23, 1974, leaving an unpaid
balance of P513,263.80; that the defendant PASUMIL and the defendant PNB, and now the
defendant NASUDECO, failed and refused to pay the plaintiff their just, valid and demandable
obligation; that the President of the NASUDECO is also the Vice-President of the PNB, and this
official holds office at the 10th Floor of the PNB, Escolta, Manila, and plaintiff besought this
official to pay the outstanding obligation of the defendant PASUMIL, inasmuch as the
defendant PNB and NASUDECO now owned and possessed the assets of the defendant
PASUMIL, and these defendants all benefited from the works, and the electrical, as well as the
engineering and repairs, performed by the plaintiff; that because of the failure and refusal of
the defendants to pay their just, valid, and demandable obligations, plaintiff suffered actual
damages in the total amount of P513,263.80; and that in order to recover these sums, the
plaintiff was compelled to engage the professional services of counsel, to whom the plaintiff
agreed to pay a sum equivalent to 25% of the amount of the obligation due by way of
attorneys fees. Accordingly, the plaintiff prayed that judgment be rendered against the
defendants PNB, NASUDECO, and PASUMIL, jointly and severally to wit:
(1) Sentencing the defendants to pay the plaintiffs the sum of P513,263.80, with annual
interest of 14% from the time the obligation falls due and demandable;
(2) Condemning the defendants to pay attorneys fees amounting to 25% of the amount
claim;
(3) Ordering the defendants to pay the costs of the suit.

30

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

Petitioners posit that they should not be held liable for the corporate debts of PASUMIL, because
their takeover of the latters foreclosed assets did not make them assignees. On the other hand,
respondent asserts that petitioners and PASUMIL should be treated as one entity and, as such,
jointly and severally held liable for PASUMILs unpaid obligation.1wphi1.nt
As a rule, a corporation that purchases the assets of another will not be liable for the debts of the
selling corporation, provided the former acted in good faith and paid adequate consideration for
such assets, except when any of the following circumstances is present: (1) where the purchaser
expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a
consolidation or merger of the corporations, (3) where the purchasing corporation is merely a
continuation of the selling corporation, and (4) where the transaction is fraudulently entered into in
order to escape liability for those debts. 11

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

Piercing the Corporate

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the

defendant Corporation, Philippine National Bank (PNB) NATIONAL SUGAR DEVELOPMENT
CORPORATION (NASUDECO) and PAMPANGA SUGAR MILLS (PASUMIL), ordering the
latter to pay jointly and severally the former the following:

Veil Not Warranted

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

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

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil
pierced when the corporation is just an alter ego of a person or of another corporation. 14 For
reasons of public policy and in the interest of justice, the corporate veil will justifiably be
impaled15 only when it becomes a shield for fraud, illegality or inequity committed against third
persons.16

2. The sum of P102,724.76 as attorneys fees; and,

3. Costs.
SO ORDERED.
Manila, Philippines, September 4, 1986.

Hence, any application of the doctrine of piercing the corporate veil should be done with
caution.17 A court should be mindful of the milieu where it is to be applied. 18 It must be certain that
the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed
against another, in disregard of its rights.19 The wrongdoing must be clearly and convincingly
established; it cannot be presumed.20 Otherwise, an injustice that was never unintended may
result from an erroneous application.21

'(SGD) ERNESTO S. TENGCO

Judge"3
Ruling of the Court of Appeals
Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and equity
for a corporation to take over and operate the business of another corporation, while disavowing or
repudiating any responsibility, obligation or liability arising therefrom.4

This Court has pierced the corporate veil to ward off a judgment credit,22 to avoid inclusion of
corporate assets as part of the estate of the decedent,23 to escape liability arising from a debt,24 or
to perpetuate fraud and/or confuse legitimate issues25 either to promote or to shield unfair
objectives26 or to cover up an otherwise blatant violation of the prohibition against forumshopping.27 Only in these and similar instances may the veil be pierced and disregarded.28

Hence, this Petition.5

Issues

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

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

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

The Court of Appeals gravely erred in law in not applying [to] the case at bench the ruling
enunciated in Edward J. Nell Co. v. Pacific Farms, 15 SCRA 415."6
Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable for the
unpaid debts of PASUMIL to respondent.
This Courts Ruling
The Petition is meritorious.

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

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

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

31

A careful review of the records reveals that DBP foreclosed the mortgage executed by PASUMIL
and acquired the assets as the highest bidder at the public auction conducted. 39 The bank was
justified in foreclosing the mortgage, because the PASUMIL account had incurred arrearages of
more than 20 percent of the total outstanding obligation.40 Thus, DBP had not only a right, but also
a duty under the law to foreclose the subject properties. 41
Pursuant to LOI No. 189-A42 as amended by LOI No. 311,43 PNB acquired PASUMILs assets that
DBP had foreclosed and purchased in the normal course. Petitioner bank was likewise tasked to
manage temporarily the operation of such assets either by itself or through a subsidiary
corporation.44

G.R. No. 150283

April 16, 2008

RYUICHI YAMAMOTO, petitioner, vs. NISHINO LEATHER INDUSTRIES, INC. and IKUO
NISHINO, respondents.
DECISION

PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets pursuant to
Section 6 of Act No. 3135.45 These assets were later conveyed to PNB for a consideration, the
terms of which were embodied in the Redemption Agreement.46 PNB, as successor-in-interest,
stepped into the shoes of DBP as PASUMILs creditor.47 By way of a Deed of Assignment,48 PNB then
transferred to NASUDECO all its rights under the Redemption Agreement.

CARPIO MORALES, J.:

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

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

In 1987, Yamamoto and the other respondent, Ikuo Nishino (Nishino), also a Japanese national,
forged a Memorandum of Agreement under which they agreed to enter into a joint venture
wherein Nishino would acquire such number of shares of stock equivalent to 70% of the authorized
capital stock of WAKO.
Eventually, Nishino and his brother1 Yoshinobu Nishino (Yoshinobu) acquired more than 70% of the
authorized capital stock of WAKO, reducing Yamamotos investment therein to, by his claim,
10%,2 less than 10% according to Nishino.3

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

The corporate name of WAKO was later changed to, as reflected earlier, its current name NLII.
Negotiations subsequently ensued in light of a planned takeover of NLII by Nishino who would buyout the shares of stock of Yamamoto. In the course of the negotiations, Yoshinobu and Nishinos
counsel Atty. Emmanuel G. Doce (Atty. Doce) advised Yamamoto by letter dated October 30, 1991,
the pertinent portions of which follow:

No Merger or Consolidation
Respondent further claims that petitioners should be held liable for the unpaid obligations of
PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly authorized PASUMIL and PNB to
merge or consolidate. On the other hand, petitioners contend that their takeover of the operations
of PASUMIL did not involve any corporate merger or consolidation, because the latter had never
lost its separate identity as a corporation.

Hereunder is a simple memorandum of the subject matters discussed with me by Mr.

Yoshinobu Nishino yesterday, October 29th, based on the letter of Mr. Ikuo Nishino from
Japan, and which I am now transmitting to you.4
xxxx

A consolidation is the union of two or more existing entities to form a new entity called the
consolidated corporation. A merger, on the other hand, is a union whereby one or more existing
corporations are absorbed by another corporation that survives and continues the combined
business.54

12. Machinery and Equipment:

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

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

Splitting machine

1 unit

Samming machine

1 unit

Forklift

1 unit

Drums

4 units

In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL and
PNB. The procedure prescribed under Title IX of the Corporation Code 59 was not followed.

Toggling machine

2 units

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

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

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

x x x x5 (Emphasis and underscoring supplied)

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

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

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

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

In their Answer with Counterclaim, respondents claimed that the machineries and equipment
subject of replevin form part of Yamamotos capital contributions in consideration of his equity in
9

SO ORDERED.
--------------------------------------------------------------------------------------------------------------

32

NLII and should thus be treated as corporate property; and that the above-said letter of Atty. Doce
to Yamamoto was merely a proposal, "conditioned on [Yamamotos] sell-out to . . . Nishino of his
entire equity,"10 which proposal was yet to be authorized by the stockholders and Board of
Directors of NLII.

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

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

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

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

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

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

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

SO ORDERED.12 (Underscoring supplied)

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

On appeal,13 the Court of Appeals held in favor of herein respondents and

accordingly reversed the RTC decision and dismissed the complaint.14 In so holding, the appellate
court found that the machineries and equipment claimed by Yamamoto are corporate property of
NLII and may not thus be retrieved without the authority of the NLII Board of Directors; 15 and that
petitioners argument that Nishino and Yamamoto cannot hide behind the shield of corporate fiction
does not lie,16 nor does petitioners invocation of the doctrine of promissory estoppel. 17 At the same
time, the Court of Appeals found no ground to support respondents Counterclaim. 18

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.
The absence of any one of these elements prevents "piercing the corporate veil ." In
applying the instrumentality or alter ego doctrine, the courts are concerned with reality and
not form, with how the corporation operated and the individual defendants relationship to
that operation."29 (Italics in the original; emphasis and underscoring supplied)

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

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

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

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

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

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

C.
x x x IN HOLDING THAT RESPONDENTS ARE NOT LIABLE FOR ATTORNEYS FEES.22
The resolution of the petition hinges, in the main, on whether the advice in the letter of Atty. Doce
that Yamamoto may retrieve the machineries and equipment, which admittedly were part of his
investment, bound the corporation. The Court holds in the negative.

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

Indeed, without a Board Resolution authorizing respondent Nishino to act for and in behalf of the
corporation, he cannot bind the latter. Under the Corporation Law, unless otherwise provided,
corporate powers are exercised by the Board of Directors.23
Urging this Court to pierce the veil of corporate fiction, Yamamoto argues, viz:

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

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

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

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

To sanction respondents attempt to evade their obligation would be to sanction the

perpetration of fraud and injustice against petitioner.32 (Underscoring supplied)

xxxx

It bears noting, however, that the aforementioned paragraph 12 of the letter is followed by a
request for Yamamoto to give his "comments on all the above, soonest."33

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

What was thus proffered to Yamamoto was not a promise, but a mere offer, subject to his
acceptance. Without acceptance, a mere offer produces no obligation.34

xxxx

33

Thus, under Article 1181 of the Civil Code, "[i]n conditional obligations, the acquisition of rights, as
well as the extinguishment or loss of those already acquired, shall depend upon the happening of
the event which constitutes the condition." In the case at bar, there is no showing of compliance
with the condition for allowing Yamamoto to take the machineries and equipment, namely, his
agreement to the deduction of their value from his capital contribution due him in the buy-out of
his interests in NLII. Yamamotos allegation that he agreed to the condition 35 remained just that,
no proof thereof having been presented.

or formerly in the control, custody, and/or possession of respondent [herein petitioner Oscar]
and to determine the shares of stock of deceased spouses Pedro and Anastacia
Reyes that were arbitrarily and fraudulently appropriated [by Oscar] for himself [and] which were
not collated and taken into account in the partition, distribution, and/or settlement of the estate of
the deceased spouses, for which he should be ordered to account for all the income from the time
he took these shares of stock, and should now deliver to his brothers and sisters their just and
respective shares."5 [Emphasis supplied.]

The machineries and equipment, which comprised Yamamotos investment in NLII,36 thus remained
part of the capital property of the corporation.37

In his Answer with Counterclaim,6 Oscar denied the charge that he illegally acquired the shares of
Anastacia Reyes. He asserted, as a defense, that he purchased the subject shares with his own
funds from the unissued stocks of Zenith, and that the suit is not a bona fide derivative suit
because the requisites therefor have not been complied with. He thus questioned the SECs
jurisdiction to entertain the complaint because it pertains to the settlement of the estate of
Anastacia Reyes.

It is settled that the property of a corporation is not the property of its stockholders or
members.38 Under the trust fund doctrine, the capital stock, property, and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors which are
preferred over the stockholders in the distribution of corporate assets. 39The distribution of
corporate assets and property cannot be made to depend on the whims and caprices of the
stockholders, officers, or directors of the corporation unless the indispensable conditions and
procedures for the protection of corporate creditors are followed. 40
WHEREFORE, the petition is DENIED.

When Republic Act (R.A.) No. 87997 took effect, the SECs exclusive and original jurisdiction over
cases enumerated in Section 5 of Presidential Decree (P.D.) No. 902-A was transferred to the RTC
designated as a special commercial court.8 The records of Rodrigos SEC case were thus turned
over to the RTC, Branch 142, Makati, and docketed as Civil Case No. 00-1553.

Costs against petitioner.

SO ORDERED.
-------------------------------------------------------------------------------------------------------------G.R. No. 165744

On October 22, 2002, Oscar filed a Motion to Declare Complaint as Nuisance or Harassment
Suit.9He claimed that the complaint is a mere nuisance or harassment suit and should, according
to the Interim Rules of Procedure for Intra-Corporate Controversies, be dismissed; and that it is
not a bona fide derivative suit as it partakes of the nature of a petition for the settlement of estate
of the deceased Anastacia that is outside the jurisdiction of a special commercial court. The RTC, in
its Order dated November 29, 2002 (RTC Order), denied the motion in part and declared:

August 11, 2008

OSCAR C. REYES, petitioner, vs. HON. REGIONAL TRIAL COURT OF MAKATI, Branch 142,
ZENITH INSURANCE CORPORATION, and RODRIGO C. REYES, respondents.
DECISION

A close reading of the Complaint disclosed the presence of two (2) causes of action, namely:
a) a derivative suit for accounting of the funds and assets of the corporation which are in the
control, custody, and/or possession of the respondent [herein petitioner Oscar] with prayer to
appoint a management committee; and b) an action for determination of the shares of stock
of deceased spouses Pedro and Anastacia Reyes allegedly taken by respondent, its accounting
and the corresponding delivery of these shares to the parties brothers and sisters. The latter
is not a derivative suit and should properly be threshed out in a petition for settlement of
estate.

BRION, J.:
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the
Decision of the Court of Appeals (CA)1 promulgated on May 26, 2004 in CA-G.R. SP No. 74970.
The CA Decision affirmed the Order of the Regional Trial Court (RTC), Branch 142, Makati City
dated November 29, 20022 in Civil Case No. 00-1553 (entitled "Accounting of All Corporate Funds
and Assets, and Damages") which denied petitioner Oscar C. Reyes (Oscar) Motion to Declare
Complaint as Nuisance or Harassment Suit.

Accordingly, the motion is denied. However, only the derivative suit consisting of the first
cause of action will be taken cognizance of by this Court. 10

BACKGROUND FACTS
Oscar thereupon went to the CA on a petition for certiorari, prohibition, and mandamus11 and
prayed that the RTC Order be annulled and set aside and that the trial court be prohibited from
continuing with the proceedings. The appellate court affirmed the RTC Order and denied the
petition in its Decision dated May 26, 2004. It likewise denied Oscars motion for reconsideration in
a Resolution dated October 21, 2004.

Oscar and private respondent Rodrigo C. Reyes (Rodrigo) are two of the four children of the
spouses Pedro and Anastacia Reyes. Pedro, Anastacia, Oscar, and Rodrigo each owned shares of
stock of Zenith Insurance Corporation (Zenith), a domestic corporation established by their family.
Pedro died in 1964, while Anastacia died in 1993. Although Pedros estate was judicially partitioned
among his heirs sometime in the 1970s, no similar settlement and partition appear to have been
made with Anastacias estate, which included her shareholdings in Zenith. As of June 30, 1990,
Anastacia owned 136,598 shares of Zenith; Oscar and Rodrigo owned 8,715,637 and 4,250
shares, respectively.3

Petitioner now comes before us on appeal through a petition for review on certiorari under Rule 45
of the Rules of Court.
ASSIGNMENT OF ERRORS

On May 9, 2000, Zenith and Rodrigo filed a complaint4 with the Securities and Exchange
Commission (SEC) against Oscar, docketed as SEC Case No. 05-00-6615. The complaint stated
that it is "a derivative suit initiated and filed by the complainant Rodrigo C. Reyes to obtain an
accounting of the funds and assets of ZENITH INSURANCE CORPORATION which are now

Petitioner Oscar presents the following points as conclusions the CA should have made:

34

1. that the complaint is a mere nuisance or harassment suit that should be dismissed under the
Interim Rules of Procedure of Intra-Corporate Controversies; and

The rule is that a complaint must contain a plain, concise, and direct statement of the ultimate
facts constituting the plaintiffs cause of action and must specify the relief sought. 13 Section 5, Rule
8 of the Revised Rules of Court provides that in all averments of fraud or mistake, the
circumstances constituting fraud or mistake must be stated with particularity.14 These
rules find specific application to Section 5(a) of P.D. No. 902-A which speaks of corporate devices
or schemes that amount to fraud or misrepresentation detrimental to the public and/or to the
stockholders.

2. that the complaint is not a bona fide derivative suit but is in fact in the nature of a petition for
settlement of estate; hence, it is outside the jurisdiction of the RTC acting as a special commercial
court.
Accordingly, he prays for the setting aside and annulment of the CA decision and resolution, and
the dismissal of Rodrigos complaint before the RTC.

In an attempt to hold Oscar responsible for corporate fraud, Rodrigo alleged in the complaint the
following:

THE COURTS RULING

3. This is a complaintto determine the shares of stock of the deceased spouses

Pedro and Anastacia Reyes that were arbitrarily and fraudulently appropriated for
himself [herein petitioner Oscar] which were not collated and taken into account in the
partition, distribution, and/or settlement of the estate of the deceased Spouses Pedro and
Anastacia Reyes, for which he should be ordered to account for all the income from the time
he took these shares of stock, and should now deliver to his brothers and sisters their just
and respective shares with the corresponding equivalent amount of P7,099,934.82 plus
interest thereon from 1978 representing his obligations to the Associated Citizens Bank that
was paid for his account by his late mother, Anastacia C. Reyes. This amount was not collated
or taken into account in the partition or distribution of the estate of their late mother,
Anastacia C. Reyes.

We find the petition meritorious.

The core question for our determination is whether the trial court, sitting as a special commercial
court, has jurisdiction over the subject matter of Rodrigos complaint. To resolve it, we rely on the
judicial principle that "jurisdiction over the subject matter of a case is conferred by law and is
determined by the allegations of the complaint, irrespective of whether the plaintiff is entitled to all
or some of the claims asserted therein."12
JURISDICTION OF SPECIAL COMMERCIAL COURTS

3.1. Respondent Oscar C. Reyes, through other schemes of fraud including

misrepresentation, unilaterally, and for his own benefit, capriciously transferred
and took possession and control of the management of Zenith Insurance
Corporation which is considered as a family corporation, and other properties and
businesses belonging to Spouses Pedro and Anastacia Reyes.

P.D. No. 902-A enumerates the cases over which the SEC (now the RTC acting as a special
commercial court) exercises exclusive jurisdiction:
SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnership, and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have original
and exclusive jurisdiction to hear and decide cases involving:

xxxx
4.1. During the increase of capitalization of Zenith Insurance Corporation, sometime in 1968,
the property covered by TCT No. 225324 was illegally and fraudulently used by respondent as
a collateral.

a) Devices or schemes employed by or any acts of the board of directors, business associates,
its officers or partners, amounting to fraud and misrepresentation which may be detrimental
to the interest of the public and/or of the stockholders, partners, members of associations or
organizations registered with the Commission.

xxxx

b) Controversies arising out of intra-corporate or partnership relations, between and among

stockholders, members, or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members, or associates,
respectively; and between such corporation, partnership or association and the State insofar
as it concerns their individual franchise or right to exist as such entity; and

5. The complainant Rodrigo C. Reyes discovered that by some manipulative scheme, the
shareholdings of their deceased mother, Doa Anastacia C. Reyes, shares of stocks
and [sic] valued in the corporate books at P7,699,934.28, more or less, excluding
interest and/or dividends, had been transferred solely in the name of respondent. By
such fraudulent manipulations and misrepresentation, the shareholdings of said respondent
Oscar C. Reyes abruptly increased to P8,715,637.00 [sic] and becomes [sic] the majority
stockholder of Zenith Insurance Corporation, which portion of said shares must be distributed
equally amongst the brothers and sisters of the respondent Oscar C. Reyes including the
complainant herein.

c) Controversies in the election or appointment of directors, trustees, officers, or managers of

such corporations, partnerships, or associations.
The allegations set forth in Rodrigos complaint principally invoke Section 5, paragraphs (a) and (b)
above as basis for the exercise of the RTCs special court jurisdiction. Our focus in examining the
allegations of the complaint shall therefore be on these two provisions.

xxxx
9.1 The shareholdings of deceased Spouses Pedro Reyes and Anastacia C. Reyes valued
at P7,099,934.28 were illegally and fraudulently transferred solely to the
respondents [herein petitioner Oscar] name and installed himself as a majority

Fraudulent Devices and Schemes

35

stockholder of ZenithInsurance Corporation [and] thereby deprived his brothers and sisters
of their respective equal shares thereof including complainant hereto.

xxxx
9.1 The shareholdings of deceased Spouses Pedro Reyes and Anastacia C. Reyes valued
at P7,099,934.28 were illegally and fraudulently transferred solely to the
respondents [herein petitioner Oscar] name and installed himself as a majority
stockholder of ZenithInsurance Corporation [and] thereby deprived his brothers and sisters
of their respective equal shares thereof including complainant hereto. [Emphasis supplied.]

xxxx
10.1 By refusal of the respondent to account of his [sic] shareholdings in the
company, he illegally and fraudulently transferred solely in his name wherein [sic]
the shares of stock of the deceased Anastacia C. Reyes [which] must be properly
collated and/or distributed equally amongst the children, including the complainant
Rodrigo C. Reyes herein, to their damage and prejudice.

In ordinary cases, the failure to specifically allege the fraudulent acts does not constitute a ground
for dismissal since such defect can be cured by a bill of particulars. In cases governed by the
Interim Rules of Procedure on Intra-Corporate Controversies, however, a bill of particulars is a
prohibited pleading.17 It is essential, therefore, for the complaint to show on its face what are
claimed to be the fraudulent corporate acts if the complainant wishes to invoke the courts special
commercial jurisdiction.

xxxx
11.1 By continuous refusal of the respondent to account of his [sic] shareholding with Zenith
Insurance Corporation[,] particularly the number of shares of stocks illegally and fraudulently
transferred to him from their deceased parents Sps. Pedro and Anastacia Reyes[,] which are
all subject for collation and/or partition in equal shares among their children. [Emphasis
supplied.]

We note that twice in the course of this case, Rodrigo had been given the opportunity to study the
propriety of amending or withdrawing the complaint, but he consistently refused. The courts
function in resolving issues of jurisdiction is limited to the review of the allegations of the
complaint and, on the basis of these allegations, to the determination of whether they are of such
nature and subject that they fall within the terms of the law defining the courts jurisdiction.
Regretfully, we cannot read into the complaint any specifically alleged corporate fraud that will call
for the exercise of the courts special commercial jurisdiction. Thus, we cannot affirm the RTCs
assumption of jurisdiction over Rodrigos complaint on the basis of Section 5(a) of P.D. No. 902-A.18

Allegations of deceit, machination, false pretenses, misrepresentation, and threats are largely
conclusions of law that, without supporting statements of the facts to which the allegations of
fraud refer, do not sufficiently state an effective cause of action.15 The late Justice Jose Feria, a
noted authority in Remedial Law, declared that fraud and mistake are required to be averred with
particularity in order to enable the opposing party to controvert the particular facts allegedly
constituting such fraud or mistake.16
Tested against these standards, we find that the charges of fraud against Oscar were not properly
supported by the required factual allegations. While the complaint contained allegations of fraud
purportedly committed by him, these allegations are not particular enough to bring the
controversy within the special commercial courts jurisdiction; they are not statements of ultimate
facts, but are mere conclusions of law: how and why the alleged appropriation of shares can be
characterized as "illegal and fraudulent" were not explained nor elaborated on.

Intra-Corporate Controversy
A review of relevant jurisprudence shows a development in the Courts approach in classifying
what constitutes an intra-corporate controversy. Initially, the main consideration in determining
whether a dispute constitutes an intra-corporate controversy was limited to a consideration of the
intra-corporate relationship existing between or among the parties.19 The types of relationships
embraced under Section 5(b), as declared in the case of Union Glass & Container Corp. v.
SEC,20 were as follows:

Not every allegation of fraud done in a corporate setting or perpetrated by corporate officers will
bring the case within the special commercial courts jurisdiction. To fall within this jurisdiction,
there must be sufficient nexus showing that the corporations nature, structure, or powers were
used to facilitate the fraudulent device or scheme. Contrary to this concept, the complaint
presented a reverse situation. No corporate power or office was alleged to have facilitated the
transfer of the shares; rather, Oscar, as an individual and without reference to his corporate
personality, was alleged to have transferred the shares of Anastacia to his name, allowing him to
become the majority and controlling stockholder of Zenith, and eventually, the corporations
President. This is the essence of the complaint read as a whole and is particularly demonstrated
under the following allegations:

a) between the corporation, partnership, or association and the public;

b) between the corporation, partnership, or association and its stockholders, partners,
members, or officers;
c) between the corporation, partnership, or association and the State as far as its franchise,
permit or license to operate is concerned; and

5. The complainant Rodrigo C. Reyes discovered that by some manipulative scheme, the
shareholdings of their deceased mother, Doa Anastacia C. Reyes, shares of stocks and [sic]
valued in the corporate books at P7,699,934.28, more or less, excluding interest and/or
dividends, had been transferred solely in the name of respondent. By such fraudulent
manipulations and misrepresentation, the shareholdings of said respondent Oscar
C. Reyes abruptly increased to P8,715,637.00 [sic] and becomes [sic] the majority
stockholder of Zenith Insurance Corporation, which portion of said shares must be
distributed equally amongst the brothers and sisters of the respondent Oscar C. Reyes
including the complainant herein.

d) among the stockholders, partners, or associates themselves. [Emphasis supplied.]

The existence of any of the above intra-corporate relations was sufficient to confer jurisdiction to
the SEC, regardless of the subject matter of the dispute. This came to be known as
the relationship test.

36

However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve, Inc.,21 the Court
introduced the nature of the controversy test. We declared in this case that it is not the mere
existence of an intra-corporate relationship that gives rise to an intra-corporate controversy; to
rely on the relationship test alone will divest the regular courts of their jurisdiction for the sole
reason that the dispute involves a corporation, its directors, officers, or stockholders. We saw that
there is no legal sense in disregarding or minimizing the value of the nature of the transactions
which gives rise to the dispute.

Article 777 of the Civil Code declares that the successional rights are transmitted from the moment
of death of the decedent. Accordingly, upon Anastacias death, her children acquired legal title to
her estate (which title includes her shareholdings in Zenith), and they are, prior to the estates
partition, deemed co-owners thereof.25 This status as co-owners, however, does not immediately
and necessarily make them stockholders of the corporation. Unless and until there is compliance
with Section 63 of the Corporation Code on the manner of transferring shares, the heirs do not
become registered stockholders of the corporation. Section 63 provides:

Under the nature of the controversy test, the incidents of that relationship must also be considered
for the purpose of ascertaining whether the controversy itself is intra-corporate. 22 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. If the relationship
and its incidents are merely incidental to the controversy or if there will still be conflict even if the
relationship does not exist, then no intra-corporate controversy exists.

Section 63. Certificate of stock and transfer of shares. The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president or vicepresident, countersigned by the secretary or assistant secretary, and sealed with the seal of
the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates indorsed
by the owner or his attorney-in-fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the parties, until
the transfer is recorded in the books of the corporation so as to show the names of
the parties to the transaction, the date of the transfer, the number of the certificate
or certificates, and the number of shares transferred. [Emphasis supplied.]

The Court then combined the two tests and declared that jurisdiction should be determined by
considering not only the status or relationship of the parties, but also the nature of the question
under controversy.23 This two-tier test was adopted in the recent case of Speed Distribution, Inc.
v. Court of Appeals:24

No shares of stock against which the corporation holds any unpaid claim shall be transferable
in the books of the corporation.

To determine whether a case involves an intra-corporate controversy, and is to be heard and

decided by the branches of the RTC specifically designated by the Court to try and decide
such cases, two elements must concur: (a) the status or relationship of the parties; and (2)
the nature of the question that is the subject of their controversy.

Simply stated, the transfer of title by means of succession, though effective and valid between the
parties involved (i.e., between the decedents estate and her heirs), does not bind the corporation
and third parties. The transfer must be registered in the books of the corporation to make the
transferee-heir a stockholder entitled to recognition as such both by the corporation and by third
parties.26

The first element requires that the controversy must arise out of intra-corporate or
partnership relations between any or all of the parties and the corporation, partnership, or
association of which they are stockholders, members or associates; between any or all of
them and the corporation, partnership, or association of which they are stockholders,
members, or associates, respectively; and between such corporation, partnership, or
association and the State insofar as it concerns their individual franchises. The second
element requires that the dispute among the parties be intrinsically connected with the
regulation of the corporation. If the nature of the controversy involves matters that are purely
civil in character, necessarily, the case does not involve an intra-corporate controversy.

We note, in relation with the above statement, that in Abejo v. Dela Cruz27 and TCL Sales
Corporation v. Court of Appeals28 we did not require the registration of the transfer before
considering the transferee a stockholder of the corporation (in effect upholding the existence of an
intra-corporate relation between the parties and bringing the case within the jurisdiction of the
SEC as an intra-corporate controversy). A marked difference, however, exists between these cases
and the present one.
In Abejo and TCL Sales, the transferees held definite and uncontested titles to a specific
number of shares of the corporation; after the transferee had established prima
facie ownership over the shares of stocks in question, registration became a mere formality in
confirming their status as stockholders. In the present case, each of Anastacias heirs holds only
an undivided interest in the shares. This interest, at this point, is still inchoate and subject to the
outcome of a settlement proceeding; the right of the heirs to specific, distributive shares of
inheritance will not be determined until all the debts of the estate of the decedent are paid. In
short, the heirs are only entitled to what remains after payment of the decedents debts; 29 whether
there will be residue remains to be seen. Justice Jurado aptly puts it as follows:

Given these standards, we now tackle the question posed for our determination under the specific
circumstances of this case:
Application of the Relationship Test
Is there an intra-corporate relationship between the parties that would characterize the case as an
intra-corporate dispute?

No succession shall be declared unless and until a liquidation of the assets and debts left by
the decedent shall have been made and all his creditors are fully paid. Until a final liquidation
is made and all the debts are paid, the right of the heirs to inherit remains inchoate. This is
so because under our rules of procedure, liquidation is necessary in order to determine
whether or not the decedent has left any liquid assets which may be transmitted to
his heirs.30 [Emphasis supplied.]

We point out at the outset that while Rodrigo holds shares of stock in Zenith, he holds them in two
capacities: in his own right with respect to the 4,250 shares registered in his name, and as one of
the heirs of Anastacia Reyes with respect to the 136,598 shares registered in her name. What is
material in resolving the issues of this case under the allegations of the complaint is
Rodrigos interest as an heir since the subject matter of the present controversy centers on the
shares of stocks belonging to Anastacia, not on Rodrigos personally-owned shares nor on his
personality as shareholder owning these shares. In this light, all reference to shares of stocks in
this case shall pertain to the shareholdings of the deceased Anastacia and the parties interest
therein as her heirs.

37

Rodrigo must, therefore, hurdle two obstacles before he can be considered a stockholder of Zenith
with respect to the shareholdings originally belonging to Anastacia. First, he must prove that there

are shareholdings that will be left to him and his co-heirs, and this can be determined only in a
settlement of the decedents estate. No such proceeding has been commenced to date. Second, he
must register the transfer of the shares allotted to him to make it binding against the corporation.
He cannot demand that this be done unless and until he has established his specific allotment
(and prima facieownership) of the shares. Without the settlement of Anastacias estate, there can
be no definite partition and distribution of the estate to the heirs. Without the partition and
distribution, there can be no registration of the transfer. And without the registration, we cannot
consider the transferee-heir a stockholder who may invoke the existence of an intra-corporate
relationship as premise for an intra-corporate controversy within the jurisdiction of a special
commercial court.

More than the matters of injury and redress, what Rodrigo clearly aims to accomplish through his
allegations of illegal acquisition by Oscar is the distribution of Anastacias shareholdings without a
prior settlement of her estate an objective that, by law and established jurisprudence, cannot be
done. The RTC of Makati, acting as a special commercial court, has no jurisdiction to settle,
partition, and distribute the estate of a deceased. A relevant provision Section 2 of Rule 90 of the
Revised Rules of Court that contemplates properties of the decedent held by one of the heirs
declares:
Questions as to advancement made or alleged to have been made by the deceased to any
heir may be heard and determined by the court having jurisdiction of the estate
proceedings; and the final order of the court thereon shall be binding on the person raising
the questions and on the heir. [Emphasis supplied.]

In sum, we find that insofar as the subject shares of stock (i.e., Anastacias shares) are
concerned Rodrigo cannot be considered a stockholder of Zenith. Consequently, we cannot
declare that an intra-corporate relationship exists that would serve as basis to bring this case
within the special commercial courts jurisdiction under Section 5(b) of PD 902-A, as amended.
Rodrigos complaint, therefore, fails the relationship test.

Worth noting are this Courts statements in the case of Natcher v. Court of Appeals: 32
Matters which involve settlement and distribution of the estate of the decedent fall
within the exclusive province of the probate court in the exercise of its limited
jurisdiction.

Application of the Nature of Controversy Test

The body rather than the title of the complaint determines the nature of an action. 31 Our
examination of the complaint yields the conclusion that, more than anything else, the complaint is
about the protection and enforcement of successional rights. The controversy it presents is purely
civil rather than corporate, although it is denominated as a "complaint for accounting of all
corporate funds and assets."

xxxx
It is clear that trial courts trying an ordinary action cannot resolve to perform
acts pertaining to a special proceeding because it is subject to specific prescribed
rules. [Emphasis supplied.]

Contrary to the findings of both the trial and appellate courts, we read only one cause of action
alleged in the complaint. The "derivative suit for accounting of the funds and assets of the
corporation which are in the control, custody, and/or possession of the respondent [herein
petitioner Oscar]" does not constitute a separate cause of action but is, as correctly claimed by
Oscar, only an incident to the "action for determination of the shares of stock of deceased spouses
Pedro and Anastacia Reyes allegedly taken by respondent, its accounting and the corresponding
delivery of these shares to the parties brothers and sisters." There can be no mistake of the
relationship between the "accounting" mentioned in the complaint and the objective of partition
and distribution when Rodrigo claimed in paragraph 10.1 of the complaint that:

That an accounting of the funds and assets of Zenith to determine the extent and value of
Anastacias shareholdings will be undertaken by a probate court and not by a special commercial
court is completely consistent with the probate courts limited jurisdiction. It has the power to
enforce an accounting as a necessary means to its authority to determine the properties included
in the inventory of the estate to be administered, divided up, and distributed. Beyond this, the
determination of title or ownership over the subject shares (whether belonging to Anastacia or
Oscar) may be conclusively settled by the probate court as a question of collation or advancement.
We had occasion to recognize the courts authority to act on questions of title or ownership in a
collation or advancement situation inCoca v. Pangilinan33 where we ruled:

10.1 By refusal of the respondent to account of [sic] his shareholdings in the company, he
illegally and fraudulently transferred solely in his name wherein [sic] the shares of stock of
the deceased Anastacia C. Reyes [which] must be properly collated and/or distributed equally
amongst the children including the complainant Rodrigo C. Reyes herein to their damage and
prejudice.

It should be clarified that whether a particular matter should be resolved by the Court of First
Instance in the exercise of its general jurisdiction or of its limited probate jurisdiction is in
reality not a jurisdictional question. In essence, it is a procedural question involving a mode
of practice "which may be waived."

We particularly note that the complaint contained no sufficient allegation that justified the need for
an accounting other than to determine the extent of Anastacias shareholdings for purposes of
distribution.

As a general rule, the question as to title to property should not be passed upon in the testate
or intestate proceeding. That question should be ventilated in a separate action. That general
rule has qualifications or exceptions justified by expediency and convenience.

Another significant indicator that points us to the real nature of the complaint are Rodrigos
repeated claims of illegal and fraudulent transfers of Anastacias shares by Oscar to the prejudice
of the other heirs of the decedent; he cited these allegedly fraudulent acts as basis for his demand
for the collation and distribution of Anastacias shares to the heirs. These claims tell us
unequivocally that the present controversy arose from the parties relationship as heirs of
Anastacia and not as shareholders of Zenith. Rodrigo, in filing the complaint, is enforcing his rights
as a co-heir and not as a stockholder of Zenith. The injury he seeks to remedy is one suffered by
an heir (for the impairment of his successional rights) and not by the corporation nor by Rodrigo as
a shareholder on record.

Thus, the probate court may provisionally pass upon in an intestate or testate proceeding the
question of inclusion in, or exclusion from, the inventory of a piece of property without
prejudice to its final determination in a separate action.

38

Although generally, a probate court may not decide a question of title or ownership,
yet ifthe interested parties are all heirs, or the question is one of collation or
advancement, or the parties consent to the assumption of jurisdiction by the probate court
and the rights of third parties are not impaired, the probate court is competent to decide
the question of ownership. [Citations omitted. Emphasis supplied.]

particular cause or wrongdoing against the corporation that he can champion in his capacity as a
shareholder on record.36
In summary, whether as an individual or as a derivative suit, the RTC sitting as special
commercial court has no jurisdiction to hear Rodrigos complaint since what is involved is the
determination and distribution of successional rights to the shareholdings of Anastacia Reyes.
Rodrigos proper remedy, under the circumstances, is to institute a special proceeding for the
settlement of the estate of the deceased Anastacia Reyes, a move that is not foreclosed by the
dismissal of his present complaint.

In sum, we hold that the nature of the present controversy is not one which may be classified as
an intra-corporate dispute and is beyond the jurisdiction of the special commercial court to resolve.
In short, Rodrigos complaint also fails the nature of the controversy test.
DERIVATIVE SUIT

WHEREFORE, we hereby GRANT the petition and REVERSE the decision of the Court of Appeals
dated May 26, 2004 in CA-G.R. SP No. 74970. The complaint before the Regional Trial Court,
Branch 142, Makati, docketed as Civil Case No. 00-1553, is ordered DISMISSED for lack of
jurisdiction.

Rodrigos bare claim that the complaint is a derivative suit will not suffice to confer jurisdiction on
the RTC (as a special commercial court) if he cannot comply with the requisites for the existence of
a derivative suit. These requisites are:

SO ORDERED.
a. the party bringing suit should be a shareholder during the time of the act or transaction
complained of, the number of shares not being material;

-------------------------------------------------------------------------------------------------------------G.R. No. 168863

b. the party has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief, but the latter has failed or refused to heed his
plea; and

June 23, 2009

HI-YIELD REALTY, INCORPORATED, Petitioner, vs. HON. COURT OF APPEALS, HON. CESAR
O. UNTALAN, in his capacity as PRESIDING JUDGE OF RTC-MAKATI, BRANCH 142,
HONORIO TORRES & SONS, INC., and ROBERTO H. TORRES, Respondents.

c. the cause of action actually devolves on the corporation; the wrongdoing or harm having
been or being caused to the corporation and not to the particular stockholder bringing the
suit.34

DECISION

Based on these standards, we hold that the allegations of the present complaint do not amount to
a derivative suit.

QUISUMBING, J.:
This is a special civil action for certiorari seeking to nullify and set aside the Decision 1 dated March
10, 2005 and Resolution2 dated May 26, 2005 of the Court of Appeals in CA-G.R. SP. No. 83919.
The appellate court had dismissed the petition for certiorari and prohibition filed by petitioner and
denied its reconsideration.

First, as already discussed above, Rodrigo is not a shareholder with respect to the shareholdings
originally belonging to Anastacia; he only stands as a transferee-heir whose rights to the share are
inchoate and unrecorded. With respect to his own individually-held shareholdings, Rodrigo has not
alleged any individual cause or basis as a shareholder on record to proceed against Oscar.

The antecedent facts of the case are undisputed.

Second, in order that a stockholder may show a right to sue on behalf of the corporation, he must
allege with some particularity in his complaint that he has exhausted his remedies within the
corporation by making a sufficient demand upon the directors or other officers for appropriate
relief with the expressed intent to sue if relief is denied.35 Paragraph 8 of the complaint hardly
satisfies this requirement since what the rule contemplates is the exhaustion of
remedies within the corporate setting:

On July 31, 2003, Roberto H. Torres (Roberto), for and on behalf of Honorio Torres & Sons, Inc.
(HTSI), filed a Petition for Annulment of Real Estate Mortgage and Foreclosure Sale 3 over two
parcels of land located in Marikina and Quezon City. The suit was filed against Leonora, Ma.
Theresa, Glenn and Stephanie, all surnamed Torres, the Register of Deeds of Marikina and Quezon
City, and petitioner Hi-Yield Realty, Inc. (Hi-Yield). It was docketed as Civil Case No. 03-892 with
Branch 148 of the Regional Trial Court (RTC) of Makati City.

8. As members of the same family, complainant Rodrigo C. Reyes has resorted [to] and
exhausted all legal means of resolving the dispute with the end view of amicably settling the
case, but the dispute between them ensued.

On September 15, 2003, petitioner moved to dismiss the petition on grounds of improper venue
and payment of insufficient docket fees. The RTC denied said motion in an Order 4 dated January
22, 2004. The trial court held that the case was, in nature, a real action in the form of a derivative
suit cognizable by a special commercial court pursuant to Administrative Matter No. 00-11-03SC.5 Petitioner sought reconsideration, but its motion was denied in an Order 6 dated April 27,
2004.

Lastly, we find no injury, actual or threatened, alleged to have been done to the corporation due to
Oscars acts. If indeed he illegally and fraudulently transferred Anastacias shares in his own name,
then the damage is not to the corporation but to his co-heirs; the wrongful transfer did not affect
the capital stock or the assets of Zenith. As already mentioned, neither has Rodrigo alleged any

39

Thereafter, petitioner filed a petition for certiorari and prohibition before the Court of Appeals. In a
Decision dated March 10, 2005, the appellate court agreed with the RTC that the case was a
derivative suit. It further ruled that the prayer for annulment of mortgage and foreclosure
proceedings was merely incidental to the main action. The dispositive portion of said decision
reads:

On the other hand, respondents maintain that the action is primarily a derivative suit to redress
the alleged unauthorized acts of its corporate officers and major stockholders in connection with
the lands. They postulate that the nullification of the mortgage and foreclosure sale would just be
a logical consequence of a decision adverse to said officers and stockholders.
After careful consideration, we are in agreement that the petition must be dismissed.

WHEREFORE, premises considered, this Petition is hereby DISMISSED. However, public respondent
is hereby DIRECTED to instruct his Clerk of Court to compute the proper docket fees and
thereafter, to order the private respondent to pay the same IMMEDIATELY.

A petition for certiorari is proper if a tribunal, board or officer exercising judicial or quasi-judicial
functions acted without or in excess of jurisdiction or with grave abuse of discretion amounting to
lack or excess of jurisdiction and there is no appeal, or any plain, speedy and adequate remedy in
the ordinary course of law.10

SO ORDERED.7
Petitioners motion for reconsideration8 was denied in a Resolution dated May 26, 2005.

Petitioner sought a review of the trial courts Orders dated January 22, 2004 and April 27, 2004 via
a petition for certiorari before the Court of Appeals. In rendering the assailed decision and
resolution, the Court of Appeals was acting under its concurrent jurisdiction to entertain petitions
for certiorari under paragraph 2,11 Section 4 of Rule 65 of the Rules of Court. Thus, if erroneous,
the decision and resolution of the appellate court should properly be assailed by means of a
petition for review on certiorari under Rule 45 of the Rules of Court. The distinction is clear: a
petition for certiorari seeks to correct errors of jurisdiction while a petition for review on certiorari
seeks to correct errors of judgment committed by the court a quo.12 Indeed, this Court has often
reminded members of the bench and bar that a special civil action for certiorari under Rule 65 lies
only when there is no appeal nor plain, speedy and adequate remedy in the ordinary course of
law.13 In the case at hand, petitioner impetuously filed a petition for certiorari before us when a
petition for review was available as a speedy and adequate remedy. Notably, petitioner filed the
present petition 5814 days after it received a copy of the assailed resolution dated May 26, 2005.
To our mind, this belated action evidences petitioners effort to substitute for a lost appeal this
petition for certiorari.

Hence, this petition which raises the following issues:

I.
WHETHER THE HONORABLE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION IN NOT
DISMISSING THE CASE AGAINST HI-YIELD FOR IMPROPER VENUE DESPITE FINDINGS BY THE
TRIAL COURT THAT THE ACTION IS A REAL ACTION.
II.
WHETHER THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING THE COMPLAINT AS
AGAINST HI-YIELD EVEN IF THE JOINDER OF PARTIES IN THE COMPLAINT VIOLATED THE RULES
ON VENUE.

For the extraordinary remedy of certiorari to lie by reason of grave abuse of discretion, the abuse
of discretion must be so patent and gross as to amount to an evasion of positive duty, or a virtual
refusal to perform the duty enjoined or to act in contemplation of law, or where the power is
exercised in an arbitrary and despotic manner by reason of passion and personal hostility.15 We
find no grave abuse of discretion on the part of the appellate court in this case.

III.
WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE ANNULMENT OF
REAL ESTATE MORTGAGE AND FORECLOSURE SALE IN THE COMPLAINT IS MERELY INCIDENTAL
[TO] THE DERIVATIVE SUIT.9

Simply, the resolution of the issues posed by petitioner rests on a determination of the nature of
the petition filed by respondents in the RTC. Both the RTC and Court of Appeals ruled that the
action is in the form of a derivative suit although captioned as a petition for annulment of real
estate mortgage and foreclosure sale.

The pivotal issues for resolution are as follows: (1) whether venue was properly laid; (2) whether
there was proper joinder of parties; and (3) whether the action to annul the real estate mortgage
and foreclosure sale is a mere incident of the derivative suit.

A derivative action is a suit by a shareholder to enforce a corporate cause of action. 16 Under the
Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board
of directors or trustees. But an individual stockholder may be permitted to institute a derivative
suit on behalf of the corporation in order to protect or vindicate corporate rights whenever the
officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the
corporation. In such actions, the corporation is the real party-in-interest while the suing
stockholder, on behalf of the corporation, is only a nominal party.17

Petitioner imputes grave abuse of discretion on the Court of Appeals for not dismissing the case
against it even as the trial court found the same to be a real action. It explains that the rule on
venue under the Rules of Court prevails over the rule prescribing the venue for intra-corporate
controversies; hence, HTSI erred when it filed its suit only in Makati when the lands subjects of the
case are in Marikina and Quezon City. Further, petitioner argues that the appellate court erred in
ruling that the action is mainly a derivative suit and the annulment of real estate mortgage and
foreclosure sale is merely incidental thereto. It points out that the caption of the case, substance
of the allegations, and relief prayed for revealed that the main thrust of the action is to recover the
lands. Lastly, petitioner asserts that it should be dropped as a party to the case for it has been
wrongly impleaded as a non-stockholder defendant in the intra-corporate dispute.

In the case of Filipinas Port Services, Inc. v. Go,18 we enumerated the foregoing requisites before a
stockholder can file a derivative suit:
a) the party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material;

40

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to heed his plea; and

There being no showing of any grave abuse of discretion on the part of the Court of Appeals the
other alleged errors will no longer be passed upon as mere errors of judgment are not proper
subjects of a petition for certiorari.

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having
been, or being caused to the corporation and not to the particular stockholder bringing the
suit.19

WHEREFORE, the instant petition is hereby DISMISSED. The Decision dated March 10, 2005 and
the Resolution dated May 26, 2005 of the Court of Appeals in CA-G.R. SP. No. 83919
are AFFIRMED.

Even then, not every suit filed on behalf of the corporation is a derivative suit. For a derivative suit
to prosper, the minority stockholder suing for and on behalf of the corporation must allege in his
complaint that he is suing on a derivative cause of action on behalf of the corporation and all other
stockholders similarly situated who may wish to join him in the suit.20 The Court finds that Roberto
had satisfied this requirement in paragraph five (5) of his petition which reads:

No pronouncement as to costs.
SO ORDERED.
--------------------------------------------------------------------------------------------------------------

5. Individual petitioner, being a minority stockholder, is instituting the instant proceeding by way of
a derivative suit to redress wrongs done to petitioner corporation and vindicate corporate rights
due to the mismanagement and abuses committed against it by its officers and controlling
stockholders, especially by respondent Leonora H. Torres (Leonora, for brevity) who, without
authority from the Board of Directors, arrogated upon herself the power to bind petitioner
corporation from incurring loan obligations and later allow company properties to be foreclosed as
hereinafter set forth;21

G.R. No. 131889

March 12, 2001

VIRGINIA O. GOCHAN, FELIX Y. GOCHAN III, MAE GOCHAN EFANN, LOUISE Y. GOCHAN,
ESTEBAN Y. GOCHAN JR., DOMINIC Y.GOCHAN, FELIX 0. GOCHAN III, MERCEDES R.
GOCHAN, ALFREDO R. GOCHAN, ANGELINA R. GOCHAN-HERNAEZ, MARIA MERCED R.
GOCHAN, CRISPO R. GOCHAN JR., MARION R. GOCHAN, MACTAN REALTY DEVELOPMENT
CORPORATION and FELIX GOCHAN & SONS REALTY CORPORATION, petitioner, vs.
RICHARD G. YOUNG, DAVID G. YOUNG, JANE G. YOUNG-LLABAN, JOHN D. YOUNG JR.,
MARY G. YOUNG-HSU and ALEXANDER THOMAS G. YOUNG as heirs of Alice Gochan; the
INTESTATE ESTATE OF JOHN D. YOUNG SR.; and CECILIA GOCHAN-UY and MIGUEL C.
UY, for themselves and on behalf and for the benefit of FELIX GOCHAN & SONS REALTY
CORPORATION, respondents.

Further, while it is true that the complaining stockholder must satisfactorily show that he has
exhausted all means to redress his grievances within the corporation; such remedy is no longer
necessary where the corporation itself is under the complete control of the person against whom
the suit is being filed. The reason is obvious: a demand upon the board to institute an action and
prosecute the same effectively would have been useless and an exercise in futility.221avvphi1
Here, Roberto alleged in his petition that earnest efforts were made to reach a compromise among
family members/stockholders before he filed the case. He also maintained that Leonora Torres held
55% of the outstanding shares while Ma. Theresa, Glenn and Stephanie excluded him from the
affairs of the corporation. Even more glaring was the fact that from June 10, 1992, when the first
mortgage deed was executed until July 23, 2002, when the properties mortgaged were foreclosed,
the Board of Directors of HTSI did nothing to rectify the alleged unauthorized transactions of
Leonora. Clearly, Roberto could not expect relief from the board.

PANGANIBAN, J.:
A court or tribunal's jurisdiction over the subject matter is determined by the allegations in the
complaint. The fact that certain persons are not registered as stockholders in the books of the
corporation will not bar them from filing a derivative suit, if it is evident from the allegations in the
complaint that they are bona fide stockholders. In view of RA 8799, intra-corporate controversies
are now within the jurisdiction of courts of general jurisdiction, no longer of the Securities and
Exchange Commission. 1wphi1.nt

Derivative suits are governed by a special set of rules under A.M. No. 01-2-04-SC 23 otherwise
known as the Interim Rules of Procedure Governing Intra-Corporate Controversies under Republic
Act No. 8799.24 Section 1,25Rule 1 thereof expressly lists derivative suits among the cases covered
by it.

The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court. The Petition
assails the February 28, 1996 Decision1 of the Court of Appeals (CA), as well as its December 18,
1997 Resolution denying petitioner's Motion for Reconsideration. The dispositive part of the CA
Decision reads as follows:

As regards the venue of derivative suits, Section 5, Rule 1 of A.M. No. 01-2-04-SC states:
SEC. 5. Venue. - All actions covered by these Rules shall be commenced and tried in the Regional
Trial Court which has jurisdiction over the principal office of the corporation, partnership, or
association concerned. Where the principal office of the corporation, partnership or association is
registered in the Securities and Exchange Commission as Metro Manila, the action must be filed in
the city or municipality where the head office is located.

"WHEREFORE, the petition as far as the heirs of Alice Gochan, is DISMISSED, without
prejudice to filing the same in the regular courts.
SO ORDERED."2

Thus, the Court of Appeals did not commit grave abuse of discretion when it found that
respondents correctly filed the derivative suit before the Makati RTC where HTSI had its principal
office.

41

In dismissing the Complaint before the SEC regarding only Alice Gochan's heirs but not the other
complainants, the CA effectively modified the December 9, 1994 Order of the hearing officer 3 of
the Securities and Exchange Commission (SEC). The Order, which was affirmed in full by the SEC
en banc, dismissed the entire case.

"On 9 December 1994, the SEC, through its Hearing Officer, granted the motion to dismiss
and ordered the cancellation of the notice of lis pendens annotated upon the titles of the
corporate lands. In its order, the SEC opined:
'In the instant case, the complaint admits that complainants Richard G. Young, David G.
Young, Jane G. Young Llaban, John D. Young, Jr., Mary G. Young Hsu and Alexander
Thomas G. Young, who are the children of the late Alice T. Gochan and the late John D.
Young, Sr. are suing in their own right and as heirs of and/or as the beneficial owners of
the shares in the capital stock of FGSRC held in trust for them during his lifetime by the
late John D. Young. Moreover, it has been shown that said complainants ha[d] never
been x x x stockholder[s] of record of FGSRC to confer them with the legal capacity to
bring and maintain their action. Conformably, the case cannot be considered as an intracorporate controversy within the jurisdiction of this Commission.

The Facts
The undisputed facts are summarized by the Court of Appeals as follows:
"Felix Gochan and Sons Realty Corporation (Gochan Realty, for brevity) was registered with
the SEC on June, 1951, with Felix Gochan, Sr., Maria Pan Nuy Go Tiong, Pedro Gochan,
Tomasa Gochan, Esteban Gochan and Crispo Gochan as its incorporators.

'The complainant heirs base what they perceived to be their stockholders' rights upon
the fact of their succession to all the rights, property and interest of their father, John D.
Young, Sr. While their heirship is not disputed, their right to compel the corporation to
register John D. Young's Sr. shares of stock in their names cannot go unchallenged
because the devolution of property to the heirs by operation of law in succession is
subject to just obligations of the deceased before such property passes to the heirs.
Conformably, until therefore the estate is settled and the payment of the debts of the
deceased is accomplished, the heirs cannot as a matter of right compel the delivery of
the shares of stock to them and register such transfer in the books of the corporation to
recognize them as stockholders. The complainant heirs succeed to the estate of [the]
deceased John D. Young, Sr. but they do not thereby become stockholders of the
corporation.

"Felix Gochan Sr.'s daughter, Alice, mother of [herein respondents], inherited 50 shares of
stock in Gochan Realty from the former.
"Alice died in 1955, leaving the 50 shares to her husband, John Young, Sr.
"In 1962, the Regional Trial Court of Cebu adjudicated 6/14 of these shares to her children,
herein [respondents] Richard Young, David Young, Jane Young Llaban, John Young Jr., Mary
Young Hsu and Alexander Thomas Young.
"Having earned dividends, these stocks numbered 179 by 20 September 1979.
"Five days later (25 September), at which time all the children had reached the age of
majority, their father John Sr., requested Gochan Realty to partition the shares of his late wife
by cancelling the stock certificates in his name and issuing in lieu thereof, new stock
certificates in the names of [herein respondents].

'Moreover, John D. [Young Sr.'s] shares of stocks form part of his estate which is the
subject of Special Proceedings No. 3694-CEB in the Regional Trial Court of Cebu, Branch
VIII, [par. 4 of the complaint]. As complainants clearly claim[,] the Intestate Estate of
John D. Young, Sr. has an interest in the subject matter of the instant case. However,
actions for the recovery or protection of the property [such as the shares of stock in
question] may be brought or defended not by the heirs but by the executor or
administrator thereof.

"On 17 October 1979, respondent Gochan Realty refused, citing as reason, the right of first
refusal granted to the remaining stockholders by the Articles of Incorporation.

'Complainants further contend that the alleged wrongful acts of the corporation and its
directors constitute fraudulent devices or schemes which may be detrimental to the
stockholders. Again, the injury [is] perceived[,] as is alleged[,] to have been suffered by
complainants as stockholders, which they are not. Admittedly, the SEC has no
jurisdiction over a controversy wherein one of the parties involved is not or not yet a
stockholder of the corporation. [SEC vs. CA, 201 SCRA 134].

"On 21, 1990, [sic] John, Sr. died, leaving the shares to the [respondents].
"On 8 February 1994, [respondents] Cecilia Gochan Uy and Miguel Uy filed a complaint with
the SEC for issuance of shares of stock to the rightful owners, nullification of shares of stock,
reconveyance of property impressed with trust, accounting, removal of officers and directors
and damages against respondents. A Notice of Lis Pendens was annotated as [sic] real
properties of the corporation.

'Further, by the express allegation of the complaint, herein complainants bring this
action as [a] derivative suit on their own behalf and on behalf of respondent FGSRC.

"On 16 March 1994, [herein petitioners] moved to dismiss the complaint alleging that: (1) the
SEC ha[d] no jurisdiction over the nature of the action; (2) the [respondents] [were] not the
real parties-in-interest and ha[d] no capacity to sue; and (3) [respondents'] causes of action
[were] barred by the Statute of Limitations.

'Section 5, Rule III of the Revised Rules of Procedure in the Securities and Exchange
Commission provides:
'Section 5. Derivative Suit. No action shall be brought by stockholder in the right of
a corporation unless the complainant was a stockholder at the time the questioned
transaction occurred as well as at the time the action was filed and remains a
stockholder during the pendency of the action. x x x.'

"The motion was opposed by herein [respondents].

"On 29 March 1994, [petitioners'] filed a Motion for cancellation of Notice of Lis Pendens.
[Respondents] opposed the said motion.

42

'The rule is in accord with well settled jurisprudence holding that a stockholder bringing
a derivative action must have been [so] at the time the transaction or act complained of
[took] place. (Pascual vs. Orozco, 19 Phil. 82; Republic vs. Cuaderno, 19 SCRA 671; San
Miguel Corporation vs. Khan, 176 SCRA 462-463) The language of the rule is mandatory,
strict compliance with the terms thereof thus being a condition precedent, a
jurisdictional requirement to the filing of the instant action.

"C. Whether or not the intestate estate of John D. Young Sr. is an indispensable party in the
SEC case considering that the individual heirs' shares are still in the decedent stockholder's
name.
"D. Whether or not the cancellation of [the] notice of lis pendens was justified considering
that the suit did not involve real properties owned by Gochan Realty." 6

'Otherwise stated, proof of compliance with the requirement must be sufficiently

established for the action to be given due course by this Commission. The failure to
comply with this jurisdictional requirement on derivative action must necessarily result in
the dismissal of the instant complaint.' (pp. 77-79, Rollo)

In addition, the Court will determine the effect of Republic Act No.8799 7 on this case.
The Court's Ruling

"[Respondents] moved for a reconsideration but the same was denied for being pro-forma.

The Petition has no merit. In view of the effectivity of RA 8799, however, the case should be
remanded to the proper regional trial court, not to the Securities and Exchange Commission.

"[Respondents] appealed to the SEC en banc, contending, among others, that the SEC ha[d]
jurisdiction over the case.

First Issue:

"[Petitioners], on the other hand, contend that the appeal was 97 days late, beyond the 30day period for appeals.

Personality of the Spouses Uy to File a Suit Before the SEC

Petitioners argue that Spouses Cecilia and Miguel Uy had no capacity or legal standing to bring the
suit before the SEC on February 8, 1994, because the latter were no longer stockholders at the
time. Allegedly, the stocks had already been purchased by the corporation. Petitioners further
assert that, being allegedly a simple contract of sale cognizable by the regular courts, the purchase
by Gochan Realty of Cecilia Gochan Uy's 210 shares does not come within the purview of an intracorporate controversy.

"On 3 March 1995, the SEC en banc ruled for the [petitioners,] holding that the
[respondents'] motion for reconsideration did not interrupt the 30-day period for appeal
because said motion was pro-forma."4
Aggrieved, herein respondents then filed a Petition for Review with the Court of Appeals.

As a general rule, the jurisdiction of a court or tribunal over the subject matter is determined by
the allegations in the complaint.8 For purposes of resolving a motion to dismiss, Cecilia Uy's
averment in the Complaint -that the purchase of her stocks by the corporation was null and void
ab initio - is deemed admitted. It is elementary that a void contract produces no effect either
against or in favor of anyone; it cannot create, modify or extinguish the juridical relation to which
it refers.9 Thus, Cecilia remains a stockholder of the corporation in view of the nullity of the
Contract of Sale. Although she was no longer registered as a stockholder in the corporate
records as of the filing of the case before the SEC, the admitted allegations in the Complaint made
her still a bona fide stockholder of Felix Gochan & Sons Realty Corporation (FGSRC), as between
said parties.

Ruling of the Court of Appeals

The Court of Appeals ruled that the SEC had no jurisdiction over the case as far as the heirs of
Alice Gochan were concerned, because they were not yet stockholders of the corporation. On the
other hand, it upheld the capacity of Respondents Cecilia Gochan Uy and her spouse, Miguel Uy. It
also held that the Intestate Estate of John Young Sr. was an indispensable party.
The appellate court further ruled that the cancellation of the notice of lis pendens on the titles of
the corporate real estate was not justified. Moreover, it declared that respondents' Motion for
Reconsideration before the SEC was not pro forma; thus, its filing tolled the appeal period.

In any event, the present controversy, whether intra-corporate or not, is no longer cognizable by
the SEC, in view of RA 8799, which transferred to regional trial courts the former's jurisdiction over
cases involving intra-corporate disputes.

Hence, this Petition.5

The Issues

Action Has Not Prescribed

These are the issues presented before us:

Petitioners contend that the statute of limitations already bars the Uy spouses' action, be it one for
annulment of a voidable contract or one based upon a written contract. The Complaint, however,
contains respondents' allegation that the sale of the shares of stock was not merely voidable, but
was void ab initio. Below we quote its relevant portion:

"A. Whether or not the Spouses Uy have the personality to file an action before the SEC
against Gochan Realty Corporation.
"B. Whether or not the Spouses Uy could properly bring a derivative suit in the name of
Gochan Realty to redress wrongs allegedly committed against it for which the directors
refused to sue.

43

"38. That on November 21, 1979, respondent Felix Gochan & Sons Realty Corporation did not
have unrestricted retained earnings in its books to cover the purchase price of the 208 shares
of stock it was then buying from complainant Cecilia Gochan Uy, thereby rendering said
purchase null and void ab initio for being violative of the trust fund doctrine and contrary to
law, morals good customs, public order and public policy;"

The Spouses Uy have the capacity to file a derivative suit in behalf of and for the benefit of the
corporation. The reason is that, as earlier discussed, the allegations of the Complaint make them
out as stockholders at the time the questioned transaction occurred, as well as at the time the
action was filed and during the pendency of the action.
Third Issue:

Necessarily, petitioners' contention that the action has prescribed cannot be sustained. Prescription
cannot be invoked as a ground if the contract is alleged to be void ab initio.10 It is axiomatic that
the action or defense for the declaration of nullity of a contract does not prescribe. 11

Capacity of the Intestate Estate of John D. Young Sr.

Petitioners contend that the Intestate Estate of John D. Young Sr. is not an indispensable party, as
there is no showing that it stands to be benefited or injured by any court judgement.

Second Issue:
Derivative Suit and the Spouses Uy

It would be useful to point out at this juncture that one of the causes of action stated in the
Complaint filed with the SEC refers to the registration, in the name of the other heirs of Alice
Gochan Young, of 6/14th of the shares still registered under the name of John D. Young Sr. Since
all the shares that belonged to Alice are still in his name, no final determination can be had
without his estate being impleaded in the suit. His estate is thus an indispensable party with
respect to the cause of action dealing with the registration of the shares in the names of the heirs
of Alice.

Petitioners also contend that the action filed by the Spouses Uy was not a derivative suit, because
the spouses and not the corporation were the injured parties. The Court is not convinced. The
following quoted portions of the Complaint readily shows allegations of injury to the corporation
itself:
"16. That on information and belief, in further pursuance of the said conspiracy and for the
fraudulent purpose of depressing the value of the stock of the Corporation and to induce the
minority stockholders to sell their shares of stock for an inadequate consideration as
aforesaid, respondent Esteban T. Gochan . . ., in violation of their duties as directors and
officers of the Corporation . . ., unlawfully and fraudulently appropriated [for] themselves the
funds of the Corporation by drawing excessive amounts in the form of salaries and cash
advances. . . and by otherwise charging their purely personal expenses to the Corporation."
xxx

xxx

Petitioners further claim that the Estate of John Young Sr. was not properly represented. They
claim that "when the estate is under administration, suits for the recovery or protection of the
property or rights of the deceased may be brought only by the administrator or executor as
approved by the court."14 The rules relative to this matter do not, however, make any such
categorical and confining statement.
Section 3 of Rule 3 of the Rules of Court, which is cited by petitioners in support of their position,
reads:

xxx

"41. That the payment of P1,200,000.00 by the Corporation to complainant Cecilia Gochan Uy
for her shares of stock constituted an unlawful, premature and partial liquidation and
distribution of assets to a stockholder, resulting in the impairment of the capital of the
Corporation and prevented it from otherwise utilizing said amount for its regular and lawful
business, to the damage and prejudice of the Corporation, its creditors, and of complainants
as minority stockholders;"12

"Sec. 3. Representatives as parties. - Where the action is allowed to be prosecuted or

defended by a representative or someone acting in a fiduciary capacity, the beneficiary shall
be included in the title of the case and shall be deemed to be the real party in interest. A
representative may be a trustee of an express trust, a guardian, an executor or administrator,
or a party authorized by law or these Rules. An agent acting in his own name and for the
benefit of an undisclosed principal may sue or be sued without joining the principal except
when the contract involves things belonging to the principal."

As early as 1911, this Court has recognized the right of a single stockholder to file derivative suits.
In its words:

Section 2 of Rule 87 of the same Rules, which also deals with administrators, states:

"[W]here corporate directors have committed a breach of trust either by their frauds, ultra
vires acts, or negligence, and the corporation is unable or unwilling to institute suit to remedy
the wrong, a single stockholder may institute that suit, suing on behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a redress of the wrong
done directly to the corporation and indirectly to the stockholders." 13

"Sec. 2. Executor or administrator may bring or defend actions which survive. -For the
recovery or protection of the property or rights of the deceased, an executor or administrator
may bring or defend, in the right of the deceased, actions for causes which survive."
The above-quoted rules, while permitting an executor or administrator to represent or to bring
suits on behalf of the deceased, do not prohibit the heirs from representing the deceased. These
rules are easily applicable to cases in which an administrator has already been appointed. But no
rule categorically addresses the situation in which special proceedings for the settlement of an
estate have already been instituted, yet no administrator has been appointed. In such instances,
the heirs cannot be expected to wait for the appointment of an administrator; then wait further to
see if the administrator appointed would care enough to file a suit to protect the rights and the
interests of the deceased; and in the meantime do nothing while the rights and the properties of
the decedent are violated or dissipated.1wphi1.nt

In the present case, the Complaint alleges all the components of a derivative suit. The allegations
of injury to the Spouses Uy can coexist with those pertaining to the corporation. The personal
injury suffered by the spouses cannot disqualify them from filing a derivative suit on behalf of the
corporation. It merely gives rise to an additional cause of action for damages against the erring
directors. This cause of action is also included in the Complaint filed before the SEC.

44

The Rules are to be interpreted liberally in order to promote their objective of securing a just,
speedy and inexpensive disposition of every action and proceeding.15 They cannot be interpreted in
such a way as to unnecessarily put undue hardships on litigants. For the protection of the interests
of the decedent, this Court has in previous instances16 recognized the heirs as proper
representatives of the decedent, even when there is already an administrator appointed by the
court. When no administrator has been appointed, as in this case, there is all the more reason to
recognize the heirs as the proper representatives of the deceased. Since the Rules do not
specifically prohibit them from representing the deceased, and since no administrator had as yet
been appointed at the time of the institution of the Complaint with the SEC, we see nothing wrong
with the fact that it was the heirs of John D. Young Sr. who represented his estate in the case filed
before the SEC.

While we sustain the appellate court, the case can no longer be remanded to the SEC. As earlier
stated, RA 8799, which became effective on August 8, 2000, transferred SEC's jurisdiction over
cases involving intra-corporate disputes to courts of general jurisdiction or to the regional trial
courtS.20 Section 5.2 thereof reads as follows:
"5.2. The Commission's jurisdiction over all cases enumerated under Section 5 of Presidential
Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate
Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall exercise jurisdiction over these cases.
The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes
submitted for final resolution which should be resolved within one (1) year from the
enactment of this Code. The Commission shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 until finally disposed."
In the light of the Resolution issued by this Court in AM No. 00-8-10-SC,21 the Court Administrator
and the Securities and Exchange Commission should be directed to cause the transfer of the
records of SEC Case No. 02-94-4674 to the appropriate court of general jurisdiction.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED, subject to the
modification that the case be remanded to the proper regional trial court. The December 9, 1994
Order of Securities and Exchange Commission hearing officer dismissing the Complaint and
directing the cancellation of the notice of lis pendens, as well as the March 3, 1995 Order denying
complainants' motion for reconsideration are REVERSEDand SET ASIDE. Pursuant to AM No. 008-10-SC, the Office of the Court Administrator and the SEC areDIRECTED to cause the actual
transfer of the records of SEC Case No.02-94-467 4 to the appropriate regional trial court.

Fourth Issue
Notice of Lis Pendens
On the issue of the annotation of the Notice of Lis Pendens on the titles of the properties of the
corporation and the other respondents, we still find no reason to disturb the ruling of the Court of
Appeals.

SO ORDERED.
--------------------------------------------------------------------------------------------------------------

Under the third, fourth and fifth causes of action of the Complaint, there are allegations of breach
of trust and confidence and usurpation of business opportunities in conflict with petitioners'
fiduciary duties to the corporation, resulting in damage to the Corporation. Under these causes of
action, respondents are asking for the delivery to the Corporation of possession of the parcels of
land and their corresponding certificates of title. Hence, the suit necessarily affects the title to or
right of possession of the real property sought to be reconveyed. The Rules of Court 17 allows the
annotation of a notice of lis pendens in actions affecting the title or right of possession of real
property.18 Thus, the Court of Appeals was correct in reversing the SEC Order for the cancellation
of the notice oflis pendens.

G.R. No. 119002

October 19, 2000

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner, vs. HON. COURT
OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION, respondents.
DECISION
KAPUNAN, J.:

The fact that respondents are not stockholders of the Mactan Realty Development Corporation and
the Lapu-Lapu Real Estate Corporation does not make them non-parties to this case. To repeat,
the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in
the Complaint. In this case, it is alleged that the aforementioned corporations are mere alter egos
of the directors-petitioners, and that the former acquired the properties sought to be re conveyed
to FGSRC in violation of the directors-petitioners' fiduciary duty to FGSRC. The notion of corporate
entity will be pierced or disregarded and the individuals composing it will be treated as
identical19 if, as alleged in the present case, the corporate entity is being used as a cloak or cover
for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business
conduit for the sole benefit of the stockholders.

On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its
managing director, wrote a letter to the Philippine Football Federation (Federation), through its
president private respondent Henri Kahn, wherein the former offered its services as a travel
agency to the latter.1 The offer was accepted.
Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to
the South East Asian Games in Kuala Lumpur as well as various other trips to the People's Republic
of China and Brisbane. The total cost of the tickets amounted to P449,654.83. For the tickets
received, the Federation made two partial payments, both in September of 1989, in the total
amount of P176,467.50.2

Effect of RA 8799

45

On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand
letter requesting for the amount of P265,894.33.3 On 30 October 1989, the Federation, through
the Project Gintong Alay, paid the amount of P31,603.00.4

The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of
the defendant Henri Kahn are hereby dismissed.
With the costs against defendant Henri Kahn.10

On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial
payment for the outstanding balance of the Federation.5 Thereafter, no further payments were
made despite repeated demands.

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994, the
respondent court rendered a decision reversing the trial court, the decretal portion of said decision
reads:

This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner
sued Henri Kahn in his personal capacity and as President of the Federation and impleaded the
Federation as an alternative defendant. Petitioner sought to hold Henri Kahn liable for the unpaid
balance for the tickets purchased by the Federation on the ground that Henri Kahn allegedly
guaranteed the said obligation.6

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET
ASIDE and another one is rendered dismissing the complaint against defendant Henri S. Kahn. 11
In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the Federation.
It rationalized that since petitioner failed to prove that Henri Kahn guaranteed the obligation of the
Federation, he should not be held liable for the same as said entity has a separate and distinct
personality from its officers.

Henri Kahn filed his answer with counterclaim. While not denying the allegation that the Federation
owed the amount P207,524.20, representing the unpaid balance for the plane tickets, he averred
that the petitioner has no cause of action against him either in his personal capacity or in his
official capacity as president of the Federation. He maintained that he did not guarantee payment
but merely acted as an agent of the Federation which has a separate and distinct juridical
personality.7

Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the
Federation be held liable for the unpaid obligation. The same was denied by the appellate court in
its resolution of 8 February 1995, where it stated that:

On the other hand, the Federation failed to file its answer, hence, was declared in default by the
trial court.8

As to the alternative prayer for the Modification of the Decision by expressly declaring in the
dispositive portion thereof the Philippine Football Federation (PFF) as liable for the unpaid
obligation, it should be remembered that the trial court dismissed the complaint against the
Philippine Football Federation, and the plaintiff did not appeal from this decision. Hence, the
Philippine Football Federation is not a party to this appeal and consequently, no judgment may be
pronounced by this Court against the PFF without violating the due process clause, let alone the
fact that the judgment dismissing the complaint against it, had already become final by virtue of
the plaintiff's failure to appeal therefrom. The alternative prayer is therefore similarly DENIED. 12

In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared
Henri Kahn personally liable for the unpaid obligation of the Federation. In arriving at the said
ruling, the trial court rationalized:
Defendant Henri Kahn would have been correct in his contentions had it been duly established that
defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor the
defendant Henri Kahn has adduced any evidence proving the corporate existence of the defendant
Federation. In paragraph 2 of its complaint, plaintiff asserted that "Defendant Philippine Football
Federation is a sports association xxx." This has not been denied by defendant Henri Kahn in his
Answer. Being the President of defendant Federation, its corporate existence is within the personal
knowledge of defendant Henri Kahn. He could have easily denied specifically the assertion of the
plaintiff that it is a mere sports association, if it were a domestic corporation. But he did not.

Petitioner now seeks recourse to this Court and alleges that the respondent court committed the
following assigned errors:13
A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD DEALT
WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE ENTITY AND IN NOT
HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE ONE WHO REPRESENTED THE
PFF AS HAVING A CORPORATE PERSONALITY.

xxx

B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE RESPONDENT

HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE UNINCORPORATED PFF,
HAVING NEGOTIATED WITH PETITIONER AND CONTRACTED THE OBLIGATION IN BEHALF OF
THE PFF, MADE A PARTIAL PAYMENT AND ASSURED PETITIONER OF FULLY SETTLING THE
OBLIGATION.

A voluntary unincorporated association, like defendant Federation has no power to enter into, or to
ratify, a contract. The contract entered into by its officers or agents on behalf of such association is
not binding on, or enforceable against it. The officers or agents are themselves personally liable.
x x x9

C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY LIABLE,

THE HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY DECLARING IN ITS
DECISION THAT THE PFF IS SOLELY LIABLE FOR THE OBLIGATION.

The dispositive portion of the trial court's decision reads:

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the principal
sum of P207,524.20, plus the interest thereon at the legal rate computed from July 5, 1990, the
date the complaint was filed, until the principal obligation is fully liquidated; and another sum of
P15,000.00 for attorney's fees.

46

The resolution of the case at bar hinges on the determination of the existence of the Philippine
Football Federation as a juridical person. In the assailed decision, the appellate court recognized
the existence of the Federation. In support of this, the CA cited Republic Act 3135, otherwise
known as the Revised Charter of the Philippine Amateur Athletic Federation, and Presidential
Decree No. 604 as the laws from which said Federation derives its existence.

5. Affiliate with international or regional sports associations after due consultation with the
Department;
xxx
13. Perform such other functions as may be provided by law.

As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the
juridical existence of national sports associations. This may be gleaned from the powers and
functions granted to these associations. Section 14 of R.A. 3135 provides:

The above powers and functions granted to national sports associations clearly indicate that these
entities may acquire a juridical personality. The power to purchase, sell, lease and encumber
property are acts which may only be done by persons, whether natural or artificial, with juridical
capacity. However, while we agree with the appellate court that national sports associations may
be accorded corporate status, such does not automatically take place by the mere passage of
these laws.

SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall
have the following functions, powers and duties:
1. To adopt a constitution and by-laws for their internal organization and government;

It is a basic postulate that before a corporation may acquire juridical personality, the State must
give its consent either in the form of a special law or a general enabling act. We cannot agree with
the view of the appellate court and the private respondent that the Philippine Football Federation
came into existence upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D.
604 any provision creating the Philippine Football Federation. These laws merely recognized the
existence of national sports associations and provided the manner by which these entities may
acquire juridical personality. Section 11 of R.A. 3135 provides:

2. To raise funds by donations, benefits, and other means for their purposes.
3. To purchase, sell, lease or otherwise encumber property both real and personal, for the
accomplishment of their purpose;
4. To affiliate with international or regional sports' Associations after due consultation with the
executive committee;

SEC. 11. National Sports' Association; organization and recognition. - A National Association shall
be organized for each individual sports in the Philippines in the manner hereinafter provided to
constitute the Philippine Amateur Athletic Federation. Applications for recognition as a National
Sports' Association shall be filed with the executive committee together with, among others, a
copy of the constitution and by-laws and a list of the members of the proposed association, and a
filing fee of ten pesos.

xxx
13. To perform such other acts as may be necessary for the proper accomplishment of their
purposes and not inconsistent with this Act.

The Executive Committee shall give the recognition applied for if it is satisfied that said association
will promote the purposes of this Act and particularly section three thereof. No application shall be
held pending for more than three months after the filing thereof without any action having been
taken thereon by the executive committee. Should the application be rejected, the reasons for
such rejection shall be clearly stated in a written communication to the applicant. Failure to specify
the reasons for the rejection shall not affect the application which shall be considered as unacted
upon: Provided, however, That until the executive committee herein provided shall have been
formed, applications for recognition shall be passed upon by the duly elected members of the
present executive committee of the Philippine Amateur Athletic Federation. The said executive
committee shall be dissolved upon the organization of the executive committee herein provided:
Provided, further, That the functioning executive committee is charged with the responsibility of
seeing to it that the National Sports' Associations are formed and organized within six months from
and after the passage of this Act.

Section 8 of P.D. 604, grants similar functions to these sports associations:

SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports
associations shall have the following functions, powers, and duties:
1. Adopt a Constitution and By-Laws for their internal organization and government which
shall be submitted to the Department and any amendment thereto shall take effect upon
approval by the Department: Provided, however, That no team, school, club, organization, or
entity shall be admitted as a voting member of an association unless 60 per cent of the
athletes composing said team, school, club, organization, or entity are Filipino citizens;
2. Raise funds by donations, benefits, and other means for their purpose subject to the
approval of the Department;

Section 7 of P.D. 604, similarly provides:

3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the
accomplishment of their purpose;

SEC. 7. National Sports Associations. - Application for accreditation or recognition as a national

sports association for each individual sport in the Philippines shall be filed with the Department
together with, among others, a copy of the Constitution and By-Laws and a list of the members of
the proposed association.

4. Conduct local, interport, and international competitions, other than the Olympic and Asian
Games, for the promotion of their sport;

The Department shall give the recognition applied for if it is satisfied that the national sports
association to be organized will promote the objectives of this Decree and has substantially

47

complied with the rules and regulations of the Department: Provided, That the Department may
withdraw accreditation or recognition for violation of this Decree and such rules and regulations
formulated by it.

This is a petition for certiorari under Rule 65 of the Rules of Court of the Decision 1 of the Court of
Appeals of 30 March 1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil Service
Commission (CSC) dated 11 August 1994 and 11 April 1995, respectively, which in turn affirmed
Resolution No. 2309 of the Board of Directors of the Al-Amanah Islamic Investment Bank of the
Philippines (AIIBP) dated 13 December 1993, finding petitioner guilty of Dishonesty in the
Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of the Service and
dismissing him from the service, and its Resolution2 of 15 December 1999 dismissing petitioners
Motion for Reconsideration.

The Department shall supervise the national sports association: Provided, That the latter shall
have exclusive technical control over the development and promotion of the particular sport for
which they are organized.
Clearly the above cited provisions require that before an entity may be considered as a national
sports association, such entity must be recognized by the accrediting organization, the Philippine
Amateur Athletic Federation under R.A. 3135, and the Department of Youth and Sports
Development under P.D. 604. This fact of recognition, however, Henri Kahn failed to substantiate.
In attempting to prove the juridical existence of the Federation, Henri Kahn attached to his motion
for reconsideration before the trial court a copy of the constitution and by-laws of the Philippine
Football Federation. Unfortunately, the same does not prove that said Federation has indeed been
recognized and accredited by either the Philippine Amateur Athletic Federation or the Department
of Youth and Sports Development. Accordingly, we rule that the Philippine Football Federation is
not a national sports association within the purview of the aforementioned laws and does not have
corporate existence of its own.

The records show that petitioner Sappari K. Sawadjaan was among the first employees of the
Philippine Amanah Bank (PAB) when it was created by virtue of Presidential Decree No. 264 on 02
August 1973. He rose through the ranks, working his way up from his initial designation as
security guard, to settling clerk, bookkeeper, credit investigator, project analyst, appraiser/
inspector, and eventually, loans analyst.3
In February 1988, while still designated as appraiser/investigator, Sawadjaan was assigned to
inspect the properties offered as collaterals by Compressed Air Machineries and Equipment
Corporation (CAMEC) for a credit line of Five Million Pesos (P5,000,000.00). The properties
consisted of two parcels of land covered by Transfer Certificates of Title (TCTs) No. N-130671 and
No. C-52576. On the basis of his Inspection and Appraisal Report, 4 the PAB granted the loan
application. When the loan matured on 17 May 1989, CAMEC requested an extension of 180 days,
but was granted only 120 days to repay the loan.5

Thus being said, it follows that private respondent Henry Kahn should be held liable for the unpaid
obligations of the unincorporated Philippine Football Federation. It is a settled principal in
corporation law that any person acting or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and becomes personally liable for contract entered into or
for other acts performed as such agent.14 As president of the Federation, Henri Kahn is presumed
to have known about the corporate existence or non-existence of the Federation. We cannot
subscribe to the position taken by the appellate court that even assuming that the Federation was
defectively incorporated, the petitioner cannot deny the corporate existence of the Federation
because it had contracted and dealt with the Federation in such a manner as to recognize and in
effect admit its existence.15 The doctrine of corporation by estoppel is mistakenly applied by the
respondent court to the petitioner. The application of the doctrine applies to a third party only
when he tries to escape liability on a contract from which he has benefited on the irrelevant ground
of defective incorporation.16 In the case at bar, the petitioner is not trying to escape liability from
the contract but rather is the one claiming from the contract.

In the meantime, Sawadjaan was promoted to Loans Analyst I on 01 July 1989.6

In January 1990, Congress passed Republic Act 6848 creating the AIIBP and repealing P.D. No.
264 (which created the PAB). All assets, liabilities and capital accounts of the PAB were transferred
to the AIIBP,7 and the existing personnel of the PAB were to continue to discharge their functions
unless discharged.8 In the ensuing reorganization, Sawadjaan was among the personnel retained
by the AIIBP.
When CAMEC failed to pay despite the given extension, the bank, now referred to as the AIIBP,
discovered that TCT No. N-130671 was spurious, the property described therein non-existent, and
that the property covered by TCT No. C-52576 had a prior existing mortgage in favor of one Divina
Pablico.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the
Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED.

On 08 June 1993, the Board of Directors of the AIIBP created an Investigating Committee to look
into the CAMEC transaction, which had cost the bank Six Million Pesos (P6,000,000.00) in
losses.9 The subsequent events, as found and decided upon by the Court of Appeals,10 are as
follows:

SO ORDERED.
-------------------------------------------------------------------------------------------------------------G.R. No. 141735

On 18 June 1993, petitioner received a memorandum from Islamic Bank [AIIBP] Chairman Roberto
F. De Ocampo charging him with Dishonesty in the Performance of Official Duties and/or Conduct
Prejudicial to the Best Interest of the Service and preventively suspending him.

June 8, 2005

SAPPARI K. SAWADJAAN, petitioner, vs. THE HONORABLE COURT OF APPEALS, THE CIVIL
SERVICE COMMISSION and AL-AMANAH INVESTMENT BANK OF THE
PHILIPPINES, respondents.

In his memorandum dated 8 September 1993, petitioner informed the Investigating Committee
that he could not submit himself to the jurisdiction of the Committee because of its alleged
partiality. For his failure to appear before the hearing set on 17 September 1993, after the hearing
of 13 September 1993 was postponed due to the Manifestation of even date filed by petitioner, the
Investigating Committee declared petitioner in default and the prosecution was allowed to present
its evidence ex parte.

DECISION
CHICO-NAZARIO, J.:

48

On 08 December 1993, the Investigating Committee rendered a decision, the pertinent portions of
which reads as follows:

III. Both the Islamic Bank and the Civil Service Commission erred in finding petitioner
Sawadjaan of having deliberately reporting false information and therefore guilty of
Dishonesty and Conduct Prejudicial to the Best Interest of the Service and penalized with
dismissal from the service.

In view of respondent SAWADJAANS abject failure to perform his duties and assigned tasks as
appraiser/inspector, which resulted to the prejudice and substantial damage to the Bank,
respondent should be held liable therefore. At this juncture, however, the Investigating Committee
is of the considered opinion that he could not be held liable for the administrative offense of
dishonesty considering the fact that no evidence was adduced to show that he profited or
benefited from being remiss in the performance of his duties. The record is bereft of any evidence
which would show that he received any amount in consideration for his non-performance of his
official duties.

On 04 July 1995, the Honorable Supreme Court En Banc referred this petition to this Honorable
Court pursuant to Revised Administrative Circular No. 1-95, which took effect on 01 June 1995.
We do not find merit [in] the petition.
Anent the first assignment of error, a reading of the records would reveal that petitioner raises for
the first time the alleged failure of the Islamic Bank [AIIBP] to promulgate rules of procedure
governing the adjudication and disposition of administrative cases involving its personnel. It is a
rule that issues not properly brought and ventilated below may not be raised for the first time on
appeal, save in exceptional circumstances (Casolita, Sr. v. Court of Appeals, 275 SCRA 257) none
of which, however, obtain in this case. Granting arguendo that the issue is of such exceptional
character that the Court may take cognizance of the same, still, it must fail. Section 26 of Republic
Act No. 6848 (1990) provides:

This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to
perform his official duties resulted to the prejudice and substantial damage to the Islamic Bank for
which he should be held liable for the administrative offense of CONDUCT PREJUDICIAL TO THE
BEST INTEREST OF THE SERVICE.
Premises considered, the Investigating Committee recommends that respondent SAPPARI
SAWADJAAN be meted the penalty of SIX (6) MONTHS and ONE (1) DAY SUSPENSION from office
in accordance with the Civil Service Commissions Memorandum Circular No. 30, Series of 1989.

Section 26. Powers of the Board. The Board of Directors shall have the broadest powers to manage
the Islamic Bank, x x x The Board shall adopt policy guidelines necessary to carry out effectively
the provisions of this Charter as well as internal rules and regulations necessary for the conduct of
its Islamic banking business and all matters related to personnel organization, office functions and
salary administration. (Italics ours)

On 13 December 1993, the Board of Directors of the Islamic Bank [AIIBP] adopted Resolution No.
2309 finding petitioner guilty of Dishonesty in the Performance of Official Duties and/or Conduct
Prejudicial to the Best Interest of the Service and imposing the penalty of Dismissal from the
Service.

On the other hand, Item No. 2 of Executive Order No. 26 (1992) entitled "Prescribing Procedure
and Sanctions to Ensure Speedy Disposition of Administrative Cases" directs, "all administrative
agencies" to "adopt and include in their respective Rules of Procedure" provisions designed to
abbreviate administrative proceedings.

On reconsideration, the Board of Directors of the Islamic Bank [AIIBP] adopted the Resolution No.
2332 on 20 February 1994 reducing the penalty imposed on petitioner from dismissal to
suspension for a period of six (6) months and one (1) day.
On 29 March 1994, petitioner filed a notice of appeal to the Merit System Protection Board (MSPB).

The above two (2) provisions relied upon by petitioner does not require the Islamic Bank [AIIBP]
to promulgate rules of procedure before administrative discipline may be imposed upon its
employees. The internal rules of procedures ordained to be adopted by the Board refers to that
necessary for the conduct of its Islamic banking business and all matters related to "personnel
organization, office functions and salary administration." On the contrary, Section 26 of RA 6848
gives the Board of Directors of the Islamic Bank the "broadest powers to manage the Islamic
Bank." This grant of broad powers would be an idle ceremony if it would be powerless to discipline
its employees.

On 11 August 1994, the CSC adopted Resolution No. 94-4483 dismissing the appeal for lack of
merit and affirming Resolution No. 2309 dated 13 December 1993 of the Board of Directors of
Islamic Bank.
On 11 April 1995, the CSC adopted Resolution No. 95-2574 denying petitioners Motion for
Reconsideration.

The second assignment of error must likewise fail. The issue is raised for the first time via this
petition forcertiorari. Petitioner submitted himself to the jurisdiction of the CSC. Although he could
have raised the alleged lack of jurisdiction in his Motion for Reconsideration of Resolution No. 944483 of the CSC, he did not do so. By filing the Motion for Reconsideration, he is estopped from
denying the CSCs jurisdiction over him, as it is settled rule that a party who asks for an
affirmative relief cannot later on impugn the action of the tribunal as without jurisdiction after an
adverse result was meted to him. Although jurisdiction over the subject matter of a case may be
objected to at any stage of the proceedings even on appeal, this particular rule, however, means
that jurisdictional issues in a case can be raised only during the proceedings in said case and
during the appeal of said case (Aragon v. Court of Appeals, 270 SCRA 603). The case at bar is a
petition [for] certiorari and not an appeal.

On 16 June 1995, the instant petition was filed with the Honorable Supreme Court on the following
assignment of errors:
I. Public respondent Al-Amanah Islamic Investment Bank of the Philippines has committed a
grave abuse of discretion amounting to excess or lack of jurisdiction when it initiated and
conducted administrative investigation without a validly promulgated rules of procedure in the
adjudication of administrative cases at the Islamic Bank.
II. Public respondent Civil Service Commission has committed a grave abuse of discretion
amounting to lack of jurisdiction when it prematurely and falsely assumed jurisdiction of the
case not appealed to it, but to the Merit System Protection Board.

But even on the merits the argument must falter. Item No. 1 of CSC Resolution No. 93-2387 dated
29 June 1993, provides:

49

Decisions in administrative cases involving officials and employees of the civil service appealable to
the Commission pursuant to Section 47 of Book V of the Code (i.e., Administrative Code of 1987)
including personnel actions such as contested appointments shall now be appealed directly to the
Commission and not to the MSPB.

Sawadjaans counsel subsequently adopted his motion, but requested that it be treated as a
motion for reconsideration.15 This motion was denied by the court a quo in its Resolution of 15
December 1999.16
Still disheartened, Sawadjaan filed the present petition for certiorari under Rule 65 of the Rules of
Court challenging the above Decision and Resolution of the Court of Appeals on the ground that
the court a quo erred: i) in ignoring the facts and evidences that the alleged Islamic Bank has no
valid by-laws; ii) in ignoring the facts and evidences that the Islamic Bank lost its juridical
personality as a corporation on 16 April 1990; iii) in ignoring the facts and evidences that the
alleged Islamic Bank and its alleged Board of Directors have no jurisdiction to act in the manner
they did in the absence of a valid by-laws; iv) in not correcting the acts of the Civil Service
Commission who erroneously rendered the assailed Resolutions No. 94-4483 and No. 95-2754 as a
result of fraud, falsification and/or misrepresentations committed by Farouk A. Carpizo and his
group, including Roberto F. de Ocampo; v) in affirming an unconscionably harsh and/or excessive
penalty; and vi) in failing to consider newly discovered evidence and reverse its decision
accordingly.

In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651, it was categorically held:
. . . The functions of the MSPB relating to the determination of administrative disciplinary cases
were, in other words, re-allocated to the Commission itself.
Be that as it may, "(i)t is hornbook doctrine that in order `(t)o ascertain whether a court (in this
case, administrative agency) has jurisdiction or not, the provisions of the law should be inquired
into. Furthermore, `the jurisdiction of the court must appear clearly from the statute law or it will
not be held to exist."(Azarcon v. Sandiganbayan, 268 SCRA 747, 757) From the provision of law
abovecited, the Civil Service Commission clearly has jurisdiction over the Administrative Case
against petitioner.

Subsequently, petitioner Sawadjaan filed an "Ex-parte Urgent Motion for Additional Extension of
Time to File a Reply (to the Comments of Respondent Al-Amanah Investment Bank of the
Philippines),17 Reply (to Respondents Consolidated Comment,)18 and Reply (to the Alleged
Comments of Respondent Al-Amanah Islamic Bank of the Philippines)."19 On 13 October 2000, he
informed this Court that he had terminated his lawyers services, and, by himself, prepared and
filed the following: 1) Motion for New Trial;20 2) Motion to Declare Respondents in Default and/or
Having Waived their Rights to Interpose Objection to Petitioners Motion for New Trial; 21 3) ExParte Urgent Motions to Punish Attorneys Amado D. Valdez, Elpidio J. Vega, Alda G. Reyes,
Dominador R. Isidoro, Jr., and Odilon A. Diaz for Being in Contempt of Court & to Inhibit them from
Appearing in this Case Until they Can Present Valid Evidence of Legal Authority; 22 4)
Opposition/Reply (to Respondent AIIBPs Alleged Comment);23 5) Ex-Parte Urgent Motion to Punish
Atty. Reynaldo A. Pineda for Contempt of Court and the Issuance of a Commitment Order/Warrant
for His Arrest;24 6) Reply/Opposition (To the Formal Notice of Withdrawal of Undersigned Counsel
as Legal Counsel for the Respondent Islamic Bank with Opposition to Petitioners Motion to Punish
Undersigned Counsel for Contempt of Court for the Issuance of a Warrant of Arrest); 25 7)
Memorandum for Petitioner;26 8) Opposition to SolGens Motion for Clarification with Motion for
Default and/or Waiver of Respondents to File their Memorandum;27 9) Motion for Contempt of
Court and Inhibition/Disqualification with Opposition to OGCCs Motion for Extension of Time to File
Memorandum;28 10) Motion for Enforcement (In Defense of the Rule of Law); 29 11) Motion and
Opposition (Motion to Punish OGCCs Attorneys Amado D. Valdez, Efren B. Gonzales, Alda G.
Reyes, Odilon A. Diaz and Dominador R. Isidoro, Jr., for Contempt of Court and the Issuance of a
Warrant for their Arrest; and Opposition to their Alleged "Manifestation and Motion" Dated
February 5, 2002);30 12) Motion for Reconsideration of Item (a) of Resolution dated 5 February
2002 with Supplemental Motion for Contempt of Court;31 13) Motion for Reconsideration of Portion
of Resolution Dated 12 March 2002;32 14) Ex-Parte Urgent Motion for Extension of Time to File
Reply Memorandum (To: CSC and AIIBPs Memorandum);33 15) Reply Memorandum (To: CSCs
Memorandum) With Ex-Parte Urgent Motion for Additional Extension of time to File Reply
Memorandum (To: AIIBPs Memorandum);34 and 16) Reply Memorandum (To: OGCCs
Memorandum for Respondent AIIBP).35

Anent the third assignment of error, we likewise do not find merit in petitioners proposition that he
should not be liable, as in the first place, he was not qualified to perform the functions of
appraiser/investigator because he lacked the necessary training and expertise, and therefore,
should not have been found dishonest by the Board of Directors of Islamic Bank [AIIBP] and the
CSC. Petitioner himself admits that the position of appraiser/inspector is "one of the most serious
[and] sensitive job in the banking operations." He should have been aware that accepting such a
designation, he is obliged to perform the task at hand by the exercise of more than ordinary
prudence. As appraiser/investigator, he is expected, among others, to check the authenticity of the
documents presented by the borrower by comparing them with the originals on file with the proper
government office. He should have made it sure that the technical descriptions in the location plan
on file with the Bureau of Lands of Marikina, jibe with that indicated in the TCT of the collateral
offered by CAMEC, and that the mortgage in favor of the Islamic Bank was duly annotated at the
back of the copy of the TCT kept by the Register of Deeds of Marikina. This, petitioner failed to do,
for which he must be held liable. That he did not profit from his false report is of no moment.
Neither the fact that it was not deliberate or willful, detracts from the nature of the act as
dishonest. What is apparent is he stated something to be a fact, when he really was not sure that
it was so.
Wherefore, above premises considered, the instant Petition is DISMISSED, and the assailed
Resolutions of the Civil Service Commission are hereby AFFIRMED.
On 24 March 1999, Sawadjaans counsel notified the court a quo of his change of address,11 but
apparently neglected to notify his client of this fact. Thus, on 23 July 1999, Sawadjaan, by himself,
filed a Motion for New Trial12 in the Court of Appeals based on the following grounds: fraud,
accident, mistake or excusable negligence and newly discovered evidence. He claimed that he had
recently discovered that at the time his employment was terminated, the AIIBP had not yet
adopted its corporate by-laws. He attached a Certification 13 by the Securities and Exchange
Commission (SEC) that it was only on 27 May 1992 that the AIIBP submitted its draft by-laws to
the SEC, and that its registration was being held in abeyance pending certain corrections being
made thereon. Sawadjaan argued that since the AIIBP failed to file its by-laws within 60 days from
the passage of Rep. Act No. 6848, as required by Sec. 51 of the said law, the bank and its
stockholders had "already forfeited its franchise or charter, including its license to exist and
operate as a corporation,"14 and thus no longer have "the legal standing and personality to initiate
an administrative case."

Petitioners efforts are unavailing, and we deny his petition for its procedural and substantive
flaws.
The general rule is that the remedy to obtain reversal or modification of the judgment on the
merits is appeal. This is true even if the error, or one of the errors, ascribed to the court rendering
the judgment is its lack of jurisdiction over the subject matter, or the exercise of power in excess
thereof, or grave abuse of discretion in the findings of fact or of law set out in the decision. 36

50

The records show that petitioners counsel received the Resolution of the Court of Appeals denying
his motion for reconsideration on 27 December 1999. The fifteen day reglamentary period to
appeal under Rule 45 of the Rules of Court therefore lapsed on 11 January 2000. On 23 February
2000, over a month after receipt of the resolution denying his motion for reconsideration, the
petitioner filed his petition for certiorari under Rule 65.

if only as a measure of self-protection against acts inimical to its interest.46 Regardless of whether
AIIBP is a corporation, a partnership, a sole proprietorship, or a sari-sari store, it is an undisputed
fact that AIIBP is the petitioners employer. AIIBP chose to retain his services during its
reorganization, controlled the means and methods by which his work was to be performed, paid
his wages, and, eventually, terminated his services.47

It is settled that a special civil action for certiorari will not lie as a substitute for the lost remedy of
appeal,37 and though there are instances38 where the extraordinary remedy of certiorari may be
resorted to despite the availability of an appeal,39 we find no special reasons for making out an
exception in this case.

And though he has had ample opportunity to do so, the petitioner has not alleged that he is
anything other than an employee of AIIBP. He has neither claimed, nor shown, that he is a
stockholder or an officer of the corporation. Having accepted employment from AIIBP, and
rendered his services to the said bank, received his salary, and accepted the promotion given him,
it is now too late in the day for petitioner to question its existence and its power to terminate his
services. 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.481avvphi1

Even if we were to overlook this fact in the broader interests of justice and treat this as a special
civil action forcertiorari under Rule 65,40 the petition would nevertheless be dismissed for failure of
the petitioner to show grave abuse of discretion. Petitioners recurrent argument, tenuous at its
very best, is premised on the fact that since respondent AIIBP failed to file its by-laws within the
designated 60 days from the effectivity of Rep. Act No. 6848, all proceedings initiated by AIIBP
and all actions resulting therefrom are a patent nullity. Or, in his words, the AIIBP and its officers
and Board of Directors,

Even if we were to consider the facts behind petitioner Sawadjaans dismissal from service, we
would be hard pressed to find error in the decision of the AIIBP.
As appraiser/investigator, the petitioner was expected to conduct an ocular inspection of the
properties offered by CAMEC as collaterals and check the copies of the certificates of title against
those on file with the Registry of Deeds. Not only did he fail to conduct these routine checks, but
he also deliberately misrepresented in his appraisal report that after reviewing the documents and
conducting a site inspection, he found the CAMEC loan application to be in order. Despite the
number of pleadings he has filed, he has failed to offer an alternative explanation for his actions.

. . . [H]ave no legal authority nor jurisdiction to manage much less operate the Islamic Bank, file
administrative charges and investigate petitioner in the manner they did and allegedly passed
Board Resolution No. 2309 on December 13, 1993 which is null and void for lack of an
(sic) authorized and valid by-laws. The CIVIL SERVICE COMMISSION was therefore affirming,
erroneously, a null and void "Resolution No. 2309 dated December 13, 1993 of the Board of
Directors of Al-Amanah Islamic Investment Bank of the Philippines" in CSC Resolution No. 94-4483
dated August 11, 1994. A motion for reconsideration thereof was denied by the CSC in its
Resolution No. 95-2754 dated April 11, 1995. Both acts/resolutions of the CSC are erroneous,
resulting from fraud, falsifications and misrepresentations of the alleged Chairman and CEO
Roberto F. de Ocampo and the alleged Director Farouk A. Carpizo and his group at the alleged
Islamic Bank.41

When he was informed of the charges against him and directed to appear and present his side on
the matter, the petitioner sent instead a memorandum questioning the fairness and impartiality of
the members of the investigating committee and refusing to recognize their jurisdiction over him.
Nevertheless, the investigating committee rescheduled the hearing to give the petitioner another
chance, but he still refused to appear before it.
Thereafter, witnesses were presented, and a decision was rendered finding him guilty of dishonesty
and dismissing him from service. He sought a reconsideration of this decision and the same
committee whose impartiality he questioned reduced their recommended penalty to suspension for
six months and one day. The board of directors, however, opted to dismiss him from service.

Nowhere in petitioners voluminous pleadings is there a showing that the court a quo committed
grave abuse of discretion amounting to lack or excess of jurisdiction reversible by a petition
for certiorari. Petitioner already raised the question of AIIBPs corporate existence and lack of
jurisdiction in his Motion for New Trial/Motion for Reconsideration of 27 May 1997 and was denied
by the Court of Appeals. Despite the volume of pleadings he has submitted thus far, he has added
nothing substantial to his arguments.

On appeal to the CSC, the Commission found that Sawadjaans failure to perform his official duties
greatly prejudiced the AIIBP, for which he should be held accountable. It held that:

The AIIBP was created by Rep. Act No. 6848. It has a main office where it conducts business, has
shareholders, corporate officers, a board of directors, assets, and personnel. It is, in fact, here
represented by the Office of the Government Corporate Counsel, "the principal law office of
government-owned corporations, one of which is respondent bank."42 At the very least, by its
failure to submit its by-laws on time, the AIIBP may be considered ade facto corporation43 whose
right to exercise corporate powers may not be inquired into collaterally in any private suit to which
such corporations may be a party.44

. . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN was remiss in the performance of
his duties as appraiser/inspector. Had respondent performed his duties as appraiser/inspector, he
could have easily noticed that the property located at Balintawak, Caloocan City covered by TCT
No. C-52576 and which is one of the properties offered as collateral by CAMEC is encumbered to
Divina Pablico. Had respondent reflected such fact in his appraisal/inspection report on said
property the ISLAMIC BANK would not have approved CAMECs loan of P500,000.00 in 1987 and
CAMECs P5 Million loan in 1988, respondent knowing fully well the Banks policy of not accepting
encumbered properties as collateral.

Moreover, a corporation which has failed to file its by-laws within the prescribed period does
not ipso facto lose its powers as such. The SEC Rules on Suspension/Revocation of the Certificate
of Registration of Corporations,45details the procedures and remedies that may be availed of before
an order of revocation can be issued. There is no showing that such a procedure has been initiated
in this case.
In any case, petitioners argument is irrelevant because this case is not a corporate controversy,
but a labor dispute; and it is an employers basic right to freely select or discharge its employees,

Respondent SAWADJAANs reprehensible act is further aggravated when he failed to check and
verify from the Registry of Deeds of Marikina the authenticity of the property located at Mayamot,
Antipolo, Rizal covered by TCT No. N-130671 and which is one of the properties offered as
collateral by CAMEC for its P5 Million loan in 1988. If he only visited and verified with the Register
of Deeds of Marikina the authenticity of TCT No. N-130671 he could have easily discovered that
TCT No. N-130671 is fake and the property described therein non-existent.

51

...

corporation was only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share
and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the
outstanding and paid up shares totalled 30,127,047 with a total par value of P301,270,430.00. It
was contended that according to section 22 of the Corporation Law and Article VIII of the by-laws
of the corporation, the power to amend, modify, repeal or adopt new by-laws may be delegated to
the Board of Directors only by the affirmative vote of stockholders representing not less than 2/3
of the subscribed and paid up capital stock of the corporation, which 2/3 should have been
computed on the basis of the capitalization at the time of the amendment. Since the amendment
was based on the 1961 authorization, petitioner contended that the Board acted without authority
and in usurpation of the power of the stockholders.

This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to
perform his official duties resulted to the prejudice and substantial damage to the ISLAMIC BANK
for which he should be held liable for the administrative offense of CONDUCT PREJUDICIAL TO THE
BEST INTEREST OF THE SERVICE.49
From the foregoing, we find that the CSC and the court a quo committed no grave abuse of
discretion when they sustained Sawadjaans dismissal from service. Grave abuse of discretion
implies such capricious and whimsical exercise of judgment as equivalent to lack of jurisdiction, or,
in other words, where the power is exercised in an arbitrary or despotic manner by reason of
passion or personal hostility, and it must be so patent and gross as to amount to an evasion of
positive duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation of
law.50 The records show that the respondents did none of these; they acted in accordance with the
law.

As a second cause of action, it was alleged that the authority granted in 1961 had already been
exercised in 1962 and 1963, after which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of the Board of Directors had
changed since the authority was given in 1961, there being six (6) new directors.

WHEREFORE, the petition is DISMISSED. The Decision of the Court of Appeals of 30 March 1999
affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil Service Commission, and its
Resolution of 15 December 1999 are hereby affirmed. Costs against the petitioner.

As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had
all the qualifications to be a director of respondent corporation, being a Substantial stockholder
thereof; that as a stockholder, petitioner had acquired rights inherent in stock ownership, such as
the rights to vote and to be voted upon in the election of directors; and that in amending the bylaws, respondents purposely provided for petitioner's disqualification and deprived him of his
vested right as afore-mentioned hence the amended by-laws are null and void. 1

SO ORDERED.
-------------------------------------------------------------------------------------------------------------G.R. No. L-45911

As additional causes of action, it was alleged that corporations have no inherent power to
disqualify a stockholder from being elected as a director and, therefore, the questioned act is ultra
vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other
corporations, entered into contracts (specifically a management contract) with respondent
corporation, which was allowed because the questioned amendment gave the Board itself the
prerogative of determining whether they or other persons are engaged in competitive or
antagonistic business; that the portion of the amended bylaws which states that in determining
whether or not a person is engaged in competitive business, the Board may consider such factors
as business and family relationship, is unreasonable and oppressive and, therefore, void; and that
the portion of the amended by-laws which requires that "all nominations for election of directors ...
shall be submitted in writing to the Board of Directors at least five (5) working days before the
date of the Annual Meeting" is likewise unreasonable and oppressive.

April 11, 1979

JOHN GOKONGWEI, JR., petitioner, vs. SECURITIES AND EXCHANGE COMMISSION,

ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO
BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL
CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA, respondents.
ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of
preliminary injunction, arose out of two cases filed by petitioner with the Securities and Exchange
Commission, as follows:

It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of
filing thereof be cancelled, and that individual respondents be made to pay damages, in specified
amounts, to petitioner.

SEC CASE NO 1375

On October 28, 1976, in connection with the same case, petitioner filed with the Securities and
Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging
that the Secretary of respondent corporation refused to allow him to inspect its records despite
request made by petitioner for production of certain documents enumerated in the request, and
that respondent corporation had been attempting to suppress information from its stockholders
despite a negative reply by the SEC to its query regarding their authority to do so. Among the
documents requested to be copied were (a) minutes of the stockholder's meeting field on March
13, 1961, (b) copy of the management contract between San Miguel Corporation and A. Soriano
Corporation (ANSCOR); (c) latest balance sheet of San Miguel International, Inc.; (d) authority of
the stockholders to invest the funds of respondent corporation in San Miguel International, Inc.;
and (e) lists of salaries, allowances, bonuses, and other compensation, if any, received by Andres
M. Soriano, Jr. and/or its successor-in-interest.

On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with
the Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended
by-laws, cancellation of certificate of filing of amended by- laws, injunction and damages with
prayer for a preliminary injunction" against the majority of the members of the Board of Directors
and San Miguel Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr.
vs. Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode
B. Conde, Miguel Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as SEC Case
No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents
amended by bylaws of the corporation, basing their authority to do so on a resolution of the
stockholders adopted on March 13, 1961, when the outstanding capital stock of respondent

52

The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents,
alleging, among others that the motion has no legal basis; that the demand is not based on good
faith; that the motion is premature since the materiality or relevance of the evidence sought
cannot be determined until the issues are joined, that it fails to show good cause and constitutes
continued harrasment, and that some of the information sought are not part of the records of the
corporation and, therefore, privileged.

Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and
inspection of documents was filed by all the respondents. This was duly opposed by petitioner. At
this juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene
as oppositors and they accordingly filed their oppositions-intervention to the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the motion for
production and inspection of documents by issuing Order No. 26, Series of 1977, stating, in part as
follows:

During the pendency of the motion for production, respondents San Miguel Corporation, Enrique
Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying the substantial
allegations therein and stating, by way of affirmative defenses that "the action taken by the Board
of Directors on September 18, 1976 resulting in the ... amendments is valid and legal because the
power to "amend, modify, repeal or adopt new By-laws" delegated to said Board on March 13,
1961 and long prior thereto has never been revoked of SMC"; that contrary to petitioner's claim,
"the vote requirement for a valid delegation of the power to amend, repeal or adopt new by-laws is
determined in relation to the total subscribed capital stock at the time the delegation of said power
is made, not when the Board opts to exercise said delegated power"; that petitioner has not
availed of his intra-corporate remedy for the nullification of the amendment, which is to secure its
repeal by vote of the stockholders representing a majority of the subscribed capital stock at any
regular or special meeting, as provided in Article VIII, section I of the by-laws and section 22 of
the Corporation law, hence the, petition is premature; that petitioner is estopped from questioning
the amendments on the ground of lack of authority of the Board. since he failed, to object to other
amendments made on the basis of the same 1961 authorization: that the power of the corporation
to amend its by-laws is broad, subject only to the condition that the by-laws adopted should not be
respondent corporation inconsistent with any existing law; that respondent corporation should not
be precluded from adopting protective measures to minimize or eliminate situations where its
directors might be tempted to put their personal interests over t I hat of the corporation; that the
questioned amended by-laws is a matter of internal policy and the judgment of the board should
not be interfered with: That the by-laws, as amended, are valid and binding and are intended to
prevent the possibility of violation of criminal and civil laws prohibiting combinations in restraint of
trade; and that the petition states no cause of action. It was, therefore, prayed that the petition be
dismissed and that petitioner be ordered to pay damages and attorney's fees to respondents. The
application for writ of preliminary injunction was likewise on various grounds.

Considering the evidence submitted before the Commission by the petitioner

and respondents in the above-entitled case, it is hereby ordered:
1. That respondents produce and permit the inspection, copying and photographing, by or on
behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the stockholders'
meeting of the respondent San Miguel Corporation held on March 13, 1961, which are in the
possession, custody and control of the said corporation, it appearing that the same is material
and relevant to the issues involved in the main case. Accordingly, the respondents should
allow petitioner-movant entry in the principal office of the respondent Corporation, San Miguel
Corporation on January 14, 1977, at 9:30 o'clock in the morning for purposes of enforcing the
rights herein granted; it being understood that the inspection, copying and photographing of
the said documents shall be undertaken under the direct and strict supervision of this
Commission. Provided, however, that other documents and/or papers not heretofore included
are not covered by this Order and any inspection thereof shall require the prior permission of
this Commission;
2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of salaries,
allowances, bonuses, compensation and/or remuneration received by respondent Jose M.
Soriano, Jr. and Andres Soriano from San Miguel International, Inc. and/or its successors-ininterest, the Petition to produce and inspect the same is hereby DENIED, as petitionermovant is not a stockholder of San Miguel International, Inc. and has, therefore, no inherent
right to inspect said documents;

Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition,
denying the material averments thereof and stating, as part of their affirmative defenses, that in
August 1972, the Universal Robina Corporation (Robina), a corporation engaged in business
competitive to that of respondent corporation, began acquiring shares therein. until September
1976 when its total holding amounted to 622,987 shares: that in October 1972, the Consolidated
Foods Corporation (CFC) likewise began acquiring shares in respondent (corporation. until its total
holdings amounted to P543,959.00 in September 1976; that on January 12, 1976, petitioner, who
is president and controlling shareholder of Robina and CFC (both closed corporations) purchased
5,000 shares of stock of respondent corporation, and thereafter, in behalf of himself, CFC and
Robina, "conducted malevolent and malicious publicity campaign against SMC" to generate support
from the stockholder "in his effort to secure for himself and in representation of Robina and CFC
interests, a seat in the Board of Directors of SMC", that in the stockholders' meeting of March 18,
1976, petitioner was rejected by the stockholders in his bid to secure a seat in the Board of
Directors on the basic issue that petitioner was engaged in a competitive business and his securing
a seat would have subjected respondent corporation to grave disadvantages; that "petitioner
nevertheless vowed to secure a seat in the Board of Directors at the next annual meeting; that
thereafter the Board of Directors amended the by-laws as afore-stated.

3. In view of the Manifestation of petitioner-movant dated November 29, 1976, withdrawing

his request to copy and inspect the management contract between San Miguel Corporation
and A. Soriano Corporation and the renewal and amendments thereof for the reason that he
had already obtained the same, the Commission takes note thereof; and
4. Finally, the Commission holds in abeyance the resolution on the matter of production and
inspection of the authority of the stockholders of San Miguel Corporation to invest the funds
of respondent corporation in San Miguel International, Inc., until after the hearing on the
merits of the principal issues in the above-entitled case.
This Order is immediately executory upon its approval.

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent corporation
issued a notice of special stockholders' meeting for the purpose of "ratification and confirmation of
the amendment to the By-laws", setting such meeting for February 10, 1977. This prompted
petitioner to ask respondent Commission for a summary judgment insofar as the first cause of
action is concerned, for the alleged reason that by calling a special stockholders' meeting for the
aforesaid purpose, private respondents admitted the invalidity of the amendments of September

As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation and
attorney's fees were presented against petitioner.

53

18, 1976. The motion for summary judgment was opposed by private respondents. Pending action
on the motion, petitioner filed an "Urgent Motion for the Issuance of a Temporary Restraining
Order", praying that pending the determination of petitioner's application for the issuance of a
preliminary injunction and/or petitioner's motion for summary judgment, a temporary restraining
order be issued, restraining respondents from holding the special stockholder's meeting as
scheduled. This motion was duly opposed by respondents.

Respondents issued notices of the annual stockholders' meeting, including in the Agenda thereof,
the following:
6. Re-affirmation of the authorization to the Board of Directors by the stockholders at the
meeting on March 20, 1972 to invest corporate funds in other companies or businesses or for
purposes other than the main purpose for which the Corporation has been organized, and
ratification of the investments thereafter made pursuant thereto.

On February 10, 1977, respondent Commission issued an order denying the motion for issuance of
temporary restraining order. After receipt of the order of denial, respondents conducted the special
stockholders' meeting wherein the amendments to the by-laws were ratified. On February 14,
1977, petitioner filed a consolidated motion for contempt and for nullification of the special
stockholders' meeting.

By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for
the issuance of a writ of preliminary injunction to restrain private respondents from taking up Item
6 of the Agenda at the annual stockholders' meeting, requesting that the same be set for hearing
on May 3, 1977, the date set for the second hearing of the case on the merits. Respondent
Commission, however, cancelled the dates of hearing originally scheduled and reset the same to
May 16 and 17, 1977, or after the scheduled annual stockholders' meeting. For the purpose of
urging the Commission to act, petitioner filed an urgent manifestation on May 3, 1977, but this
notwithstanding, no action has been taken up to the date of the filing of the instant petition.

A motion for reconsideration of the order denying petitioner's motion for summary judgment was
filed by petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up to
the time of the filing of the instant petition, the said motion had not yet been scheduled for
hearing. Likewise, the motion for reconsideration of the order granting in part and denying in part
petitioner's motion for production of record had not yet been resolved.

With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court that
respondent Commission gravely abused its discretion when it failed to act with deliberate dispatch
on the motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations
upon his rights as stockholder of respondent corporation, and that respondent are acting
oppressively against petitioner, in gross derogation of petitioner's rights to property and due
process. He prayed that this Court direct respondent SEC to act on collateral incidents pending
before it.

In view of the fact that the annul stockholders' meeting of respondent corporation had been
scheduled for May 10, 1977, petitioner filed with respondent Commission a Manifestation stating
that he intended to run for the position of director of respondent corporation. Thereafter,
respondents filed a Manifestation with respondent Commission, submitting a Resolution of the
Board of Directors of respondent corporation disqualifying and precluding petitioner from being a
candidate for director unless he could submit evidence on May 3, 1977 that he does not come
within the disqualifications specified in the amendment to the by-laws, subject matter of SEC Case
No. 1375. By reason thereof, petitioner filed a manifestation and motion to resolve pending
incidents in the case and to issue a writ of injunction, alleging that private respondents were
seeking to nullify and render ineffectual the exercise of jurisdiction by the respondent Commission,
to petitioner's irreparable damage and prejudice, Allegedly despite a subsequent Manifestation to
prod respondent Commission to act, petitioner was not heard prior to the date of the stockholders'
meeting.

On May 6, 1977, this Court issued a temporary restraining order restraining private respondents
from disqualifying or preventing petitioner from running or from being voted as director of
respondent corporation and from submitting for ratification or confirmation or from causing the
ratification or confirmation of Item 6 of the Agenda of the annual stockholders' meeting on May 10,
1977, or from Making effective the amended by-laws of respondent corporation, until further
orders from this Court or until the Securities and Ex-change Commission acts on the matters
complained of in the instant petition.

Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to
act hence petitioner came to this Court.

On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order
had been issued by this Court, or on May 9, 1977, the respondent Commission served upon
petitioner copies of the following orders:

SEC. CASE NO. 1423

(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for
reconsideration, with its supplement, of the order of the Commission denying in part petitioner's
motion for production of documents, petitioner's motion for reconsideration of the order denying
the issuance of a temporary restraining order denying the issuance of a temporary restraining
order, and petitioner's consolidated motion to declare respondents in contempt and to nullify the
stockholders' meeting;

Petitioner likewise alleges that, having discovered that respondent corporation has been investing
corporate funds in other corporations and businesses outside of the primary purpose clause of the
corporation, in violation of section 17 1/2 of the Corporation Law, he filed with respondent
Commission, on January 20, 1977, a petition seeking to have private respondents Andres M.
Soriano, Jr. and Jose M. Soriano, as well as the respondent corporation declared guilty of such
violation, and ordered to account for such investments and to answer for damages.

(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of
respondent corporation but stating that he should not sit as such if elected, until such time that
the Commission has decided the validity of the bylaws in dispute, and denying deferment of Item 6
of the Agenda for the annual stockholders' meeting; and

On February 4, 1977, motions to dismiss were filed by private respondents, to which a

consolidated motion to strike and to declare individual respondents in default and an opposition ad
abundantiorem cautelam were filed by petitioner. Despite the fact that said motions were filed as
early as February 4, 1977, the commission acted thereon only on April 25, 1977, when it denied
respondents' motion to dismiss and gave them two (2) days within which to file their answer, and
set the case for hearing on April 29 and May 3, 1977.

(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for
reconsideration of the order of respondent Commission denying petitioner's motion for summary
judgment;

54

It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted
with indecent haste and without circumspection in issuing the aforesaid orders to petitioner's
irreparable damage and injury; (2) that it acted without jurisdiction and in violation of petitioner's
right to due process when it decided en banc an issue not raised before it and still pending before
one of its Commissioners, and without hearing petitioner thereon despite petitioner's request to
have the same calendared for hearing , and (3) that the respondents acted oppressively against
the petitioner in violation of his rights as a stockholder, warranting immediate judicial intervention.

for as director; and that in the same meeting, Item 6 of the Agenda was discussed, voted upon,
ratified and confirmed. Further it was averred that the questions and issues raised by petitioner
are pending in the Securities and Exchange Commission which has acquired jurisdiction over the
case, and no hearing on the merits has been had; hence the elevation of these issues before the
Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable
questions for the determination of this Court because (1) the respondent Commission acted
without circumspection, unfairly and oppresively against petitioner, warranting the intervention of
this Court; (2) a derivative suit, such as the instant case, is not rendered academic by the act of a
majority of stockholders, such that the discussion, ratification and confirmation of Item 6 of the
Agenda of the annual stockholders' meeting of May 10, 1977 did not render the case moot; that
the amendment to the bylaws which specifically bars petitioner from being a director is void since
it deprives him of his vested rights.

It is prayed in the supplemental petition that the SEC orders complained of be declared null and
void and that respondent Commission be ordered to allow petitioner to undertake discovery
proceedings relative to San Miguel International. Inc. and thereafter to decide SEC Cases No. 1375
and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their
comment, alleging that the petition is without merit for the following reasons:

Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after
receiving a copy of the restraining order issued by this Court and noting that the restraining order
did not foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in
SEC Case No. 1375.

(1) that the petitioner the interest he represents are engaged in business competitive and
antagonistic to that of respondent San Miguel Corporation, it appearing that the owns and controls
a greater portion of his SMC stock thru the Universal Robina Corporation and the Consolidated
Foods Corporation, which corporations are engaged in business directly and substantially
competing with the allied businesses of respondent SMC and of corporations in which SMC has
substantial investments. Further, when CFC and Robina had accumulated investments. Further,
when CFC and Robina had accumulated shares in SMC, the Board of Directors of SMC realized the
clear and present danger that competitors or antagonistic parties may be elected directors and
thereby have easy and direct access to SMC's business and trade secrets and plans;

In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied
deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent corporation,
took into consideration an urgent manifestation filed with the Commission by petitioner on May 3,
1977 which prayed, among others, that the discussion of Item 6 of the Agenda be deferred. The
reason given for denial of deferment was that "such action is within the authority of the
corporation as well as falling within the sphere of stockholders' right to know, deliberate upon
and/or to express their wishes regarding disposition of corporate funds considering that their
investments are the ones directly affected." It was alleged that the main petition has, therefore,
become moot and academic.

(2) that the amended by law were adopted to preserve and protect respondent SMC from the clear
and present danger that business competitors, if allowed to become directors, will illegally and
unfairly utilize their direct access to its business secrets and plans for their own private gain to the
irreparable prejudice of respondent SMC, and, ultimately, its stockholders. Further, it is asserted
that membership of a competitor in the Board of Directors is a blatant disregard of no less that the
Constitution and pertinent laws against combinations in restraint of trade;

On September 29,1977, petitioner filed a second supplemental petition with prayer for preliminary
injunction, alleging that the actuations of respondent SEC tended to deprive him of his right to due
process, and "that all possible questions on the facts now pending before the respondent
Commission are now before this Honorable Court which has the authority and the competence to
act on them as it may see fit." (Reno, pp. 927-928.)

(3) that by laws are valid and binding since a corporation has the inherent right and duty to
preserve and protect itself by excluding competitors and antogonistic parties, under the law of selfpreservation, and it should be allowed a wide latitude in the selection of means to preserve itself;

Petitioner, in his memorandum, submits the following issues for resolution;

(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to
petitioner's own acts or omissions, since he failed to have the petition to suspend, pendente
lite the amended by-laws calendared for hearing. It was emphasized that it was only on April 29,
1977 that petitioner calendared the aforesaid petition for suspension (preliminary injunction) for
hearing on May 3, 1977. The instant petition being dated May 4, 1977, it is apparent that
respondent Commission was not given a chance to act "with deliberate dispatch", and

(1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying
a competitor from nomination or election to the Board of Directors are valid and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request for
an examination of the records of San Miguel International, Inc., a fully owned subsidiary of San
Miguel Corporation; and

(5) that, even assuming that the petition was meritorious was, it has become moot and academic
because respondent Commission has acted on the pending incidents, complained of. It was,
therefore, prayed that the petition be dismissed.

(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of
Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and the ratification of
the investment in a foreign corporation of the corporate funds, allegedly in violation of section 171/2 of the Corporation Law.

On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the
petition has become moot and academic for the reason, among others that the acts of private
respondent sought to be enjoined have reference to the annual meeting of the stockholders of
respondent San Miguel Corporation, which was held on may 10, 1977; that in said meeting, in
compliance with the order of respondent Commission, petitioner was allowed to run and be voted

55

Whether or not amended by-laws are valid is purely a legal question which public interest requires
to be resolved

II
Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or
election to the Board of Directors of SMC are valid and reasonable

It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC
for an appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the
principle of exhaustion of administrative remedies", considering that: first: "whether or not the
provisions of the amended by-laws are intrinsically valid ... is purely a legal question. There is no
factual dispute as to what the provisions are and evidence is not necessary to determine whether
such amended by-laws are valid as framed and approved ... "; second: "it is for the interest and
guidance of the public that an immediate and final ruling on the question be made ... "; third:
"petitioner was denied due process by SEC" when "Commissioner de Guzman had openly shown
prejudice against petitioner ... ", and "Commissioner Sulit ... approved the amended by-laws exparte and obviously found the same intrinsically valid; and finally: "to remand the case to SEC
would only entail delay rather than serve the ends of justice."

The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether

the by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a
legal sense unreasonable and therefore unlawful is a question of law. 10 This rule is subject,
however, to the limitation that where the reasonableness of a by-law is a mere matter of
judgment, and one upon which reasonable minds must necessarily differ, a court would not be
warranted in substituting its judgment instead of the judgment of those who are authorized to
make by-laws and who have exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable because they were
tailored to suppress the minority and prevent them from having representation in the Board", at
the same time depriving petitioner of his "vested right" to be voted for and to vote for a person of
his choice as director.

Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the
legal issues raised by the parties in keeping with the "cherished rules of procedure" that "a court
should always strive to settle the entire controversy in a single proceeding leaving no root or
branch to bear the seeds of future ligiation", citingGayong v. Gayos. 3 To the same effect is the
prayer of San Miguel Corporation that this Court resolve on the merits the validity of its amended
by laws and the rights and obligations of the parties thereunder, otherwise "the time spent and
effort exerted by the parties concerned and, more importantly, by this Honorable Court, would
have been for naught because the main question will come back to this Honorable Court for final
resolution." Respondent Eduardo R. Visaya submits a similar appeal.

Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel
Corporation content that ex. conclusion of a competitor from the Board is legitimate corporate
purpose, considering that being a competitor, petitioner cannot devote an unselfish and undivided
Loyalty to the corporation; that it is essentially a preventive measure to assure stockholders of San
Miguel Corporation of reasonable protective from the unrestrained self-interest of those charged
with the promotion of the corporate enterprise; that access to confidential information by a
competitor may result either in the promotion of the interest of the competitor at the expense of
the San Miguel Corporation, or the promotion of both the interests of petitioner and respondent
San Miguel Corporation, which may, therefore, result in a combination or agreement in violation of
Article 186 of the Revised Penal Code by destroying free competition to the detriment of the
consuming public. It is further argued that there is not vested right of any stockholder under
Philippine Law to be voted as director of a corporation. It is alleged that petitioner, as of May 6,
1978, has exercised, personally or thru two corporations owned or controlled by him, control over
the following shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei, Jr. 6,325
shares; (b) Universal Robina Corporation 738,647 shares; (c) CFC Corporation 658,313
shares, or a total of 1,403,285 shares. Since the outstanding capital stock of San Miguel
Corporation, as of the present date, is represented by 33,139,749 shares with a par value of
P10.00, the total shares owned or controlled by petitioner represents 4.2344% of the total
outstanding capital stock of San Miguel Corporation. It is also contended that petitioner is the
president and substantial stockholder of Universal Robina Corporation and CFC Corporation, both
of which are allegedly controlled by petitioner and members of his family. It is also claimed that
both the Universal Robina Corporation and the CFC Corporation are engaged in businesses directly
and substantially competing with the alleged businesses of San Miguel Corporation, and of
corporations in which SMC has substantial investments.

It is only the Solicitor General who contends that the case should be remanded to the SEC for
hearing and decision of the issues involved, invoking the latter's primary jurisdiction to hear and
decide case involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire
controversy in a single proceeding, leaving nor root or branch to bear the seeds of future
litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the case on the
merits instead of remanding it to the trial court for further proceedings since the ends of justice
would not be subserved by the remand of the case. In Republic v. Security Credit and Acceptance
Corporation, et al., 6 this Court, finding that the main issue is one of law, resolved to decide the
case on the merits "because public interest demands an early disposition of the case", and
in Republic v. Central Surety and Insurance Company, 7 this Court denied remand of the thirdparty complaint to the trial court for further proceedings, citing precedent where this Court, in
similar situations resolved to decide the cases on the merits, instead of remanding them to the
trial court where (a) the ends of justice would not be subserved by the remand of the case; or (b)
where public interest demand an early disposition of the case; or (c) where the trial court had
already received all the evidence presented by both parties and the Supreme Court is now in a
position, based upon said evidence, to decide the case on its merits. 8 It is settled that the doctrine
of primary jurisdiction has no application where only a question of law is involved. 8a Because
uniformity may be secured through review by a single Supreme Court, questions of law may
appropriately be determined in the first instance by courts. 8b In the case at bar, there are facts
which cannot be denied, viz.: that the amended by-laws were adopted by the Board of Directors of
the San Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly
pursuant to section 22 of the Corporation Law; that in a special meeting on February 10, 1977
held specially for that purpose, the amended by-laws were ratified by more than 80% of the
stockholders of record; that the foreign investment in the Hongkong Brewery and Distellery, a beer
manufacturing company in Hongkong, was made by the San Miguel Corporation in 1948; and that
in the stockholders' annual meeting held in 1972 and 1977, all foreign investments and operations
of San Miguel Corporation were ratified by the stockholders.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN MIGUEL

CORPORATION
According to respondent San Miguel Corporation, the areas of, competition are enumerated in its
Board the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:
Product Line Estimated Market Share Total
1977 SMC Robina-CFC

56

Table Eggs 0.6% 10.0% 10.6%

Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%

corporation has this inherent power as one of its necessary and inseparable legal incidents,
independent of any specific enabling provision in its charter or in general law, such power of selfgovernment being essential to enable the corporation to accomplish the purposes of its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its bylaws "the qualifications, duties and compensation of directors, officers and employees ... " This
must necessarily refer to a qualification in addition to that specified by section 30 of the
Corporation Law, which provides that "every director must own in his right at least one share of
the capital stock of the stock corporation of which he is a director ... " InGovernment v. El
Hogar, 14 the Court sustained the validity of a provision in the corporate by-law requiring that
persons elected to the Board of Directors must be holders of shares of the paid up value of
P5,000.00, which shall be held as security for their action, on the ground that section 21 of the
Corporation Law expressly gives the power to the corporation to provide in its by-laws for the
qualifications of directors and is "highly prudent and in conformity with good practice. "

Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved
product sales of over P400 million or more than 20% of the P2 billion total product sales of SMC.
Significantly, the combined market shares of SMC and CFC-Robina in layer pullets dressed chicken,
poultry and hog feeds ice cream, instant coffee and woven fabrics would result in a position of
such dominance as to affect the prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines
which, for SMC, represented sales amounting to more than ?478 million. In addition, CFC-Robina
was directly competing in the sale of coffee with Filipro, a subsidiary of SMC, which product line
represented sales for SMC amounting to more than P275 million. The CFC-Robina group (Robitex,
excluding Litton Mills recently acquired by petitioner) is purportedly also in direct competition with
Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to more than P95 million. The
areas of competition between SMC and CFC-Robina in 1977 represented, therefore, for SMC,
product sales of more than P849 million.

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR

Any person "who buys stock in a corporation does so with the knowledge that its affairs
are dominated by a majority of the stockholders and that he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act of incorporation and lawfully
enacted by-laws and not forbidden by law." 15 To this extent, therefore, the stockholder may be
considered to have "parted with his personal right or privilege to regulate the disposition of his
property which he has invested in the capital stock of the corporation, and surrendered it to the
will of the majority of his fellow incorporators. ... It cannot therefore be justly said that the
contract, express or implied, between the corporation and the stockholders is infringed ... by any
act of the former which is authorized by a majority ... ." 16

According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894
stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the
total outstanding shares of SMC, rejected petitioner's candidacy for the Board of Directors because
they "realized the grave dangers to the corporation in the event a competitor gets a board seat in
SMC." On September 18, 1978, the Board of Directors of SMC, by "virtue of powers delegated to it
by the stockholders," approved the amendment to ' he by-laws in question. At the meeting of
February 10, 1977, these amendments were confirmed and ratified by 5,716 shareholders owning
24,283,945 shares, or more than 80% of the total outstanding shares. Only 12 shareholders,
representing 7,005 shares, opposed the confirmation and ratification. At the Annual Stockholders'
Meeting of May 10, 1977, 11,349 shareholders, owning 27,257.014 shares, or more than 90% of
the outstanding shares, rejected petitioner's candidacy, while 946 stockholders, representing
1,648,801 shares voted for him. On the May 9, 1978 Annual Stockholders' Meeting, 12,480
shareholders, owning more than 30 million shares, or more than 90% of the total outstanding
shares. voted against petitioner.

Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of
incorporation by a vote or written assent of the stockholders representing at least two-thirds of
the subscribed capital stock of the corporation If the amendment changes, diminishes or restricts
the rights of the existing shareholders then the disenting minority has only one right, viz.: "to
object thereto in writing and demand payment for his share." Under section 22 of the same law,
the owners of the majority of the subscribed capital stock may amend or repeal any by-law or
adopt new by-laws. It cannot be said, therefore, that petitioner has a vested right to be elected
director, in the face of the fact that the law at the time such right as stockholder was acquired
contained the prescription that the corporate charter and the by-law shall be subject to
amendment, alteration and modification. 17

AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY

CONFERRED BY LAW

It being settled that the corporation has the power to provide for the qualifications of its directors,
the next question that must be considered is whether the disqualification of a competitor from
being elected to the Board of Directors is a reasonable exercise of corporate authority.

Private respondents contend that the disputed amended by laws were adopted by the Board of
Directors of San Miguel Corporation a-, a measure of self-defense to protect the corporation from
the clear and present danger that the election of a business competitor to the Board may cause
upon the corporation and the other stockholders inseparable prejudice. Submitted for resolution,
therefore, is the issue whether or not respondent San Miguel Corporation could, as a measure of
self- protection, disqualify a competitor from nomination and election to its Board of Directors.

A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS

SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation are not regarded as
trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the
corporation and the stockholders as a body are concerned. As agents entrusted with the
management of the corporation for the collective benefit of the stockholders, "they occupy a
fiduciary relation, and in this sense the relation is one of trust." 18 "The ordinary trust relationship
of directors of a corporation and stockholders", according to Ashaman v. Miller, 19 "is not a matter
of statutory or technical law. It springs from the fact that directors have the control and guidance
of corporate affairs and property and hence of the property interests of the stockholders. Equity

It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws
'for its internal government, and to regulate the conduct and prescribe the rights and duties of its
members towards itself and among themselves in reference to the management of its affairs. 12 At
common law, the rule was "that the power to make and adopt by-laws was inherent in every
corporation as one of its necessary and inseparable legal incidents. And it is settled throughout the
United States that in the absence of positive legislative provisions limiting it, every private

57

recognizes that stockholders are the proprietors of the corporate interests and are ultimately the
only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton,
the directors of corporations, thus:

20

corporation and is good." An exception exists in New Jersey, where the Supreme Court held that
the Corporation Law in New Jersey prescribed the only qualification, and therefore the corporation
was not empowered to add additional qualifications. 25 This is the exact opposite of the situation in
the Philippines because as stated heretofore, section 21 of the Corporation Law expressly provides
that a corporation may make by-laws for the qualifications of directors. Thus, it has been held that
an officer of a corporation cannot engage in a business in direct competition with that of the
corporation where he is a director by utilizing information he has received as such officer, under
"the established law that a director or officer of a corporation may not enter into a competing
enterprise which cripples or injures the business of the corporation of which he is an officer or
director. 26

emphatically restated the standard of fiduciary obligation of

A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such fiduciary
position cannot serve himself first and his cestuis second. ... He cannot manipulate the affairs
of his corporation to their detriment and in disregard of the standards of common decency. He
cannot by the intervention of a corporate entity violate the ancient precept against serving
two masters ... He cannot utilize his inside information and strategic position for his own
preferment. He cannot violate rules of fair play by doing indirectly through the corporation
what he could not do so directly. He cannot violate rules of fair play by doing indirectly though
the corporation what he could not do so directly. He cannot use his power for his personal
advantage and to the detriment of the stockholders and creditors no matter how absolute in
terms that power may be and no matter how meticulous he is to satisfy technical
requirements. For that power is at all times subject to the equitable limitation that it may not
be exercised for the aggrandizement, preference or advantage of the fiduciary to the
exclusion or detriment of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co.,

21

It is also well established that corporate officers "are not permitted to use their position of trust
and confidence to further their private interests." 27 In a case where directors of a corporation
cancelled a contract of the corporation for exclusive sale of a foreign firm's products, and after
establishing a rival business, the directors entered into a new contract themselves with the foreign
firm for exclusive sale of its products, the court held that equity would regard the new contract as
an offshoot of the old contract and, therefore, for the benefit of the corporation, as a "faultless
fiduciary may not reap the fruits of his misconduct to the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the fiduciary
standards could not be upheld where the fiduciary was acting for two entities with competing
interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an
officer or director taking advantage of an opportunity for his own personal profit when the interest
of the corporation justly calls for protection. 30

it was said:

... A person cannot serve two hostile and adverse master, without detriment to one of them.
A judge cannot be impartial if personally interested in the cause. No more can a director.
Human nature is too weak -for this. Take whatever statute provision you please giving power
to stockholders to choose directors, and in none will you find any express prohibition against
a discretion to select directors having the company's interest at heart, and it would simply be
going far to deny by mere implication the existence of such a salutary power

It is not denied that a member of the Board of Directors of the San Miguel Corporation has access
to sensitive and highly confidential information, such as: (a) marketing strategies and pricing
structure; (b) budget for expansion and diversification; (c) research and development; and (d)
sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms.

... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company

from being a director, the same reasoning would apply to disqualify the wife and immediate
member of the family of such stockholder, on account of the supposed interest of the wife in her
husband's affairs, and his suppose influence over her. It is perhaps true that such stockholders
ought not to be condemned as selfish and dangerous to the best interest of the corporation until
tried and tested. So it is also true that we cannot condemn as selfish and dangerous and
unreasonable the action of the board in passing the by-law. The strife over the matter of control in
this corporation as in many others is perhaps carried on not altogether in the spirit of brotherly
love and affection. The only test that we can apply is as to whether or not the action of the Board
is authorized and sanctioned by law. ... . 22

It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel
Corporation, who is also the officer or owner of a competing corporation, from taking advantage of
the information which he acquires as director to promote his individual or corporate interests to
the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of
the by-laws was made. Certainly, where two corporations are competitive in a substantial sense, it
would seem improbable, if not impossible, for the director, if he were to discharge effectively his
duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties
above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid and
reasonable an amendment to the by-laws of a bank, requiring that its directors should not be
directors, officers, employees, agents, nominees or attorneys of any other banking corporation,
affiliate or subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of the court,
thus:

These principles have been applied by this Court in previous cases. 23

AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER INELIGIBLE
TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN
COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID

... A bank director has access to a great deal of information concerning the business and
plans of a bank which would likely be injurious to the bank if known to another bank, and it
was reasonable and prudent to enlarge this minimum disqualification to include any director,
officer, employee, agent, nominee, or attorney of any other bank in California.
The Ashkins case, supra, specifically recognizes protection against rivals and others who
might acquire information which might be used against the interests of the corporation as a
legitimate object of by-law protection. With respect to attorneys or persons associated with a
firm which is attorney for another bank, in addition to the direct conflict or potential conflict of
interest, there is also the danger of inadvertent leakage of confidential information through

It is a settled state law in the United States, according to Fletcher, that corporations have the
power to make by-laws declaring a person employed in the service of a rival company to be
ineligible for the corporation's Board of Directors. ... (A)n amendment which renders ineligible, or if
elected, subjects to removal, a director if he be also a director in a corporation whose business is
in competition with or is antagonistic to the other corporation is valid." 24 This is based upon the
principle that where the director is so employed in the service of a rival company, he cannot serve
both, but must betray one or the other. Such an amendment "advances the benefit of the

58

casual office discussions or accessibility of files. Defendant's directors determined that its
welfare was best protected if this opportunity for conflicting loyalties and potential misuse and
leakage of confidential information was foreclosed.

There is another important consideration in determining whether or not the amended by-laws are
reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair
competition. Thus, section 2 of Article XIV of the Constitution provides: "The State shall regulate
or prohibit private monopolies when the public interest so requires. No combinations in restraint of
trade or unfair competition shall be snowed."

In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:

Article 186 of the Revised Penal Code also provides:

(1) A director shall not be directly or indirectly interested as a stockholder in any other firm,
company, or association which competes with the subject corporation.

Art. 186. Monopolies and combinations in restraint of trade. The penalty of prision
correccional in its minimum period or a fine ranging from two hundred to six thousand pesos,
or both, shall be imposed upon:

(2) A director shall not be the immediate member of the family of any stockholder in any
other firm, company, or association which competes with the subject corporation,

1. Any person who shall enter into any contract or agreement or shall take part in any
conspiracy or combination in the form of a trust or otherwise, in restraint of trade or
commerce or to prevent by artificial means free competition in the market.

(3) A director shall not be an officer, agent, employee, attorney, or trustee in any other firm,
company, or association which compete with the subject corporation.
(4) A director shall be of good moral character as an essential qualification to holding office.

2. Any person who shag monopolize any merchandise or object of trade or commerce, or shall
combine with any other person or persons to monopolize said merchandise or object in order
to alter the price thereof by spreading false rumors or making use of any other artifice to
restrain free competition in the market.

(5) No person who is an attorney against the corporation in a law suit is eligible for service on
the board. (At p. 7.)

3. Any person who, being a manufacturer, producer, or processor of any merchandise or

object of commerce or an importer of any merchandise or object of commerce from any
foreign country, either as principal or agent, wholesale or retailer, shall combine, conspire or
agree in any manner with any person likewise engaged in the manufacture, production,
processing, assembling or importation of such merchandise or object of commerce or with
any other persons not so similarly engaged for the purpose of making transactions prejudicial
to lawful commerce, or of increasing the market price in any part of the Philippines, or any
such merchandise or object of commerce manufactured, produced, processed, assembled in
or imported into the Philippines, or of any article in the manufacture of which such
manufactured, produced, processed, or imported merchandise or object of commerce is used.

These are not based on theorical abstractions but on human experience that a person cannot
serve two hostile masters without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of
his position as director of San Miguel Corporation, he would absent himself from meetings at which
confidential matters would be discussed, would not detract from the validity and reasonableness of
the by-laws here involved. Apart from the impractical results that would ensue from such
arrangement, it would be inconsistent with petitioner's primary motive in running for board
membership which is to protect his investments in San Miguel Corporation. More important,
such a proposed norm of conduct would be against all accepted principles underlying a director's
duty of fidelity to the corporation, for the policy of the law is to encourage and enforce responsible
corporate management. As explained by Oleck: 31 "The law win not tolerate the passive attitude of
directors ... without active and conscientious participation in the managerial functions of the
company. As directors, it is their duty to control and supervise the day to day business activities of
the company or to promulgate definite policies and rules of guidance with a vigilant eye toward
seeing to it that these policies are carried out. It is only then that directors may be said to have
fulfilled their duty of fealty to the corporation."

There are other legislation in this jurisdiction, which prohibit monopolies and combinations in
restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are
aimed at raising levels of competition by improving the consumers' effectiveness as the final
arbiter in free markets. These laws are designed to preserve free and unfettered competition as
the rule of trade. "It rests on the premise that the unrestrained interaction of competitive forces
will yield the best allocation of our economic resources, the lowest prices and the highest quality ...
." 34 they operate to forestall concentration of economic power. 35 The law against monopolies and
combinations in restraint of trade is aimed at contracts and combinations that, by reason of the
inherent nature of the contemplated acts, prejudice the public interest by unduly restraining
competition or unduly obstructing the course of trade. 36

Sound principles of corporate management counsel against sharing sensitive information with a
director whose fiduciary duty of loyalty may well require that he disclose this information to a
competitive arrival. These dangers are enhanced considerably where the common director such as
the petitioner is a controlling stockholder of two of the competing corporations. It would seem
manifest that in such situations, the director has an economic incentive to appropriate for the
benefit of his own corporation the corporate plans and policies of the corporation where he sits as
director.

The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to have
a well defined meaning in other jurisdictions. A "monopoly" embraces any combination the
tendency of which is to prevent competition in the broad and general sense, or to control prices to
the detriment of the public. 37 In short, it is the concentration of business in the hands of a few.
The material consideration in determining its existence is not that prices are raised and
competition actually excluded, but that power exists to raise prices or exclude competition when
desired. 38Further, it must be considered that the Idea of monopoly is now understood to include a
condition produced by the mere act of individuals. Its dominant thought is the notion of

Indeed, access by a competitor to confidential information regarding marketing strategies and

pricing policies of San Miguel Corporation would subject the latter to a competitive disadvantage
and unjustly enrich the competitor, for advance knowledge by the competitor of the strategies for
the development of existing or new markets of existing or new products could enable said
competitor to utilize such knowledge to his advantage. 32

59

exclusiveness or unity, or the suppression of competition by the qualification of interest or

management, or it may be thru agreement and concert of action. It is, in brief, unified tactics with
regard to prices. 39

effect destroy free competition and deprive the consuming public of opportunity to buy goods of
the highest possible quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then
the election of petitioner to the Board of SMC may constitute a violation of the prohibition
contained in section 13(5) of the Corporation Law. Said section provides in part that "any
stockholder of more than one corporation organized for the purpose of engaging in agriculture may
hold his stock in such corporations solely for investment and not for the purpose of bringing about
or attempting to bring about a combination to exercise control of incorporations ... ."

From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord
with reality. The election of petitioner to the Board of respondent Corporation can bring about an
illegal situation. This is because an express agreement is not necessary for the existence of a
combination or conspiracy in restraint of trade. 40 It is enough that a concert of action is
contemplated and that the defendants conformed to the arrangements, 41 and what is to be
considered is what the parties actually did and not the words they used. For instance, the Clayton
Act prohibits a person from serving at the same time as a director in any two or more
corporations, if such corporations are, by virtue of their business and location of
operation, competitors so that the elimination of competition between them would constitute
violation of any provision of the anti-trust laws. 42 There is here a statutory recognition of the anticompetitive dangers which may arise when an individual simultaneously acts as a director of two
or more competing corporations. A common director of two or more competing corporations would
have access to confidential sales, pricing and marketing information and would be in a position to
coordinate policies or to aid one corporation at the expense of another, thereby stifling
competition. This situation has been aptly explained by Travers, thus:

Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of
petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder
but waived in the case of another, then it could be reasonably claimed that the by-law was being
applied in a discriminatory manner. However, the by law, by its terms, applies to all stockholders.
The equal protection clause of the Constitution requires only that the by-law operate equally upon
all persons of a class. Besides, before petitioner can be declared ineligible to run for director, there
must be hearing and evidence must be submitted to bring his case within the ambit of the
disqualification. Sound principles of public policy and management, therefore, support the view
that a by-law which disqualifies a competition from election to the Board of Directors of another
corporation is valid and reasonable.

The argument for prohibiting competing corporations from sharing even one director is that
theinterlock permits the coordination of policies between nominally independent firms to an
extent that competition between them may be completely eliminated. Indeed, if a director, for
example, is to be faithful to both corporations, some accommodation must result. Suppose X
is a director of both Corporation A and Corporation B. X could hardly vote for a policy by A
that would injure B without violating his duty of loyalty to B at the same time he could hardly
abstain from voting without depriving A of his best judgment. If the firms really do
compete in the sense of vying for economic advantage at the expense of the other there
can hardly be any reason for an interlock between competitors other than the suppression of
competition. 43 (Emphasis supplied.)

In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to
the corporation in adopting measures to protect legitimate corporation interests. Thus, "where the
reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead of the
judgment of those who are authorized to make by-laws and who have expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present Board powers to perpetua
themselves in power such fears appear to be misplaced. This power, but is very nature, is subject
to certain well established limitations. One of these is inherent in the very convert and definition of
the terms "competition" and "competitor". "Competition" implies a struggle for advantage between
two or more forces, each possessing, in substantially similar if not Identical degree, certain
characteristics essential to the business sought. It means an independent endeavor of two or more
persons to obtain the business patronage of a third by offering more advantageous terms as an
inducement to secure trade. 46 The test must be whether the business does in fact compete, not
whether it is capable of an indirect and highly unsubstantial duplication of an isolated or noncharacteristics activity. 47 It is, therefore, obvious that not every person or entity engaged in
business of the same kind is a competitor. Such factors as quantum and place of business, Identity
of products and area of competition should be taken into consideration. It is, therefore, necessary
to show that petitioner's business covers a substantial portion of the same markets for similar
products to the extent of not less than 10% of respondent corporation's market for competing
products. While We here sustain the validity of the amended by-laws, it does not follow as a
necessary consequence that petitioner is ipso facto disqualified. Consonant with the requirement of
due process, there must be due hearing at which the petitioner must be given the fullest
opportunity to show that he is not covered by the disqualification. As trustees of the corporation
and of the stockholders, it is the responsibility of directors to act with fairness to the
stockholders. 48 Pursuant to this obligation and to remove any suspicion that this power may be
utilized by the incumbent members of the Board to perpetuate themselves in power, any decision
of the Board to disqualify a candidate for the Board of Directors should be reviewed by the
Securities behind Exchange Commission en banc and its decision shall be final unless reversed by
this Court on certiorari. 49 Indeed, it is a settled principle that where the action of a Board of
Directors is an abuse of discretion, or forbidden by statute, or is against public policy, or is ultra
vires, or is a fraud upon minority stockholders or creditors, or will result in waste, dissipation or
misapplication of the corporation assets, a court of equity has the power to grant appropriate
relief. 50

According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the
Clayton Act, it was established that: "By means of the interlocking directorates one man or group
of men have been able to dominate and control a great number of corporations ... to the detriment
of the small ones dependent upon them and to the injury of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly, shared information on
production, orders, shipments, capacity and inventories may lead to control of production for the
purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the products of
San Miguel Corporation, the essence of competition in a free market for the purpose of serving the
lowest priced goods to the consuming public would be frustrated, The competitor could so
manipulate the prices of his products or vary its marketing strategies by region or by brand in
order to get the most out of the consumers. Where the two competing firms control a substantial
segment of the market this could lead to collusion and combination in restraint of trade. Reason
and experience point to the inevitable conclusion that the inherent tendency of interlocking
directorates between companies that are related to each other as competitors is to blunt the edge
of rivalry between the corporations, to seek out ways of compromising opposing interests, and
thus eliminate competition. As respondent SMC aptly observes, knowledge by CFC-Robina of SMC's
costs in various industries and regions in the country win enable the former to practice price
discrimination. CFC-Robina can segment the entire consuming population by geographical areas or
income groups and change varying prices in order to maximize profits from every market segment.
CFC-Robina could determine the most profitable volume at which it could produce for every
product line in which it competes with SMC. Access to SMC pricing policy by CFC-Robina would in

60

III

to take cognizance of it as a qualification. In other words, the specific provisions take from the
stockholder the burden of showing propriety of purpose and place upon the corporation the burden
of showing impropriety of purpose or motive. 58 It appears to be the general rule that stockholders
are entitled to full information as to the management of the corporation and the manner of
expenditure of its funds, and to inspection to obtain such information, especially where it appears
that the company is being mismanaged or that it is being managed for the personal benefit of
officers or directors or certain of the stockholders to the exclusion of others." 59

Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an
examination of the records of San Miguel International Inc., a fully owned subsidiary of San Miguel
Corporation
Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was
denied inspection rights as stockholder of SMC "was made in the teeth of undisputed facts that,
over a specific period, petitioner had been furnished numerous documents and information," to
wit: (1) a complete list of stockholders and their stockholdings; (2) a complete list of proxies given
by the stockholders for use at the annual stockholders' meeting of May 18, 1975; (3) a copy of the
minutes of the stockholders' meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million
investment in associated companies and other companies as of December 31, 1975; (5) a listing of
the salaries, allowances, bonuses and other compensation or remunerations received by the
directors and corporate officers of SMC; (6) a copy of the US $100 million Euro-Dollar Loan
Agreement of SMC; and (7) copies of the minutes of all meetings of the Board of Directors from
January 1975 to May 1976, with deletions of sensitive data, which deletions were not objected to
by petitioner.

While the right of a stockholder to examine the books and records of a corporation for a lawful
purpose is a matter of law, the right of such stockholder to examine the books and records of a
wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing.
Some state courts recognize the right under certain conditions, while others do not. Thus, it has
been held that where a corporation owns approximately no property except the shares of stock of
subsidiary corporations which are merely agents or instrumentalities of the holding company, the
legal fiction of distinct corporate entities may be disregarded and the books, papers and
documents of all the corporations may be required to be produced for examination, 60 and that a
writ of mandamus, may be granted, as the records of the subsidiary were, to all incontents and
purposes, the records of the parent even though subsidiary was not named as a
party. 61 mandamus was likewise held proper to inspect both the subsidiary's and the parent
corporation's books upon proof of sufficient control or dominion by the parent showing the relation
of principal or agent or something similar thereto. 62

Further, it was averred that upon request, petitioner was informed in writing on September 18,
1976; (1) that SMC's foreign investments are handled by San Miguel International, Inc.,
incorporated in Bermuda and wholly owned by SMC; this was SMC's first venture abroad, having
started in 1948 with an initial outlay of ?500,000.00, augmented by a loan of Hongkong $6 million
from a foreign bank under the personal guaranty of SMC's former President, the late Col. Andres
Soriano; (2) that as of December 31, 1975, the estimated value of SMI would amount to almost
P400 million (3) that the total cash dividends received by SMC from SMI since 1953 has amount to
US $ 9.4 million; and (4) that from 1972-1975, SMI did not declare cash or stock dividends, all
earnings having been used in line with a program for the setting up of breweries by SMI

On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary
corporation is a separate and distinct corporation domiciled and with its books and records in
another jurisdiction, and is not legally subject to the control of the parent company, although it
owned a vast majority of the stock of the subsidiary. 63 Likewise, inspection of the books of an
allied corporation by stockholder of the parent company which owns all the stock of the subsidiary
has been refused on the ground that the stockholder was not within the class of "persons having
an interest." 64

These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies
of the afore-mentioned documents. 51

In the Nash case, 65 The Supreme Court of New York held that the contractual right of former
stockholders to inspect books and records of the corporation included the right to inspect
corporation's subsidiaries' books and records which were in corporation's possession and control in
its office in New York."

Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all
business transactions of the corporation and minutes of any meeting shall be open to the
inspection of any director, member or stockholder of the corporation at reasonable hours."

In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a
controlled subsidiary corporation which used the same offices and had Identical officers and
directors.

The stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership
of the corporate property, whether this ownership or interest be termed an equitable ownership, a
beneficial ownership, or a ownership. 52This right is predicated upon the necessity of selfprotection. It is generally held by majority of the courts that where the right is granted by statute
to the stockholder, it is given to him as such and must be exercised by him with respect to his
interest as a stockholder and for some purpose germane thereto or in the interest of the
corporation. 53 In other words, the inspection has to be germane to the petitioner's interest as a
stockholder, and has to be proper and lawful in character and not inimical to the interest of the
corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the right to examine the books of
the corporation must be exercised in good faith, for specific and honest purpose, and not to gratify
curiosity, or for specific and honest purpose, and not to gratify curiosity, or for speculative or
vexatious purposes. The weight of judicial opinion appears to be, that on application for
mandamus to enforce the right, it is proper for the court to inquire into and consider the
stockholder's good faith and his purpose and motives in seeking inspection. 56 Thus, it was held
that "the right given by statute is not absolute and may be refused when the information is not
sought in good faith or is used to the detriment of the corporation." 57 But the "impropriety of
purpose such as will defeat enforcement must be set up the corporation defensively if the Court is

In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC,
petitioner contended that respondent corporation "had been attempting to suppress information
for the stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to
copies of some documents which for some reason or another, respondent corporation is very
reluctant in revealing to the petitioner notwithstanding the fact that no harm would be caused
thereby to the corporation." 67 There is no question that stockholders are entitled to inspect the
books and records of a corporation in order to investigate the conduct of the management,
determine the financial condition of the corporation, and generally take an account of the
stewardship of the officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San
Miguel Corporation and, therefore, under its control, it would be more in accord with equity, good
faith and fair dealing to construe the statutory right of petitioner as stockholder to inspect the

61

books and records of the corporation as extending to books and records of such wholly subsidiary
which are in respondent corporation's possession and control.

voting stock of nay agricultural or mining corporation; and (c) that such holdings shall be
solely for investment and not for the purpose of bringing about a monopoly in any line of
commerce of combination in restraint of trade." The Philippine Corporation Law by Sulpicio S.
Guevara, 1967 Ed., p. 89) (Emphasis supplied.)

IV

40. Power to invest corporate funds. A private corporation has the power to invest its
corporate funds "in any other corporation or business, or for any purpose other than the main
purpose for which it was organized, provide that 'its board of directors has been so authorized
in a resolution by the affirmative vote of stockholders holding shares in the corporation
entitling them to exercise at least two-thirds of the voting power on such a propose at a
stockholders' meeting called for that purpose,' and provided further, that no agricultural or
mining corporation shall in anywise be interested in any other agricultural or mining
corporation. When the investment is necessary to accomplish its purpose or purposes as
stated in its articles of incorporation the approval of the stockholders is not necessary."" (Id.,
p. 108) (Emphasis ours.) (pp. 258-259).

Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of
respondent corporation to ratify the investment of corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested
corporate funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of
the Corporation Law, and alleges that respondent SEC should have investigated the charge, being
a statutory offense, instead of allowing ratification of the investment by the stockholders.
Respondent SEC's position is that submission of the investment to the stockholders for ratification
is a sound corporate practice and should not be thwarted but encouraged.

Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed
investment, there is no question that a corporation, like an individual, may ratify and thereby
render binding upon it the originally unauthorized acts of its officers or other agents. 70 This is true
because the questioned investment is neither contrary to law, morals, public order or public policy.
It is a corporate transaction or contract which is within the corporate powers, but which is
defective from a supported failure to observe in its execution the. requirement of the law that the
investment must be authorized by the affirmative vote of the stockholders holding two-thirds of
the voting power. This requirement is for the benefit of the stockholders. The stockholders for
whose benefit the requirement was enacted may, therefore, ratify the investment and its
ratification by said stockholders obliterates any defect which it may have had at the outset.
"Mere ultra vires acts", said this Court in Pirovano, 71 "or those which are not illegal and void ab
initio, but are not merely within the scope of the articles of incorporation, are merely voidable and
may become binding and enforceable when ratified by the stockholders.

Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other
corporation or business or for any purpose other than the main purpose for which it was
organized" provided that its Board of Directors has been so authorized by the affirmative vote of
stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If
the investment is made in pursuance of the corporate purpose, it does not need the approval of
the stockholders. It is only when the purchase of shares is done solely for investment and not to
accomplish the purpose of its incorporation that the vote of approval of the stockholders holding
shares entitling them to exercise at least two-thirds of the voting power is necessary. 69
As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an
investment in the same business stated as its main purpose in its Articles of Incorporation, which
is to manufacture and market beer. It appears that the original investment was made in 19471948, when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong
(Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer
thereat. Restructuring of the investment was made in 1970-1971 thru the organization of SMI in
Bermuda as a tax free reorganization.

Besides, the investment was for the purchase of beer manufacturing and marketing facilities which
is apparently relevant to the corporate purpose. The mere fact that respondent corporation
submitted the assailed investment to the stockholders for ratification at the annual meeting of May
10, 1977 cannot be construed as an admission that respondent corporation had committed
an ultra vires act, considering the common practice of corporations of periodically submitting for
the gratification of their stockholders the acts of their directors, officers and managers.

Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc.,
supra, appears relevant. In said case, one of the issues was the legality of an investment made by
Manao Sugar Central Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of
the stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a company engaged in
the manufacture of sugar bags. The lower court said that "there is more logic in the stand that if
the investment is made in a corporation whose business is important to the investing corporation
and would aid it in its purpose, to require authority of the stockholders would be to unduly curtail
the power of the Board of Directors." This Court affirmed the ruling of the court a quo on the
matter and, quoting Prof. Sulpicio S. Guevara, said:

WHEREFORE, judgment is hereby rendered as follows:

The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to
examine the books and records of San Miguel International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six
(6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro,
voted to sustain the validity per se of the amended by-laws in question and to dismiss the petition
without prejudice to the question of the actual disqualification of petitioner John Gokongwei, Jr. to
run and if elected to sit as director of respondent San Miguel Corporation being decided, after a
new and proper hearing by the Board of Directors of said corporation, whose decision shall be
appealable to the respondent Securities and Exchange Commission deliberating and acting en
banc and ultimately to this Court. Unless disqualified in the manner herein provided, the
prohibition in the afore-mentioned amended by-laws shall not apply to petitioner.

"j. Power to acquire or dispose of shares or securities. A private corporation, in order to

accomplish is purpose as stated in its articles of incorporation, and subject to the limitations
imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose
of shares, bonds, securities, and other evidence of indebtedness of any domestic or foreign
corporation. Such an act, if done in pursuance of the corporate purpose, does not need the
approval of stockholders; but when the purchase of shares of another corporation is done
solely for investment and not to accomplish the purpose of its incorporation, the vote of
approval of the stockholders is necessary. In any case, the purchase of such shares or
securities must be subject to the limitations established by the Corporations law; namely, (a)
that no agricultural or mining corporation shall be restricted to own not more than 15% of the

62

The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on
the validity of the foreign investment of respondent corporation as moot.

Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending
hearing by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.

already agreed to amicably settle the issue after he made a partial payment of P19,000,000.00 on
the dishonored check.1wphi1.nt

Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but
otherwise concurs in the result.

On March 23, 1994, the City Prosecutor dismissed I.S. No. 93-15886 on the following grounds: (1)
that petitioner lacked the requisite authority to initiate the criminal complaint for and on Concord's
behalf; and (2) that Concord and Vic Ang Siong had already agreed upon the payment of the
latter's balance on the dishonored check.

Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a
separate opinion, wherein they voted against the validity of the questioned amended bylaws and
that this question should properly be resolved first by the SEC as the agency of primary
jurisdiction. They concur in the result that petitioner may be allowed to run for and sit as director
of respondent SMC in the scheduled May 6, 1979 election and subsequent elections until
disqualified after proper hearing by the respondent's Board of Directors and petitioner's
disqualification shall have been sustained by respondent SEC en banc and ultimately by final
judgment of this Court.

A copy of the City Prosecutor's resolution was sent by registered mail to petitioner in the address
he indicated in his complaint-affidavit. Notwithstanding that petitioner was represented by counsel,
the latter was not furnished a copy of the resolution.
On June 27, 1994, petitioner's counsel was able to secure a copy of the resolution dismissing I.S.
No. 93-15886. Counting his 15-day appeal period from said date, petitioner moved for
reconsideration on July 7, 1994.

In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the
petition by allowing petitioner to examine the books and records of San Miguel International, Inc.
as specified in the petition. The petition, insofar as it assails the validity of the amended by- laws
and the ratification of the foreign investment of respondent corporation, for lack of necessary
votes, is hereby DISMISSED. No costs.

On October 21, 1994, the City Prosecutor denied petitioner's motion for reconsideration.
Petitioner's counsel received a copy of the denial order on November 3, 1994.

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

On November 7, 1994, petitioner's lawyer filed a motion to extend the period to appeal by an
additional 15 days counted from November 3, 1994 with the Chief State Prosecutor. He manifested
that it would take time to communicate with petitioner who is a Hong Kong resident and enable the
latter to verify the appeal as procedurally required.

G.R. No. 122452

January 29, 2001

On November 8, 1994, petitioner appealed the dismissal of his complaint by the City Prosecutor to
the Chief State Prosecutor. The appeal was signed by petitioner's attorney only and was not
verified by petitioner until November 23, 1994.

TAM WING TAK, petitioner, vs. HON. RAMON P. MAKASIAR (in his Capacity as Presiding
Judge of the Regional Trial Court of Manila, Branch 35) and ZENON DE GUIA (in his
capacity as Chief State Prosecutor), respondents.

On December 8, 1994, the Chief State Prosecutor dismissed the appeal for having been filed out of
time. Petitioner's lawyer received a copy of the letter-resolution dismissing the appeal on January
20, 1995.

QUISUMBING, J.:
This is a petition for review on certiorari of the decision of the Regional Trial Court of Manila,
Branch 35, dated September 14, 1995, which dismissed herein petitioner's special civil action for
mandamus and sustained the Letter-Order of respondent Chief State Prosecutor. The latter
dismissed petitioner's appeal from the resolution of the City Prosecutor of Quezon City, which, in
turn, dismissed petitioner's complaint against Vic Ang Siong for violation of the Bouncing Checks
Law or B.P. Blg. 22.

On January 30, 1995, petitioner moved for reconsideration.

On March 9, 1995, respondent Chief State Prosecutor denied the motion for reconsideration.
Petitioner then filed Civil Case No. 95-74394 for mandamus with the Regional Trial Court of Quezon
City to compel the Chief State Prosecutor to file or cause the filing of an information charging Vic
Ang Siong with violation of B.P. Blg. 22.

The factual background of this case is as follows:

On November 11, 1992, petitioner, in his capacity as director of Concord-World Properties, Inc.,
(Concord for brevity), a domestic corporation, filed an affidavit-complaint with the Quezon City
Prosecutor's Office, charging Vic Ang Siong with violation of B.P. Blg. 22. Docketed by the
Prosecutor as I.S. No. 93-15886, the complaint alleged that a check for the amount of
P83,550,000.00, issued by Vic Ang Siong in favor of Concord, was dishonored when presented for
encashment.

On September 14, 1995, the trial court disposed of the action as follows:
WHEREFORE, for utter lack of merit, the petition for mandamus of petitioner is DENIED and
DISMISSED.
SO ORDERED.1

Vic Ang Siong sought the dismissal of the case on two grounds: First, that petitioner had no
authority to file the case on behalf of Concord, the payee of the dishonored check, since the firm's
board of directors had not empowered him to act on its behalf. Second, he and Concord had

Petitioner moved for reconsideration, but the trial court denied this motion in its order dated
October 24, 1995.

63

Hence, the instant petition.

We agree with petitioner that there is no "generally accepted practice" in the service of orders,
resolutions, and processes, which allows service upon either the litigant or his lawyer. As a rule,
notice or service made upon a party who is represented by counsel is a nullity,8 However, said rule
admits of exceptions, as when the court or tribunal order service upon the party9 or when the
technical defect is waived.10

Before this Court, petitioner claims respondent judge committed grave errors of law in sustaining
respondent Chief State Prosecutor whose action flagrantly contravenes: (1) the established rule on
service of pleadings and orders upon parties represented by counsel; (b) the basic principle that
except in private crimes, any competent person may initiate a criminal case; and (3) the B.P. Blg.
22 requirement that arrangement for full payment of a bounced check must be made by the
drawer with the drawee within five (5) banking days from notification of the check's dishonor.2

To resolve the issue on validity of service, we must make a determination as to which is the
applicable rule the on service in the Rules of Court, as petitioner insists or the rule on service in
DOJ Order No. 223?

We find pertinent for our resolution the following issues:

The Rules of Court were promulgated by this Court pursuant to Section 13, Article VII of the 1935
Constitution11(now Section 5 [5], Article VIII of the Constitution) 12 to govern "pleadings, practice
and procedure in all courts of the Philippines." The purpose of the Rules is clear and does not need
any interpretation. The Rules were meant to govern court (stress supplied) procedures and
pleadings. As correctly pointed out by the Solicitor General, a preliminary investigation,
notwithstanding its judicial nature, is not a court proceeding. The holding of a preliminary
investigation is a function of the Executive Department and not of the Judiciary.13 Thus, the rule on
service provided for in the Rules of Court cannot be made to apply to the service of resolutions by
public prosecutors, especially as the agency concerned, in this case, the Department of Justice,
has its own procedural rules governing said service.

(1) Was there valid service of the City Prosecutor's resolution upon petitioner?
(2) Will mandamus lie to compel the City Prosecutor to file the necessary information in
court?
In upholding respondent Chief State Prosecutor, the court a quo held:
It is generally accepted principle in the service of orders, resolutions, processes and other
papers to serve them on the party or his counsel, either in his office, if known, or else in the
residence, also if known. As the party or his counsel is not expected to be present at all times
in his office or residence, service is allowed to be made with a person in charge of the office,
or with a person of sufficient discretion to receive the same in the residence.

A plain reading of Section 2 of DOJ Order No. 223 clearly shows that in preliminary investigation,
service can be made upon the party himself or through his counsel. It must be assumed that when
the Justice Department crafted the said section, it was done with knowledge of the pertinent rule
in the Rules of Court and of jurisprudence interpreting it. The DOJ could have just adopted the rule
on service provided for in the Rules of Court, but did not. Instead, it opted to word Section 2 of
DOJ Order No. 223 in such a way as to leave no doubt that in preliminary investigations, service of
resolutions of public prosecutors could be made upon either the party or his counsel.

In the case under consideration, it is not disputed that the controverted Resolution dismissing
the complaint of the petitioner against Vic Ang Siong was served on the former by registered
mail and was actually delivered by the postmaster on April 9, 1994 at said petitioner's given
address in the record at No. 5 Kayumanggi Street, West Triangle, Quezon City. The registered
mail was in fact received by S. Ferraro. The service then was complete and the period for
filing a motion for reconsideration or appeal began to toll from that date. It expired on April
24, 1994. Considering that his motion for reconsideration was filed only on July 7, 1994, the
same was filed beyond the prescribed period, thereby precluding further appeal to the Office
of the respondent.3

Moreover, the Constitution provides that "Rules of procedure of special courts and quasi-judicial
bodies shall remain effective unless disapproved by the Supreme Court." 14 There is naught in the
records to show that we have disapproved and nullified Section 2 of DOJ Order No. 223 and since
its validity is not an issue in the instant case, we shall refrain from ruling upon its validity.
We hold that there was valid service upon petitioner pursuant to Section 2 of DOJ Order No. 223.

Petitioner, before us, submits that there is no such "generally accepted practice" which gives a
tribunal the option of serving pleadings, orders, resolutions, and other papers to either the
opposing party himself or his counsel. Petitioner insists that the fundamental rule in this
jurisdiction is that if a party appears by counsel, then service can only be validly made upon
counsel and service upon the party himself becomes invalid and without effect. Petitioner relies
upon Rule 13, Section 2 of the Rules of Court4 and our ruling in J.M. Javier Logging Corp. v. Mardo,
24 SCRA 776 (1968) to support his stand. In the J.M. Javier case, we held:

On the issue of whether mandamus will lie. In general, mandamus may be resorted to only where
one's right is founded clearly in law and not when it is doubtful.15 The exception is to be found in
criminal cases where mandamus is available to compel the performance by the public prosecutor of
an ostensibly discretionary function, where by reason of grave abuse of discretion on his part, he
willfully refuses to perform a duty mandated by law.16 Thus, mandamus may issue to compel a
prosecutor to file an information when he refused to do so in spite of the prima facie evidence of
guilt.17

[W]here a party appears by attorney, notice to the former is not a notice in law, unless
service upon the party himself is ordered by the court 5

Petitioner takes the stance that it was grave abuse for discretion on the part of respondent Chief
State Prosecutor to sustain the dismissal of I.S. No. 93-15886 on the grounds that: (1) Vic Ang
Siong's obligation which gave rise to the bounced check had already been extinguished by partial
payment and agreement to amicably settle balance, and (2) petitioner had no standing to file the
criminal complaint since he was neither the payee nor holder of the bad check. Petitioner opines
that neither ground justifies dismissal of his complaint.

The Solicitor General, for respondents, contends that the applicable rule on service in the present
case is Section 2 of the Department of Justice (DOJ) Order No. 223, 6 which allows service to be
made upon either party or his counsel. Respondents argue that while a preliminary investigation
has been considered as partaking of the nature of a judicial proceeding, 7 nonetheless, it is not a
court proceeding and hence, falls outside of the ambit of the Rules of Court.

64

Petitioner's stand is unavailing. Respondent Chief State Prosecutor in refusing to order the filing of
an information for violation of B.P. Blg. 22 against Vic Ang Siong did not act without or in excess of
jurisdiction or with grave abuse of discretion.

CARPIO MORALES, J.:

Inland Construction and Development Corp. (Inland) obtained various loans and other credit
accommodations from petitioner, then known as Associated Citizens Bank ([the bank] which later
became United Overseas Bank, Phils., and still later Westmost Bank) in 1977.

First, with respect to the agreement between Concord and Victor Ang Siong to amicably settle their
difference, we find this resort to an alternative dispute settlement mechanism as not contrary to
law, public policy, or public order. Efforts of parties to solve their disputes outside of the courts are
looked on with favor, in view of the clogged dockets of the judiciary.

To secure the payment of its obligations, Inland executed real estate mortgages over three real
properties in Pasig City covered by Transfer Certificates of Title Nos. 4820, 4821 and 4822. 1

Second, it is not disputed in the instant case that Concord, a domestic corporation, was the payee
of the bum check, not petitioner. Therefore, it is Concord, as payee of the bounced check, which is
the injured party. Since petitioner was neither a payee nor a holder of the bad check, he had
neither the personality to sue nor a cause of action against Vic Ang Siong. Under Section 36 of the
Corporation Code18, read in relation to Section 23,19 it is clear that where a corporation is an
injured party, its power to sue is lodged with its board of directors or turstees. 20 Note that
petitioner failed to show any proof that he was authorized or deputized or granted specific powers
by Concord's board of director to sue Victor And Siong for and on behalf of the firm. Clearly,
petitioner as a minority stockholder and member of the board of directors had no such power or
authority to sue on Concord's behalf. Nor can we uphold his act as a derivative suit. For a
derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the
corporation must allege in his complaint that he is suing on a derivative cause of action on behalf
of the corporation and all other stockholders similarly situated who may wish to join him in the
suit.21 There is no showing that petitioner has complied with the foregoing requisites. It is obvious
that petitioner has not shown any clear legal right which would warrant the overturning of the
decision of public respondents to dismiss the complaint against Vic Ang Siong. A public prosecutor,
by the nature of his office, is under no compulsion to file a criminal information where no clear
legal justification has been shown, and no sufficient evidence of guilt nor prima facie case has
been presented by the petitioner.22 No reversible error may be attributed to the court a quo when it
dismissed petitioner's special civil action for mandamus.1wphi1.nt

Inland likewise issued promissory notes in favor of the bank, viz:

Promissory Note No. BD-2739-77
Amount: P155,000.00
Due Date: January 2, 19782
Promissory Note No. BD-2884-77
Amount: P880,000.00
Due Date: February 23, 19783
Promissory Note No. BD-2997
Amount: P60,000.00
Due Date: March 22, 19784 (Emphasis supplied)
When the first and second promissory notes fell due, Inland defaulted in its payments. It, however,
authorized the bank to debit P350,000 from its savings account to partially satisfy its obligations. 5

WHEREFORE, the instant petition is DISMISSED for lack of merit. Costs against petitioner.
SO ORDERED.

It appears that by a Deed of Assignment, Conveyance and Release dated May 2, 1978, Felix
Aranda, President of Inland, assigned and conveyed all his rights and interests at Hanil-Gonzales
Construction & Development (Phils.) Corporation (Hanil-Gonzales Corporation) in favor of Horacio
Abrantes (Abrantes), Executive Vice-President and General Manager of Hanil-Gonzales
Corporation. Under the same Deed of Assignment, it appears that Abrantes assumed, among other
obligations of Inland and Aranda, Promissory Note No. BD-2884-77 in the amount of P800,000 as
shown in the May 26, 1978 Deed of Assignment of Obligation in which Aranda and Inland, on one
hand, and Abrantes and Hanil-Gonzales Corporation, on the other, forged as follows:

-------------------------------------------------------------------------------------------------------------G.R. No. 123650

March 23, 2009

WESTMONT BANK (formerly ASSOCIATED CITIZENS BANK and now UNITED OVERSEAS
BANK, PHILS.) AND THE PROVINCIAL SHERIFF OF RIZAL, Petitioners, vs. INLAND
CONSTRUCTION AND DEVELOPMENT CORP., Respondent.

x x x x.

x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 123822

WHEREAS, among the obligations assumed by Mr. HORACIO C. ABRANTES [in the May 2, 1978
Deed] is the account of the FIRST PARTY (Aranda and Inland) in favor of the ASSOCIATED
CITIZENS BANK as evidenced by Promissory Note No. BD-2884-77 in the amount of EIGHT
HUNDRED EIGHTY THOUSAND (P880,000.00) PESOS, x x x x;

March 23, 2009

WESTMONT BANK (formerly ASSOCIATED CITIZENS BANK and now UNITED OVERSEAS
BANK, PHILS.),Petitioner, vs. COURT OF APPEALS and INLAND CONSTRUCTION AND
DEVELOPMENT CORP., Respondents.

WHEREAS, the parties herein have agreed to obtain the conformity of the ASSOCIATED CITIZENS
BANK to the foregoing arrangement x x x x;

DECISION

65

NOW, THEREFORE, the herein parties have mutually agreed that the SECOND PARTY (Abrantes and
Hanil-Gonzalez) shall assume full and complete liability and responsibility for the payment to
ASSOCIATED CITIZENS BANK Promissory Note No. BD-2884-77 x x x x.

WHEREFORE, the decision appealed from is hereby AFFIRMED only insofar as it finds appellant
Associated Bank to have ratified the Deed of Assignment (Exhibit "O"), but REVERSED in all other
respects, and judgment is accordingly rendered ordering the plaintiff-appellee Inland Construction
and Development Corporation to paydefendant-appellant Associated Bank the sum of One Hundred
Eighty Six Thousand Two Hundred Forty One Pesos and Eighty Six Centavos (P186,241.86) with
legal interest thereon computed from December 21, 1979 until the same is fully paid.

THE SECOND PARTY shall make such necessary arrangements with the ASSOCIATED CITIZENS
BANK for the full liquidation of said account, x x x x.

No pronouncement as to costs.

x x x x. (Emphasis and underscoring supplied)

SO ORDERED. (Underscoring supplied)

The banks Account Officer, Lionel Calo Jr. (Calo), signed for its conformity to the deed. 6

In affirming the observation of the trial court that the bank ratified the assignment of Inlands
Promissory Note No. BD-2884-77, the appellate court discoursed as follows:

On December 14, 1979, Inland was served a Notice of Sheriffs Sale foreclosing the real estate
mortgages over its real properties, prompting it to file a complaint for injunction against the bank
and the Provincial Sheriff of Rizal at the Regional Trial Court (RTC) of Pasig City.7 This complaint
was later amended.8

In the instant case, both the assignors (Aranda and Inland) and assignees (Abrantes and HanilGonzales) in the subject deed of assignment have been major clients of Associated Bank for
several years with accounts amounting to millions of pesos. For several years, Associated Bank
had, either intentionally or negligently, been habitually clothing Calo with the apparent powers to
perform acts in behalf of the bank. x x x x.

Answering the amended complaint, the bank underscored that it "had no knowledge, much less did
it give its conformity to the alleged assignment of the obligation covered by PN# BD-2884 [-77]." 9
The trial court found that the bank ratified the act of its account officer Calo, thus:

x x x x.

x x x x. Culled from the evidence on record, the Court finds that the defendant Bank ratified the
act of Calo when its Executive Committee failed to repudiate the assignment within a reasonable
time and even approved the request for a restructuring of Liberty Const. & Dev. Corp./HanilGonzales Construction & Development Corp.s obligations, which included the P880,000.00
loan (Exhibit "U" to "X", and its submarkings). Clearly, the assumption of the loan was very well
known to the defendant Bank and the latter posed no objection to it. In fact, the positive act on
the part of the defendant in restructuring the loan of the assignee attest to its consent in the said
transaction. The evidence on record conveys the fact that the Hanil-Gonzales Const. and
Development Corp. assumed the obligation of the plaintiff on the SECOND NOTE. Later, it asked
the defendant for a restructuring of its loan, including the P880,000.00 loan. Thereafter, payments
were made by the assignee to the defendant Bank. The preponderance of evidence tilts heavily in
favor of the plaintiff claiming that a case of delegacionoccurs.10 (Emphasis and italics supplied;
Underscoring in the original)

Calo signed the subject deed of assignment on or about May 26, 1978. The principal obligation
covered by the deed involved a hefty sum of eight hundred eighty thousand pesos (P880,000.00).
Despite the enormity of the amount involved, Associated Bank never made any attempt to
repudiate the act of Calo until almost seven (7) years later, when Mitos C. Olivares, Manager of the
Cash Department of Associated Bank, issued an INTER-OFFICE MEMORANDUM dated May
20, 1985 which pertinently reads:
"2) Conforme of Associated Bank signed by Lionel Calo Jr. has no bearing since he has no authority
to sign for the bank as he was only an account officer with no signing authority;
x x x x.
5) I suggest, Mr. Calo be asked to be present at court hearings to explain why he signed for the
bank, knowing his limitations"

It accordingly rendered judgment in favor of Inland by Decision11 of March 31, 1992, the
dispositive portion of which reads:

The abovequoted inter-office memorandum is addressed internally to the other offices within
Associated Bank. It is not addressed to Inland or any outsider for that matter. Worse, it was not
even offered in evidence by Associated Bank to give Inland the opportunity to object to or
comment on the said document, but was merely attached as one of the annexes to the banks
MEMORANDUM FOR DEFENDANTS. Obviously, no evidentiary weight may be attached to said interoffice memorandum, which is even self serving. In fact, it ought not to be considered at all.
(Emphasis and underscoring supplied)

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants,
permanently, perpetually and forever restraining and enjoining the defendants Associated Citizens
Bank and the Sheriff of this Court from proceeding with the foreclosure of and conducting an
auction sale on the real estate covered by and embraced in Transfer Certificates of Title Nos. 4820,
4821 and 4822 of the Register of Deeds of Rizal (now Pasig, Metro Manila) and to refund to
plaintiff the amount of P8,866.89, with legal interest thereon from the filing of the complaint until
full payment, with costs.

The appellate court, however, specifically mentioned that the "lower court erred when it rendered a
decision which permanently, perpetually and forever restrains the sheriff from proceeding with the
threatened foreclosure auction sale of the subject mortgage properties."14

SO ORDERED. (Emphasis and underscoring supplied)

The bank appealed the trial courts decision to the Court of Appeals which, by Decision 12 of May 31,
1995, modified the same, disposing as follows:13

66

The bank moved for partial reconsideration of the appellate courts decision on the aspect of its
ratification of the Deed of Assignment but the same was denied by Resolution 15 of January 24,
1996.

That petitioner sent the following reply-letter, dated November 29, 1982, to the above-quoted
letter to it of assignee Abrantes indicates that it had full and complete knowledge of the
assumption by Abrantes of Inlands obligation:

The bank, via two different counsels,16 filed before this Court separate petitions for review, G.R.
No. 123650, Associated Citizens Bank, et al. v. Court of Appeals, et al; and G.R. No. 123822,
Westmont Bank (formerly Associated Bank) v. Inland Construction & Development Corp., assailing
the same appellate courts decision.1awphi1Owing to a series of oversight,17 the petition in G.R.
123650 was initially dismissed but was later reinstated by Resolution of June 21, 1999.

We are pleased to advise you that our Executive Committee in its meeting last November 25,
1982, has approved your request for the restructuring of your outstanding obligations x x x
x.24 (Underscoring supplied)
Respecting this reply-letter of the bank granting Hanil-Gonzales request to restructure its loans,
petitioner, as a banking institution, is expected to have exercised the highest degree of diligence
and meticulousness in the conduct of its business. When it received the loan restructuring
request, with specific mention of Inlands Promissory Note No. BD-2884-77, petitioner-bank was
under obligation to fastidiously scrutinize such loan account. And since it clearly approved the
request for restructuring, any "uncertainty" that its reply-letter approving such request may not
thus work to prejudice Hanil-Gonzales or Inland.

The records18 show that Inland failed to file its comment and memorandum on the petitions.
Both petitions for review impute error on the part of the appellate court in
AFFIRMING THE FINDING OF THE TRIAL COURT THAT PETITIONER HAVE [SIC] RATIFIED THE
DEED OF ASSIGNMENT (EXH. "O").

Petitioner relies heavily, however, on the Courts pronouncement in Yao Ka Sin Trading that it was
incumbent upon, in this case, Inland to prove that petitioner had clothed its account officer with
apparent power to conform to the Deed of Assignment. 25

The bank, which had, as reflected early on, become known as Westmont Bank (petitioner),
maintains that Calo had no authority to bind it in the Deed of Assignment and that a single,
isolated unauthorized act of its agent is not sufficient to establish that it clothed him with apparent
authority. Petitioner adds that the records fail to disclose evidence of similar acts of Calo executed
either in its favor or in favor of other parties.19 Moreover, petitioner reasserts that the unauthorized
act of Calo never came to its knowledge, hence, it is not estopped from repudiating the Deed of
Assignment.20

Petitioners simplistic reading of Yao Ka Sin Trading v. Court of Appeals 26 does not impress. In Yao
Ka Sin Trading, the therein respondent cement company had shown by clear and convincing
evidence that its president was not authorized to undertake a particular transaction. It presented
its by-laws stating that only its board of directors has the power to enter into an agreement or
contract of any kind. The companys board of directors even forthwith issued a resolution to
repudiate the contract. Thus, it was only after the company successfully discharged its burden that
the other party, the therein petitioner Yao Ka Sin Trading, had to prove that indeed the cement
company had clothed its president with the apparent power to execute the contract by evidence of
similar acts executed in its favor or in favor of other parties.

The petitions fail.

The general rule remains that, in the absence of authority from the board of directors, no person,
not even its officers, can validly bind a corporation.21 If a corporation, however, consciously lets
one of its officers, or any other agent, to act within the scope of an apparent authority, it will be
estopped from denying such officers authority.22

Unmistakably, the Courts directive in Yao Ka Sin Trading is that a corporation should first prove by
clear evidence that its corporate officer is not in fact authorized to act on its behalf before the
burden of evidence shifts to the other party to prove, by previous specific acts, that an officer was
clothed by the corporation with apparent authority.

The records show that Calo was the one assigned to transact on petitioners behalf respecting the
loan transactions and arrangements of Inland as well as those of Hanil-Gonzales and Abrantes.
Since it conducted business through Calo, who is an Account Officer, it is presumed that he had
authority to sign for the bank in the Deed of Assignment.

It bears noting that in Westmont Bank v. Pronstroller,27 the therein petitioner Westmont Bank,
through a management committee, proved that it rejected the letter-agreement entered into by its
assistant vice-president. Consequently, the therein respondent had to prove by citing other
instances of the said officers apparent authority to bind the bank-therein petitioner.1avvphi1

Petitioner cannot feign ignorance of the May 26, 1978 Deed of Assignment, the pertinent portion of
which was quoted above. Notably, assignee Abrantes notified petitioner about his assumption of
Inlands obligation. Thus, in his July 26, 1979 letter to petitioner, he wrote:

In the present petitions, petitioner-bank failed to discharge its primary burden of proving that Calo
was notauthorized to bind it, as it did not present proof that Calo was unauthorized. It did not
present, much less cite, any Resolution from its Board of Directors or its Charter or By-laws from
which the Court could reasonably infer that he indeed had no authority to sign in its behalf or bind
it in the Deed of Assignment. The May 20, 1985 inter-office memorandum 28 stating that Calo had
"no signing authority" remains self-serving as it does not even form part of petitioners body of
evidence.

This refers to the accounts of Liberty Construction and Development Corporation (LCDC) and our
sister-company, Hanil-Gonzalez Construction & Development Corporation (HGCDC) which as of July
31, 1979 was computed at P1,814,442.40, inclusive of interest, penalties and fees, net of marginal
deposits. This includes the account of
Inland Construction & Development Corporation which had been assumed by HGCDC.23 (Emphasis
and underscoring supplied)

Thus, the assertion that the petitioner cannot be faulted for its delay in repudiating the apparent
authority of Calo is similarly flawed, there being no evidence on record that it had actually
repudiated such apparent authority. It should be noted that it was the bank which pleaded that
defense in the first place. What is extant in the records is a reasonable certainty that the bank had
ratified the Deed of Assignment.

67

The assumption that a ruling on the issue of ratification would affect any and all foreclosure
proceedings on the mortgaged properties remains unfounded. For the challenged appellate courts
Decision29 still mentioned the possibility of foreclosing on the mortgaged properties as Inland was
still indebted to the bank in the amount ofP186, 241.86 covering the other two promissory
notes (No. BD-2739-77 and No. BD-2997) and other obligationsthat Inland was not able to satisfy
upon maturity.

As the price of a proprietary share was around the P5 million range, Benito Unchuan, then
president of CCCI, offered to sell respondent a share for only P3.5 million. Respondent, however,
purchased the share of a certain Dr. Butalid for only P3 million. Consequently, on September 6,
1996, CCCI issued Proprietary Ownership Certificate No. 1446 to respondent.
During the meetings dated April 4, 1997 and May 30, 1997 of the CCCI Board of Directors, action
on respondents application for proprietary membership was deferred. In another Board meeting
held on July 30, 1997, respondents application was voted upon. Subsequently, or on August 1,
1997, respondent received a letter from Julius Z. Neri, CCCIs corporate secretary, informing him
that the Board disapproved his application for proprietary membership.

Both the trial courts and the appellate courts inferences and conclusion that petitioner ratified its
account officers act are thus rationally based on evidence and circumstances duly highlighted in
their respective decisions. Absent any serious abuse or evident lack of basis or capriciousness of
any kind, the lower courts findings of fact are conclusive upon this Court.30

On August 6, 1997, Edmundo T. Misa, on behalf of respondent, wrote CCCI a letter of

reconsideration. As CCCI did not answer, respondent, on October 7, 1997, wrote another letter of
reconsideration. Still, CCCI kept silent. On November 5, 1997, respondent again sent CCCI a letter
inquiring whether any member of the Board objected to his application. Again, CCCI did not reply.

WHEREFORE, the petitions are DENIED. The decision of the Court of Appeals in CA-G.R. CV No.
39634 is AFFIRMED.
Costs against petitioner.

Consequently, on December 23, 1998, respondent filed with the Regional Trial Court (RTC), Branch
71, Pasig City a complaint for damages against petitioners, docketed as Civil Case No. 67190.

SO ORDERED.

After trial, the RTC rendered its Decision dated February 14, 2001 in favor of respondent, thus:

-------------------------------------------------------------------------------------------------------------G.R. No. 160273

WHEREFORE, judgment is hereby rendered in favor of plaintiff:

January 18, 2008

1. Ordering defendants to pay, jointly and severally, plaintiff the amount of P2,340,000.00 as
actual or compensatory damages.

CEBU COUNTRY CLUB, INC., SABINO R. DAPAT, RUBEN D. ALMENDRAS, JULIUS Z. NERI,
DOUGLAS L. LUYM, CESAR T. LIBI, RAMONTITO* E. GARCIA and JOSE B.
SALA, petitioners, vs. RICARDO F. ELIZAGAQUE, respondent.

2. Ordering defendants to pay, jointly and severally, plaintiff the amount of P5,000,000.00 as
moral damages.

DECISION
SANDOVAL-GUTIERREZ, J.:

3. Ordering defendants to pay, jointly and severally, plaintiff the amount of P1,000,000.00 as
exemplary damages.

For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997 Rules
of Civil Procedure, as amended, assailing the Decision1 dated January 31, 2003 and Resolution
dated October 2, 2003 of the Court of Appeals in CA-G.R. CV No. 71506.

4. Ordering defendants to pay, jointly and severally, plaintiff the amount of P1,000,000.00 as
and by way of attorneys fees and P80,000.00 as litigation expenses.
5. Costs of suit.

The facts are:

Counterclaims are hereby DISMISSED for lack of merit.

Cebu Country Club, Inc. (CCCI), petitioner, is a domestic corporation operating as a non-profit and
non-stock private membership club, having its principal place of business in Banilad, Cebu City.
Petitioners herein are members of its Board of Directors.

SO ORDERED.2

Sometime in 1987, San Miguel Corporation, a special company proprietary member of CCCI,
designated respondent Ricardo F. Elizagaque, its Senior Vice President and Operations Manager for
the Visayas and Mindanao, as a special non-proprietary member. The designation was thereafter
approved by the CCCIs Board of Directors.

On appeal by petitioners, the Court of Appeals, in its Decision dated January 31, 2003, affirmed
the trial courts Decision with modification, thus:
WHEREFORE, premises considered, the assailed Decision dated February 14, 2001 of the
Regional Trial Court, Branch 71, Pasig City in Civil Case No. 67190 is hereby AFFIRMED with
MODIFICATION as follows:

In 1996, respondent filed with CCCI an application for proprietary membership. The application
was indorsed by CCCIs two (2) proprietary members, namely: Edmundo T. Misa and Silvano Ludo.

68

1. Ordering defendants-appellants to pay, jointly and severally, plaintiff-appellee the amount

ofP2,000,000.00 as moral damages;

(b) Such proposal shall be posted by the Secretary for a period of thirty (30) days on the Club
bulletin board during which time any member may interpose objections to the admission of
the applicant by communicating the same to the Board of Directors;

2. Ordering defendants-appellants to pay, jointly and severally, plaintiff-appellee the amount

ofP1,000,000.00 as exemplary damages;

(c) After the expiration of the aforesaid thirty (30) days, if no objections have been filed or if
there are, the Board considers the objections unmeritorious, the candidate shall be qualified
for inclusion in the "Eligible-for-Membership List";

3. Ordering defendants-appellants to pay, jointly and severally, plaintiff-appellee the mount

of P500,000.00 as attorneys fees and P50,000.00 as litigation expenses; and

(d) Once included in the "Eligible-for-Membership List" and after the candidate shall have
acquired in his name a valid POC duly recorded in the books of the corporation as his own, he
shall become a Proprietary Member, upon a non-refundable admission fee of P1,000.00,
provided that admission fees will only be collected once from any person.

4. Costs of the suit.

The counterclaims are DISMISSED for lack of merit.

On March 1, 1978, Section 3(c) was amended to read as follows:

SO ORDERED.3
(c) After the expiration of the aforesaid thirty (30) days, the Board may, by unanimous vote
of all directors present at a regular or special meeting, approve the inclusion of the
candidate in the "Eligible-for-Membership List".

On March 3, 2003, petitioners filed a motion for reconsideration and motion for leave to set the
motion for oral arguments. In its Resolution4 dated October 2, 2003, the appellate court denied the
motions for lack of merit.

As shown by the records, the Board adopted a secret balloting known as the "black ball system" of
voting wherein each member will drop a ball in the ballot box. A white ball represents conformity
to the admission of an applicant, while a black ball means disapproval. Pursuant to Section 3(c), as
amended, cited above, a unanimous vote of the directors is required. When respondents
application for proprietary membership was voted upon during the Board meeting on July 30,
1997, the ballot box contained one (1) black ball. Thus, for lack of unanimity, his application was
disapproved.

Hence, the present petition.

The issue for our resolution is whether in disapproving respondents application for proprietary
membership with CCCI, petitioners are liable to respondent for damages, and if so, whether their
liability is joint and several.
Petitioners contend, inter alia, that the Court of Appeals erred in awarding exorbitant damages to
respondent despite the lack of evidence that they acted in bad faith in disapproving the latters
application; and in disregarding their defense of damnum absque injuria.

Obviously, the CCCI Board of Directors, under its Articles of Incorporation, has the right to approve
or disapprove an application for proprietary membership. But such right should not be exercised
arbitrarily. Articles 19 and 21 of the Civil Code on the Chapter on Human Relations provide
restrictions, thus:

For his part, respondent maintains that the petition lacks merit, hence, should be denied.
Article 19. Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith.

CCCIs Articles of Incorporation provide in part:

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

SEVENTH: That this is a non-stock corporation and membership therein as well as the right of
participation in its assets shall be limited to qualified persons who are duly accredited owners
of Proprietary Ownership Certificates issued by the corporation in accordance with its ByLaws.

In GF Equity, Inc. v. Valenzona,5 we expounded Article 19 and correlated it with Article 21, thus:

Corollary, Section 3, Article 1 of CCCIs Amended By-Laws provides:

This article, known to contain what is commonly referred to as the principle of abuse of
rights, sets certain standards which must be observed not only in the exercise of one's rights
but also in the performance of one's duties. These standards are the following: to act with
justice; to give everyone his due; and to observe honesty and good faith. The law, therefore,
recognizes a primordial limitation on all rights; that in their exercise, the norms of human
conduct set forth in Article 19 must be observed. A right, though by itself legal because
recognized or granted by law as such, may nevertheless become the source of some
illegality. When a right is exercised in a manner which does not conform with the
norms enshrined in Article 19 and results in damage to another, a legal wrong is
thereby committed for which the wrongdoer must be held responsible. But while
Article 19 lays down a rule of conduct for the government of human relations and for the
maintenance of social order, it does not provide a remedy for its violation. Generally, an

SECTION 3. HOW MEMBERS ARE ELECTED The procedure for the admission of new
members of the Club shall be as follows:
(a) Any proprietary member, seconded by another voting proprietary member, shall submit to
the Secretary a written proposal for the admission of a candidate to the "Eligible-forMembership List";

69

action for damages under either Article 20 or Article 21 would be proper. (Emphasis in the
original)

Anent the award of exemplary damages, Article 2229 allows it by way of example or correction for
the public good. Nonetheless, since exemplary damages are imposed not to enrich one party or
impoverish another but to serve as a deterrent against or as a negative incentive to curb socially
deleterious actions,9 we reduce the amount from P1,000,000.00 to P25,000.00 only.

In rejecting respondents application for proprietary membership, we find that petitioners violated
the rules governing human relations, the basic principles to be observed for the rightful
relationship between human beings and for the stability of social order. The trial court and the
Court of Appeals aptly held that petitioners committed fraud and evident bad faith in disapproving
respondents applications. This is contrary to morals, good custom or public policy. Hence,
petitioners are liable for damages pursuant to Article 19 in relation to Article 21 of the same Code.

On the matter of attorneys fees and litigation expenses, Article 2208 of the same Code provides,
among others, that attorneys fees and expenses of litigation may be recovered in cases when
exemplary damages are awarded and where the court deems it just and equitable that attorneys
fees and expenses of litigation should be recovered, as in this case. In any event, however, such
award must be reasonable, just and equitable. Thus, we reduce the amount of attorneys fees
(P500,000.00) and litigation expenses (P50,000.00) to P50,000.00 andP25,000.00, respectively.

It bears stressing that the amendment to Section 3(c) of CCCIs Amended By-Laws requiring the
unanimous vote of the directors present at a special or regular meeting was not printed on the
application form respondent filled and submitted to CCCI. What was printed thereon was the
original provision of Section 3(c) which was silent on the required number of votes needed for
admission of an applicant as a proprietary member.

Lastly, petitioners argument that they could not be held jointly and severally liable for damages
because only one (1) voted for the disapproval of respondents application lacks merit.
Section 31 of the Corporation Code provides:

Petitioners explained that the amendment was not printed on the application form due to economic
reasons. We find this excuse flimsy and unconvincing. Such amendment, aside from being
extremely significant, was introduced way back in 1978 or almost twenty (20) years before
respondent filed his application. We cannot fathom why such a prestigious and exclusive golf
country club, like the CCCI, whose members are all affluent, did not have enough money to cause
the printing of an updated application form.

SEC. 31. Liability of directors, trustees or officers. Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faithin directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such directors, or trustees shall
be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons. (Emphasis ours)

It is thus clear that respondent was left groping in the dark wondering why his application was
disapproved. He was not even informed that a unanimous vote of the Board members was
required. When he sent a letter for reconsideration and an inquiry whether there was an objection
to his application, petitioners apparently ignored him. Certainly, respondent did not deserve this
kind of treatment. Having been designated by San Miguel Corporation as a special non-proprietary
member of CCCI, he should have been treated by petitioners with courtesy and civility. At the very
least, they should have informed him why his application was disapproved.

WHEREFORE, we DENY the petition. The challenged Decision and Resolution of the Court of
Appeals in CA-G.R. CV No. 71506 are AFFIRMED with modification in the sense that (a) the award
of moral damages is reduced fromP2,000,000.00 to P50,000.00; (b) the award of exemplary
damages is reduced from P1,000,000.00 toP25,000.00; and (c) the award of attorneys fees and
litigation expenses is reduced from P500,000.00 andP50,000.00 to P50,000.00 and P25,000.00,
respectively.

The exercise of a right, though legal by itself, must nonetheless be in accordance with the proper
norm. When the right is exercised arbitrarily, unjustly or excessively and results in damage to
another, a legal wrong is committed for which the wrongdoer must be held responsible. 6 It bears
reiterating that the trial court and the Court of Appeals held that petitioners disapproval of
respondents application is characterized by bad faith.

Costs against petitioners.

SO ORDERED.
--------------------------------------------------------------------------------------------------------------

As to petitioners reliance on the principle of damnum absque injuria or damage without injury,
suffice it to state that the same is misplaced. In Amonoy v. Gutierrez,7 we held that this principle
does not apply when there is an abuse of a persons right, as in this case.

G.R. No. 124293

January 31, 2005

J.G. SUMMIT HOLDINGS, INC., petitioner, vs. COURT OF APPEALS; COMMITTEE ON

PRIVATIZATION, its Chairman and Members; ASSET PRIVATIZATION TRUST; and
PHILYARDS HOLDINGS, INC., respondents.

As to the appellate courts award to respondent of moral damages, we find the same in order.
Under Article 2219 of the New Civil Code, moral damages may be recovered, among others, in acts
and actions referred to in Article 21. We believe respondents testimony that he suffered mental
anguish, social humiliation and wounded feelings as a result of the arbitrary denial of his
application. However, the amount of P2,000,000.00 is excessive. While there is no hard-and-fast
rule in determining what would be a fair and reasonable amount of moral damages, the same
should not be palpably and scandalously excessive. Moral damages are not intended to impose a
penalty to the wrongdoer, neither to enrich the claimant at the expense of the defendant. 8 Taking
into consideration the attending circumstances here, we hold that an award to respondent
of P50,000.00, instead of P2,000,000.00, as moral damages is reasonable.

RESOLUTION
PUNO, J.:
For resolution before this Court are two motions filed by the petitioner, J.G. Summit Holdings, Inc.
for reconsideration of our Resolution dated September 24, 2003 and to elevate this case to the
Court En Banc. The petitioner questions the Resolution which reversed our Decision of November

70

20, 2000, which in turn reversed and set aside a Decision of the Court of Appeals promulgated on
July 18, 1995.

xxx xxx xxx

2.0 The highest bid, as well as the buyer, shall be subject to the final approval of both the APT
Board of Trustees and the Committee on Privatization (COP).

I. Facts
The undisputed facts of the case, as set forth in our Resolution of September 24, 2003, are as
follows:

2.1 APT reserves the right in its sole discretion, to reject any or all bids.
3.0 This public bidding shall be on an Indicative Price Bidding basis. The Indicative price set for the
National Government's 87.67% equity in PHILSECO is PESOS: ONE BILLION THREE HUNDRED
MILLION (P1,300,000,000.00).

On January 27, 1997, the National Investment and Development Corporation (NIDC), a
government corporation, entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy
Industries, Ltd. of Kobe, Japan (KAWASAKI) for the construction, operation and management of
the Subic National Shipyard, Inc. (SNS) which subsequently became the Philippine Shipyard and
Engineering Corporation (PHILSECO). Under the JVA, the NIDC and KAWASAKI will contribute P330
million for the capitalization of PHILSECO in the proportion of 60%-40% respectively. One of its
salient features is the grant to the parties of the right of first refusal should either of them
decide to sell, assign or transfer its interest in the joint venture, viz:

xxx xxx xxx

6.0 The highest qualified bid will be submitted to the APT Board of Trustees at its regular meeting
following the bidding, for the purpose of determining whether or not it should be endorsed by the
APT Board of Trustees to the COP, and the latter approves the same. The APT shall advise
Kawasaki Heavy Industries, Inc. and/or its nominee, [PHILYARDS] Holdings, Inc., that the highest
bid is acceptable to the National Government. Kawasaki Heavy Industries, Inc. and/or
[PHILYARDS] Holdings, Inc. shall then have a period of thirty (30) calendar days from the date of
receipt of such advice from APT within which to exercise their "Option to Top the Highest Bid" by
offering a bid equivalent to the highest bid plus five (5%) percent thereof.

1.4 Neither party shall sell, transfer or assign all or any part of its interest in SNS [PHILSECO] to
any third party without giving the other under the same terms the right of first refusal. This
provision shall not apply if the transferee is a corporation owned or controlled by the
GOVERNMENT or by a KAWASAKI affiliate.
On November 25, 1986, NIDC transferred all its rights, title and interest in PHILSECO to the
Philippine National Bank (PNB). Such interests were subsequently transferred to the National
Government pursuant to Administrative Order No. 14. On December 8, 1986, President Corazon C.
Aquino issued Proclamation No. 50 establishing the Committee on Privatization (COP) and the
Asset Privatization Trust (APT) to take title to, and possession of, conserve, manage and dispose of
non-performing assets of the National Government. Thereafter, on February 27, 1987, a trust
agreement was entered into between the National Government and the APT wherein the latter was
named the trustee of the National Government's share in PHILSECO. In 1989, as a result of a
quasi-reorganization of PHILSECO to settle its huge obligations to PNB, the National Government's
shareholdings in PHILSECO increased to 97.41% thereby reducing KAWASAKI's shareholdings to
2.59%.

6.1 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. exercise their
"Option to Top the Highest Bid," they shall so notify the APT about such exercise of their option
and deposit with APT the amount equivalent to ten percent (10%) of the highest bid plus five
percent (5%) thereof within the thirty (30)-day period mentioned in paragraph 6.0 above. APT will
then serve notice upon Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc.
declaring them as the preferred bidder and they shall have a period of ninety (90) days from the
receipt of the APT's notice within which to pay the balance of their bid price.
6.2 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. fail to exercise
their "Option to Top the Highest Bid" within the thirty (30)-day period, APT will declare the highest
bidder as the winning bidder.

In the interest of the national economy and the government, the COP and the APT deemed it best
to sell the National Government's share in PHILSECO to private entities. After a series of
negotiations between the APT and KAWASAKI, they agreed that the latter's right of first refusal
under the JVA be "exchanged" for the right to top by five percent (5%) the highest bid for the said
shares. They further agreed that KAWASAKI would be entitled to name a company in which it was
a stockholder, which could exercise the right to top. On September 7, 1990, KAWASAKI informed
APT that Philyards Holdings, Inc. (PHI)1 would exercise its right to top.

xxx xxx xxx

12.0 The bidder shall be solely responsible for examining with appropriate care these rules, the
official bid forms, including any addenda or amendments thereto issued during the bidding period.
The bidder shall likewise be responsible for informing itself with respect to any and all conditions
concerning the PHILSECO Shares which may, in any manner, affect the bidder's proposal. Failure
on the part of the bidder to so examine and inform itself shall be its sole risk and no relief for error
or omission will be given by APT or COP. . . .

At the pre-bidding conference held on September 18, 1993, interested bidders were given copies
of the JVA between NIDC and KAWASAKI, and of the Asset Specific Bidding Rules (ASBR) drafted
for the National Government's 87.6% equity share in PHILSECO. The provisions of the ASBR were
explained to the interested bidders who were notified that the bidding would be held on December
2, 1993. A portion of the ASBR reads:

At the public bidding on the said date, petitioner J.G. Summit Holdings, Inc. 2 submitted a bid of
Two Billion and Thirty Million Pesos (P2,030,000,000.00) with an acknowledgment of KAWASAKI/
[PHILYARDS'] right to top, viz:

1.0 The subject of this Asset Privatization Trust (APT) sale through public bidding is the National
Government's equity in PHILSECO consisting of 896,869,942 shares of stock (representing 87.67%
of PHILSECO's outstanding capital stock), which will be sold as a whole block in accordance with
the rules herein enumerated.

4. I/We understand that the Committee on Privatization (COP) has up to thirty (30) days to act on
APT's recommendation based on the result of this bidding. Should the COP approve the highest
bid, APT shall advise Kawasaki Heavy Industries, Inc. and/or its nominee, [PHILYARDS] Holdings,
Inc. that the highest bid is acceptable to the National Government. Kawasaki Heavy Industries,

71

Inc. and/or [PHILYARDS] Holdings, Inc. shall then have a period of thirty (30) calendar days from
the date of receipt of such advice from APT within which to exercise their "Option to Top the
Highest Bid" by offering a bid equivalent to the highest bid plus five (5%) percent thereof.

(a) accept the said amount of P2,030,000,000.00 less bid deposit and interests from
petitioner;
(b) execute a Stock Purchase Agreement with petitioner;

As petitioner was declared the highest bidder, the COP approved the sale on December 3, 1993
"subject to the right of Kawasaki Heavy Industries, Inc./[PHILYARDS] Holdings, Inc. to top JGSMI's
bid by 5% as specified in the bidding rules."

(c) cause the issuance in favor of petitioner of the certificates of stocks representing 87.6% of
PHILSECO's total capitalization;

On December 29, 1993, petitioner informed APT that it was protesting the offer of PHI to top its
bid on the grounds that: (a) the KAWASAKI/PHI consortium composed of KAWASAKI,
[PHILYARDS], Mitsui, Keppel, SM Group, ICTSI and Insular Life violated the ASBR because the last
four (4) companies were the losing bidders thereby circumventing the law and prejudicing the
weak winning bidder; (b) only KAWASAKI could exercise the right to top; (c) giving the same
option to top to PHI constituted unwarranted benefit to a third party; (d) no right of first refusal
can be exercised in a public bidding or auction sale; and (e) the JG Summit consortium was not
estopped from questioning the proceedings.

(d) return to private respondent PHGI the amount of Two Billion One Hundred Thirty-One
Million Five Hundred Thousand Pesos (P2,131,500,000.00); and
(e) cause the cancellation of the stock certificates issued to PHI.
SO ORDERED.
In separate Motions for Reconsideration, respondents submit[ted] three basic issues for x x x
resolution: (1) Whether PHILSECO is a public utility; (2) Whether under the 1977 JVA, KAWASAKI
can exercise its right of first refusal only up to 40% of the total capitalization of PHILSECO; and (3)
Whether the right to top granted to KAWASAKI violates the principles of competitive
bidding.3 (citations omitted)

On February 2, 1994, petitioner was notified that PHI had fully paid the balance of the purchase
price of the subject bidding. On February 7, 1994, the APT notified petitioner that PHI had
exercised its option to top the highest bid and that the COP had approved the same on January 6,
1994. On February 24, 1994, the APT and PHI executed a Stock Purchase Agreement.
Consequently, petitioner filed with this Court a Petition for Mandamus under G.R. No. 114057. On
May 11, 1994, said petition was referred to the Court of Appeals. On July 18, 1995, the Court of
Appeals denied the same for lack of merit. It ruled that the petition for mandamus was not the
proper remedy to question the constitutionality or legality of the right of first refusal and the right
to top that was exercised by KAWASAKI/PHI, and that the matter must be brought "by the proper
party in the proper forum at the proper time and threshed out in a full blown trial." The Court of
Appeals further ruled that the right of first refusal and the right to top are prima facie legal and
that the petitioner, "by participating in the public bidding, with full knowledge of the right to top
granted to KAWASAKI/[PHILYARDS] isestopped from questioning the validity of the award given
to [PHILYARDS] after the latter exercised the right to top and had paid in full the purchase price of
the subject shares, pursuant to the ASBR." Petitioner filed a Motion for Reconsideration of said
Decision which was denied on March 15, 1996. Petitioner thus filed a Petition for Certiorari with
this Court alleging grave abuse of discretion on the part of the appellate court.

In a Resolution dated September 24, 2003, this Court ruled in favor of the respondents. On the
first issue, we held that Philippine Shipyard and Engineering Corporation (PHILSECO) is not a
public utility, as by nature, a shipyard is not a public utility 4 and that no law declares a shipyard to
be a public utility.5 On the second issue, we found nothing in the 1977 Joint Venture Agreement
(JVA) which prevents Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) from acquiring
more than 40% of PHILSECOs total capitalization.6 On the final issue, we held that the right to top
granted to KAWASAKI in exchange for its right of first refusal did not violate the principles of
competitive bidding.7
On October 20, 2003, the petitioner filed a Motion for Reconsideration 8 and a Motion to Elevate
This Case to the Court En Banc.9 Public respondents Committee on Privatization (COP) and Asset
Privatization Trust (APT), and private respondent Philyards Holdings, Inc. (PHILYARDS) filed their
Comments on J.G. Summit Holdings, Inc.s (JG Summits) Motion for Reconsideration and Motion to
Elevate This Case to the Court En Banc on January 29, 2004 and February 3, 2004, respectively.

On November 20, 2000, this Court rendered x x x [a] Decision ruling among others that the Court
of Appeals erred when it dismissed the petition on the sole ground of the impropriety of the special
civil action of mandamus because the petition was also one of certiorari. It further ruled that a
shipyard like PHILSECO is a public utility whose capitalization must be sixty percent (60%) Filipinoowned. Consequently, the right to top granted to KAWASAKI under the Asset Specific Bidding Rules
(ASBR) drafted for the sale of the 87.67% equity of the National Government in PHILSECO is
illegal not only because it violates the rules on competitive bidding but more so, because it
allows foreign corporations to own more than 40% equity in the shipyard. It also held that
"although the petitioner had the opportunity to examine the ASBR before it participated in the
bidding, it cannot be estopped from questioning the unconstitutional, illegal and inequitable
provisions thereof." Thus, this Court voided the transfer of the national government's 87.67%
share in PHILSECO to Philyard[s] Holdings, Inc., and upheld the right of JG Summit, as the highest
bidder, to take title to the said shares, viz:

II. Issues
Based on the foregoing, the relevant issues to resolve to end this litigation are the following:
1. Whether there are sufficient bases to elevate the case at bar to the Court en banc.
2. Whether the motion for reconsideration raises any new matter or cogent reason to warrant
a reconsideration of this Courts Resolution of September 24, 2003.

WHEREFORE, the instant petition for review on certiorari is GRANTED. The assailed Decision and
Resolution of the Court of Appeals are REVERSED and SET ASIDE. Petitioner is ordered to pay to
APT its bid price of Two Billion Thirty Million Pesos (P2,030,000,000.00), less its bid deposit plus
interests upon the finality of this Decision. In turn, APT is ordered to:

Motion to Elevate this Case to the

Court En Banc

72

The petitioner prays for the elevation of the case to the Court en banc on the following grounds:

of first refusal in commercial law and estoppel in civil law. Contractual obligations arising from
rights of first refusal are not new in this jurisdiction and have been recognized in numerous
cases.18 Estoppel is too known a civil law concept to require an elongated discussion. Fundamental
principles on public bidding were likewise used to resolve the issues raised by the petitioner. To be
sure, petitioner leans on the right to top in a public bidding in arguing that the case at bar involves
a novel issue. We are not swayed. The right to top was merely a condition or a reservation made in
the bidding rules which was fully disclosed to all bidding parties. In Bureau Veritas, represented
by Theodor H. Hunermann v. Office of the President, et al., 19 we dealt with this
conditionality, viz:

1. The main issue of the propriety of the bidding process involved in the present case has
been confused with the policy issue of the supposed fate of the shipping industry which has
never been an issue that is determinative of this case. 10
2. The present case may be considered under the Supreme Court Resolution dated February
23, 1984 which included among en banc cases those involving a novel question of law and
those where a doctrine or principle laid down by the Court en banc or in division may be
modified or reversed.11

x x x It must be stressed, as held in the case of A.C. Esguerra & Sons v. Aytona, et al., (L-18751,
28 April 1962, 4 SCRA 1245), that in an "invitation to bid, there is a condition imposed upon
the bidders to the effect that the bidding shall be subject to the right of the government
to reject any and all bids subject to its discretion. In the case at bar, the government
has made its choice and unless an unfairness or injustice is shown, the losing bidders
have no cause to complain nor right to dispute that choice. This is a well-settled doctrine
in this jurisdiction and elsewhere."

3. There was clear executive interference in the judicial functions of the Court when the
Honorable Jose Isidro Camacho, Secretary of Finance, forwarded to Chief Justice Davide, a
memorandum dated November 5, 2001, attaching a copy of the Foreign Chambers Report
dated October 17, 2001, which matter was placed in the agenda of the Court and noted by it
in a formal resolution dated November 28, 2001.12

The discretion to accept or reject a bid and award contracts is vested in the Government agencies
entrusted with that function. The discretion given to the authorities on this matter is of such wide
latitude that the Courts will not interfere therewith, unless it is apparent that it is used as a shield
to a fraudulent award (Jalandoni v. NARRA, 108 Phil. 486 [1960]). x x x The exercise of this
discretion is a policy decision that necessitates prior inquiry, investigation, comparison, evaluation,
and deliberation. This task can best be discharged by the Government agencies concerned, not by
the Courts. The role of the Courts is to ascertain whether a branch or instrumentality of the
Government has transgressed its constitutional boundaries. But the Courts will not interfere with
executive or legislative discretion exercised within those boundaries. Otherwise, it strays into the
realm of policy decision-making.

Opposing J.G. Summits motion to elevate the case en banc, PHILYARDS points out the petitioners
inconsistency in previously opposing PHILYARDS Motion to Refer the Case to the Court En
Banc. PHILYARDS contends that J.G. Summit should now be estopped from asking that the case be
referred to the Court en banc. PHILYARDS further contends that the Supreme Court en banc is not
an appellate court to which decisions or resolutions of its divisions may be appealed citing
Supreme Court Circular No. 2-89 dated February 7, 1989.13 PHILYARDS also alleges that there is
no novel question of law involved in the present case as the assailed Resolution was based on wellsettled jurisprudence. Likewise, PHILYARDS stresses that the Resolution was merely an outcome of
the motions for reconsideration filed by it and the COP and APT and is "consistent with the
inherent power of courts to amend and control its process and orders so as to make them
conformable to law and justice. (Rule 135, sec. 5)"14 Private respondent belittles the petitioners
allegations regarding the change in ponente and the alleged executive interference as shown by
former Secretary of Finance Jose Isidro Camachos memorandum dated November 5, 2001 arguing
that these do not justify a referral of the present case to the Court en banc.

It is only upon a clear showing of grave abuse of discretion that the Courts will set aside the award
of a contract made by a government entity. Grave abuse of discretion implies a capricious,
arbitrary and whimsical exercise of power (Filinvest Credit Corp. v. Intermediate Appellate Court,
No. 65935, 30 September 1988, 166 SCRA 155). The abuse of discretion must be so patent and
gross as to amount to an evasion of positive duty or to a virtual refusal to perform a duty enjoined
by law, as to act at all in contemplation of law, where the power is exercised in an arbitrary and
despotic manner by reason of passion or hostility (Litton Mills, Inc. v. Galleon Trader, Inc., et al[.],
L-40867, 26 July 1988, 163 SCRA 489).

In insisting that its Motion to Elevate This Case to the Court En Banc should be granted, J.G.
Summit further argued that: its Opposition to the Office of the Solicitor Generals Motion to Refer is
different from its own Motion to Elevate; different grounds are invoked by the two motions; there
was unwarranted "executive interference"; and the change in ponente is merely noted in asserting
that this case should be decided by the Court en banc.15

The facts in this case do not indicate any such grave abuse of discretion on the part of public
respondents when they awarded the CISS contract to Respondent SGS. In the "Invitation to
Prequalify and Bid" (Annex "C," supra), the CISS Committee made an express reservation of
the right of the Government to "reject any or all bids or any part thereof or waive any
defects contained thereon and accept an offer most advantageous to the Government."
It is a well-settled rule that where such reservation is made in an Invitation to Bid, the
highest or lowest bidder, as the case may be, is not entitled to an award as a matter of
right (C & C Commercial Corp. v. Menor, L-28360, 27 January 1983, 120 SCRA 112). Even the
lowest Bid or any Bid may be rejected or, in the exercise of sound discretion, the award may be
made to another than the lowest bidder (A.C. Esguerra & Sons v. Aytona, supra, citing 43 Am. Jur.,
788). (emphases supplied)1awphi1.nt

We find no merit in petitioners contention that the propriety of the bidding process involved in the
present case has been confused with the policy issue of the fate of the shipping industry which,
petitioner maintains, has never been an issue that is determinative of this case. The Courts
Resolution of September 24, 2003 reveals a clear and definitive ruling on the propriety of the
bidding process. In discussing whether the right to top granted to KAWASAKI in exchange for its
right of first refusal violates the principles of competitive bidding, we made an exhaustive
discourse on the rules and principles of public bidding and whether they were complied with in the
case at bar.16 This Court categorically ruled on the petitioners argument that PHILSECO, as a
shipyard, is a public utility which should maintain a 60%-40% Filipino-foreign equity ratio, as it
was a pivotal issue. In doing so, we recognized the impact of our ruling on the shipbuilding
industry which was beyond avoidance.17
We reject petitioners argument that the present case may be considered under the Supreme Court
Resolution dated February 23, 1984 which included among en banc cases those involving a novel
question of law and those where a doctrine or principle laid down by the court en banc or in
division may be modified or reversed. The case was resolved based on basic principles of the right

Like the condition in the Bureau Veritas case, the right to top was a condition imposed by the
government in the bidding rules which was made known to all parties. It was a condition
imposed on all bidders equally, based on the APTs exercise of its discretion in deciding
on how best to privatize the governments shares in PHILSECO. It was not a whimsical or
arbitrary condition plucked from the ether and inserted in the bidding rules but a condition which

73

the APT approved as the best way the government could comply with its contractual obligations to
KAWASAKI under the JVA and its mandate of getting the most advantageous deal for the
government. The right to top had its history in the mutual right of first refusal in the JVA and was
reached by agreement of the government and KAWASAKI.

1. The conversion of the right of first refusal into a right to top by 5% does not violate any
provision in the JVA between NIDC and KAWASAKI.
2. PHILSECO is not a public utility and therefore not governed by the constitutional restriction
on foreign ownership.

Further, there is no "executive interference" in the functions of this Court by the mere filing of a
memorandum by Secretary of Finance Jose Isidro Camacho. The memorandum was merely "noted"
to acknowledge its filing. It had no further legal significance. Notably too, the assailed
Resolution dated September 24, 2003 was decided unanimously by the Special First
Division in favor of the respondents.

3. The petitioner is legally estopped from assailing the validity of the proceedings of the public
bidding as it voluntarily submitted itself to the terms of the ASBR which included the provision
on the right to top.
4. The right to top was exercised by PHILYARDS as the nominee of KAWASAKI and the fact
that PHILYARDS formed a consortium to raise the required amount to exercise the right to top
the highest bid by 5% does not violate the JVA or the ASBR.

Again, we emphasize that a decision or resolution of a Division is that of the Supreme Court 20 and
the Court en banc is not an appellate court to which decisions or resolutions of a Division may be
appealed.21

5. The 60%-40% Filipino-foreign constitutional requirement for the acquisition of lands does
not apply to PHILSECO because as admitted by petitioner itself, PHILSECO no longer owns
real property.

For all the foregoing reasons, we find no basis to elevate this case to the Court en banc.
Motion for Reconsideration

6. Petitioners motion to elevate the case to the Court en banc is baseless and would only
delay the termination of this case.33

Three principal arguments were raised in the petitioners Motion for Reconsideration. First, that a
fair resolution of the case should be based on contract law, not on policy considerations; the
contracts do not authorize the right to top to be derived from the right of first refusal. 22 Second,
that neither the right of first refusal nor the right to top can be legally exercised by the consortium
which is not the proper party granted such right under either the JVA or the Asset Specific Bidding
Rules (ASBR).23 Third, that the maintenance of the 60%-40% relationship between the National
Investment and Development Corporation (NIDC) and KAWASAKI arises from contract and from
the Constitution because PHILSECO is a landholding corporation and need not be a public utility to
be bound by the 60%-40% constitutional limitation.24

In a Consolidated Comment dated March 8, 2004, J.G. Summit countered the arguments of the
public and private respondents in this wise:
1. The award by the APT of 87.67% shares of PHILSECO to PHILYARDS with losing bidders
through the exercise of a right to top, which is contrary to law and the constitution is null and
void for being violative of substantive due process and the abuse of right provision in the Civil
Code.

On the other hand, private respondent PHILYARDS asserts that J.G. Summit has not been able to
show compelling reasons to warrant a reconsideration of the Decision of the Court.25 PHILYARDS
denies that the Decision is based mainly on policy considerations and points out that it is premised
on principles governing obligations and contracts and corporate law such as the rule requiring
respect for contractual stipulations, upholding rights of first refusal, and recognizing the assignable
nature of contracts rights.26 Also, the ruling that shipyards are not public utilities relies on
established case law and fundamental rules of statutory construction. PHILYARDS stresses that
KAWASAKIs right of first refusal or even the right to top is not limited to the 40% equity of the
latter.27 On the landholding issue raised by J.G. Summit, PHILYARDS emphasizes that this is a nonissue and even involves a question of fact. Even assuming that this Court can take cognizance of
such question of fact even without the benefit of a trial, PHILYARDS opines that landholding by
PHILSECO at the time of the bidding is irrelevant because what is essential is that ultimately a
qualified entity would eventually hold PHILSECOs real estate properties. 28 Further, given the
assignable nature of the right of first refusal, any applicable nationality restrictions, including
landholding limitations, would not affect the right of first refusal itself, but only the manner of its
exercise.29 Also, PHILYARDS argues that if this Court takes cognizance of J.G. Summits allegations
of fact regarding PHILSECOs landholding, it must also recognize PHILYARDS assertions that
PHILSECOs landholdings were sold to another corporation.30 As regards the right of first refusal,
private respondent explains that KAWASAKIs reduced shareholdings (from 40% to 2.59%) did not
translate to a deprivation or loss of its contractually granted right of first refusal. 31 Also, the
bidding was valid because PHILYARDS exercised the right to top and it was of no moment that
losing bidders later joined PHILYARDS in raising the purchase price.32

a. The bidders[] right to top was actually exercised by losing bidders.

b. The right to top or the right of first refusal cannot co-exist with a genuine competitive
bidding.
c. The benefits derived from the right to top were unwarranted.
2. The landholding issue has been a legitimate issue since the start of this case but is
shamelessly ignored by the respondents.
a. The landholding issue is not a non-issue.
b. The landholding issue does not pose questions of fact.
c. That PHILSECO owned land at the time that the right of first refusal was agreed upon and
at the time of the bidding are most relevant.
d. Whether a shipyard is a public utility is not the core issue in this case.

In cadence with the private respondent PHILYARDS, public respondents COP and APT contend:

74

3. Fraud and bad faith attend the alleged conversion of an inexistent right of first refusal to
the right to top.

On the landholding issue, J.G. Summit submits that since PHILSECO is a landholding company,
KAWASAKI could exercise its right of first refusal only up to 40% of the shares of PHILSECO due to
the constitutional prohibition on landholding by corporations with more than 40% foreign-owned
equity. It further argues that since KAWASAKI already held at least 40% equity in PHILSECO, the
right of first refusal was inutile and as such, could not subsequently be converted into the right to
top. 37 Petitioner also asserts that, at present, PHILSECO continues to violate the constitutional
provision on landholdings as its shares are more than 40% foreign-owned. 38PHILYARDS admits
that it may have previously held land but had already divested such landholdings. 39 It contends,
however, that even if PHILSECO owned land, this would not affect the right of first refusal but only
the exercise thereof. If the land is retained, the right of first refusal, being a property right, could
be assigned to a qualified party. In the alternative, the land could be divested before the exercise
of the right of first refusal. In the case at bar, respondents assert that since the right of first
refusal was validly converted into a right to top, which was exercised not by KAWASAKI, but by
PHILYARDS which is a Filipino corporation (i.e., 60% of its shares are owned by Filipinos), then
there is no violation of the Constitution.40 At first, it would seem that questions of fact beyond
cognizance by this Court were involved in the issue. However, the records show that PHILYARDS
admits it had owned land up until the time of the bidding. 41 Hence, the only issue is
whether KAWASAKI had a valid right of first refusal over PHILSECO shares under the
JVA considering that PHILSECO owned land until the time of the bidding and KAWASAKI
already held 40% of PHILSECOs equity.

a. The history behind the birth of the right to top shows fraud and bad faith.
b. The right of first refusal was, indeed, "effectively useless."
4. Petitioner is not legally estopped to challenge the right to top in this case.
a. Estoppel is unavailing as it would stamp validity to an act that is prohibited by law or
against public policy.
b. Deception was patent; the right to top was an attractive nuisance.
c. The 10% bid deposit was placed in escrow.
J.G. Summits insistence that the right to top cannot be sourced from the right of first refusal is
not new and we have already ruled on the issue in our Resolution of September 24, 2003. We
upheld the mutual right of first refusal in the JVA.34 We also ruled that nothing in the JVA prevents
KAWASAKI from acquiring more than 40% of PHILSECOs total capitalization.35 Likewise, nothing in
the JVA or ASBR bars the conversion of the right of first refusal to the right to top. In sum, nothing
new and of significance in the petitioners pleading warrants a reconsideration of our ruling.

We uphold the validity of the mutual rights of first refusal under the JVA between KAWASAKI and
NIDC. First of all, the right of first refusal is a property right of PHILSECO shareholders, KAWASAKI
and NIDC, under the terms of their JVA. This right allows them to purchase the shares of their coshareholder before they are offered to a third party. The agreement of co-shareholders to
mutually grant this right to each other, by itself, does not constitute a violation of the
provisions of the Constitution limiting land ownership to Filipinos and Filipino
corporations. As PHILYARDS correctly puts it, if PHILSECO still owns land, the right of first refusal
can be validly assigned to a qualified Filipino entity in order to maintain the 60%-40% ratio. This
transfer, by itself, does not amount to a violation of the Anti-Dummy Laws, absent proof of any
fraudulent intent. The transfer could be made either to a nominee or such other party which the
holder of the right of first refusal feels it can comfortably do business with. Alternatively,
PHILSECO may divest of its landholdings, in which case KAWASAKI, in exercising its right of first
refusal, can exceed 40% of PHILSECOs equity. In fact, it can even be said that if the foreign
shareholdings of a landholding corporation exceeds 40%, it is not the foreign
stockholders ownership of the shares which is adversely affected but the capacity of the
corporation to own land that is, the corporation becomes disqualified to own land. This finds
support under the basic corporate law principle that the corporation and its stockholders are
separate juridical entities. In this vein, the right of first refusal over shares pertains to the
shareholders whereas the capacity to own land pertains to the corporation. Hence, the fact that
PHILSECO owns land cannot deprive stockholders of their right of first refusal. No law
disqualifies a person from purchasing shares in a landholding corporation even if the
latter will exceed the allowed foreign equity, what the law disqualifies is the corporation
from owning land. This is the clear import of the following provisions in the Constitution:

Likewise, we already disposed of the argument that neither the right of first refusal nor the right to
top can legally be exercised by the consortium which is not the proper party granted such right
under either the JVA or the ASBR. Thus, we held:
The fact that the losing bidder, Keppel Consortium (composed of Keppel, SM Group, Insular Life
Assurance, Mitsui and ICTSI), has joined PHILYARDS in the latter's effort to raise P2.131 billion
necessary in exercising the right to top is not contrary to law, public policy or public morals. There
is nothing in the ASBR that bars the losing bidders from joining either the winning bidder (should
the right to top is not exercised) or KAWASAKI/PHI (should it exercise its right to top as it did), to
raise the purchase price. The petitioner did not allege, nor was it shown by competent evidence,
that the participation of the losing bidders in the public bidding was done with fraudulent intent.
Absent any proof of fraud, the formation by [PHILYARDS] of a consortium is legitimate in a free
enterprise system. The appellate court is thus correct in holding the petitioner estopped from
questioning the validity of the transfer of the National Government's shares in PHILSECO to
respondent.36
Further, we see no inherent illegality on PHILYARDS act in seeking funding from parties who were
losing bidders. This is a purely commercial decision over which the State should not interfere
absent any legal infirmity. It is emphasized that the case at bar involves the disposition of shares
in a corporation which the government sought to privatize. As such, the persons with whom
PHILYARDS desired to enter into business with in order to raise funds to purchase the shares are
basically its business. This is in contrast to a case involving a contract for the operation of or
construction of a government infrastructure where the identity of the buyer/bidder or financier
constitutes an important consideration. In such cases, the government would have to take utmost
precaution to protect public interest by ensuring that the parties with which it is contracting have
the ability to satisfactorily construct or operate the infrastructure.

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

75

fisheries, or industrial uses other than the development of water power, beneficial use may be the
measure and limit of the grant.

definition of immovable property, "contracts for public works, and servitudes and other real rights
over immovable property."46 Any existing landholding, however, is denied by PHILYARDS citing its
recent financial statements.47 First, these are questions of fact, the veracity of which would require
introduction of evidence. The Court needs to validate these factual allegations based on competent
and reliable evidence. As such, the Court cannot resolve the questions they pose. Second, J.G.
Summit misreads the provisions of the Constitution cited in its own pleadings, to wit:

xxx xxx xxx

Section 7. Save in cases of hereditary succession, no private lands shall be transferred or
conveyed except to individuals, corporations, or associations qualified to acquire or hold
lands of the public domain.42(emphases supplied)

29.2 Petitioner has consistently pointed out in the past that private respondent is not a 60%-40%
corporation, and this violates the Constitution x x x The violation continues to this day because
under the law, it continues to own real property

The petitioner further argues that "an option to buy land is void in itself (Philippine Banking
Corporation v. Lui She, 21 SCRA 52 [1967]). The right of first refusal granted to KAWASAKI, a
Japanese corporation, is similarly void. Hence, the right to top, sourced from the right of first
refusal, is also void."43 Contrary to the contention of petitioner, the case of Lui She did not that
say "an option to buy land is void in itself," for we ruled as follows:

xxx xxx xxx

32. To review the constitutional provisions involved, Section 14, Article XIV of the 1973
Constitution (the JVA was signed in 1977), provided:

x x x To be sure, a lease to an alien for a reasonable period is valid. So is an option

giving an alien the right to buy real property on condition that he is granted Philippine
citizenship. As this Court said in Krivenko vs. Register of Deeds:

"Save in cases of hereditary succession, no private lands shall be transferred or conveyed except
to individuals, corporations, or associations qualified to acquire or hold lands of the public domain."

[A]liens are not completely excluded by the Constitution from the use of lands for residential
purposes. Since their residence in the Philippines is temporary, they may be granted temporary
rights such as a lease contract which is not forbidden by the Constitution. Should they desire to
remain here forever and share our fortunes and misfortunes, Filipino citizenship is not impossible
to acquire.

32.1 This provision is the same as Section 7, Article XII of the 1987 Constitution.
32.2 Under the Public Land Act, corporations qualified to acquire or hold lands of the public
domain are corporations at least 60% of which is owned by Filipino citizens (Sec. 22,
Commonwealth Act 141, as amended). (emphases supplied)

But if an alien is given not only a lease of, but also an option to buy, a piece of land, by
virtue of which the Filipino owner cannot sell or otherwise dispose of his property, this
to last for 50 years, then it becomes clear that the arrangement is a virtual transfer of
ownership whereby the owner divests himself in stages not only of the right to enjoy the
land (jus possidendi, jus utendi, jus fruendi and jus abutendi) but also of the right to
dispose of it (jus disponendi) rights the sum total of which make up ownership. It is
just as if today the possession is transferred, tomorrow, the use, the next day, the
disposition, and so on, until ultimately all the rights of which ownership is made up are
consolidated in an alien. And yet this is just exactly what the parties in this case did within this
pace of one year, with the result that Justina Santos'[s] ownership of her property was reduced to
a hollow concept. If this can be done, then the Constitutional ban against alien landholding in the
Philippines, as announced in Krivenko vs. Register of Deeds, is indeed in grave
peril.44 (emphases supplied; Citations omitted)

As correctly observed by the public respondents, the prohibition in the Constitution applies only to
ownership of land.48 It does not extend to immovable or real property as defined under
Article 415 of the Civil Code.Otherwise, we would have a strange situation where the ownership
of immovable property such as trees, plants and growing fruit attached to the land 49 would be
limited to Filipinos and Filipino corporations only.
III.
WHEREFORE, in view of the foregoing, the petitioners Motion for Reconsideration is DENIED
WITH FINALITY and the decision appealed from is AFFIRMED. The Motion to Elevate This Case to
the Court En Banc is likewise DENIED for lack of merit.
SO ORDERED.

In Lui She, the option to buy was invalidated because it amounted to a virtual transfer of
ownership as the owner could not sell or dispose of his properties. The contract in Lui
She prohibited the owner of the land from selling, donating, mortgaging, or encumbering the
property during the 50-year period of the option to buy. This is not so in the case at bar where the
mutual right of first refusal in favor of NIDC and KAWASAKI does not amount to a virtual transfer
of land to a non-Filipino. In fact, the case at bar involves a right of first refusal over shares of
stock while the Lui She case involves an option to buy the land itself. As discussed earlier,
there is a distinction between the shareholders ownership of shares and the corporations
ownership of land arising from the separate juridical personalities of the corporation and its
shareholders.

-------------------------------------------------------------------------------------------------------------G.R. No. 139370

July 4, 2002

RENE KNECHT and KNECHT, INC., petitioners, vs. UNITED CIGARETTE CORP., represented
by ENCARNACION GONZALES WONG, and EDUARDO BOLIMA, Sheriff, Regional Trial
Court, Branch 151, Pasig City, respondents.

We note that in its Motion for Reconsideration, J.G. Summit alleges that PHILSECO continues to
violate the Constitution as its foreign equity is above 40% and yet owns long-term leasehold
rights which are real rights.45 It cites Article 415 of the Civil Code which includes in the

DECISION

76

SANDOVAL-GUTIERREZ, J.:

Mortgage, less the P80,000.00 which plaintiff had paid to defendant company as earnest money
and less the amount in excess of the P250,000.00 overdraft line obligation of defendant
corporation with Philippine Commercial and Industrial Bank which the parties had agreed will be
assumed by the plaintiff; assumption by the plaintiff of the total of the overdraft line obligation of
defendant corporation to the Philippine Commercial and & Industrial Bank for which the properties
are answerable; and the balance of P300,000.00 to be paid in two equal installments payable 12
months and 24 months from date of sale with 10% annual interest each installment to be covered
by draft accepted by the Philippine Bank of Commerce; provided, that, together with
theP80,000.00 earnest money paid by plaintiff to defendant, should the sum of defendant
corporations overdraft line obligation to the Philippine Commercial and Industrial Bank (which
obligation will be assumed by plaintiff) total more than P420,000.00, which is the total of
the P170,000.00 still due as down payment and the P250,000.00 agreed portion of the obligation
to the Philippine Commercial and Industrial Bank to be assumed by plaintiff, the excess over said
amount of P420,000.00, as well as the other amounts which plaintiff may have to pay for existing
attachments and other encumbrances authorized by existing orders and the expenses in
connection with the same, shall be insufficient from the 2nd installment as well.

Before us is a petition for review on certiorari1 seeking to set aside the Decision dated May 19,
1999 of the Court of Appeals in CA-G.R. SP No. 47978 upholding the validity of the Orders dated
June 27, 1997 and May 12, 1998 issued by the Regional Trial Court, Branch 151, Pasig City in Civil
Case No. 9165.
The facts are:
Rose Packing Company, Inc. (Rose Packing), a domestic corporation, owns three (3) parcels of land
with a total area of 31, 842 square meters situated in Sto. Domingo, Cainta, Rizal. The largest
among these parcels has an area of 31,447 square meters covered by Transfer Certificate of Title
(TCT) No. 73620 of the Registry of Deeds of Rizal. The other two remaining parcels are
unregistered. The area covered by TCT No. 73620 is mortgaged with the Philippine Commercial
and Industrial Bank (PCIB).

"Should the total balance of P720,000.00 of the purchase price be insufficient to free the
properties from the obligation of defendant corporation for which they are or have been made
answerable, defendant corporation is hereby ordered to reimburse plaintiff the amount of the
excess and to execute the appropriate and effective deed without mortgage transferring and
conveying the subject properties to plaintiff.

On October 26, 1965, Rose Packing, through its President Rene Knecht, sold to the United
Cigarette Corporation (UCC), a domestic corporation, the said parcels of land, with all the buildings
and improvements thereon, forP800,000.00.2 Rose Packing made a warranty that the lots are free
from all liens and encumbrances, except the real estate mortgage constituted over the area
covered by TCT No. 73620. For its part, UCC promised to pay the purchase price under the
following terms and conditions: (a) a P250,000.00 down payment must be made upon signing of
the deed of sale with mortgage; (b) it will assume Rose Packings P250,000.00 overdraft line
obligation with the PCIB, subject to the latters approval; and (c) the balance of P300,000.00 shall
be paid in two annual installments at P150,000.00 each (within 12 and 14 months) from the date
of sale, with 10% annual interest. To secure the deal, UCC initially paid Rose Packing P80,000.00
as earnest money.

"Defendant Rose Packing Company, Inc., is also ordered to pay plaintiff the amount of P10,000.00
in moral damages and to indemnify plaintiff United Cigarette Corporation in the amount
of P20,000.00 as litigation expenses which include the costs of this suit and attorneys fees.
"SO ORDERED."4

Before the deed of sale could be executed, the parties found that Rose Packings actual obligation
with the PCIB far exceeded the P250,000.00 which UCC assumed to pay under their agreement.
So the PCIB demanded additional collateral from UCC as a condition precedent for the approval of
the sale of the mortgaged property. However, UCC did not comply.

Rose Packing interposed an appeal to the Court of Appeals (CA), docketed as CA-G.R. No. 45525R. On March 30, 1973 and during the pendency of this appeal, UCCs corporate life
expired.5 Alberto Wong, one of UCCs major stockholders, was appointed trustee/liquidator of the
dissolved corporation. He then represented UCC in the proceedings in Civil Case 9165. 6

Meanwhile, Rose Packing again offered to sell the same lots to other prospective buyers without
the knowledge of UCC and without returning to the latter the earnest money it earlier paid. 3

On June 26, 1976, the CA affirmed the CFI Decision with modification in the sense that the award
of moral damages was deleted. This prompted Rose Packing and Rene Knecht to file with this Court
a petition for review on certiorari, docketed as G.R. No. L-44977. In a Resolution dated January 5,
1977, this Court denied the petition for lack of merit.7 They filed a motion for reconsideration but
was denied. On March 23, 1977, this Courts Decision became final and executory.8

Aggrieved, UCC, on March 2, 1966, filed with the then Court of First Instance (CFI) of Rizal, Branch
I, a complaint against Rose Packing and Rene Knecht for specific performance and recovery of
damages, docketed as Civil Case No. 9165.

Unfortunately, several supervening incidents hampered the due execution of the CFI Decision.
On July 15, 1969, the CFI rendered a Decision holding that Rose Packing was in bad faith when it
did not inform UCC the amount of its actual obligation with the PCIB. Considering that UCC agreed
to assume the overdraft line obligation of Rose Packing with the PCIB only to the extent
of P250,000.00, it (UCC) cannot be compelled to assume the excess obligation. The dispositive
portion of the CFI Decision reads:

The records show that on July 15, 1968, even before the trial court could render its Decision in
Civil Case No 9165, Rose Packing filed Civil Case No. 11015 with Branch 2 of the same CFI,
praying among others, to enjoin the PCIB from proceeding with the foreclosure sale of the land
covered by TCT No. 73620. The CFI denied the application for injunction. Thus, the foreclosure
sale proceeded and title over the subject lot was consolidated in the name of the PCIB through the
issuance of TCT No. 286176 by the Registry of Deeds of Rizal. 9 On appeal by Rose Packing,
docketed as CA-G.R. No. 43198-R, the Court of Appeals upheld the validity of the foreclosure sale
but declared void ab initio the consolidation of ownership in the name of PCIB over the subject
property for being premature. The appellate court granted Rose Packing a 60-day period within
which to redeem the foreclosed property. Unsatisfied, Rose Packing filed a petition for review on
certiorari with this Court, docketed as G.R. No. L.-33084.10

"PREMISES CONSIDERED, this Court orders defendants Rose Packing Companys, Inc. and its
President, Rene Knecht to convey and deliver to plaintiff, United Cigarette Corporation, the three
parcels of land object of the complaint, together with all the buildings and improvements thereon,
with the exception of machines for canning factory, and to execute the corresponding deed of sale
with mortgage covering said properties for the purchase price of P800,000.00 under the following
terms and conditions: P250,000.00 as down payment upon the signing of the Deed of Sale with

77

On November 14, 1988, this Court rendered a Decision in G.R. No. L.-3308411 declaring the
foreclosure sale void and remanding Civil Case No. 11015 to the lower court for further
proceedings to determine the exact amount of Rose Packings liability with the PCIB. In effect,
ownership over the subject property reverted to Rose Packing. At that time, however, Rose Packing
(like UCC) had been dissolved with the expiration of its corporate charter on June 10, 1986.
Thereupon, Knecht, Inc., a domestic corporation, undertook the liquidation of Rose Packings
assets as well as the winding-up of its pending affairs.

Forthwith, Rose Packing filed a petition for review on certiorari with this Court, docketed as G.R.
No. 109385. On August 30, 1993, this Court denied the petition17 on the ground that no
reversible error was committed by the CA in rendering the questioned decision in CA-G.R. SP
No. 28333. Rose Packing filed a motion for reconsideration but it was denied with finality by this
Court in a Resolution dated October 20, 1993.
On November 14, 1993, Knecht, Inc. and Rene Knecht, claiming that they had just discovered
UCCs dissolution on April 10, 1973 and that the three-year period to liquidate its affairs had
already expired, again questioned before the RTC of Pasig City, Branch 151, the validity of the June
17, 1992 Order granting the writ of execution in Civil Case No. 9165. They averred that upon its
dissolution, UCC may no longer move for execution.

Subsequently, on July 19, 1990, UCC, through its liquidator Alberto Wong, filed with the CFI,
Branch 2 a motion for leave to intervene and to admit its complaint-in-intervention in Civil Case
No. 11015, which case was then absorbed by Branch 152 of the Regional Trial Court (RTC), Pasig
City pursuant to the implementation of Batas Pambansa Blg. 129 (the Judiciary Reorganization Act
of 1981).12 The complaint-in-intervention sought to compel Rose Packing to comply with the
Decision in Civil Case No. 9165 and prayed that a writ of execution be issued to enforce that
decision. Rose Packing, through its liquidator/trustee, Knecht, Inc., opposed the motion claiming
that the Decision in Civil Case No. 9165 which became final on March 23, 1977 can no longer be
enforced since more than ten (10) years had elapsed from its finality.13

On March 24, 1994, the trial court ordered the issuance of an alias writ of execution in favor of
UCC.18 The alias writ was subsequently issued on April 19, 1994.
When the alias writ was about to be implemented, Rose Packing, through Knecht, Inc. and Rene
Knecht, instituted another petition with the CA, docketed as CA-G.R. SP No. 33852. 19 They assailed
the validity of the writ, reiterating that the judgment in Civil Case No. 9165 which had become
final and executory in 1977 cannot be enforced in favor of UCC due to the latters dissolution in
1973.

Despite the opposition, the RTC of Pasig (Branch 152), in an Order dated December 10, 1990,
granted UCCs motion for leave to intervene and admitted its complaint-in-intervention. On
October 10, 1991, the same court issued an Order granting the writ of execution prayed for by
UCC to enforce the Decision in Civil Case No. 9165.

The CA, on October 25, 1994, dismissed the petition.20 It ruled that the validity and propriety of
the enforcement of the Decision in Civil Case No. 9165 had been resolved with finality in CA-G.R.
SP No. 26545 and CA-G.R. SP No 28333, and affirmed by this Court in G.R. No. 109385.

Rose Packing, through Knecht, Inc. then questioned the validity of these twin orders via a petition
for certiorari with the CA, docketed as CA-G.R. SP No. 26545. The CA, in its Decision dated March
5, 1992,14 nullified the CFI Orders dated December 10, 1990 and October 10, 1991, holding that
UCCs intervention in Civil Case No. 11015 is not warranted since the "only purpose is to execute
the judgment obtained by UCC against petitioner (Rose Packing) in Civil Case No. 9165." Thus, the
RTC of Pasig City (Branch 152) has no jurisdiction to admit the complaint-in-intervention and to
issue the assailed writ of execution.

Aggrieved, Knecht, Inc. and Rene Knecht again filed a petition with this Court, docketed as G.R.
Nos. 118183-84, questioning the Decision of the Court of Appeals in CA-G.R. SP No. 33852. In a
Resolution dated January 30, 1995, this Court denied the petition for being technically infirm. Their
motion for reconsideration was denied with finality on March 15, 1995.21

While it nullified the Orders dated December 10, 1990 and October 10, 1991, the CA nonetheless
stressed that"UCCs right to execute the judgment in Civil Case No. 9165 has not yet
prescribed insofar as the parcel of land covered by TCT No. 73620 is concerned" because
this land was involved in Civil Case No. 11015. Its execution can be availed of in Branch 151, not
in Branch 152, of the RTC, Pasig City. As regards the two other unregistered parcels of
land, the judgment has already prescribed because these properties were not involved in
Civil Case No. 11015, hence, UCC should have then sought the execution of the judgment
with respect to said properties.

On July 15, 1995, UCC, thru Encarnacion Gonzales Wong, its new trustee/liquidation, filed a
motion for the issuance of a second alias writ of execution to enforce the decision in Civil Case No.
9165 insofar as the land covered by TCT No. 73620 is concerned. Surprisingly, for unknown
reasons, title over the subject realty (then already substituted by TCT No. 286176 in the name of
PCIB) underwent an anomalous transfer in the name of Knecht, Inc under TCT No. 613113.22
On November 8, 1995, upon UCCs motion, the trial court issued a Second Alias Writ
of Execution.23

Pursuant to the CA Decision in CA-G.R. SP No. 26545, the RTC of Pasig City (Branch 151) issued
an Order on June 17, 199215 granting UCCs motion for the issuance of a writ of execution of the
judgment in Civil Case No. 9165 with respect to the land covered by TCT 73620 (then still in the
name of PCIB under TCT No. 286176).

To further derail the implementation of the second alias writ of execution over the property
covered by TCT No. 613113, Knecht, Inc. and Rene Knecht filed a petition with the CA, docketed
as CA G.R. SP No. 39003. They contended anew that Civil Case No. 9165 can no longer be
enforced for having been rendered moot and academic because of UCCs dissolution in 1973 and
that of Rose Packing in 1986. Finding the contention devoid of merit, the CA in its Decision dated
May 8, 1996,24 dismissed the petition. It held that the three-year period allowed to a dissolved
corporation for liquidating its assets and winding up of its affairs can be extended under certain
circumstances where, as here, the suit filed by UCC during its corporate existence necessarily
prolonged that period. Moreover, mere dissolution of a corporation cannot be invoked by Rose
Packing to unjustly enrich itself at the expense of the dissolved corporation.

In seeking the annulment of this order, Rose Packing, through Knecht, Inc. and Rene Knecht, filed
with the CA CA-G.R. SP No. 28333 for certiorari. For the second time, it assailed the validity of the
judgment in Civil Case No. 9165 and reiterated its position that UCCs right to enforce that
judgment had already prescribed.
On March 18, 1993, the CA rendered a Decision16 in CA-G.R. SP No. 28333 reiterating its ruling in
CA-G.R. No. 26545 that UCCs right to file a motion for execution of the Decision in Civil Case No.
9165 has not yet prescribed insofar as the titled land is concerned, and that Rose Packing could no
longer re-litigate Civil Case No. 9165 which had long become final and executory.

Knecht, Inc. and Rene Knecht filed with this Court a petition for review, docketed as G.R. No.
124983, questioning the CA Decision in CA-G.R. SP No. 39003. In a Resolution dated August 26,

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1996, this Court dismissed the petition for petitioners failure to pay the prescribed docketing and
other fees within the reglementary period. On November 11, 1996, their motion for
reconsideration was denied with finality.25

Viewed from the facts stated above, it appears that petitioners have filed a total of eight (8)
appeals and/or petitions (including the present petition) with this Court and the CA, all geared
towards frustrating the execution of the judgment in Civil Case No. 9165, to wit:

Thereafter, the trial court, upon motion26 by UCC, issued an Order dated June 27, 199727 directing
Sheriff Eduardo L. Bolima of Branch 151, RTC, Pasig City to execute the corresponding deed of sale
with mortgage in compliance with the judgment in Civil Case No. 9165.

1. CA-G.R. SP No. 28333 Petition for certiorari filed with the CA to annul the June 17, 1992
Order of the RTC, Branch 151, Pasig City allowing the issuance of a writ of execution to
enforce the decision in Civil Case No. 9165 (in accordance with the Decision of the CA in CAG.R. SP No. 26545). Petitioners insisted that the judgment in Civil Case No. 9165 cannot be
enforced due to prescription. The CA dismissed the petition and upheld the questioned order
of the trial court;

Rene Knecht filed a motion for reconsideration28 insisting that the execution of the judgment in
Civil Case No. 9165 cannot be availed of anymore whether against Rose Packing or in favor of UCC
because both corporations had been dissolved. This motion was denied by the trial court in an
Order dated May 12, 1998.29

2. G.R. No. 109385 Petition for review on certiorari filed with this Court questioning the CA
Decision in CA-G.R. SP No. 28333. This Court found no reversible error on the part of the CA;

Undaunted, Rene Knecht and Knecht, Inc. filed a petition with the CA, docketed as CA-G.R. SP No.
47978, assailing the trial courts jurisdiction to issue the June 27, 1997 and May 12, 1998 Orders.
They impleaded as respondents Hon. Deogracias O. Felizardo (Judge, RTC, Branch 151, Pasig
City), Sheriff Eduardo L. Bolima and UCC. Pending resolution of this petition, Sheriff Bolima
executed a "Sheriffs Deed of Absolute Sale"30 dated June 16, 1998 transferring to UCC the parcel
of land covered by TCT No. 613113 for a consideration of P720,000.00 (which is the difference
between the agreed purchase price of P800,000.00 and the amount of P80,000.00 paid by UCC as
earnest money). UCC deposited the P720,000.00 with the Cashier of the Clerk of Court, RTC, Pasig
City.

3. CA-G.R. SP No. 33852 Petition for certiorari filed with the CA seeking to enjoin the
enforcement of an alias writ of execution issued by the trial court on April 19, 1994.
Petitioners interposed the new argument that the judgment in Civil Case No. 9165 cannot be
enforced due to the dissolution of UCC on March 30, 1973. The CA dismissed the petition;
4. G.R. Nos. 118183 and 118184 Petition for review on certiorari filed with this Court
questioning the CA Decision in CA-G.R. SP No. 33852. This Court dismissed the petition in a
Resolution dated January 30, 1995;

On May 10, 1999, the CA rendered the now questioned Decision,31 upholding the twin orders of the
trial court dated June 27, 1997 and May 12, 1998. The CA emphasized that all the issues raised in
the petition including the validity of the enforcement of the decision and the corresponding writ
of execution issued in Civil Case No. 9165 in favor of UCC had already been finally decided and
judicially laid to rest in the several certiorari proceedings filed by Rene Knecht and Knecht, Inc.
with the Court of Appeals and this court. These issues cannot be reopened and re-litigated without
violating the rule on res judicata. Furthermore, the certiorari proceedings directed against the
enforcement of the same decision and writ of execution constitute forum-shopping which, in
essence, "degrades the administration of justice".

5. CA-G.R. SP No. 39003 Petition for certiorari and prohibition with prayer for the issuance
of temporary restraining order filed with the CA seeking, among others, the annulment of the
second alias writ of execution issued by the trial court on November 8, 1995. Petitioners
reiterated that the judgment in Civil Case No. 9165 cannot anymore be enforced for having
been rendered moot and academic by the dissolution of UCC. The CA denied this petition for
lack of merit and upheld the validity of the second alias writ of execution;
6. G.R. No. 124983 Petition for review on certiorari filed with this Court questioning the CA
Decision in CA-G.R. SP No. 39003. This Court denied the petition in a Resolution dated August
26, 1996;

Upon denial by the CA of their motion for reconsideration, Rene Knecht and Knecht, Inc. filed the
present petition for review on certiorari assailing the Decision in CA-G.R. SP No. 47978.

7. CA-G.R. SP No. 47978 Petition for certiorari filed with the CA seeking to annul the June
27, 1997 Order of the trial court directing Sheriff Eduardo L. Bolima of Branch 151, RTC, Pasig
City to execute the corresponding deed of sale with mortgage in compliance with the
judgment and the second alias writ of execution issued in Civil Case No. 9165. Petitioners
persistently claimed that the decision in Civil Case No. 9165 is voided by the expiration of
UCCs three-year period of liquidation from its dissolution. Furthermore, they theorized that
the second alias writ of execution is improper because it varied the terms of the judgment
and also deprived Knecht, Inc. of its property without due process of law. The CA denied this
petition and cited petitioners guilty of forum shopping;

In the main, petitioners vehemently aver that the absence of a statutory authority for the
extension of the life of UCC for the purpose of pursuing Civil Case No. 9165 after its dissolution
rendered void the July 15, 1969 Decision of the trial court in that case. A void decision can be
attacked any time either directly or collaterally without violating the rules on res judicata and nonforum shopping. Necessarily, the writs of execution and all other orders issued by the trial court to
implement that void decision are likewise void. In support of this contention, petitioners
cite Sumera vs. Valencia,32 National Abaca and Other Fibers Corporation vs. Pore33 and Board of
Liquidators vs. Kalaw.34

8. G.R. No. 139370 The present petition for review filed with this Court questioning the
decision of the CA in CA-G.R. SP No. 47978.

Furthermore, petitioners claim that the November 8, 1995 second alias writ of execution cannot be
implemented by the June 27, 1997 Order of the trial court because: (1) the second alias writ
varied the terms of the judgment in Civil Case No. 9165 resulting in the deprivation of petitioner
Knecht, Inc. of its property without due process; and (2) the said writ having expired,
became functus officio.

Petitioners basis in filing these multiple petitions is the expiration of UCCs corporate existence.
There is no doubt that the judgment in Civil Case No. 9165 became final and executory on March
23, 1977. That this judgment is still enforceable was decided with finality by this Court in G.R. No.
109385.

The petition lacks merit.

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In Reburiano vs. Court of Appeals,35 a case with similar facts, this Court held:

Deeds of Rizal, presently covered by TCT No. 613113, due to what respondent UCC claims to
be anomalous transfers. Verily, not because the title to a parcel of land is cancelled and
replaced by a new one makes it a new or different lot." 36

"the trustee (of a dissolved corporation) may commence a suit which can proceed to final
judgment even beyond the three-year period (of liquidation) x x x, no reason can be
conceived why a suit already commenced by the corporation itself during its
existence, not by a mere trustee who, by fiction, merely continues the legal personality of the
dissolved corporation, should not be accorded similar treatment to proceed to final
judgment and execution thereof." (Emphasis ours)

Lastly, petitioners submit that the November 8, 1995 second alias writ of execution cannot be
implemented by the June 27, 1997 Order of the trial court on the ground that the said writ had
already expired and, therefore, had become functus officio pursuant to former Section 11, Rule 39
of the Rules of Civil Procedure. We quote with approval the following disquisition of the CA in
rejecting petitioners argument:

Indeed, the rights of a corporation (dissolved pending litigation) are accorded protection by law.
This is clear from Section 145 of the Corporation Code, thus:

"Petitioners protestation that the second alias writ of execution dated November 8, 1995 could no
longer be enforced after its life span of (sixty) 60 days is incorrect. At the present times, the life
span of a writ of execution is without limit for as long as the judgment has not been satisfied,
although it is returnable to the court issuing it immediately after the judgment has been satisfied
in part or in full. If the judgment cannot be satisfied in full within thirty (30) days after receipt of
the writ, the officers duty is to report to the court and state the reason therefor (Section 14, Rule
39, 1997 Rules). There is, therefore, no more need to ask an alias writ of execution under the new
Rules."37

"Section 145. Amendment or repeal. No right or remedy in favor of or against any

corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred
by any such corporation, stockholders, members, directors, trustees, or officers, shall be
removed or impaired either by the subsequent dissolution of said corporation or by any
subsequent amendment or repeal of this Code or of any part thereof." (Emphasis ours)
The dissolution of UCC itself, or the expiration of its three-year liquidation period, should not be a
bar to the enforcement of its rights as a corporation. One of these rights, to be sure, includes the
UCCs right to seek from the court the execution of a valid and final judgment in Civil Case No.
9165 through its trustee/liquidator Encarnacion Gonzales Wong for the benefit of its
stockholders, creditors and any other person who may have legal claims against it. To hold
otherwise would be to allow petitioners to unjustly enrich themselves at the expense of UCC. This,
in effect, renders nugatory all the efforts and expenses of UCC in its quest to secure justice, not to
mention the undue delay in disposing of this case prejudicial to the administration of justice.

To be sure, the expiration of the second alias writ is attributable to petitioners alone who
deliberately caused the filing of numerous and unmeritorious petitions with the CA and this Court
to thwart the long-delayed execution of the final and executory Decision in Civil Case No. 9165.
It may now be trite, but apt, to stress that the Rules of Court "shall be liberally construed in order
to promote their objective of securing a just, speedy and inexpensive disposition of every action
and proceeding."38 They are mere tools designed to facilitate the attainment of justice. Any rigid
application of the rules which would tend to frustrate, rather than promote, substantial justice is
abhorred.39

Next, petitioners aver that the November 8, 1995 second alias writ of execution, implemented in
the June 27, 1997 Order of the trial court, varied the judgment in Civil Case No. 9165 resulting in
the deprivation of their property without due process.

Every litigation must come to an end. While a litigants right to initiate an action in court is fully
respected, however, once his case has been adjudicated by a competent court in a valid final
judgment, he should not be permitted to initiate similar suits hoping to secure a favorable ruling,
for this will result to endless litigations detrimental to the administration of justice, as in this case.

Their argument is fallacious.

Suffice it to state that the final decision sought to be enforced in the alias writ only pertains to the
area covered by TCT No. 73620, not to the other two unregistered lots. The said writ was intended
only for the execution of the judgment respecting one and the same parcel of land which, as
elucidated earlier, underwent series of transfer from Rose Packing (TCT No. 73620) to PCIB (TCT
No. 286176) and later to petitioner Knecht, Inc. (TCT No. 613113).1wphi1 As aptly found by the
CA:

WHEREFORE, the instant petition is DENIED and the assailed Decision of the Court of Appeals in
CA-G.R. SP No. 47978 is AFFIRMED. Treble costs against petitioners.
SO ORDERED.

"x x x what is being commanded to be conveyed in the judgment is Lot 2, Parcel 20, Plan 11-8099,
Amd-2,formerly covered by TCT No. 73620, Book No. T-645, Page No. 20 of the Registry of

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