CORPORATION LAW (first batch)

G.R. No. L-64013 November 28, 1983

UNION GLASS & CONTAINER CORPORATION and CARLOS PALANCA, JR., in his capacity as
President of Union Glass & Container Corporation, petitioners,
vs.
THE SECURITIES AND EXCHANGE COMMISSION and CAROLINA HOFILEÑA, respondents.

Eduardo R. Ceniza for petitioners.

The Solicitor General for respondent SEC.

Remedios C. Balbin for respondent Carolina Y. Hofileña.

ESCOLIN, J.:ñé+.£ªwph!1

This petition for certiorari and prohibition seeks to annul and set aside the Order of the
Securities and Exchange Commission, dated September 25, 1981, upholding its jurisdiction in
SEC Case No. 2035, entitled "Carolina Hofileña, Complainant, versus Development Bank of the
Philippines, et al., Respondents."

Private respondent Carolina Hofileña, complainant in SEC Case No. 2035, is a stockholder of
Pioneer Glass Manufacturing Corporation, Pioneer Glass for short, a domestic corporation
engaged in the operation of silica mines and the manufacture of glass and glassware. Since
1967, Pioneer Glass had obtained various loan accommodations from the Development Bank
of the Philippines [DBP], and also from other local and foreign sources which DBP guaranteed.

As security for said loan accommodations, Pioneer Glass mortgaged and/or assigned its assets,
real and personal, to the DBP, in addition to the mortgages executed by some of its corporate
officers over their personal assets. The proceeds of said financial exposure of the DBP were
used in the construction of a glass plant in Rosario, Cavite, and the operation of seven silica
mining claims owned by the corporation.

It appears that through the conversion into equity of the accumulated unpaid interests on the
various loans amounting to P5.4 million as of January 1975, and subsequently increased by
another P2.2 million in 1976, the DBP was able to gain control of the outstanding shares of
common stocks of Pioneer Glass, and to get two, later three, regular seats in the corporation's
board of directors.
Sometime in March, 1978, when Pioneer Glass suffered serious liquidity problems such that it
could no longer meet its financial obligations with DBP, it entered into a dacion en pago
agreement with the latter, whereby all its assets mortgaged to DBP were ceded to the latter in
full satisfaction of the corporation's obligations in the total amount of P59,000,000.00. Part of
the assets transferred to the DBP was the glass plant in Rosario, Cavite, which DBP leased and
subsequently sold to herein petitioner Union Glass and Container Corporation, hereinafter
referred to as Union Glass.

On April 1, 1981, Carolina Hofileña filed a complaint before the respondent Securities and
Exchange Commission against the DBP, Union Glass and Pioneer Glass, docketed as SEC Case
No. 2035. Of the five causes of action pleaded therein, only the first cause of action concerned
petitioner Union Glass as transferee and possessor of the glass plant. Said first cause of action
was based on the alleged illegality of the aforesaid dacion en pago resulting from: [1] the
supposed unilateral and unsupported undervaluation of the assets of Pioneer Glass covered by
the agreement; [2] the self-dealing indulged in by DBP, having acted both as
stockholder/director and secured creditor of Pioneer Glass; and [3] the wrongful inclusion by
DBP in its statement of account of P26M as due from Pioneer Glass when the same had
already been converted into equity.

Thus, with respect to said first cause of action, respondent Hofileña prayed that the SEC issue
an order:têñ.£îhqwâ£

1. Holding that the so called dacion en pago conveying all the assets of Pioneer
Glass and the Hofileña personal properties to Union Glass be declared null and
void on the ground that the said conveyance was tainted with.têñ.£îhqwâ£

A. Self-dealing on the part of DBP which was acting both as a

controlling stockholder/director and as secured creditor of the
Pioneer Glass, all to its advantage and to that of Union Glass, and to
the gross prejudice of the Pioneer Glass,

B. That the dacion en pago is void because there was gross

undervaluation of the assets included in the so-called dacion en pago
by more than 100% to the prejudice of Pioneer Glass and to the
undue advantage of DBP and Union Glass;

C. That the DBP unduly favored Union Glass over another buyer, San
Miguel Corporation, notwithstanding the clearly advantageous terms
offered by the latter to the prejudice of Pioneer Glass, its other
creditors and so-called 'Minority stockholders.'
 2. Holding that the assets of the Pioneer Glass taken over by DBP and part of
which was delivered to Union Glass particularly the glass plant to be returned
accordingly.

3. That the DBP be ordered to accept and recognize the appraisal conducted by
the Asian Appraisal Inc. in 1975 and again in t978 of the asset of Pioneer Glass. 1

In her common prayer, Hofileña asked that DBP be sentenced to pay Pioneer Glass actual,
consequential, moral and exemplary damages, for its alleged illegal acts and gross bad faith;
and for DBP and Union Glass to pay her a reasonable amount as attorney's fees. 2

On April 21, 1981, Pioneer Glass filed its answer. On May 8, 1981, petitioners moved for
dismissal of the case on the ground that the SEC had no jurisdiction over the subject matter or
nature of the suit. Respondent Hofileña filed her opposition to said motion, to which herein
petitioners filed a rejoinder.

On July 23, 1981, SEC Hearing Officer Eugenio E. Reyes, to whom the case was assigned,
granted the motion to dismiss for lack of jurisdiction. However, on September 25, 1981, upon
motion for reconsideration filed by respondent Hofileña, Hearing Officer Reyes reversed his
original order by upholding the SEC's jurisdiction over the subject matter and over the persons
of petitioners. Unable to secure a reconsideration of the Order as well as to have the same
reviewed by the Commission En Banc, petitioners filed the instant petition for certiorari and
prohibition to set aside the order of September 25, 1981, and to prevent respondent SEC from
taking cognizance of SEC Case No. 2035.

The issue raised in the petition may be propounded thus: Is it the regular court or the SEC that
has jurisdiction over the case?

In upholding the SEC's jurisdiction over the case Hearing Officer Reyes rationalized his
conclusion thus:têñ.£îhqwâ£

As correctly pointed out by the complainant, the present action is in the form of a
derivative suit instituted by a stockholder for the benefit of the corporation,
respondent Pioneer Glass and Manufacturing Corporation, principally against
another stockholder, respondent Development Bank of the Philippines, for alleged
illegal acts and gross bad faith which resulted in the dacion en pago arrangement
now being questioned by complainant. These alleged illegal acts and gross bad
faith came about precisely by virtue of respondent Development Bank of the
Philippine's status as a stockholder of co-respondent Pioneer Glass Manufacturing
Corporation although its status as such stockholder, was gained as a result of its
being a creditor of the latter. The derivative nature of this instant action can also
be gleaned from the common prayer of the complainant which seeks for an order
directing respondent Development Bank of the Philippines to pay co-respondent
 Pioneer Glass Manufacturing Corporation damages for the alleged illegal acts and
gross bad faith as above-mentioned.

As far as respondent Union Glass and Container Corporation is concerned, its

inclusion as a party-respondent by virtue of its being an indispensable party to the
present action, it being in possession of the assets subject of the dacion en
pago and, therefore, situated in such a way that it will be affected by any
judgment thereon, 3

In the ordinary course of things, petitioner Union Glass, as transferee and possessor of the
glass plant covered by the dacion en pago agreement, should be joined as party-defendant
under the general rule which requires the joinder of every party who has an interest in or lien
on the property subject matter of the dispute. 4 Such joinder of parties avoids multiplicity of
suits as well as ensures the convenient, speedy and orderly administration of justice.

But since petitioner Union Glass has no intra-corporate relation with either the complainant or
the DBP, its joinder as party-defendant in SEC Case No. 2035 brings the cause of action
asserted against it outside the jurisdiction of the respondent SEC.

The jurisdiction of the SEC is delineated by Section 5 of PD No. 902-A as follows:têñ.£îhqwâ£

Sec. 5. In addition to the regulatory and adjudicative function of the Securities and
Exchange Commission over corporations, partnerships and other forms of
associations registered with it as expressly granted under existing laws and
devices, it shall have original and exclusive jurisdiction to hear and decide cases
involving:

a] Devices and schemes employed by or any acts, of the board of directors,

business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public and/or
the stockholders, partners, members of associations or organizations registered
with the Commission

b] Controversies arising out of intra-corporate or partnership relations, between

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

c] Controversies in the election or appointments of directors, trustees, officers or

managers of such corporations, partnerships or associations.
This grant of jurisdiction must be viewed in the light of the nature and function of the SEC
under the law. Section 3 of PD No. 902-A confers upon the latter "absolute jurisdiction,
supervision, and control over all corporations, partnerships or associations, who are grantees
of primary franchise and/or license or permit issued by the government to operate in the
Philippines ... " The principal function of the SEC is the supervision and control over
corporations, partnerships and associations with the end in view that investment in these
entities may be encouraged and protected, and their activities pursued for the promotion of
economic development. 5

It is in aid of this office that the adjudicative power of the SEC must be exercised. Thus the law
explicitly specified and delimited its jurisdiction to matters intrinsically connected with the
regulation of corporations, partnerships and associations and those dealing with the internal
affairs of such corporations, partnerships or associations.

Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must
pertain to any of the following relationships: [a] between the corporation, partnership or
association and the public; [b] between the corporation, partnership or association and its
stockholders, partners, members, or officers; [c] between the corporation, partnership or
association and the state in so far as its franchise, permit or license to operate is concerned;
and [d] among the stockholders, partners or associates themselves.

The fact that the controversy at bar involves the rights of petitioner Union Glass who has no
intra-corporate relation either with complainant or the DBP, places the suit beyond the
jurisdiction of the respondent SEC. The case should be tried and decided by the court of
general jurisdiction, the Regional Trial Court. This view is in accord with the rudimentary
principle that administrative agencies, like the SEC, are tribunals of limited jurisdiction 6 and, as
such, could wield only such powers as are specifically granted to them by their enabling
statutes. 7 As We held in Sunset View Condominium Corp. vs. Campos, Jr.: 8têñ.£îhqwâ£

Inasmuch as the private respondents are not shareholders of the petitioner

condominium corporation, the instant cases for collection cannot be a
'controversy arising out of intra-corporate or partnership relations between and
among stockholders, members or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members
or associates, respectively,' which controversies are under the original and
exclusive jurisdiction of the Securities & Exchange Commission, pursuant to
Section 5 [b] of P.D. No. 902-A. ...

As heretofore pointed out, petitioner Union Glass is involved only in the first cause of action of
Hofileñas complaint in SEC Case No, 2035. While the Rules of Court, which applies suppletorily
to proceedings before the SEC, allows the joinder of causes of action in one complaint, such
procedure however is subject to the rules regarding jurisdiction, venue and joinder of
parties. 9 Since petitioner has no intra-corporate relationship with the complainant, it cannot
be joined as party-defendant in said case as to do so would violate the rule or jurisdiction.
Hofileñas complaint against petitioner for cancellation of the sale of the glass plant should
therefore be brought separately before the regular court But such action, if instituted, shall be
suspended to await the final outcome of SEC Case No. 2035, for the issue of the validity of
the dacion en pago posed in the last mentioned case is a prejudicial question, the resolution of
which is a logical antecedent of the issue involved in the action against petitioner Union Glass.
Thus, Hofileñas complaint against the latter can only prosper if final judgment is rendered in
SEC Case No. 2035, annulling the dacion en pago executed in favor of the DBP.

WHEREFORE, the instant petition is hereby granted, and the questioned Orders of respondent
SEC, dated September 25, 1981, March 25, 1982 and May 28, 1982, are hereby set aside.
Respondent Commission is ordered to drop petitioner Union Glass from SEC Case No. 2035,
without prejudice to the filing of a separate suit before the regular court of justice. No
pronouncement as to costs.

SO ORDERED.1äwphï1.ñët

Concepcion, Jr., Guerrero, Abad Santos, De Castro, Melencio-Herrera, Plana, Relova and
Gutierrez, Jr., JJ., concur.

Separate Opinions

TEEHANKEE, J., concurring:

I concur in the Court's judgment penned by Mr. Justice Escolin setting aside the questioned
orders of respondent SEC and ordering that petitioner Union Glass be dropped from SEC Case
No. 2035 for lack of SEC jurisdiction over it as a third party purchaser of the glass plant
acquired by the DBP by dacion en pago from Pioneer Glass, without prejudice to Hofileña filing
a separate suit in the regular courts of justice against Union Glass for recovery and cancellation
of the said sale of the glass plant in favor of Union Glass.

I concur also with the statement in the Court's opinion that the final outcome of SEC Case No.
2035 with regard to the validity of the dacion en pago is a prejudicial case. If Hofileña's
complaint against said dacion en pago fails in the SEC, then it clearly has no cause of action
against Union Glass for cancellation of DBP's sale of the plant to Union Glass.

The purpose of this brief concurrence is with reference to the statement in the Court's opinion
that "Thus, Hofileñas complaint against the latter can only prosper if final judgment is rendered
in SEC Case No. 2035, annulling the dacion en pago executed in favor of the DBP," to erase any
impression that a favorable judgment secured by Hofileña in SEC Case No. 2035 against the
DBP and Pioneer Glass would necessarily mean that its action against Union Glass in the
regular courts of justice for recovery and cancellation of the DBP sale of the glass plant to
Union Glass would necessarily prosper. It must be borne in mind that as already indicated, the
SEC has no jurisdiction over Union Glass as an outsider. The suit in the regular courts of justice
that Hofileña might bring against Union Glass is of course subject to all defenses as to the
validity of the sale of the glass plant in its favor as a buyer in good faith and should it
successfully substantiate such defenses, then Hofileñas action against it for cancellation of the
sale might fail as a consequence.

AQUINO, J., dissenting:

I dissent with due deference to Justice Escolin's opinion. What are belatedly assailed in this
certiorari and prohibition case filed on May 17, 1983 are the order of September 25, 1981 of
Eugenio E. Reyes, a SEC hearing officer, and the orders of March 25 and May 28, 1982 of
Antonio R. Manabat, another SEC hearing officer.

Although a jurisdictional issue is raised and jurisdiction over the subject matter may be raised
at any stage of the case, nevertheless, the petitioners are guilty of laches and nonexhaustion of
the remedy of appeal with the Securities and Exchange Commission en banc.

The petitioners resorted to the special civil actions of certiorari and prohibition because they
assail the orders of mere SEC hearing officers. This is not a review of the order, decision or
ruling of the SEC sitting en banc which, according to section 6 of Presidential Decree No. 902-A
(1976), may be made by this Court "in accordance with the pertinent provisions of the Rules of
Court."

Rule 43 of the Rules of Court used to allow review by this Court of the SEC order, ruling or
decision. Republic Act 5434 (1968) substituted the Court of Appeals for this Court in line with
the policy of lightening our heavy jurisdictional burden. But this Court seems to have been
restored as the reviewing authority by Presidential Decree No. 902-A.

However, section 9 of the Judiciary Reorganization Law returned to the Intermediate Appellate
Court the exclusive jurisdiction to review the ruling, order or decision of the SEC as a quasi-
judicial agency. The same section 9 granted to the Appellate Court jurisdiction in certiorari and
prohibition cases over the SEC although not exclusive.têñ.£îhqwâ£

In this case, the SEC seems to have adopted the orders of the two hearing officers
as its own orders as shown by the stand taken by the Solicitor General in
defending the SEC. If that were so, that is, if the orders of the hearing officers
 should be treated as the orders of the SEC itself en banc, this Court would have no
jurisdiction over this case. It should be the Appellate Court that should exercise
the power of review.

Carolina Hofileña has been a stockholder since 1958 of the Pioneer Glass Manufacturing
Corporation. Her personal assets valued at P6,804,810 were apparently or supposedly
mortgaged to the DBP to secure the obligations of Pioneer Glass (p. 32, Rollo).

Pioneer Glass became indebted to the Development Bank of the Philippines in the total sum of
P59,000,000. Part of the loan was used by Pioneer Glass to establish its glass plant in Rosario,
Cavite. The unpaid interest on the loan amounting to around seven million pesos became the
DBP's equity in Pioneer Glass. The DBP became a substantial stockholder of Pioneer Glass.
Three members of the Pioneer Glass' board of directors were from the DBP.

The glass plant commenced operations in 1977. At that time, Pioneer Glass was heavily
indebted to the DBP. Instead of foreclosing its mortgage, DBP maneuvered to have the
mortgaged assets of Pioneer Glass, including the glass plant, transferred to the DBP by way
of dacion en pago. This transaction was alleged to be an "auto contract" or a case of the DBP
contracting with itself since the DBP had a dominant position in Pioneer Glass.

Hofileña alleged that although the debt to the DBP of Pioneer Glass amounted to P59,000,000,
the glass plant in 1977 had a "sound value" of P77,329,000 and a "reproduction cost" of
P90,403,000. She further alleged that San Miguel Corporation was willing to buy the glass plant
for P40,000,000 cash, whereas it was actually sold to Union Glass & Container Corporation for
the same amount under a 25-year term of payment (pp. 32-34, Rollo).

On March 31, 1981; Carmen Hofileña filed with the SEC a complaint against the DBP, Union
Glass, Pioneer Glass and Rafael Sison as chairman of the DBP and Pioneer Glass boards of
directors. Union Glass filed a motion to dismiss on the ground that jurisdiction over the case is
lodged in the Court of First Instance. Hofileña opposed the motion. Hearing Officer Reyes in his
order of July 23, 1981 dismissed the complaint on the ground that the case is beyond the
jurisdiction of the SEC.

Hofileña filed a motion for reconsideration which was opposed by Union Glass. Hearing Officer
Reyes in his order of September 25, 1981 reconsidered his dismissal order and ruled that Union
Glass is an indispensable party because it is the transferee of the controverted assets given by
way of dacion en pago to the DBP. He ruled that the SEC has jurisdiction over the case.

Union Glass filed a motion for reconsideration. Hearing Officer Antonio R. Manabat denied the
motion on the ground "that the present action is an intra-corporate dispute involving
stockholders of the same corporation (p. 26, Rollo).
Union Glass filed a second motion for reconsideration with the prayer that the SEC should
decide the motion en banc. The hearing officer ruled that the remedy of Union Glass was to
file a timely appeal. Hence, its second motion for reconsideration was denied by the hearing
officer. (This ruling is a technicality which hinders substantial justice.)

It is clear that Union Glass has no cause of action for certiorari and prohibition. Its recourse
was to appeal to the SEC en banc the denial of its first motion for reconsideration.

There is no question that the SEC has jurisdiction over the intra-corporate dispute between
Hofileña and the DBP, both stockholders of Pioneer Glass, over the dacion en pago.

Now, does the SEC lose jurisdiction because of the joinder of Union Glass which has privity
with the DBP since it was the transferee of the assets involved in the dacion en pago?

Certainly, the joinder of Union Glass does not divest the SEC of jurisdiction over the case. The
joinder of Union Glass is necessary because the DBP, its transfer or, is being sued regarding
the dacion en pago. The defenses of Union Glass are tied up with the defenses of the DBP in
the intra-corporate dispute. Hofileñas cause of action should not be split.

It would not be judicious and expedient to require Hofileña to sue the DBP and Union Glass in
the Regional Trial Court. The SEC is more competent than the said court to decide the intra-
corporate dispute.

The SEC, as the agency enforcing Presidential Decree No. 902-A, is in the best position to know
the extent of its jurisdiction. Its determination that it has jurisdiction in this case has
persuasive weight.

Concepcion, Jr., Guerro, Abad Santos, De Castro, Melencio-Herrera, Plana, Relova and
Gutierrez, Jr., JJ., concur.

G.R. No. L-63558 May 19, 1987

SPOUSES JOSE ABEJO AND AURORA ABEJO, TELEC. TRONIC SYSTEMS, INC., petitioners,
vs.
HON. RAFAEL DE LA CRUZ, JUDGE OF THE REGIONAL TRIAL COURT (NATIONAL CAPITAL
JUDICIAL REGION, BRANCH CLX-PASIG), SPOUSES AGAPITO BRAGA AND VIRGINIA BRAGA,
VIRGILIO BRAGA AND NORBERTO BRAGA, respondents.

No. L-68450-51 May 19, 1987

POCKET BELL PHILIPPINES, INC., AGAPITO T. BRAGA, VIRGILIO T. BRAGA, NORBERTO BRAGA,
and VIRGINIA BRAGA, petitioners,
vs.
THE HONORABLE SECURITIES AND EXCHANGE COMMISSION, TELECTRONIC SYSTEMS, INC.,
JOSE ABEJO, JOSE LUIS SANTIAGO, SIMEON A. MIRAVITE, SR., ANDRES T. VELARDE AND L.
QUIDATO BANDOLINO, respondents.

TEEHANKEE, C.J.:

These two cases, jointly heard, are jointly herein decided. They involve the question of who,
between the Regional Trial Court and the Securities and Exchange Commission (SEC), has
original and exclusive jurisdiction over the dispute between the principal stockholders of the
corporation Pocket Bell Philippines, Inc. (Pocket Bell), a "tone and voice paging corporation,"
namely, the spouses Jose Abejo and Aurora Abejo (hereinafter referred to as the Abejos) and
the purchaser, Telectronic Systems, Inc. (hereinafter referred to as Telectronics) of their
133,000 minority shareholdings (for P5 million) and of 63,000 shares registered in the name of
Virginia Braga and covered by five stock certificates endorsed in blank by her (for
P1,674,450.00), and the spouses Agapito Braga and Virginia Braga (hereinafter referred to as
the Bragas), erstwhile majority stockholders. With the said purchases, Telectronics would
become the majority stockholder, holding 56% of the outstanding stock and voting power of
the corporation Pocket Bell.

With the said purchases in 1982, Telectronics requested the corporate secretary of the
corporation, Norberto Braga, to register and transfer to its name, and those of its nominees
the total 196,000 Pocket Bell shares in the corporation's transfer book, cancel the surrendered
certificates of stock and issue the corresponding new certificates of stock in its name and those
of its nominees.

Norberto Braga, the corporate secretary and son of the Bragas, refused to register the
aforesaid transfer of shares in t e corporate oo s, asserting that the Bragas claim preemptive
rights over the 133,000 Abejo shares and that Virginia Braga never transferred her 63,000
shares to Telectronics but had lost the five stock certificates representing those shares.

This triggered off the series of intertwined actions between the protagonists, all centered on
the question of jurisdiction over the dispute, which were to culminate in the filing of the two
cases at bar.

The Bragas assert that the regular civil court has original and exclusive jurisdiction as against
the Securities and Exchange Commission, while the Abejos claim the contrary. A summary of
the actions resorted to by the parties follows:
A. ABEJOS ACTIONS IN SEC

1. The Abejos and Telectronics and the latter's nominees, as new majority shareholders, filed
SEC Cases Nos. 02379 and 02395 against the Bragas on December 17, 1982 and February 14,
1983, respectively.

2. In SEC Case No. 02379, they prayed for mandamus from the SEC ordering Norberto Braga, as
corporate secretary of Pocket Bell to register in their names the transfer and sale of the
aforesaid 196,000 Pocket Bell shares (of the Abejos 1 and Virginia Braga 2, cancel the
surrendered certificates as duly endorsed and to issue new certificates in their names.

3. In SEC Case No.02395, they prayed for injunction and a temporary restraining order that the
SEC enjoin the Bragas from disbursing or disposing funds and assets of Pocket Bell and from
performing such other acts pertaining to the functions of corporate officers.

4. Pocket Bell's corporate secretary, Norberto Braga, filed a Motion to Dismiss the mandamus
case (SEC Case No. 02379) contending that the SEC has no jurisdiction over the nature of the
action since it does not involve an intracorporate controversy between stockholders, the
principal petitioners therein, Telectronics, not being a stockholder of record of Pocket Bell.

5. On January 8, 1983, SEC Hearing Officer Joaquin Garaygay denied the motion. On January
14, 1983, the corporate secretary filed a Motion for Reconsideration. On March 21, 1983, SEC
Hearing Officer Joaquin Garaygay issued an order granting Braga's motion for reconsideration
and dismissed SEC Case No. 02379.

6. On February 11, 1983, the Bragas filed their Motion to Dismiss the injunction case, SEC Case
No. 02395. On April 8, 1985, the SEC Director, Eugenio Reyes, acting upon the Abejos'ex-parte
motion, created a three-man committee composed of Atty. Emmanuel Sison as Chairman and
Attys. Alfredo Oca and Joaquin Garaygay as members, to hear and decide the two SEC cases
(Nos. 02379 and 02395).

7. On April 13, 1983, the SEC three-man committee issued an order reconsidering the aforesaid
order of March 21, 1983 of the SEC Hearing Officer Garaygay (dismissing the mandamus
petition SEC Case No. 02379) and directing corporate secretary Norberto Braga to file his
answer to the petitioner therein.

B. BRAGAS' ACTION IN SEC

8. On December 12, 1983, the Bragas filed a petition for certiorari, prohibition and mandamus
with the SEC en banc, SEC Case No. EB #049, seeking the dismissal of SEC Cases Nos.' 02379
and 02395 for lack of jurisdiction of the Comn-iission and the setting aside of the various
orders issued by the SEC three-man committee in the course of the proceedings in the two SEC
cases.
9. On May 15, 1984, the SEC en banc issued an order dismissing the Bragas' petition in SEC
Case No. EB#049 for lack of merit and at the same time ordering the SEC Hearing Committee to
continue with the hearings of the Abejos and Telectronics SEC Cases Nos. 02379 and 02395,
ruhng that the "issue is not the ownership of shares but rather the nonperformance by the
Corporate Secretary of the ministerial duty of recording transfers of shares of stock of the
corporation of which he is secretary."

10. On May 15, 1984 the Bragas filed a motion for reconsideration but the SEC en banc denied
the same on August 9, 1984.

C. BRAGAS' ACTION IN CFI (NOWRTC)

11. On November 25, 1982, following the corporate secretary's refusal to register the transfer
of the shares in question, the Bragas filed a complaint against the Abejos and Telectronics in
the Court of First Instance of Pasig, Branch 21 (now the Regional Trial Court, Branch 160)
docketed as Civil Case No. 48746 for: (a) rescission and annulment of the sale of the shares of
stock in Pocket Bell made by the Abejos in favor of Telectronics on the ground that it violated
the Bragas' alleged pre-emptive right over the Abej os' shareholdings and an alleged perfected
contract with the Abejos to sell the same shares in their (Bragas) favor, (Ist cause of
action); plus damages for bad faith; and (b) declaration ofnullity of any transfer, assignment or
endorsement of Virginia Bragas' stock certificates for 63,000 shares in Pocket Ben to
Telectronics for want of consent and consideration, alleging that said stock certificates, which
were intended as security for a loan application and were thus endorsed by her in blank, had
been lost (2nd cause of action).

12. On January 4, 1983, the Abejos filed a Motion to Dismiss the complaint on the ground that
it is the SEC that is vested under PD 902-A with original and exclusive jurisdiction to hear and
decide cases involving, among others, controversies "between and among stockholders" and
that the Bragas' suit is such a controversy as the issues involved therein are the stockholders'
alleged pre-emptive rights, the validity of the transfer and endorsement of certificates of stock,
the election of corporate officers and the management and control of the corporation's
operations. The dismissal motion was granted by Presiding Judge G. Pineda on January 14,
1983.

13. On January 24, 1983, the Bragas filed a motion for reconsideration. The Abejos opposed.
Meanwhile, respondent Judge Rafael de la Cruz was appointed presiding judge of the court
(renamed Regional Trial Court) in place of Judge G. Pineda.

14. On February 14, 1983, respondent Judge de la Cruz issued an order rescinding the January
14, 1983 order and reviving the temporary restraining order previously issued on December
23, 1982 restraining Telectronics' agents or representatives from enforcing their resolution
constituting themselves as the new set of officers of Pocket Bell and from assuming control of
the corporation and discharging their functions.
15. On March 2, 1983, the Abejos filed a motion for reconsideration, which motion was duly
opposed by the Bragas. On March 11, 1983, respondent Judge denied the motion for
reconsideration.

D. ABEJOS' PETITION AT BAR

16. On March 26, 1983, the Abejos, alleging that the acts of respondent Judge in refusing to
dismiss the complaint despite clear lack of jurisdiction over the action and in refusing to
reconsider his erroneous position were performed without jurisdiction and with grave abuse of
discretion, filed their herein Petition for certiorari and Prohibition with Preliminary Injunction.
They prayed that the challenged orders of respondent Judge dated February 14, 1983 and
March 11, 1983 be set aside for lack of jurisdiction and that he be ordered to permanently
desist from further proceedings in Civil Case No. 48746. Respondent judge desisted from
further proceedings in the case, dispensing with the need of issuing any restraining order.

E. BRAGAS' PETITION AT BAR

17. On August 29, 1984, the Bragas, alleging in turn that the SEC has no jurisdiction over SEC
Cases Nos. 02379 and 02395 and that it acted arbitrarily, whimsically and capriciously in
dismissing their petition (in SEC Case No. EB #049) for dismissal of the said cases, filed their
herein Petition for certiorari and Prohibition with Preliminary Injunction or TRO. The petitioner
seeks the reversal and/or setting aside of the SEC Order dated May 15, 1984 dismissing their
petition in said SEC Case No. EB #049 and sustaining its jurisdiction over SEC Cases Nos. 02379
and 02395, filed by the Abejos. On September 24, 1984, this Court issued a temporary
restraining order to maintain the status quo and restrained the SEC and/or any of its officers or
hearing committees from further proceeding with the hearings in SEC Cases Nos. 02379 and
02395 and from enforcing any and all orders and/or resolutions issued in connection with the
said cases.

The cases, having been given due course, were jointly heard by the Court on March 27, 1985
and the parties thereafter filed on April 16, 1985 their respective memoranda in amplification
of oral argument on the points of law that were crystalled during the hearing,

The Court rules that the SEC has original and exclusive jurisdiction over the dispute between
the principal stockholders of the corporation Pocket Bell, namely, the Abejos and

Telectronics, the purchasers of the 56% majority stock (supra, at page 2) on the one hand, and
the Bragas, erstwhile majority stockholders, on the other, and that the SEC, through its en banc
Resolution of May 15, 1984 co"ectly ruled in dismissing the Bragas' Petition questioning its
jurisdiction, that "the issue is not the ownership of shares but rather the nonperformance by
the Corporate Secretary of the ministerial duty of recording transfers of shares of stock of the
Corporation of which he is secretary."
1. The SEC ruling upholding its primary and exclusive jurisdiction over the dispute is correctly
premised on, and fully supported by, the applicable provisions of P.D. No. 902-A which
reorganized the SEC with additional powers "in line with the government's policy of
encouraging investments, both domestic and foreign, and more active publicParticipation in
the affairs of private corporations and enterprises through which desirable activities may be
pursued for the promotion of economic development; and, to promote a wider and more
meaningful equitable distribution of wealth," and accordingly provided that:

SEC. 3. The Commission shall have absolute jurisdiction, supervision and control
ouer all corporations, partnerships or associations, who are the grantees of
primary franchise and/or a license or permit issued by the government to operate
in the Philippines; ...

SEC. 5. In addition to the regulatory and adjudicative functions of the Securities

and Exchange Commission over corporations, partnerships and other forms of
associations registered with it as expressly granted under existing laws and
decrees, it shall have original and exclusive jurisdiction to hear and decide
cases involving:

a) Devices or schemes employed by or any acts, of the board of

directors, business associations, its officers or partners, amounting
to fruud and misrepresentation which may be detrimental to the
interest of the public andlor of the stockholder, partners, members of
associations or organizations registered with the Commission.

b) Controversies arising out of intracorporate or partnership

relations, between and among stockholders, members, or associates;
between any andlor all of them and the corporation, partnership or
association of which they are stockholders, members or assmiates,
respectively; and between such corporation, partnership or
assmiation and the state insofar as it concems their individual
franchise or right to exist as such entity;

c) Controversies in the election or appointments of directors, trustees,

officers or managers of such corporations, partnerships or
associations. 3

Section 6 further grants the SEC "in order to effectively exercise such jurisdiction," the
power, inter alia, "to issue preliminary or permanent injunctions, whether prohibitory
or mandatory, in all cases in which it has jurisdiction, and in which cases the pertinent
provisions of the Rules of Court shall apply."
2. Basically and indubitably, the dispute at bar, as held by the SEC, is an intracorporate dispute
that has arisen between and among the principal stockholders of the corporation Pocket Bell
due to the refusal of the corporate secretary, backed up by his parents as erstwhile majority
shareholders, to perform his "ministerial duty" to record the transfers of the corporation's
controlling (56%) shares of stock, covered by duly endorsed certificates of stock, in favor of
Telectronics as the purchaser thereof. mandamus in the SEC to compel the corporate secretary
to register the transfers and issue new certificates in favor of Telectronics and its nominees was
properly resorted to under Rule XXI, Section 1 of the SEC's New Rules of Procedure, 4 which
provides for the filing of such petitions with the SEC. Section 3 of said Rules further authorizes
the SEC to "issue orders expediting the proceedings ... and also [to] grant a preliminary
injunction for the preservation of the rights of the parties pending such proceedings, "

The claims of the Bragas, which they assert in their complaint in the Regional Trial Court,
praying for rescission and annulment of the sale made by the Abejos in favor of Telectronics on
the ground that they had an alleged perfected preemptive right over the Abejos' shares as well
as for annulment of sale to Telectronics of Virginia Braga's shares covered by street certificates
duly endorsed by her in blank, may in no way deprive the SEC of its primary and exclusive
jurisdiction to grant or not the writ of mandamus ordering the registration of the shares so
transferred. The Bragas' contention that the question of ordering the recording of the transfers
ultimately hinges on the question of ownership or right thereto over the shares
notwithstanding, the jurisdiction over the dispute is clearly vested in the SEC.

3. The very complaint of the Bragas for annulment of the sales and transfers as filed by them in
the regular court questions the validity of the transfer and endorsement of the certificates of
stock, claiming alleged pre-emptive rights in the case of the Abejos' shares and alleged loss of
thio certificates and lack of consent and consideration in the case of Virginia Braga's shares.
Such dispute c learly involve's controversies "between and among stockholders, " as to the
Abej os' right to sell and dispose of their shares to Telectronics, the validity of the latter's
acquisition of Virginia Braga's shares, who between the Bragas and the Abejos' transferee
should be recognized as the controlling shareholders of the corporation, with the right to elect
the corporate officers and the management and control of its operations. Such a dispute and
case clearly fag within the original and exclusive jurisdiction of the SEC to decide, under
Section 5 of P.D. 902-A, above-quoted. The restraining order issued by the Regional Trial Court
restraining Telectronics agents and representatives from enforcing their resolution constituting
themselves as the new set of officers of Pocket Bell and from assuming control of the
corporation and discharging their functions patently encroached upon the SEC's exclusive
jurisdiction over such specialized corporate controversies calling for its special competence. As
stressed by the Solicitor General on behalf of the SEC, the Court has held that "Nowhere does
the law [PD 902-A] empower any Court of First Instance [now Regional Trial Court] to interfere
with the orders of the Commission," 5 and consequently "any ruling by the trial court on the
issue of ownership of the shares of stock is not binding on the Commission 6 for want of
jurisdiction.
4. The dispute therefore clearly falls within the general classification of cases within the SEC's
original and exclusive jurisdiction to hear and decide, under the aforequoted governing section
5 of the law. Insofar as the Bragas and their corporate secretary's refusal on behalf of the
corporation Pocket Bell to record the transfer of the 56% majority shares to Telectronics may
be deemed a device or scheme amounting to fraud and misrepresentation emplolyed by them
to keep themselves in control of the corporation to the detriment of Telectronics (as buyer and
substantial investor in the corporate stock) and the Abejos (as substantial stockholders-sellers),
the case falls under paragraph (a). The dispute is likewise an intra-corporate controversy
between and among the majority and minority stockholders as to the transfer and disposition
of the controlling shares of the corporation, failing under paragraph (b). As stressed by the
Court in DMRC Enterprises v. Este del Sol Mountain Reserve, Inc, 7 Considering the announced
policy of PD 902-A, the expanded jurisdiction of the respondent Securities and Exchange
Commission under said decree extends exclusively to matters arising from contracts involving
investments in private corporations, partnerships and associations." The dispute also concerns
the fundamental issue ofwhether the Bragas or Telectronics have the right to elect the
corporate directors and officers and manage its business and operations, which falls under
paragraph (c).

5. Most of the cases that have come to this Court involve those under paragraph (b), i.e.
whether the controversy is an intra-corporate one, arising "between and among stockholders"
or "between any or allof them and the corporation." The parties have focused their arguments
on this question. The Bragas' contention in his field must likewise fail. In Philex Mining Corp. v.
Reyes, 8 the Court spelled out that"'an intra-corporate controversy is one which arises between
a stockholder and the corporation. There is no distinction, qualification, nor any exemption
whatsoever. The provision is broad and covers all kinds of controversies between stockholders
and corporations. The issue of whether or not a corporation is bound to replace a
stockholder's lost certificate of stock is a matter purely between a stockholder and the
corporation. It is a typical intra-corporate dispute. The quqsjion of damage's raised is merely
incidental to that main issue. The Court rejected the stockholders' theory of excluding his
complaint (for replacement of a lost stock [dividend] certificate which he claimed to have
never received) from the classification of intra-corporate controversies as one that "does not
square with the intent of the law, which is to segregate from the general jurisdiction of regular
Courts controversies involving corporations and their stockholders and to bring them to the
SEC for exclusive resolution, in much the same way that labor disputes are now brought to the
Ministry-of Labor and Employment (MOLE) and the National Labor Relations Commission
(NLRC), and not to the Courts."

(a) The Bragas contend that Telectronics, as buyertransferee of the 56% majority
shares is not a registered stockholder, because they, through their son the
corporate secretary, appear to have refused to perform "the ministerial duty of
recording transfers of shares of stock of the corporation of which he is the
secretary," and that the dispute is therefore, not an intracorporate one. This
contention begs the question which must properly be resolved by the SEC, but
which they would prevent by their own act, through their son, of blocking the due
recording of the transfer and cannot be sanctioned. It can be seen from their very
complaint in the regular courts that they with their two sons constituting the
plaintiffs are all stockholders while the defendants are the Abejos who are also
stockholders whose sale of the shares to Telectronics they would annul.

(b) There can be no question that the dispute between the Abejos and the Bragas
as to the sale and transfer of the former's shares to Telectronics for P5 million is
an intracorporate one under section 5 (b), prescinding from the applicability of
section 5 (a) and (c), (supra, par. 4) lt is the SEC which must resolve the Bragas'
claim in their own complaint in the court case filed by them of an alleged pre-
emptive right to buy the Abejos' shares by virtue of "on-going negotiations,"
which they may submit as their defense to the mandamus petition to register the
sale of the shares to Telectronics. But asserting such preemptive rights and asking
that the same be enforced is a far cry from the Bragas' claim that "the case relates
to questions of ownership" over the shares in question. 9 (Not to mention, as
pointed out by the Abejos, that the corporation is not a close corporation, and no
restriction over the free transferability of the shares appears in the Articles of
Incorporation, as well as in the by-laws 10 and the certificates of stock
themselves, as required by law for the enforcement of such restriction. See Go Soc
& Sons, etc. v. IAC, G.R. No. 72342, Resolution of February 19, 1987.)

(c) The dispute between the Bragas and Telectronics as to the sale and transfer for
P1,674,450.00 of Virginia Braga's 63.000 shares covered by Street certificates duly
endorsed in blank by her is within the special competence and jurisdiction of the
SEC, dealing as it does with the free transferability of corporate shares,
particularly street certificates," as guaranteed by the Corporation Code and its
proclaimed policy of encouraging foreign and domestic investments in Philippine
private corpora. tions and more active public participation therein for the
Promotion of economic development. Here again, Virginia Braga's claim of loss of
her street certificates 11 or theft thereof (denounced by Telectronics as 11
perjurious" 12 ) must be pleaded by her as a defense against Telectronics'petition
for mandamus and recognition now as the controlling stockholder of the
corporation in the light of the joint affidavit of Geneml Cerefino S. Carreon of the
National Telecommunications Commission and private respondent Jose Luis
Santiago of Telectronics narrating the facts and circumstances of how the former
sold and delivered to Telectronics on behalf of his compadres, the Bragas, Virginia
Braga's street certificates for 63,000 shares equivalent to 18% of the corporation's
outstanding stock and received the cash price thereof. 13 But as to the sale and
transfer of the Abejos' shares, the Bragas cannot oust the SEC of its original and
exclusive jurisdiction to hear and decide the case, by blocking through the
 corporate secretary, their son, the due recording of the transfer and sale of the
shares in question and claiming that Telectronics is not a stockholder of the
corporation – which is the very issue that the SEC is called upon to resolve. As the
SEC maintains, "There is no requirement that a stockholder of a corporation must
be a registered one in order that,the Securities and Exchange Commission may
take cognizance of a suit seeking to enforce his rights as such stockholder." 14 This
is because the SEC by express mandate has "absolute jurisdiction, supervision and
control over all corporations" and is called upon to enforce the provisions of the
Corporation Code, among which is the stock purchaser's right to secure the
corresponding certificate in his name under the provisions of Section 63 of the
Code. Needless to say, any problem encountered in securing the certificates of
stock representing the investment made by the buyer must be expeditiously dealt
with through administrative mandamus proceedings with the SEC, rather than
through the usual tedious regular court procedure. Furthermore, as stated in the
SEC order of April 13, 1983, notice given to the corporation of the sale of the
shares and presentation of the certificates for transfer is ,equivalent to
registration: "Whether the refusal of the (corporation) to effect the same is ivalid
or not is still subject to the outcome of the hearing on the merits of the case. 15

6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative
commissions and boards the power to resolve specialized disputes in the field of labor (as in
corporations, public transportation and public utilities) ruled that Congress in requiring the
Industrial Court's intervention in the resolution of labor-management controversies likely to
cause strikes or lockouts meant such jurisdiction to be exclusive, although it did not so
expressly state in the law. The Court held that under the "sense-making and expeditious
doctrine of primary jurisdiction ... the courts cannot or will n6t determine a controversy
involving a question which is within the jurisdiction of an administrative tribunal, where the
question demands the exercise of sound administrative discretion requiring the special
knowledge, experience, and seruices of the administratiue tribunal to determine technical and
intricate matters of fact, and a uniformity of ruling is essential to comply uith the purposes of
the regulatory statute administered " 16

In this era of clogged court dockets, the need for specialized administrative boards or
commissions with the special knowledge, experience and capability to hear and determine
promptly disputes on technical matters or essentially factual matters, subject to judicial review
in case of grave abuse of discretion, has become well nigh indispensable. Thus, in 1984, the
Court noted that "between the power lodged in an administrative body and a court, the
unmistakable trend has been to refer it to the former. 'Increasingly, this Court has been
committed to the view that unless the law speaks clearly and unequivocably, the choice should
fall on [an administrative agency.]' " 17 The Court in the earlier case of Ebon vs. De
Guzman 18 noted that the lawmaking authority, in restoring to the labor arbiters and the NLRC
their jurisdiction to award all kinds of damages in labor cases, as against the previous P.D.
amendment splitting their jurisdiction with the regular courts, "evidently ... had second
thoughts about depriving the Labor Arbiters and the NLRC of the jurisdiction to award
damages in labor cases because that setup would mean duplicity of suits, splitting the cause of
action and possible conflicting findings and conclusions by two tribunals on one and the same
claim."

7. Thus, the Corporation Code (B.P. No. 178) enacted on May 1, 1980 specifically vests the SEC
with the Rule-making power in the discharge of its task of implementing the provisions of the
Code and particularly charges it with the duty of preventing fraud and abuses on the part of
controlling stockholders, directors and officers, as follows:

SEC. 143. Rule-making power of the Securities and Exchange Commission. — The
Securities and Exchange Commission shall have the power and authority to
implement the provisions of this Code, and to promulgate rules and regulations
reasonably necessary to enable it to perform its duties hereunder, particularly in
the prevention of fraud and abuses on the part of the controlling stockholders,
members, directors, trustees or officers. (Emphasis supplied)

The dispute between the contending parties for control of thecorporation manifestly fans
within the primary and exclusive jurisdiction of the SEC in whom the law has reserved such
jurisdiction as an administrative agency of special competence to deal promptly and
expeditiously therewith.

As the Court stressed in Union Glass & Container Corp. v. SEC, 19 "This grant of jurisdiction [in
Section 51 must be viewed in the light of the nature and functions of the SEC under the law.
Section 3 of PD No. 902-A confers upon the latter 'absolute jurisdiction, supervision, and
control over all corporations, partnerships or associations, who are grantees of primary
franchise and/or license or permit issued by the government to operate in the Philippines ...
The principal function of the SEC is the supervision and control over corporations, partnerships
and associations with the end in view that investment in these entities may be encouraged and
protected, and their activities pursued for the promotion of economic development.

"It is in aid of this office that the adjudicative power of the SEC must be exercised. Thus the law
explicitly specified and delin-dted its jurisdiction to matters intrinsically connected with the
regulation of corporations, partnerships and associations and those dealing with the internal
affairs of such corporations, partnerships or associations.

"Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must
pertain to any of the following relationships: [al between the corporation, partnership or
association and the public; [b] between the corporation, partnership or association and its
stockholders, partners, members, or officers; [c] between the corporation, partnership or
association and the state in so far as its franchise, permit or license to operate is concerned;
and Id] among the stockholders, partners or associates themselves." 20
Parenthetically, the cited case of Union Glass illustrates by way of contrast what disputes do
not fall within the special jurisdiction of the SEC. In this case, the SEC had properly assumed
jurisdiction over the dissenting stockholders' com. Plaint against the corporation Pioneer Glass
questioning its dacion en pago of its glass plant and all its assets in favor of the DBP which was
clearly an intra-corporate controversy dealing with its internal affairs. But the Court held that
the SEC had no jurisdiction over petitioner Union Glass Corp., imPle,aded as third party
purchaser of the plant from DBP in the action to annul the dacion en pago. The Court held that
such action for recovery of the glass plant could be brought by the dissenting stockholder to
the regular courts only if and when the SE C rendered final judgment annulling the dacion en
pago and furthermore subject to Union Glass' defenses as a third party buyer in good faith.
Similarly, in the DMRC case, therein petitioner's,tomplaint for collection of the amounts due to
it as payment of rentals for the lease of its heavy equipment in the form mainly of cash and
part in shares of stock of the debtor-defendant corporation was held to be not covered by the
SEC's exclusive jurisdiction over intracorporate disputes, since "to pass upon a money claim
under a lease contract would be beyond the competence Of the Securities and Exchange
Commission and to separate the claim for money from the claim for shares of stock would be
splitting a single cause of action resulting in a multiplicity of suitS." 21 Such an action for
collection of a debt does not involve enforcement Of rights and obligations under the
Corporation Code nor the in. temal or intracorporate affairs of the debtor corporation. But in
aR disputes affecting and dealing With the interests of the corporation and its stockholders,
following the trend and clear legislative intent of entmsting all disputes of a specialized nature
to administrative agencies possessing. the requisite competence, special knowledge,
experience and services and facilities to expeditiously resolve them and determine the
essential facts including technical and intricate matters, as in labor and public utilities rates
disputes, the SEC has been given "the original and exclusive jurisdiction to hear anddecide"
them (under section 5 of P.D. 902-A) "in addition to [its] regulatory and adjudicative functions"
(under Section 3, vesting in it "absolute jurisdiction, supervision and control over all
corporations" and the Rule-making power granted it in Section 143 of the Corporation
Code, supra). As stressed by the Court in the Philex case, supra, "(T)here is no distinction,
qualification, nor any exemption whatsoever. The provision is broad and covers all kinds of
controversies between stockholders and corporations."

It only remains now to deal with the Order dated April 15, 1983 (Annex H, Petition) 22 of the
SEC's three-member Hearing Conunittee granting Telectronics' motion for creation of a
receivership or management committee with the ample powers therein enumerated for the
preservation pendente lite of the corporation's assets and in discharge of its "power and duty
to preserve the rights of the parties, the stockholders, the public availing of the corporation's
services and the rights of creditors," as well as "for reasons of equity and justice ... (and) to
prevent possible paralization of corporate business." The said Order has not been
implemented notwithstanding its having been upheld per the SEC en banc's Order of May 15,
1984 (Annex "V", Petition) dismissing for lack of merit the petition for certiorari, prohibition
and mandamus with prayer for restraining order or injunction filed by the Bragas seeking the
disbandment of the Hearing Committee and the setting aside of its Orders, and its Resolution
of August 9, 1984, denying reconsideration (Annex "X", Petition), due to the Bragas' filing of
the petition at bar.

Prescinding from the great concern of damage and prejudice expressed by Telectronics due to
the Bragas having remained in control of the corporation and having allegedly committed acts
of gross mismanagement and misapplication of funds, the Court finds that under the facts and
circumstances of record, it is but fair and just that the SEC's order creating a receivership
committee be implemented forthwith, in accordance with its terms, as follows:

The three-man receivership committee shall be composed of a representative

from the commission, in the person of the Director, Examiners and Appraisers
Department or his designated representative, and a representative from the
petitioners and a representative of the respondent.

The petitioners and respondent are therefore directed to sub. mit to the
Commission the name of their designated representative within three (3) days
from receipt of this order. The Conunission shall appoint the other representatives
if either or both parties fafl to comply with the requirement within the stated
time.

ACCORDINGLY, judgment is hereby rendered:

(a) Granting the petition in G.R. No. 63558, annulling the challenged Orders of
respondent Judge clated February 14, 1983 and March i 1, 1983 (Annexes "L" and
"P" of the Abejos' petition) and prohibiting respondent Judge from further
proceeding in Civil Case No. 48746 filed in his Court other than to dismiss the
same for lack or jurisdiction over the subject-matter;

(b) Dismissing the petition in G.R. Nos. 68450-51 and lifting the temporary
restraining order issued on September 24, 1984, effective immediately upon
promulgation hereof,

(c) Directing the SEC through its Hearing Committee to proceed immediately with
hearing and resolving the pending mandamus petition for recording in the
corporate books the transfer to Telectronics and its nominees of the majority
(56%) shares of stock of the corporation Pocket Bell pertaining to the Abejos and
Virginia Braga and all related issues, taking into consideration, without need of
resubmittal to it, the pleadings, annexes and exhibits filed by the contending
parties in the cases at bar; and

(d) Likewise directing the SEC through its Hearing Committee to proceed
immediately with the implementation of its receivership or management
 committee Order of April 15, 1983 in SEC Case No. 2379 and for the purpose, the
contending parties are ordered to submit to said Hearing Committee the name of
their designated representatives in the receivership/management committee
within three (3) days from receipt of this decision, on pain of forfeiture of such
right in case of failure to comply herewith, as provided in the said Order; and
ordering theBragas to perform only caretaker acts in the corporation pending the
organization of such receivership/management committee and assumption of its
functions.

This decision shall be immediately executory upon its promulgation.

SO ORDERED.

G.R. No. 87135 May 22, 1992

ALMA MAGALAD, petitioner,

vs.
PREMIERE FINANCING CORP., respondent.

PARAS, J.:

This is an appeal originally filed with the Court of Appeals but certified to this court for
disposition since it involves purely questions of law from the decision of the Regional Trial
Court (RTC), Branch LXXXV, Quezon City, dated May 22, 1984, in Civil Case No. Q-40392,
ordering the defendant-appellant Premiere Financing Corporation (Premiere for short) to pay
to the plaintiff-appellee Alma Magalad (Magalad for short) the sum of:
(a) P50,000.00, the principal obligation, plus interest at the legal rate from September 12,
1983, until the full amount is paid; (b) P10,000.00, both for moral and exemplary damages; (c)
P5,000.00, for and as attorney's fees and (d) the costs of suit.

The antecedent facts of the case are as follows:

Premiere is a financing company engaged in soliciting and accepting money market placements
or deposits (Original Record, p. 29).

On September 12, 1983 with expired permit to issue commercial papers (Ibid., p. 8) and with
intention not to pay or defraud its creditors, Premiere induced and misled Magalad into
making a money market placement of P50,000.00 at 22% interest per annum for which it
issued a receipt (Ibid., Exh. "B", p. 8). Aside from the receipt, Premier likewise issued two (2)
post-dated checks in the total sum of P51,079.00 (Ibid., Exh. "C", p. 9) and assigned to Magalad
its receivable from a certain David Saman for the same amount (Ibid., Exh. "C", p. 10).

When the said checks were presented for payment on their due dates, the drawee bank
dishonored the checks for lack of sufficient funds to cover the amount (Ibid., Exhs. "D-1", "E-1",
pp. 11-12). Despite demands by Magalad for the replacement of said checks with cash,
Premiere, for no valid reason, failed and refused to honor such demands and due to fraudulent
acts of Premiere, Magalad suffered sleepless nights, mental anguish, fright, serious anxiety,
considering the fact that the money she invested is blood money and is the only source of
support for her family (Ibid., p. 4).

Magalad in order to seek redress and retrieve her blood money, availed of the service of
counsel for which she agreed to pay twenty percent (20%) of the amount due as and for
attorney's fees (Ibid.)

On January 10, 1984, Magalad filed a complaint for damages with prayer for writ of preliminary
attachment with the RTC, Branch LXXXV, Quezon City, docketed as Civil Case No. Q-40392
against herein Premiere (Ibid., p. 3-6).

Premiere having failed to file an answer and acting on Magalad's motion, the lower court
declared Premiere in default by virtue of an order dated April 5, 1984 allowing Magalad to
present evidence ex-parte (Ibid., pp. 21; 22)

On May 22, 1984 the lower court rendered a default judgment against Premiere, the
dispositive portion of which reads:

From the foregoing evidence, the court finds that plaintiff has fully established her
claim that defendant had indeed acted fraudulently in incurring the obligation and
considering that no evidence has been adduced by the defendant to contradict
the same, judgment is hereby rendered ordering the defendant to pay plaintiff as
follows:

(a) P50,000.00, the principal obligation, plus interest at the legal rate from
September 12, 1983 until the full amount is paid;

(b) P10,000.00 both for moral and exemplary damages;

(c) P5,000.00 for and as attorney's fees; and

(d) the costs of suit.

SO ORDERED. (Ibid., p. 30)

Premiere filed a motion for reconsideration of the foregoing decision, based principally on a
question of law alleging that the Securities and Exchange Commission (SEC) has exclusive and
original jurisdiction over a corporation under a state of suspension of payments (Ibid., pp. 32-
41).

Magalad filed an opposition to the motion for reconsideration on January 8, 1985 alleging
among others that the regular court has jurisdiction over the case to the exclusion of the SEC.
(Ibid., pp. 51-53).

On May 28, 1986 the lower court issued an order denying the motion for reconsideration
(Ibid., p. 61).

On June 11, 1986 Premiere filed his notice of appeal which led to the issuance of the order of
the lower court dated July 29, 1986 elevating the case to the Court of Appeals (CA) (Ibid., pp.
62-63).

The Court of Appeals in its resolution dated September 8, 1987 dismissed the case for failure
of Premiere to file its brief despite the ninety-day extension granted to it, which expired on
June 10, 1987 (Rollo, p. 16).

An omnibus motion for reconsideration and admission of late filing of Premiere's brief was
filed on September 22, 1987 (Rollo, pp. 17-19; 32).

On September 30, 1987 the Court of Appeals issued a resolution which reconsidered its
previous resolution dated September 5, 1987 and admitted the Premiere's brief (Rollo, p. 26).

On January 31, 1989 the Court of Appeals issued a resolution certifying the instant case to this
Court on the ground that the case involves a question of law, the dispositive part of which
stating:

ACCORDINGLY, pursuant to Rule 50, Sec. 3, in relation to the Judiciary Act of 1948,
Sec. 17, par. 4(3) (4), the Appeal in this case is hereby certified to the Supreme
Court on the ground that the only issue raised concerns the jurisdiction of the trial
court and only a question of law. (Rollo, p. 33)

Hence, this appeal.

The pivotal issue in this case is whether or not the court a quo had jurisdiction to try the
instant case.

At the very core of this appeal assailing the aforesaid pronouncement of the lower court, and
around which revolve the arguments of the parties, is the applicability of Presidential Decree
No. 902-A (Reorganization of the SEC with Additional Powers), as amended by Presidential
Decrees Nos. 1653, 1758 and 1799. Magalad submits that the legal suit which she has brought
against Premiere is an ordinary action for damages with the preliminary attachment cognizable
solely by the RTC. Premiere, on the other hand, espouses the original and exclusive jurisdiction
of the Securities and Exchange Commission.

Presidential Decree No. 902-A, Section 3, provides:

Sec. 3. The Commission shall have absolute jurisdiction, supervision and control
over all corporations, partnerships or associations, who are the grantees of
primary franchises and/or a license or permit issued by the government to
operate in the Philippines; and in the exercise of its authority, it shall have the
power to enlist the aid and support of and to deputize any and all enforcement
agencies of the government, civil or military as well as any private institution,
corporation, firm, association or person. (As amended by Presidential Decree No.
1758).

Sec. 3 of Pres. Decree No. 902-A should also be read in conjunction with Sec. 5 of the same
law, providing:

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities

and Exchange Commission over corporations, partnerships and other forms of
associations registered with it as expressly granted under the existing laws and
decrees, it shall have original and exclusive jurisdiction to hear and decide cases
involving:

a) Devises or schemes employed by or any acts of the Board of

Directors, business associates, its officers or partners, amounting to
fraud and misrepresentation which may be detrimental to the public
and/or to the stockholders, partners, members of associations or
organizations registered with the Commission. (Emphasis supplied)

Considering that Magalad's complaint sufficiently alleges acts amounting to fraud and
misrepresentation committed by Premiere, the SEC must be held to retain its original and
exclusive jurisdiction over the case, despite the fact that the suit involves collection of sums of
money paid to said corporation, the recovery of which would ordinarily fall within the
jurisdiction of regular courts. The fraud committed is detrimental to the interest of the public
and, therefore, encompasses a category of relationship within the SEC jurisdiction.

Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must
pertain to any of the following relationships: (a) between the corporation, partnership or
association and the public; (b) between the corporation, partnership or association and its
stockholders, partners, members or officers; (c) between the corporation, partnership or
association and the state so far as its franchise, permit or license to operate is concerned; and
(d) among the stockholders, partners or associates themselves (Union Glass & Container Corp.
v. SEC, 126 SCRA 31; 38; 1983; Abejo v. De la Cruz, 149 SCRA 654, 1987).

In this case, the recitals of the complaint sufficiently allege that devices or schemes amounting
to fraud and misrepresentation detrimental to the interest of the public have been resorted to
by Premiere Corporation. It can not but be conceded, therefore, that the SEC may exercise its
adjudicative powers pursuant to Sec. 5(a) of Pres. Decree No. 902-A (Supra).

The fact that Premiere's authority to engage in financing already expired will not have the
effect of divesting the SEC of its original and exclusive jurisdiction. The expanded jurisdiction of
the SEC was conceived primarily to protect the interest of the investing public. That Magalad's
money placements were in the nature of investments in Premiere can not be gainsaid.
Magalad had reasonably expected to receive returns from moneys she had paid to Premiere.
Unfortunately, however, she was the victim of alleged fraud and misrepresentation.

Reliance by Magalad on the cases of DMRC v. Este del Sol, (132 SCRA 293) and Union Glass &
Container Corp. v. SEC (126 SCRA 31), where the jurisdiction of the ordinary Courts was upheld,
is misplaced for, as explicitly stated in those cases, nowhere in the complaints therein is found
any averment of fraud or misrepresentation committed by the respective corporations
involved. The causes of action, therefore, were nothing more than simple money claims.

Further bolstering the jurisdiction of the SEC in this case is the fact that said agency had
already appointed a Rehabilitation Receiver for Premiere and has directed all proceedings or
claims against it be suspended. This, pursuant to Sec. 6(c) of Pres. Decree No. 902-A providing
that "upon appointment of a . . . rehabilitation receiver . . . all actions for claims against
corporations . . . under receivership pending before any court, tribunal, board or body shall be
suspended accordingly."

By so doing, SEC has exercised its original and exclusive jurisdiction to hear and decide cases
involving:

a) Petitions of corporations, partnerships or associations to be declared in the

state of suspension of payments in cases where the corporation, partnership or
association possesses sufficient property to cover all its debts but foresees the
impossibility of meeting them when they respectively fall due or in cases where
the corporation, partnership or association has no sufficient assets to cover its
liabilities but is under the management of a Rehabilitation Receiver or
Management of a Rehabilitation Receiver or Management Committee created
pursuant to this Decree. (Section 5(d) of Pres. Decree No. 902-A as added by Pres.
Decree 1758).

In fine, the adjudicative powers of the SEC being clearly defined by law, its jurisdiction over this
case has to be upheld.
PREMISES CONSIDERED, the instant appeal is GRANTED, and the order of the Presiding Judge
of the Regional Trial Court, Quezon City, Branch LXXXV dated May 22, 1984, in Civil Case No. Q-
40392 is REVERSED and SET ASIDE, without prejudice to the filing by Alma Magalad of the
appropriate complaint against Premiere Financing Corporation with the Securities and
Exchange Commission.

SO ORDERED.

G.R. No. L-12719 May 31, 1962

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.

Office of the Solicitor General for petitioner.

V. Jaime and L. E. Petilla for respondent.

PAREDES, J.:

This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of
the Collector of Internal Revenue, assessing against and demanding from the "Club Filipino,
Inc. de Cebu", the sum of P12,068.84 as fixed and percentage taxes, surcharge and
compromise penalty, allegedly due from it as a keeper of bar and restaurant.

As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a
civic corporation organized under the laws of the Philippines with an original authorized capital
stock of P22,000.00, which was subsequently increased to P200,000.00, among others, to it
"proporcionar, operar, y mantener un campo de golf, tenis, gimnesio (gymnasiums), juego de
bolos (bowling alleys), mesas de billar y pool, y toda clase de juegos no prohibidos por leyes
generales y ordenanzas generales; y desarollar y cultivar deportes de toda clase y
denominacion cualquiera para el recreo y entrenamiento saludable de sus miembros y
accionistas" (sec. 2, Escritura de Incorporacion del Club Filipino, Inc. Exh. A). Neither in the
articles or by-laws is there a provision relative to dividends and their distribution, although it is
covenanted that upon its dissolution, the Club's remaining assets, after paying debts, shall be
donated to a charitable Philippine Institution in Cebu (Art. 27, Estatutos del Club, Exh. A-a.).

The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from
the government), and a bar-restaurant where it sells wines and liquors, soft drinks, meals and
short orders to its members and their guests. The bar-restaurant was a necessary incident to
the operation of the club and its golf-course. The club is operated mainly with funds derived
from membership fees and dues. Whatever profits it had, were used to defray its overhead
expenses and to improve its golf-course. In 1951. as a result of a capital surplus, arising from
the re-valuation of its real properties, the value or price of which increased, the Club declared
stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a
BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its
bar and restaurant, although it secured B-4, B-9(a) and B-7 licenses. In a letter dated December
22, 1852, the Collector of Internal Revenue assessed against and demanded from the Club, the
following sums: —

As percentage tax on its gross receipts

during the tax years 1946 to 1951 P9,599.07
Surcharge therein 2,399.77
As fixed tax for the years 1946 to 1952 70.00
Compromise penalty 500.00

The Club wrote the Collector, requesting for the cancellation of the assessment. The request
having been denied, the Club filed the instant petition for review.

The dominant issues involved in this case are twofold:

1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed and
percentage taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax Code,
under which the assessment was made, in connection with the operation of its bar and
restaurant, during the periods mentioned above; and

2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty.

Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a
business on which the percentage tax is imposed shall pay in full a fixed annual tax of ten pesos
for each calendar year or fraction thereof in which such person shall engage in said business."
Section 183 provides in general that "the percentage taxes on business shall be payable at the
end of each calendar quarter in the amount lawfully due on the business transacted during
each quarter; etc." And section 191, same Tax Code, provides "Percentage tax . . . Keepers of
restaurants, refreshment parlors and other eating places shall pay a tax three per centum, and
keepers of bar and cafes where wines or liquors are served five per centum of their gross
receipts . . .". It has been held that the liability for fixed and percentage taxes, as provided by
these sections, does not ipso facto attach by mere reason of the operation of a bar and
restaurant. For the liability to attach, the operator thereof must be engaged in the business as
a barkeeper and restaurateur. The plain and ordinary meaning of business is restricted to
activities or affairs where profit is the purpose or livelihood is the motive, and the term
business when used without qualification, should be construed in its plain and ordinary
meaning, restricted to activities for profit or livelihood (The Coll. of Int. Rev. v. Manila Lodge
No. 761 of the BPOE [Manila Elks Club] & Court of Tax Appeals, G.R. No. L-11176, June 29,
1959, giving full definitions of the word "business"; Coll. of Int. Rev. v. Sweeney, et al.
[International Club of Iloilo, Inc.], G.R. No. L-12178, Aug. 21, 1959, the facts of which are
similar to the ones at bar; Manila Polo Club v. B. L. Meer, etc., No. L-10854, Jan. 27, 1960).

Having found as a fact that the Club was organized to develop and cultivate sports of all class
and denomination, for the healthful recreation and entertainment of its stockholders and
members; that upon its dissolution, its remaining assets, after paying debts, shall be donated
to a charitable Philippine Institution in Cebu; that it is operated mainly with funds derived from
membership fees and dues; that the Club's bar and restaurant catered only to its members and
their guests; that there was in fact no cash dividend distribution to its stockholders and that
whatever was derived on retail from its bar and restaurant was used to defray its overall
overhead expenses and to improve its golf-course (cost-plus-expenses-basis), it stands to
reason that the Club is not engaged in the business of an operator of bar and restaurant (same
authorities, cited above).

It is conceded that the Club derived profit from the operation of its bar and restaurant, but
such fact does not necessarily convert it into a profit-making enterprise. The bar and restaurant
are necessary adjuncts of the Club to foster its purposes and the profits derived therefrom are
necessarily incidental to the primary object of developing and cultivating sports for the
healthful recreation and entertainment of the stockholders and members. That a Club makes
some profit, does not make it a profit-making Club. As has been remarked a club should always
strive, whenever possible, to have surplus (Jesus Sacred Heart College v. Collector of Int. Rev.,
G.R. No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco Educational Corp., G.R. No. L-
9276, Oct. 23, 1956).1äwphï1.ñët

It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee Club
is a stock corporation. This is unmeritorious. The facts that the capital stock of the respondent
Club is divided into shares, does not detract from the finding of the trial court that it is not
engaged in the business of operator of bar and restaurant. What is determinative of whether
or not the Club is engaged in such business is its object or purpose, as stated in its articles and
by-laws. It is a familiar rule that the actual purpose is not controlled by the corporate form or
by the commercial aspect of the business prosecuted, but may be shown by extrinsic evidence,
including the by-laws and the method of operation. From the extrinsic evidence adduced, the
Tax Court concluded that the Club is not engaged in the business as a barkeeper and
restaurateur.

Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a
capital stock divided into shares and (2) an authority to distribute to the holders of such
shares, dividends or allotments of the surplus profits on the basis of the shares held (sec. 3,
Act No. 1459). In the case at bar, nowhere in its articles of incorporation or by-laws could be
found an authority for the distribution of its dividends or surplus profits. Strictly speaking, it
cannot, therefore, be considered a stock corporation, within the contemplation of the
corporation law.

A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-
profit, nonstock organizations, unless the intent to the contrary is manifest and patent"
(Collector v. BPOE Elks Club, et al., supra), which is not the case in the present appeal.

Having arrived at the conclusion that respondent Club is not engaged in the business as an
operator of a bar and restaurant, and therefore, not liable for fixed and percentage taxes, it
follows that it is not liable for any penalty, much less of a compromise penalty.

WHEREFORE, the decision appealed from is affirmed without costs.

Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera and Dizon, JJ., concur.
Bengzon, C.J., is on leave.

G.R. No. 91889 August 27, 1993

MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY AND NEPOMUCENO

REDOVAN, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, EDGARDO D. PABALAN, MANUEL A. TORRES, JR.,
MARIA THERESA V. VELOSO AND CASTRENSE C. VELOSO, respondents.

Virgilio E. Dulay for petitioners.

Torres, Tobias, Azura & Jocson for private respondents.

NOCON, J.:

This is a petition for review on certiorari to annul and set aside the decision 1 of the Court of
Appeals affirming the decision2 of the Regional Trial Court of Pasay, Branch 114 Civil Cases Nos.
8198-P, and 2880-P, the dispositive portion of which reads, as follows:

Wherefore, in view of all the foregoing considerations, in this Court hereby

renders judgment, as follows:

In Civil Case No. 2880-P, the petition filed by Manuel R. Dulay Enterprises, Inc. and
Virgilio E. Dulay for annulment or declaration of nullity of the decision of the
 Metropolitan Trial Court, Branch 46, Pasay City, in its Civil Case No. 38-81 entitled
"Edgardo D. Pabalan, et al., vs. Spouses Florentino Manalastas, et al.," is dismissed
for lack of merits;

In Civil Case No. 8278-P, the complaint filed by Manuel R. Dulay Enterprises, Inc.
for cancellation of title of Manuel A. Torres, Jr. (TCT No. 24799 of the Register of
Deeds of Pasay City) and reconveyance, is dismissed for lack or merit, and,

In Civil Case No. 8198-P, defendants Manuel R. Dulay Enterprises, Inc. and Virgilio
E. Dulay are ordered to surrender and deliver possession of the parcel of land,
together with all the improvements thereon, described in Transfer Certificate of
Title No. 24799 of the Register of Deeds of Pasay City, in favor of therein plaintiffs
Manuel A. Torres, Jr. as owner and Edgardo D. Pabalan as real estate administrator
of said Manuel A. Torres, Jr.; to account for and return to said plaintiffs the rentals
from dwelling unit No. 8-A of the apartment building (Dulay Apartment) from
June 1980 up to the present, to indemnify plaintiffs, jointly and severally,
expenses of litigation in the amount of P4,000.00 and attorney's fees in the sum of
P6,000.00, for all the three (3) cases. Co-defendant Nepomuceno Redovan is
ordered to pay the current and subsequent rentals on the premises leased by him
to plaintiffs.

The counterclaim of defendants Virgilio E. Dulay and Manuel R. Dulay Enterprises,

Inc. and N. Redovan, dismissed for lack of merit. With costs against the three (3)
aforenamed defendants. 3

The facts as found by the trial court are as follows:

Petitioner Manuel R. Dulay Enterprises, Inc, a domestic corporation with the following as
members of its Board of Directors: Manuel R. Dulay with 19,960 shares and designated as
president, treasurer and general manager, Atty. Virgilio E. Dulay with 10 shares and designated
as vice-president; Linda E. Dulay with 10 shares; Celia Dulay-Mendoza with 10 shares; and Atty.
Plaridel C. Jose with 10 shares and designated as secretary, owned a property covered by TCT
No. 17880 4 and known as Dulay Apartment consisting of sixteen (16) apartment units on a six
hundred eighty-nine (689) square meters lot, more or less, located at Seventh Street (now
Buendia Extension) and F.B. Harrison Street, Pasay City.

Petitioner corporation through its president, Manuel Dulay, obtained various loans for the
construction of its hotel project, Dulay Continental Hotel (now Frederick Hotel). It even had to
borrow money from petitioner Virgilio Dulay to be able to continue the hotel project. As a
result of said loan, petitioner Virgilio Dulay occupied one of the unit apartments of the subject
property since property since 1973 while at the same time managing the Dulay Apartment at
his shareholdings in the corporation was subsequently increased by his father. 5
On December 23, 1976, Manuel Dulay by virtue of Board Resolution
No 186 of petitioner corporation sold the subject property to private respondents spouses
Maria Theresa and Castrense Veloso in the amount of P300,000.00 as evidenced by the Deed
of Absolute Sale.7 Thereafter, TCT No. 17880 was cancelled and TCT No. 23225 was issued to
private respondent Maria Theresa Veloso. 8 Subsequently, Manuel Dulay and private
respondents spouses Veloso executed a Memorandum to the Deed of Absolute Sale of
December 23, 1976 9 dated December 9, 1977 giving Manuel Dulay within (2) years or until
December 9, 1979 to repurchase the subject property for P200,000.00 which was, however,
not annotated either in TCT No. 17880 or TCT No. 23225.

On December 24, 1976, private respondent Maria Veloso, without the knowledge of Manuel
Dulay, mortgaged the subject property to private respondent Manuel A. Torres for a loan of
P250,000.00 which was duly annotated as Entry No. 68139 in TCT No. 23225. 10

Upon the failure of private respondent Maria Veloso to pay private respondent Torres, the
subject property was sold on April 5, 1978 to private respondent Torres as the highest bidder in
an extrajudicial foreclosure sale as evidenced by the Certificate of Sheriff's Sale 11 issued on
April 20, 1978.

On July 20, 1978, private respondent Maria Veloso executed a Deed of Absolute Assignment of
the Right to Redeem 12 in favor of Manuel Dulay assigning her right to repurchase the subject
property from private respondent Torres as a result of the extra sale held on April 25, 1978.

As neither private respondent Maria Veloso nor her assignee Manuel Dulay was able to
redeem the subject property within the one year statutory period for redemption, private
respondent Torres filed an Affidavit of Consolidation of Ownership 13 with the Registry of Deeds
of Pasay City and TCT No. 24799 14 was subsequently issued to private respondent Manuel
Torres on April 23, 1979.

On October 1, 1979, private respondent Torres filed a petition for the issuance of a writ of
possession against private respondents spouses Veloso and Manuel Dulay in LRC Case No.
1742-P. However, when petitioner Virgilio Dulay was never authorized by the petitioner
corporation to sell or mortgage the subject property, the trial court ordered private
respondent Torres to implead petitioner corporation as an indispensable party but the latter
moved for the dismissal of his petition which was granted in an Order dated April 8, 1980.

On June 20, 1980, private respondent Torres and Edgardo Pabalan, real estate administrator of
Torres, filed an action against petitioner corporation, Virgilio Dulay and Nepomuceno Redovan,
a tenant of Dulay Apartment Unit No. 8-A for the recovery of possession, sum of money and
damages with preliminary injunction in Civil Case, No. 8198-P with the then Court of First
Instance of Rizal.
On July 21, 1980, petitioner corporation filed an action against private respondents spouses
Veloso and Torres for the cancellation of the Certificate of Sheriff's Sale and TCT No. 24799 in
Civil Case No. 8278-P with the then Court of First Instance of Rizal.

On January 29, 1981, private respondents Pabalan and Torres filed an action against spouses
Florentino and Elvira Manalastas, a tenant of Dulay Apartment Unit No. 7-B, with petitioner
corporation as intervenor for ejectment in Civil Case No. 38-81 with the Metropolitan Trial
Court of Pasay City which rendered a decision on April 25, 1985, dispositive portion of which
reads, as follows:

Wherefore, judgment is hereby rendered in favor of the plaintiff (herein private

respondents) and against the defendants:

1. Ordering the defendants and all persons claiming possession under them to
vacate the premises.

2. Ordering the defendants to pay the rents in the sum of P500.000 a month from
May, 1979 until they shall have vacated the premises with interest at the legal
rate;

3. Ordering the defendants to pay attorney's fees in the sum of P2,000.00 and
P1,000.00 as other expenses of litigation and for them to pay the costs of the
suit.15

Thereafter or on May 17, 1985, petitioner corporation and Virgilio Dulay filed an action against
the presiding judge of the Metropolitan Trial Court of Pasay City, private respondents Pabalan
and Torres for the annulment of said decision with the Regional Trial Court of Pasay in Civil
Case No. 2880-P.

Thereafter, the three (3) cases were jointly tried and the trial court rendered a decision in favor
of private respondents.

Not satisfied with said decision, petitioners appealed to the Court of Appeals which rendered a
decision on October 23, 1989, the dispositive portion of which reads, as follows:

PREMISES CONSIDERED, the decision being appealed should be as it is hereby

AFFIRMED in full. 16

On November 8, 1989, petitioners filed a Motion for Reconsideration which was denied on
January 26, 1990.

Hence, this petition.

During the pendency of this petition, private respondent Torres died on April 3, 1991 as shown
in his death certificate 17 and named Torres-Pabalan Realty & Development Corporation as his
heir in his holographic will 18dated October 31, 1986.

Petitioners contend that the respondent court had acted with grave abuse of discretion when
it applied the doctrine of piercing the veil of corporate entity in the instant case considering
that the sale of the subject property between private respondents spouses Veloso and Manuel
Dulay has no binding effect on petitioner corporation as Board Resolution No. 18 which
authorized the sale of the subject property was resolved without the approval of all the
members of the board of directors and said Board Resolution was prepared by a person not
designated by the corporation to be its secretary.

We do not agree.

Section 101 of the Corporation Code of the Philippines provides:

Sec. 101. When board meeting is unnecessary or improperly held. Unless the by-
laws provide otherwise, any action by the directors of a close corporation without
a meeting shall nevertheless be deemed valid if:

1. Before or after such action is taken, written consent thereto is signed by all the
directors, or

2. All the stockholders have actual or implied knowledge of the action and make
no prompt objection thereto in writing; or

3. The directors are accustomed to take informal action with the express or
implied acquiese of all the stockholders, or

4. All the directors have express or implied knowledge of the action in question
and none of them makes prompt objection thereto in writing.

If a directors' meeting is held without call or notice, an action taken therein within
the corporate powers is deemed ratified by a director who failed to attend, unless
he promptly files his written objection with the secretary of the corporation after
having knowledge thereof.

In the instant case, petitioner corporation is classified as a close corporation and consequently
a board resolution authorizing the sale or mortgage of the subject property is not necessary to
bind the corporation for the action of its president. At any rate, corporate action taken at a
board meeting without proper call or notice in a close corporation is deemed ratified by the
absent director unless the latter promptly files his written objection with the secretary of the
corporation after having knowledge of the meeting which, in his case, petitioner Virgilio Dulay
failed to do.

It is relevant to note that although a corporation is an entity which has a personality distinct
and separate from its individual stockholders or members, 19 the veil of corporate fiction may
be pierced when it is used to defeat public convenience justify wrong, protect fraud or defend
crime. 20 The privilege of being treated as an entity distinct and separate from its stockholder
or members is therefore confined to its legitimate uses and is subject to certain limitations to
prevent the commission of fraud or other illegal or unfair act. When the corporation is used
merely as an alter ego or business conduit of a person, the law will regard the corporation as
the act of that person. 21 The Supreme Court had repeatedly disregarded the separate
personality of the corporation where the corporate entity was used to annul a valid contract
executed by one of its members.

Petitioners' claim that the sale of the subject property by its president, Manuel Dulay, to
private respondents spouses Veloso is null and void as the alleged Board Resolution No. 18 was
passed without the knowledge and consent of the other members of the board of directors
cannot be sustained. As correctly pointed out by the respondent Court of Appeals:

Appellant Virgilio E. Dulay's protestations of complete innocence to the effect that

he never participated nor was even aware of any meeting or resolution
authorizing the mortgage or sale of the subject premises (see par. 8, affidavit of
Virgilio E. Dulay, dated May 31, 1984, p. 14, Exh. "21") is difficult to believe. On the
contrary, he is very much privy to the transactions involved. To begin with, he is a
incorporator and one of the board of directors designated at the time of the
organization of Manuel R. Dulay Enterprise, Inc. In ordinary parlance, the said
entity is loosely referred to as a "family corporation". The nomenclature, if
imprecise, however, fairly reflects the cohesiveness of a group and the parochial
instincts of the individual members of such an aggrupation of which Manuel R.
Dulay Enterprises, Inc. is typical: four-fifths of its incorporators being close
relatives namely, three (3) children and their father whose name identifies their
corporation (Articles of Incorporation of Manuel R. Dulay Enterprises, Inc. Exh.
"31-A"). 22

Besides, the fact that petitioner Virgilio Dulay on June 24, 1975 executed an affidavit 23 that he
was a signatory witness to the execution of the post-dated Deed of Absolute Sale of the
subject property in favor of private respondent Torres indicates that he was aware of the
transaction executed between his father and private respondents and had, therefore,
adequate knowledge about the sale of the subject property to private respondents.

Consequently, petitioner corporation is liable for the act of Manuel Dulay and the sale of the
subject property to private respondents by Manuel Dulay is valid and binding. As stated by the
trial court:
 . . . the sale between Manuel R. Dulay Enterprises, Inc. and the spouses Maria
Theresa V. Veloso and Castrense C. Veloso, was a corporate act of the former and
not a personal transaction of Manuel R. Dulay. This is so because Manuel R. Dulay
was not only president and treasurer but also the general manager of the
corporation. The corporation was a closed family corporation and the only non-
relative in the board of directors was Atty. Plaridel C. Jose who appeared on paper
as the secretary. There is no denying the fact, however, that Maria Socorro R.
Dulay at times acted as secretary. . . ., the Court can not lose sight of the fact that
the Manuel R. Dulay Enterprises, Inc. is a closed family corporation where the
incorporators and directors belong to one single family. It cannot be concealed
that Manuel R. Dulay as president, treasurer and general manager almost had
absolute control over the business and affairs of the corporation. 24

Moreover, the appellate courts will not disturb the findings of the trial judge unless he has
plainly overlooked certain facts of substance and value that, if considered, might affect the
result of the case, 25 which is not present in the instant case.

Petitioners' contention that private respondent Torres never acquired ownership over the
subject property since the latter was never in actual possession of the subject property nor
was the property ever delivered to him is also without merit.

Paragraph 1, Article 1498 of the New Civil Code provides:

When the sale is made through a public instrument, the execution thereof shall be
equivalent to the delivery of the thing which is the object of the contract, if from
the deed the contrary do not appear or cannot clearly be inferred.

Under the aforementioned article, the mere execution of the deed of sale in a public
document is equivalent to the delivery of the property. Likewise, this Court had held that:

It is settled that the buyer in a foreclosure sale becomes the absolute owner of
the property purchased if it is not redeemed during the period of one year after
the registration of the sale. As such, he is entitled to the possession of the said
property and can demand it at any time following the consolidation of ownership
in his name and the issuance to him of a new transfer certificate of title. The buyer
can in fact demand possession of the land even during the redemption period
except that he has to post a bond in accordance with Section 7 of Act No. 3133 as
amended. No such bond is required after the redemption period if the property is
not redeemed. Possession of the land then becomes an absolute right of the
purchaser as confirmed owner. 26

Therefore, prior physical delivery or possession is not legally required since the execution of
the Deed of Sale in deemed equivalent to delivery.
Finally, we hold that the respondent appellate court did not err in denying petitioner's motion
for reconsideration despite the fact that private respondents failed to submit their comment to
said motion as required by the respondent appellate court from resolving petitioners' motion
for reconsideration without the comment of the private respondent which was required
merely to aid the court in the disposition of the motion. The courts are as much interested as
the parties in the early disposition of cases before them. To require otherwise would
unnecessarily clog the courts' dockets.

WHEREFORE, the petition is DENIED and the decision appealed from is hereby AFFIRMED.

SO ORDERED.

EN BANC
[G.R. Nos. 84132-33 : December 10, 1990.]
192 SCRA 257
NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC., Petitioners, vs. PHILIPPINE
VETERANS BANK, THE EX-OFFICIO SHERIFF and GODOFREDO QUILING, in his capacity as
Deputy Sheriff of Calamba, Laguna, Respondents.

DECISION

CRUZ, J.:

This case involves the constitutionality of a presidential decree which, like all other issuances
of President Marcos during his regime, was at that time regarded as sacrosanct. It is only now,
in a freer atmosphere, that his acts are being tested by the touchstone of the fundamental law
that even then was supposed to limit presidential action.: rd
The particular enactment in question is Pres. Decree No. 1717, which ordered the
rehabilitation of the Agrix Group of Companies to be administered mainly by the National
Development Company. The law outlined the procedure for filing claims against the Agrix
companies and created a Claims Committee to process these claims. Especially relevant to this
case, and noted at the outset, is Sec. 4(1) thereof providing that "all mortgages and other liens
presently attaching to any of the assets of the dissolved corporations are hereby extinguished."
Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of private respondent Philippine
Veterans Bank a real estate mortgage dated July 7, 1978, over three (3) parcels of land situated
in Los Baños, Laguna. During the existence of the mortgage, AGRIX went bankrupt. It was for
the expressed purpose of salvaging this and the other Agrix companies that the
aforementioned decree was issued by President Marcos.
Pursuant thereto, the private respondent filed a claim with the AGRIX Claims Committee for
the payment of its loan credit. In the meantime, the New Agrix, Inc. and the National
Development Company, petitioners herein, invoking Sec. 4 (1) of the decree, filed a petition
with the Regional Trial Court of Calamba, Laguna, for the cancellation of the mortgage lien in
favor of the private respondent. For its part, the private respondent took steps to
extrajudicially foreclose the mortgage, prompting the petitioners to file a second case with the
same court to stop the foreclosure. The two cases were consolidated.
After the submission by the parties of their respective pleadings, the trial court rendered the
impugned decision. Judge Francisco Ma. Guerrero annulled not only the challenged provision,
viz., Sec. 4 (1), but the entire Pres. Decree No. 1717 on the grounds that: (1) the presidential
exercise of legislative power was a violation of the principle of separation of powers; (2) the
law impaired the obligation of contracts; and (3) the decree violated the equal protection
clause. The motion for reconsideration of this decision having been denied, the present
petition was filed.: rd
The petition was originally assigned to the Third Division of this Court but because of the
constitutional questions involved it was transferred to the Court en banc. On August 30, 1988,
the Court granted the petitioner's prayer for a temporary restraining order and instructed the
respondents to cease and desist from conducting a public auction sale of the lands in question.
After the Solicitor General and the private respondent had filed their comments and the
petitioners their reply, the Court gave due course to the petition and ordered the parties to file
simultaneous memoranda. Upon compliance by the parties, the case was deemed submitted.
The petitioners contend that the private respondent is now estopped from contesting the
validity of the decree. In support of this contention, it cites the recent case of Mendoza v. Agrix
Marketing, Inc., 1 where the constitutionality of Pres. Decree No. 1717 was also raised but not
resolved. The Court, after noting that the petitioners had already filed their claims with the
AGRIX Claims Committee created by the decree, had simply dismissed the petition on the
ground of estoppel.
The petitioners stress that in the case at bar the private respondent also invoked the provisions
of Pres. Decree No. 1717 by filing a claim with the AGRIX Claims Committee. Failing to get
results, it sought to foreclose the real estate mortgage executed by AGRIX in its favor, which
had been extinguished by the decree. It was only when the petitioners challenged the
foreclosure on the basis of Sec. 4 (1) of the decree, that the private respondent attacked the
validity of the provision. At that stage, however, consistent with Mendoza, the private
respondent was already estopped from questioning the constitutionality of the decree.
The Court does not agree that the principle of estoppel is applicable.
It is not denied that the private respondent did file a claim with the AGRIX Claims Committee
pursuant to this decree. It must be noted, however, that this was done in 1980, when President
Marcos was the absolute ruler of this country and his decrees were the absolute law. Any
judicial challenge to them would have been futile, not to say foolhardy. The private
respondent, no less than the rest of the nation, was aware of that reality and knew it had no
choice under the circumstances but to conform.: nad
It is true that there were a few venturesome souls who dared to question the dictator's
decisions before the courts of justice then. The record will show, however, that not a single act
or issuance of President Marcos was ever declared unconstitutional, not even by the highest
court, as long as he was in power. To rule now that the private respondent is estopped for
having abided with the decree instead of boldly assailing it is to close our eyes to a cynical fact
of life during that repressive time.
This case must be distinguished from Mendoza, where the petitioners, after filing their claims
with the AGRIX Claims Committee, received in settlement thereof shares of stock valued at
P40,000.00 without protest or reservation. The herein private respondent has not been paid a
single centavo on its claim, which was kept pending for more than seven years for alleged lack
of supporting papers. Significantly, the validity of that claim was not questioned by the
petitioner when it sought to restrain the extrajudicial foreclosure of the mortgage by the
private respondent. The petitioner limited itself to the argument that the private respondent
was estopped from questioning the decree because of its earlier compliance with its
provisions.
Independently of these observations, there is the consideration that an affront to the
Constitution cannot be allowed to continue existing simply because of procedural inhibitions
that exalt form over substance.
The Court is especially disturbed by Section 4(1) of the decree, quoted above, extinguishing all
mortgages and other liens attaching to the assets of AGRIX. It also notes, with equal concern,
the restriction in Subsection (ii) thereof that all "unsecured obligations shall not bear interest"
and in Subsection (iii) that "all accrued interests, penalties or charges as of date hereof
pertaining to the obligations, whether secured or unsecured, shall not be recognized."
These provisions must be read with the Bill of Rights, where it is clearly provided in Section 1
that "no person shall be deprived of life, liberty or property without due course of law nor shall
any person be denied the equal protection of the law" and in Section 10 that "no law impairing
the obligation of contracts shall be passed."
In defending the decree, the petitioners argue that property rights, like all rights, are subject to
regulation under the police power for the promotion of the common welfare. The contention is
that this inherent power of the state may be exercised at any time for this purpose so long as
the taking of the property right, even if based on contract, is done with due process of law.
This argument is an over-simplification of the problem before us. The police power is not a
panacea for all constitutional maladies. Neither does its mere invocation conjure an instant
and automatic justification for every act of the government depriving a person of his life,
liberty or property.
A legislative act based on the police power requires the concurrence of a lawful subject and a
lawful method. In more familiar words, a) the interests of the public generally, as distinguished
from those of a particular class, should justify the interference of the state; and b) the means
employed are reasonably necessary for the accomplishment of the purpose and not unduly
oppressive upon individuals. 2
Applying these criteria to the case at bar, the Court finds first of all that the interests of the
public are not sufficiently involved to warrant the interference of the government with the
private contracts of AGRIX. The decree speaks vaguely of the "public, particularly the small
investors," who would be prejudiced if the corporation were not to be assisted. However, the
record does not state how many there are of such investors, and who they are, and why they
are being preferred to the private respondent and other creditors of AGRIX with vested
property rights.:-cralaw
The public interest supposedly involved is not identified or explained. It has not been shown
that by the creation of the New Agrix, Inc. and the extinction of the property rights of the
creditors of AGRIX, the interests of the public as a whole, as distinguished from those of a
particular class, would be promoted or protected. The indispensable link to the welfare of the
greater number has not been established. On the contrary, it would appear that the decree
was issued only to favor a special group of investors who, for reasons not given, have been
preferred to the legitimate creditors of AGRIX.
Assuming there is a valid public interest involved, the Court still finds that the means employed
to rehabilitate AGRIX fall far short of the requirement that they shall not be unduly oppressive.
The oppressiveness is patent on the face of the decree. The right to property in all mortgages,
liens, interests, penalties and charges owing to the creditors of AGRIX is arbitrarily destroyed.
No consideration is paid for the extinction of the mortgage rights. The accrued interests and
other charges are simply rejected by the decree. The right to property is dissolved by legislative
fiat without regard to the private interest violated and, worse, in favor of another private
interest.
A mortgage lien is a property right derived from contract and so comes under the protection of
the Bill of Rights. So do interests on loans, as well as penalties and charges, which are also
vested rights once they accrue. Private property cannot simply be taken by law from one
person and given to another without compensation and any known public purpose. This is
plain arbitrariness and is not permitted under the Constitution.
And not only is there arbitrary taking, there is discrimination as well. In extinguishing the
mortgage and other liens, the decree lumps the secured creditors with the unsecured creditors
and places them on the same level in the prosecution of their respective claims. In this respect,
all of them are considered unsecured creditors. The only concession given to the secured
creditors is that their loans are allowed to earn interest from the date of the decree, but that
still does not justify the cancellation of the interests earned before that date. Such interests,
whether due to the secured or the unsecured creditors, are all extinguished by the decree.
Even assuming such cancellation to be valid, we still cannot see why all kinds of creditors,
regardless of security, are treated alike.
Under the equal protection clause, all persons or things similarly situated must be treated
alike, both in the privileges conferred and the obligations imposed. Conversely, all persons or
things differently situated should be treated differently. In the case at bar, persons differently
situated are similarly treated, in disregard of the principle that there should be equality only
among equals.- nad
One may also well wonder why AGRIX was singled out for government help, among other
corporations where the stockholders or investors were also swindled. It is not clear why other
companies entitled to similar concern were not similarly treated. And surely, the stockholders
of the private respondent, whose mortgage lien had been cancelled and legitimate claims to
accrued interests rejected, were no less deserving of protection, which they did not get. The
decree operated, to use the words of a celebrated case, 3 "with an evil eye and an uneven
hand."
On top of all this, New Agrix, Inc. was created by special decree notwithstanding the provision
of Article XIV, Section 4 of the 1973 Constitution, then in force, that:
SEC. 4. The Batasang Pambansa shall not, except by general law, provide for the formation,
organization, or regulation of private corporations, unless such corporations are owned or
controlled by the Government or any subdivision or instrumentality thereof. 4
The new corporation is neither owned nor controlled by the government. The National
Development Corporation was merely required to extend a loan of not more than
P10,000,000.00 to New Agrix, Inc. Pending payment thereof, NDC would undertake the
management of the corporation, but with the obligation of making periodic reports to the
Agrix board of directors. After payment of the loan, the said board can then appoint its own
management. The stocks of the new corporation are to be issued to the old investors and
stockholders of AGRIX upon proof of their claims against the abolished corporation. They shall
then be the owners of the new corporation. New Agrix, Inc. is entirely private and so should
have been organized under the Corporation Law in accordance with the above-cited
constitutional provision.
The Court also feels that the decree impairs the obligation of the contract between AGRIX and
the private respondent without justification. While it is true that the police power is superior
to the impairment clause, the principle will apply only where the contract is so related to the
public welfare that it will be considered congenitally susceptible to change by the legislature in
the interest of the greater number. 5 Most present-day contracts are of that nature. But as
already observed, the contracts of loan and mortgage executed by AGRIX are purely private
transactions and have not been shown to be affected with public interest. There was therefore
no warrant to amend their provisions and deprive the private respondent of its vested
property rights.
It is worth noting that only recently in the case of the Development Bank of the Philippines v.
NLRC, 6 we sustained the preference in payment of a mortgage creditor as against the
argument that the claims of laborers should take precedence over all other claims, including
those of the government. In arriving at this ruling, the Court recognized the mortgage lien as a
property right protected by the due process and contract clauses notwithstanding the
argument that the amendment in Section 110 of the Labor Code was a proper exercise of the
police power.: nad
The Court reaffirms and applies that ruling in the case at bar.
Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise of the police power, not
being in conformity with the traditional requirements of a lawful subject and a lawful method.
The extinction of the mortgage and other liens and of the interest and other charges pertaining
to the legitimate creditors of AGRIX constitutes taking without due process of law, and this is
compounded by the reduction of the secured creditors to the category of unsecured creditors
in violation of the equal protection clause. Moreover, the new corporation, being neither
owned nor controlled by the Government, should have been created only by general and not
special law. And insofar as the decree also interferes with purely private agreements without
any demonstrated connection with the public interest, there is likewise an impairment of the
obligation of the contract.
With the above pronouncements, we feel there is no more need to rule on the authority of
President Marcos to promulgate Pres. Decree No. 1717 under Amendment No. 6 of the 1973
Constitution. Even if he had such authority, the decree must fall just the same because of its
violation of the Bill of Rights.
WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is declared
UNCONSTITUTIONAL. The temporary restraining order dated August 30, 1988, is LIFTED. Costs
against the petitioners.- nad
SO ORDERED.

G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC.,
(BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,

vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER
MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES and
CONSTANCIO MAGLANA, respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.

Renato J. Robles for BORMAHECO, Inc. and Cervanteses.

Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals in
CA-G.R. CV No. 66195 which modified the decision of the then Court of First Instance of Manila
in Civil Case No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all
defendants (respondents in G.R. No. 84197) was dismissed but in all other respects the trial
court's decision was affirmed.

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

WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim

to pay plaintiff the amount of P311,056.02, with interest at the rate of 12% per
annum compounded monthly; plus 15% of the amount awarded to plaintiff as
attorney's fees from July 2,1966, until full payment is made; plus P70,000.00
moral and exemplary damages.

It is found in the records that the cross party plaintiffs incurred additional
miscellaneous expenses aside from Pl51,000.00,,making a total of P184,878.74.
Defendant Jacob S. Lim is further required to pay cross party plaintiff, Bormaheco,
the Cervanteses one-half and Maglana the other half, the amount of Pl84,878.74
with interest from the filing of the cross-complaints until the amount is fully paid;
plus moral and exemplary damages in the amount of P184,878.84 with interest
from the filing of the cross-complaints until the amount is fully paid; plus moral
and exemplary damages in the amount of P50,000.00 for each of the two
Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the

Cervanteses, and another P20,000.00 to Constancio B. Maglana as attorney's fees.

xxx xxx xxx

 WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against
defendants Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed.
Instead, plaintiff is required to indemnify the defendants Bormaheco and the
Cervanteses the amount of P20,000.00 as attorney's fees and the amount of
P4,379.21, per year from 1966 with legal rate of interest up to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of

P20,000.00 as attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action was
filed in good faith. The fact that the properties of the Bormaheco and the
Cervanteses were attached and that they were required to file a counterbond in
order to dissolve the attachment, is not an act of bad faith. When a man tries to
protect his rights, he should not be saddled with moral or exemplary damages.
Furthermore, the rights exercised were provided for in the Rules of Court, and it
was the court that ordered it, in the exercise of its discretion.

No damage is decided against Malayan Insurance Company, Inc., the third-party

defendant, for it only secured the attachment prayed for by the plaintiff Pioneer. If
an insurance company would be liable for damages in performing an act which is
clearly within its power and which is the reason for its being, then nobody would
engage in the insurance business. No further claim or counter-claim for or against
anybody is declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as
owner-operator of Southern Air Lines (SAL) a single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and
executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts
and one (1) set of necessary spare parts for the total agreed price of US $109,000.00 to be paid
in installments. One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965
while the other aircraft, arrived in Manila on July 18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No.
84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in
behalf of its principal, Lim, for the balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco
and Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions)
contributed some funds used in the purchase of the above aircrafts and spare parts. The funds
were supposed to be their contributions to a new corporation proposed by Lim to expand his
airline business. They executed two (2) separate indemnity agreements (Exhibits D-1 and D-2)
in favor of Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL,
Bormaheco and the Cervanteses. The indemnity agreements stipulated that the indemnitors
principally agree and bind themselves jointly and severally to indemnify and hold and save
harmless Pioneer from and against any/all damages, losses, costs, damages, taxes, penalties,
charges and expenses of whatever kind and nature which Pioneer may incur in consequence of
having become surety upon the bond/note and to pay, reimburse and make good to Pioneer,
its successors and assigns, all sums and amounts of money which it or its representatives
should or may pay or cause to be paid or become liable to pay on them of whatever kind and
nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of
Pioneer as deed of chattel mortgage as security for the latter's suretyship in favor of the
former. It was stipulated therein that Lim transfer and convey to the surety the two aircrafts.
The deed (Exhibit D) was duly registered with the Office of the Register of Deeds of the City of
Manila and with the Civil Aeronautics Administration pursuant to the Chattel Mortgage Law
and the Civil Aeronautics Law (Republic Act No. 776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request payments
from the surety. Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage
before the Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third party
claim alleging that they are co-owners of the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of
preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and
Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim
alleging that they were not privies to the contracts signed by Lim and, by way of counterclaim,
sought for damages for being exposed to litigation and for recovery of the sums of money they
advanced to Lim for the purchase of the aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but
dismissed Pioneer's complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs
complaint against all the defendants was dismissed. In all other respects the trial court's
decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

 RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE
APPEAL OF PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD ALREADY
COLLECTED THE PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF THE
JDA AND THAT IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT
FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT.
(Rollo - G. R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had

reinsured its risk of liability under the surety bond in favor of JDA and
subsequently collected the proceeds of such reinsurance in the sum of
P295,000.00. Defendants' alleged obligation to Pioneer amounts to P295,000.00,
hence, plaintiffs instant action for the recovery of the amount of P298,666.28
from defendants will no longer prosper. Plaintiff Pioneer is not the real party in
interest to institute the instant action as it does not stand to be benefited or
injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover the

amount from defendants, hence, it instituted the action is utterly devoid of merit.
Plaintiff did not even present any evidence that it is the attorney-in-fact of the
reinsurance company, authorized to institute an action for and in behalf of the
latter. To qualify a person to be a real party in interest in whose name an action
must be prosecuted, he must appear to be the present real owner of the right
sought to be enforced (Moran, Vol. I, Comments on the Rules of Court, 1979 ed.,
p. 155). It has been held that the real party in interest is the party who would be
benefited or injured by the judgment or the party entitled to the avails of the suit
(Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is
meant a present substantial interest as distinguished from a mere expectancy or a
future, contingent, subordinate or consequential interest (Garcia v. David, 67 Phil.
27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v.
Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V.
35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered as the

real party in interest as it has already been paid by the reinsurer the sum of
P295,000.00 — the bulk of defendants' alleged obligation to Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff Pioneer

from its reinsurer, the former was able to foreclose extra-judicially one of the
subject airplanes and its spare engine, realizing the total amount of P37,050.00
from the sale of the mortgaged chattels. Adding the sum of P37,050.00, to the
proceeds of the reinsurance amounting to P295,000.00, it is patent that plaintiff
 has been overpaid in the amount of P33,383.72 considering that the total amount
it had paid to JDA totals to only P298,666.28. To allow plaintiff Pioneer to recover
from defendants the amount in excess of P298,666.28 would be tantamount to
unjust enrichment as it has already been paid by the reinsurance company of the
amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis defendant
Lim's liability to JDA. Well settled is the rule that no person should unjustly enrich
himself at the expense of another (Article 22, New Civil Code). (Rollo-84197, pp.
24-25).

The petitioner contends that-(1) it is at a loss where respondent court based its finding that
petitioner was paid by its reinsurer in the aforesaid amount, as this matter has never been
raised by any of the parties herein both in their answers in the court below and in their
respective briefs with respondent court; (Rollo, p. 11) (2) even assuming hypothetically that it
was paid by its reinsurer, still none of the respondents had any interest in the matter since the
reinsurance is strictly between the petitioner and the re-insurer pursuant to section 91 of the
Insurance Code; (3) pursuant to the indemnity agreements, the petitioner is entitled to recover
from respondents Bormaheco and Maglana; and (4) the principle of unjust enrichment is not
applicable considering that whatever amount he would recover from the co-indemnitor will be
paid to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money was
never raised by the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues threshed
out were:

xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so much of its
obligations to JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still any
claim against defendants, considering the amount it has realized from the sale of
the mortgaged properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond it had
executed in favor of JDA, collected the proceeds of such reinsurance in the sum of
P295,000, and paid with the said amount the bulk of its alleged liability to JDA
under the said surety bond, it is plain that on this score it no longer has any right
to collect to the extent of the said amount.
 On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing
defendants for the amount paid to it by the reinsurers, notwithstanding that the
cause of action pertains to the latter, Pioneer says: The reinsurers opted instead
that the Pioneer Insurance & Surety Corporation shall pursue alone the case.. . . .
Pioneer Insurance & Surety Corporation is representing the reinsurers to recover
the amount.' In other words, insofar as the amount paid to it by the reinsurers
Pioneer is suing defendants as their attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint that
Pioneer is suing as attorney-in- fact of the reinsurers for any amount. Lastly, and
most important of all, Pioneer has no right to institute and maintain in its own
name an action for the benefit of the reinsurers. It is well-settled that an action
brought by an attorney-in-fact in his own name instead of that of the principal will
not prosper, and this is so even where the name of the principal is disclosed in the
complaint.

Section 2 of Rule 3 of the Old Rules of Court provides that 'Every

action must be prosecuted in the name of the real party in interest.'
This provision is mandatory. The real party in interest is the party
who would be benefitted or injured by the judgment or is the party
entitled to the avails of the suit.

This Court has held in various cases that an attorney-in-fact is not a

real party in interest, that there is no law permitting an action to be
brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18
Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12;
Filipinos Industrial Corporation v. San Diego G.R. No. L- 22347,1968,
23 SCRA 706, 710-714.

The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has
collected P295,000.00 from the reinsurers, the uninsured portion of what it paid
to JDA is the difference between the two amounts, or P3,666.28. This is the
amount for which Pioneer may sue defendants, assuming that the indemnity
agreement is still valid and effective. But since the amount realized from the sale
of the mortgaged chattels are P35,000.00 for one of the airplanes and P2,050.00
for a spare engine, or a total of P37,050.00, Pioneer is still overpaid by
P33,383.72. Therefore, Pioneer has no more claim against defendants. (Record on
Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate court.
Considering this admitted payment, the only issue that cropped up was the effect of payment
made by the reinsurers to the petitioner. Therefore, the petitioner's argument that the
respondents had no interest in the reinsurance contract as this is strictly between the
petitioner as insured and the reinsuring company pursuant to Section 91 (should be Section
98) of the Insurance Code has no basis.

In general a reinsurer, on payment of a loss acquires the same rights by

subrogation as are acquired in similar cases where the original insurer pays a loss
(Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).

The rules of practice in actions on original insurance policies are in general

applicable to actions or contracts of reinsurance. (Delaware, Ins. Co. v.
Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of the
wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who
has violated the contract. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber
Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany
Manufacturing Corporation v. Court of Appeals (154 SCRA 650 [1987]):

Note that if a property is insured and the owner receives the indemnity from the
insurer, it is provided in said article that the insurer is deemed subrogated to the
rights of the insured against the wrongdoer and if the amount paid by the insurer
does not fully cover the loss, then the aggrieved party is the one entitled to
recover the deficiency. Evidently, under this legal provision, the real party in
interest with regard to the portion of the indemnity paid is the insurer and not the
insured. (Emphasis supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of
the reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's
complaint as against the respondents for the reason that the petitioner was not the real party
in interest in the complaint and, therefore, has no cause of action against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should
not have been dismissed on the premise that the evidence on record shows that it is entitled
to recover from the counter indemnitors. It does not, however, cite any grounds except its
allegation that respondent "Maglanas defense and evidence are certainly incredible" (p. 12,
Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence to
substantiate its finding that the counter-indemnitors are not liable to the petitioner. The trial
court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to be valid
and effective after the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved,
agreed to issue the bond provided that the same would be mortgaged to it, but
this was not possible because the planes were still in Japan and could not be
mortgaged here in the Philippines. As soon as the aircrafts were brought to the
Philippines, they would be mortgaged to Pioneer Insurance to cover the bond, and
this indemnity agreement would be cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties have

impaired and rendered insufficient the security under the chattel
mortgage and there is thus no other sufficient security for the claim
sought to be enforced by this action.

This is judicial admission and aside from the chattel mortgage there is no other
security for the claim sought to be enforced by this action, which necessarily
means that the indemnity agreement had ceased to have any force and effect at
the time this action was instituted. Sec 2, Rule 129, Revised Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage
on the planes and spare parts, no longer has any further action against the
defendants as indemnitors to recover any unpaid balance of the price. The
indemnity agreement was ipso jure extinguished upon the foreclosure of the
chattel mortgage. These defendants, as indemnitors, would be entitled to be
subrogated to the right of Pioneer should they make payments to the latter.
Articles 2067 and 2080 of the New Civil Code of the Philippines.

Independently of the preceding proposition Pioneer's election of the remedy of

foreclosure precludes any further action to recover any unpaid balance of the
price.
SAL or Lim, having failed to pay the second to the eight and last installments to
JDA and Pioneer as surety having made of the payments to JDA, the alternative
remedies open to Pioneer were as provided in Article 1484 of the New Civil Code,
known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by

extrajudicial foreclosure and the instant suit. Such being the case, as provided by
the aforementioned provisions, Pioneer shall have no further action against the
purchaser to recover any unpaid balance and any agreement to the contrary is
void.' Cruz, et al. v. Filipinas Investment & Finance Corp. No. L- 24772, May
27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through the
contention that Pioneer is not the vendor but JDA. The reason is that Pioneer is
actually exercising the rights of JDA as vendor, having subrogated it in such rights.
Nor may the application of the provision be validly opposed on the ground that
these defendants and defendant Maglana are not the vendee but indemnitors.
Pascual, et al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61
SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their
maturity dates discharged these defendants from any liability as alleged
indemnitors. The change of the maturity dates of the obligations of Lim, or SAL
extinguish the original obligations thru novations thus discharging the
indemnitors.

The principal hereof shall be paid in eight equal successive three

months interval installments, the first of which shall be due and
payable 25 August 1965, the remainder of which ... shall be due and
payable on the 26th day x x x of each succeeding three months and
the last of which shall be due and payable 26th May 1967.

However, at the trial of this case, Pioneer produced a memorandum executed by

SAL or Lim and JDA, modifying the maturity dates of the obligations, as follows:

The principal hereof shall be paid in eight equal successive three

month interval installments the first of which shall be due and
payable 4 September 1965, the remainder of which ... shall be due
and payable on the 4th day ... of each succeeding months and the last
of which shall be due and payable 4th June 1967.

Not only that, Pioneer also produced eight purported promissory notes bearing
maturity dates different from that fixed in the aforesaid memorandum; the due
date of the first installment appears as October 15, 1965, and those of the rest of
the installments, the 15th of each succeeding three months, that of the last
installment being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates, effected
twice, were done without the knowledge, much less, would have it believed that
these defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have
it believed that these defendants and defendant Maglana knew of and consented
to the modification of the obligations. But if that were so, there would have been
the corresponding documents in the form of a written notice to as well as written
conformity of these defendants, and there are no such document. The
consequence of this was the extinguishment of the obligations and of the surety
bond secured by the indemnity agreement which was thereby also extinguished.
Applicable by analogy are the rulings of the Supreme Court in the case of
Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic
Petroleum Co. v. Hizon David, 45 Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor without

the consent of the guarantor extinguishes the guaranty The mere
failure on the part of the creditor to demand payment after the debt
has become due does not of itself constitute any extension time
referred to herein, (New Civil Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co.,
Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the
same. Consequently, Pioneer has no more cause of action to recover from these
defendants, as supposed indemnitors, what it has paid to JDA. By virtue of an
express stipulation in the surety bond, the failure of JDA to present its claim to
Pioneer within ten days from default of Lim or SAL on every installment, released
Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these defendants

thru the indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him to

reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or became illegal.

These defendants are entitled to recover damages and attorney's fees from
Pioneer and its surety by reason of the filing of the instant case against them and
the attachment and garnishment of their properties. The instant action is clearly
 unfounded insofar as plaintiff drags these defendants and defendant Maglana.'
(Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose agreement
was to do business through the corporate vehicle but who failed to incorporate
the entity in which they had chosen to invest? How are the losses to be treated in
situations where their contributions to the intended 'corporation' were invested
not through the corporate form? This Petition presents these fundamental
questions which we believe were resolved erroneously by the Court of Appeals
('CA'). (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of
respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to
incorporate, a de facto partnership among them was created, and that as a consequence of
such relationship all must share in the losses and/or gains of the venture in proportion to their
contribution. The petitioner, therefore, questions the appellate court's findings ordering him to
reimburse certain amounts given by the respondents to the petitioner as their contributions to
the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants' cross-
claims in the total amount of P184,878.74 as correctly found by the trial court,
with interest from the filing of the cross-complaints until the amount is fully paid.
Defendant Lim should pay one-half of the said amount to Bormaheco and the
Cervanteses and the other one-half to defendant Maglana. It is established in the
records that defendant Lim had duly received the amount of Pl51,000.00 from
defendants Bormaheco and Maglana representing the latter's participation in the
ownership of the subject airplanes and spare parts (Exhibit 58). In addition, the
cross-party plaintiffs incurred additional expenses, hence, the total sum of P
184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the stockholders
in a defectively incorporated association should be governed by the supposed
charter and the laws of the state relating thereto and not by the rules governing
 partners (Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it
is ordinarily held that persons who attempt, but fail, to form a corporation and
who carry on business under the corporate name occupy the position of partners
inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus,
where persons associate themselves together under articles to purchase property
to carry on a business, and their organization is so defective as to come short of
creating a corporation within the statute, they become in legal effect partners
inter se, and their rights as members of the company to the property acquired by
the company will be recognized (Smith v. Schoodoc Pond Packing Co., 84 A.
268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where certain persons
associated themselves as a corporation for the development of land for irrigation
purposes, and each conveyed land to the corporation, and two of them contracted
to pay a third the difference in the proportionate value of the land conveyed by
him, and no stock was ever issued in the corporation, it was treated as a trustee
for the associates in an action between them for an accounting, and its capital
stock was treated as partnership assets, sold, and the proceeds distributed among
them in proportion to the value of the property contributed by each (Shorb v.
Beaudry, 56 Cal. 446). However, such a relation does not necessarily exist, for
ordinarily persons cannot be made to assume the relation of partners, as between
themselves, when their purpose is that no partnership shall exist (London Assur.
Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it
should be implied only when necessary to do justice between the parties; thus, one
who takes no part except to subscribe for stock in a proposed corporation which is
never legally formed does not become a partner with other subscribers who
engage in business under the name of the pretended corporation, so as to be
liable as such in an action for settlement of the alleged partnership and
contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation between
certain stockholders and other stockholders, who were also directors, will not be
implied in the absence of an agreement, so as to make the former liable to
contribute for payment of debts illegally contracted by the latter (Heald v. Owen,
44 N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics
supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his failure
to appear during the pretrial despite notification. In his answer, the petitioner denied having
received any amount from respondents Bormaheco, the Cervanteses and Maglana. The trial
court and the appellate court, however, found through Exhibit 58, that the petitioner received
the amount of P151,000.00 representing the participation of Bormaheco and Atty. Constancio
B. Maglana in the ownership of the subject airplanes and spare parts. The record shows that
defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a corporation with the
respondents despite his representations to them. This gives credence to the cross-claims of the
respondents to the effect that they were induced and lured by the petitioner to make
contributions to a proposed corporation which was never formed because the petitioner
reneged on their agreement. Maglana alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and
Maglana to expand his airline business. Lim was to procure two DC-3's from Japan
and secure the necessary certificates of public convenience and necessity as well
as the required permits for the operation thereof. Maglana sometime in May
1965, gave Cervantes his share of P75,000.00 for delivery to Lim which Cervantes
did and Lim acknowledged receipt thereof. Cervantes, likewise, delivered his share
of the undertaking. Lim in an undertaking sometime on or about August 9,1965,
promised to incorporate his airline in accordance with their agreement and
proceeded to acquire the planes on his own account. Since then up to the filing of
this answer, Lim has refused, failed and still refuses to set up the corporation or
return the money of Maglana. (Record on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim,
cross-claim and third party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering
defendants to purchase two airplanes and spare parts from Japan which the latter
considered as their lawful contribution and participation in the proposed
corporation to be known as SAL. Arrangements and negotiations were undertaken
by defendant Lim. Down payments were advanced by defendants Bormaheco and
the Cervanteses and Constancio Maglana (Exh. E- 1). Contrary to the agreement
among the defendants, defendant Lim in connivance with the plaintiff, signed and
executed the alleged chattel mortgage and surety bond agreement in his personal
capacity as the alleged proprietor of the SAL. The answering defendants learned
for the first time of this trickery and misrepresentation of the other, Jacob Lim,
when the herein plaintiff chattel mortgage (sic) allegedly executed by defendant
Lim, thereby forcing them to file an adverse claim in the form of third party claim.
Notwithstanding repeated oral demands made by defendants Bormaheco and
Cervanteses, to defendant Lim, to surrender the possession of the two planes and
their accessories and or return the amount advanced by the former amounting to
an aggregate sum of P 178,997.14 as evidenced by a statement of accounts, the
latter ignored, omitted and refused to comply with them. (Record on Appeal, pp.
341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de
facto partnership was created among the parties which would entitle the petitioner to a
reimbursement of the supposed losses of the proposed corporation. The record shows that the
petitioner was acting on his own and not in behalf of his other would-be incorporators in
transacting the sale of the airplanes and spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of
Appeals is AFFIRMED.

SO ORDERED.

G.R. No. 96161 February 21, 1992

PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL
DEVELOPMENT, INC., petitioners,
vs.
COURT OF APPEALS, SECURITIES & EXCHANGE COMMISSION and STANDARD PHILIPS
CORPORATION, respondents.

Emeterio V. Soliven & Associates for petitioners.

Narciso A. Manantan for private respondent.

MELENCIO-HERRERA, J.:

Petitioners challenge the Decision of the Court of Appeals, dated 31 July 1990, in CA-GR Sp.
No. 20067, upholding the Order of the Securities and Exchange Commission, dated 2 January
1990, in SEC-AC No. 202, dismissing petitioners' prayer for the cancellation or removal of the
word "PHILIPS" from private respondent's corporate name.

Petitioner Philips Export B.V. (PEBV), a foreign corporation organized under the laws of the
Netherlands, although not engaged in business here, is the registered owner of the trademarks
PHILIPS and PHILIPS SHIELD EMBLEM under Certificates of Registration Nos. R-1641 and R-
1674, respectively issued by the Philippine Patents Office (presently known as the Bureau of
Patents, Trademarks and Technology Transfer). Petitioners Philips Electrical Lamps, Inc. (Philips
Electrical, for brevity) and Philips Industrial Developments, Inc. (Philips Industrial, for short),
authorized users of the trademarks PHILIPS and PHILIPS SHIELD EMBLEM, were incorporated
on 29 August 1956 and 25 May 1956, respectively. All petitioner corporations belong to the
PHILIPS Group of Companies.
Respondent Standard Philips Corporation (Standard Philips), on the other hand, was issued a
Certificate of Registration by respondent Commission on 19 May 1982.

On 24 September 1984, Petitioners filed a letter complaint with the Securities & Exchange
Commission (SEC) asking for the cancellation of the word "PHILIPS" from Private Respondent's
corporate name in view of the prior registration with the Bureau of Patents of the trademark
"PHILIPS" and the logo "PHILIPS SHIELD EMBLEM" in the name of Petitioner, PEBV, and the
previous registration of Petitioners Philips Electrical and Philips Industrial with the SEC.

As a result of Private Respondent's refusal to amend its Articles of Incorporation, Petitioners

filed with the SEC, on 6 February 1985, a Petition (SEC Case No. 2743) praying for the issuance
of a Writ of Preliminary Injunction, alleging, among others, that Private Respondent's use of
the word PHILIPS amounts to an infringement and clear violation of Petitioners' exclusive right
to use the same considering that both parties engage in the same business.

In its Answer, dated 7 March 1985, Private Respondent countered that Petitioner PEBV has no
legal capacity to sue; that its use of its corporate name is not at all similar to Petitioners'
trademark PHILIPS when considered in its entirety; and that its products consisting of chain
rollers, belts, bearings and cutting saw are grossly different from Petitioners' electrical
products.

After conducting hearings with respect to the prayer for Injunction; the SEC Hearing Officer, on
27 September 1985, ruled against the issuance of such Writ.

On 30 January 1987, the same Hearing Officer dismissed the Petition for lack of merit. In so
ruling, the latter declared that inasmuch as the SEC found no sufficient ground for the granting
of injunctive relief on the basis of the testimonial and documentary evidence presented, it
cannot order the removal or cancellation of the word "PHILIPS" from Private Respondent's
corporate name on the basis of the same evidence adopted in toto during trial on the merits.
Besides, Section 18 of the Corporation Code (infra) is applicable only when the corporate
names in question are identical. Here, there is no confusing similarity between Petitioners' and
Private Respondent's corporate names as those of the Petitioners contain at least two words
different from that of the Respondent. Petitioners' Motion for Reconsideration was likewise
denied on 17 June 1987.

On appeal, the SEC en banc affirmed the dismissal declaring that the corporate names of
Petitioners and Private Respondent hardly breed confusion inasmuch as each contains at least
two different words and, therefore, rules out any possibility of confusing one for the other.

On 30 January 1990, Petitioners sought an extension of time to file a Petition for Review
on Certiorari before this Court, which Petition was later referred to the Court of Appeals in a
Resolution dated 12 February 1990.
In deciding to dismiss the petition on 31 July 1990, the Court of
Appeals1 swept aside Petitioners' claim that following the ruling in Converse Rubber
Corporation v. Universal Converse Rubber Products, Inc., et al, (G. R. No. L-27906, January 8,
1987, 147 SCRA 154), the word PHILIPS cannot be used as part of Private Respondent's
corporate name as the same constitutes a dominant part of Petitioners' corporate names. In so
holding, the Appellate Court observed that the Converse case is not four-square with the
present case inasmuch as the contending parties in Converse are engaged in a similar business,
that is, the manufacture of rubber shoes. Upholding the SEC, the Appellate Court concluded
that "private respondents' products consisting of chain rollers, belts, bearings and cutting saw
are unrelated and non-competing with petitioners' products i.e. electrical lamps such that
consumers would not in any probability mistake one as the source or origin of the product of
the other."

The Appellate Court denied Petitioners' Motion for Reconsideration on 20 November 1990,
hence, this Petition which was given due course on 22 April 1991, after which the parties were
required to submit their memoranda, the latest of which was received on 2 July 1991. In
December 1991, the SEC was also required to elevate its records for the perusal of this Court,
the same not having been apparently before respondent Court of Appeals.

We find basis for petitioners' plea.

As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115 (1927), the Court declared
that a corporation's right to use its corporate and trade name is a property right, a right in
rem, which it may assert and protect against the world in the same manner as it may protect
its tangible property, real or personal, against trespass or conversion. It is regarded, to a certain
extent, as a property right and one which cannot be impaired or defeated by subsequent
appropriation by another corporation in the same field (Red Line Transportation Co. vs. Rural
Transit Co., September 8, 1934, 20 Phil 549).

A name is peculiarly important as necessary to the very existence of a corporation (American

Steel Foundries vs. Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160; Lauman vs. Lebanon
Valley R. Co., 30 Pa 42; First National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE
792). Its name is one of its attributes, an element of its existence, and essential to its identity
(6 Fletcher [Perm Ed], pp. 3-4). The general rule as to corporations is that each corporation
must have a name by which it is to sue and be sued and do all legal acts. The name of a
corporation in this respect designates the corporation in the same manner as the name of an
individual designates the person (Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538;
Newport Mechanics Mfg. Co. vs. Starbird. 10 NH 123); and the right to use its corporate name
is as much a part of the corporate franchise as any other privilege granted (Federal Secur. Co.
vs. Federal Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial
Association, 18 RI 165, 26 A 36).
A corporation acquires its name by choice and need not select a name identical with or similar
to one already appropriated by a senior corporation while an individual's name is thrust upon
him (See Standard Oil Co. of New Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973,
977). A corporation can no more use a corporate name in violation of the rights of others than
an individual can use his name legally acquired so as to mislead the public and injure another
(Armington vs. Palmer, 21 RI 109. 42 A 308).

Our own Corporation Code, in its Section 18, expressly provides that:

No corporate name may be allowed by the Securities and Exchange Commission if

the proposed name is identical or deceptively or confusingly similar to that of any
existing corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing law. Where a change in a corporate
name is approved, the commission shall issue an amended certificate of
incorporation under the amended name. (Emphasis supplied)

The statutory prohibition cannot be any clearer. To come within its scope, two requisites must
be proven, namely:

(1) that the complainant corporation acquired a prior right over the use of such corporate
name; and

(2) the proposed name is either:

(a) identical; or

(b) deceptively or confusingly similar

to that of any existing corporation or to any other name already protected by law; or

(c) patently deceptive, confusing or contrary to existing law.

The right to the exclusive use of a corporate name with freedom from infringement by
similarity is determined by priority of adoption (1 Thompson, p. 80 citing Munn v. Americana
Co., 82 N. Eq. 63, 88 Atl. 30; San Francisco Oyster House v. Mihich, 75 Wash. 274, 134 Pac.
921). In this regard, there is no doubt with respect to Petitioners' prior adoption of' the name
''PHILIPS" as part of its corporate name. Petitioners Philips Electrical and Philips Industrial were
incorporated on 29 August 1956 and 25 May 1956, respectively, while Respondent Standard
Philips was issued a Certificate of Registration on 12 April 1982, twenty-six (26) years later
(Rollo, p. 16). Petitioner PEBV has also used the trademark "PHILIPS" on electrical lamps of all
types and their accessories since 30 September 1922, as evidenced by Certificate of
Registration No. 1651.
The second requisite no less exists in this case. In determining the existence of confusing
similarity in corporate names, the test is whether the similarity is such as to mislead a person,
using ordinary care and discrimination. In so doing, the Court must look to the record as well
as the names themselves (Ohio Nat. Life Ins. Co. v. Ohio Life Ins. Co., 210 NE 2d 298). While the
corporate names of Petitioners and Private Respondent are not identical, a reading of
Petitioner's corporate names, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC.
and PHILIPS INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to conclude that "PHILIPS"
is, indeed, the dominant word in that all the companies affiliated or associated with the
principal corporation, PEBV, are known in the Philippines and abroad as the PHILIPS Group of
Companies.

Respondents maintain, however, that Petitioners did not present an iota of proof of actual
confusion or deception of the public much less a single purchaser of their product who has
been deceived or confused or showed any likelihood of confusion. It is settled, however, that
proof of actual confusion need not be shown. It suffices that confusion is probably or likely to
occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line of cases).

It may be that Private Respondent's products also consist of chain rollers, belts, bearing and
the like, while petitioners deal principally with electrical products. It is significant to note,
however, that even the Director of Patents had denied Private Respondent's application for
registration of the trademarks "Standard Philips & Device" for chain, rollers, belts, bearings and
cutting saw. That office held that PEBV, "had shipped to its subsidiaries in the Philippines
equipment, machines and their parts which fall under international class where "chains,
rollers, belts, bearings and cutting saw," the goods in connection with which Respondent is
seeking to register 'STANDARD PHILIPS' . . . also belong" ( Inter Partes Case No. 2010, June 17,
1988, SEC Rollo).

Furthermore, the records show that among Private Respondent's primary purposes in its
Articles of Incorporation (Annex D, Petition p. 37, Rollo) are the following:

To buy, sell, barter, trade, manufacture, import, export, or otherwise acquire,

dispose of, and deal in and deal with any kind of goods, wares, and merchandise
such as but not limited to plastics, carbon products, office stationery and supplies,
hardware parts, electrical wiring devices, electrical component parts, and/or
complement of industrial, agricultural or commercial machineries, constructive
supplies, electrical supplies and other merchandise which are or may become
articles of commerce except food, drugs and cosmetics and to carry on such
business as manufacturer, distributor, dealer, indentor, factor, manufacturer's
representative capacity for domestic or foreign companies. (emphasis ours)

For its part, Philips Electrical also includes, among its primary purposes, the following:
 To develop manufacture and deal in electrical products, including electronic,
mechanical and other similar products . . . (p. 30, Record of SEC Case No. 2743)

Given Private Respondent's aforesaid underlined primary purpose, nothing could prevent it
from dealing in the same line of business of electrical devices, products or supplies which fall
under its primary purposes. Besides, there is showing that Private Respondent not only
manufactured and sold ballasts for fluorescent lamps with their corporate name printed
thereon but also advertised the same as, among others, Standard Philips (TSN, before the SEC,
pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). As aptly pointed out by
Petitioners, [p]rivate respondent's choice of "PHILIPS" as part of its corporate name
[STANDARD PHILIPS CORPORATION] . . . tends to show said respondent's intention to ride on
the popularity and established goodwill of said petitioner's business throughout the world"
(Rollo, p. 137). The subsequent appropriator of the name or one confusingly similar thereto
usually seeks an unfair advantage, a free ride of another's goodwill (American Gold Star
Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC 269, 191 F 2d 488).

In allowing Private Respondent the continued use of its corporate name, the SEC maintains
that the corporate names of Petitioners PHILIPS ELECTRICAL LAMPS. INC. and PHILIPS
INDUSTRIAL DEVELOPMENT, INC. contain at least two words different from that of the
corporate name of respondent STANDARD PHILIPS CORPORATION, which words will readily
identify Private Respondent from Petitioners and vice-versa.

True, under the Guidelines in the Approval of Corporate and Partnership Names formulated by
the SEC, the proposed name "should not be similar to one already used by another corporation
or partnership. If the proposed name contains a word already used as part of the firm name or
style of a registered company; the proposed name must contain two other words different
from the company already registered" (Emphasis ours). It is then pointed out that Petitioners
Philips Electrical and Philips Industrial have two words different from that of Private
Respondent's name.

What is lost sight of, however, is that PHILIPS is a trademark or trade name which was
registered as far back as 1922. Petitioners, therefore, have the exclusive right to its use which
must be free from any infringement by similarity. A corporation has an exclusive right to the
use of its name, which may be protected by injunction upon a principle similar to that upon
which persons are protected in the use of trademarks and tradenames (18 C.J.S. 574). Such
principle proceeds upon the theory that it is a fraud on the corporation which has acquired a
right to that name and perhaps carried on its business thereunder, that another should
attempt to use the same name, or the same name with a slight variation in such a way as to
induce persons to deal with it in the belief that they are dealing with the corporation which
has given a reputation to the name (6 Fletcher [Perm Ed], pp. 39-40, citing Borden Ice Cream
Co. v. Borden's Condensed Milk Co., 210 F 510). Notably, too, Private Respondent's name
actually contains only a single word, that is, "STANDARD", different from that of Petitioners
inasmuch as the inclusion of the term "Corporation" or "Corp." merely serves the Purpose of
distinguishing the corporation from partnerships and other business organizations.

The fact that there are other companies engaged in other lines of business using the word
"PHILIPS" as part of their corporate names is no defense and does not warrant the use by
Private Respondent of such word which constitutes an essential feature of Petitioners'
corporate name previously adopted and registered and-having acquired the status of a well-
known mark in the Philippines and internationally as well (Bureau of Patents Decision No. 88-
35 [TM], June 17, 1988, SEC Records).

In support of its application for the registration of its Articles of Incorporation with the SEC,
Private Respondent had submitted an undertaking "manifesting its willingness to change its
corporate name in the event another person, firm or entity has acquired a prior right to the
use of the said firm name or one deceptively or confusingly similar to it." Private respondent
must now be held to its undertaking.

As a general rule, parties organizing a corporation must choose a name at their

peril; and the use of a name similar to one adopted by another corporation,
whether a business or a nonbusiness or non-profit organization if misleading and
likely to injure it in the exercise in its corporate functions, regardless of intent, may
be prevented by the corporation having the prior right, by a suit for injunction
against the new corporation to prevent the use of the name (American Gold Star
Mothers, Inc. v. National Gold Star Mothers, Inc., 89 App DC 269, 191 F 2d 488, 27
ALR 2d 948).

WHEREFORE, the Decision of the Court of Appeals dated 31 July 1990, and its Resolution dated
20 November 1990, are SET ASIDE and a new one entered ENJOINING private respondent from
using "PHILIPS" as a feature of its corporate name, and ORDERING the Securities and Exchange
Commission to amend private respondent's Articles of Incorporation by deleting the word
PHILIPS from the corporate name of private respondent.

No costs.

SO ORDERED.

G.R. No. 101897. March 5, 1993.

LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS, LYCEUM OF APARRI,
LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF LALLO, INC., LYCEUM OF
TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF CATANDUANES, LYCEUM OF SOUTHERN
PHILIPPINES, LYCEUM OF EASTERN MINDANAO, INC. and WESTERN PANGASINAN LYCEUM,
INC., respondents.

Quisumbing, Torres & Evangelista Law Offices and Ambrosio Padilla for petitioner.

Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law Offices for respondents.

Froilan Siobal for Western Pangasinan Lyceum.

SYLLABUS

1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION OF PROPOSED NAME WHICH IS

IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF ANY EXISTING CORPORATION, PROHIBITED;
CONFUSION AND DECEPTION EFFECTIVELY PRECLUDED BY THE APPENDING OF GEOGRAPHIC
NAMES TO THE WORD "LYCEUM". — The Articles of Incorporation of a corporation must,
among other things, set out the name of the corporation. Section 18 of the Corporation Code
establishes a restrictive rule insofar as corporate names are concerned: "Section 18. Corporate
name. — No corporate name may be allowed by the Securities an Exchange Commission if the
proposed name is identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or is patently deceptive, confusing
or contrary to existing laws. When a change in the corporate name is approved, the
Commission shall issue an amended certificate of incorporation under the amended name."
The policy underlying the prohibition in Section 18 against the registration of a corporate name
which is "identical or deceptively or confusingly similar" to that of any existing corporation or
which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the
avoidance of fraud upon the public which would have occasion to deal with the entity
concerned, the evasion of legal obligations and duties, and the reduction of difficulties of
administration and supervision over corporations. We do not consider that the corporate
names of private respondent institutions are "identical with, or deceptively or confusingly
similar" to that of the petitioner institution. True enough, the corporate names of private
respondent entities all carry the word "Lyceum" but confusion and deception are effectively
precluded by the appending of geographic names to the word "Lyceum." Thus, we do not
believe that the "Lyceum of Aparri" can be mistaken by the general public for the Lyceum of
the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of
the Philippines.

2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD "LYCEUM," NOT ATTENDED
WITH EXCLUSIVITY. — It is claimed, however, by petitioner that the word "Lyceum" has
acquired a secondary meaning in relation to petitioner with the result that word, although
originally a generic, has become appropriable by petitioner to the exclusion of other
institutions like private respondents herein. The doctrine of secondary meaning originated in
the field of trademark law. Its application has, however, been extended to corporate names
sine the right to use a corporate name to the exclusion of others is based upon the same
principle which underlies the right to use a particular trademark or tradename. In Philippine
Nut Industry, Inc. v. Standard Brands, Inc., the doctrine of secondary meaning was elaborated
in the following terms: " . . . a word or phrase originally incapable of exclusive appropriation
with reference to an article on the market, because geographically or otherwise descriptive,
might nevertheless have been used so long and so exclusively by one producer with reference
to his article that, in that trade and to that branch of the purchasing public, the word or phrase
has come to mean that the article was his product." The question which arises, therefore, is
whether or not the use by petitioner of "Lyceum" in its corporate name has been for such
length of time and with such exclusivity as to have become associated or identified with the
petitioner institution in the mind of the general public (or at least that portion of the general
public which has to do with schools). The Court of Appeals recognized this issue and answered
it in the negative: "Under the doctrine of secondary meaning, a word or phrase originally
incapable of exclusive appropriation with reference to an article in the market, because
geographical or otherwise descriptive might nevertheless have been used so long and so
exclusively by one producer with reference to this article that, in that trade and to that group
of the purchasing public, the word or phrase has come to mean that the article was his
produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been referred to as
the distinctiveness into which the name or phrase has evolved through the substantial and
exclusive use of the same for a considerable period of time. . . . No evidence was ever
presented in the hearing before the Commission which sufficiently proved that the word
'Lyceum' has indeed acquired secondary meaning in favor of the appellant. If there was any of
this kind, the same tend to prove only that the appellant had been using the disputed word for
a long period of time. . . . In other words, while the appellant may have proved that it had been
using the word 'Lyceum' for a long period of time, this fact alone did not amount to mean that
the said word had acquired secondary meaning in its favor because the appellant failed to
prove that it had been using the same word all by itself to the exclusion of others. More so,
there was no evidence presented to prove that confusion will surely arise if the same word
were to be used by other educational institutions. Consequently, the allegations of the
appellant in its first two assigned errors must necessarily fail." We agree with the Court of
Appeals. The number alone of the private respondents in the case at bar suggests strongly that
petitioner's use of the word "Lyceum" has not been attended with the exclusivity essential for
applicability of the doctrine of secondary meaning. Petitioner's use of the word "Lyceum" was
not exclusive but was in truth shared with the Western Pangasinan Lyceum and a little later
with other private respondent institutions which registered with the SEC using "Lyceum" as
part of their corporation names. There may well be other schools using Lyceum or Liceo in
their names, but not registered with the SEC because they have not adopted the corporate
form of organization.

3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE WHETHER THEY ARE
CONFUSINGLY OR DECEPTIVELY SIMILAR TO ANOTHER CORPORATE ENTITY'S NAME. —
petitioner institution is not entitled to a legally enforceable exclusive right to use the word
"Lyceum" in its corporate name and that other institutions may use "Lyceum" as part of their
corporate names. To determine whether a given corporate name is "identical" or "confusingly
or deceptively similar" with another entity's corporate name, it is not enough to ascertain the
presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate names in their
entirety and when the name of petitioner is juxtaposed with the names of private
respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively
similar" with each other.

DECISION

FELICIANO, J p:

Petitioner is an educational institution duly registered with the Securities and Exchange
Commission ("SEC"). When it first registered with the SEC on 21 September 1950, it used the
corporate name Lyceum of the Philippines, Inc. and has used that name ever since.

On 24 February 1984, petitioner instituted proceedings before the SEC to compel the private
respondents, which are also educational institutions, to delete the word "Lyceum" from their
corporate names and permanently to enjoin them from using "Lyceum" as part of their
respective names.

Some of the private respondents actively participated in the proceedings before the SEC. These
are the following, the dates of their original SEC registration being set out below opposite their
respective names:

Western Pangasinan Lyceum — 27 October 1950

Lyceum of Cabagan — 31 October 1962

Lyceum of Lallo, Inc. — 26 March 1972

Lyceum of Aparri — 28 March 1972

Lyceum of Tuao, Inc. — 28 March 1972

Lyceum of Camalaniugan — 28 March 1972

The following private respondents were declared in default for failure to file an answer despite
service of summons:

Buhi Lyceum;

Central Lyceum of Catanduanes;

Lyceum of Eastern Mindanao, Inc.; and

Lyceum of Southern Philippines

Petitioner's original complaint before the SEC had included three (3) other entities:

1. The Lyceum of Malacanay;

2. The Lyceum of Marbel; and

3. The Lyceum of Araullo

The complaint was later withdrawn insofar as concerned the Lyceum of Malacanay and the
Lyceum of Marbel, for failure to serve summons upon these two (2) entities. The case against
the Liceum of Araullo was dismissed when that school motu proprio change its corporate
name to "Pamantasan ng Araullo."

The background of the case at bar needs some recounting. Petitioner had sometime before
commenced in the SEC a proceeding (SEC-Case No. 1241) against the Lyceum of Baguio, Inc. to
require it to change its corporate name and to adopt another name not "similar [to] or
identical" with that of petitioner. In an Order dated 20 April 1977, Associate Commissioner
Julio Sulit held that the corporate name of petitioner and that of the Lyceum of Baguio, Inc.
were substantially identical because of the presence of a "dominant" word, i.e., "Lyceum," the
name of the geographical location of the campus being the only word which distinguished one
from the other corporate name. The SEC also noted that petitioner had registered as a
corporation ahead of the Lyceum of Baguio, Inc. in point of time, 1 and ordered the latter to
change its name to another name "not similar or identical [with]" the names of previously
registered entities.

The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court in a case
docketed as G.R. No. L-46595. In a Minute Resolution dated 14 September 1977, the Court
denied the Petition for Review for lack of merit. Entry of judgment in that case was made on 21
October 1977. 2

Armed with the Resolution of this Court in G.R. No. L-46595, petitioner then wrote all the
educational institutions it could find using the word "Lyceum" as part of their corporate name,
and advised them to discontinue such use of "Lyceum." When, with the passage of time, it
became clear that this recourse had failed, petitioner instituted before the SEC SEC-Case No.
2579 to enforce what petitioner claims as its proprietary right to the word "Lyceum." The SEC
hearing officer rendered a decision sustaining petitioner's claim to an exclusive right to use the
word "Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of Baguio, Inc.
case (SEC-Case No. 1241) and held that the word "Lyceum" was capable of appropriation and
that petitioner had acquired an enforceable exclusive right to the use of that word.
On appeal, however, by private respondents to the SEC En Banc, the decision of the hearing
officer was reversed and set aside. The SEC En Banc did not consider the word "Lyceum" to
have become so identified with petitioner as to render use thereof by other institutions as
productive of confusion about the identity of the schools concerned in the mind of the general
public. Unlike its hearing officer, the SEC En Banc held that the attaching of geographical names
to the word "Lyceum" served sufficiently to distinguish the schools from one another,
especially in view of the fact that the campuses of petitioner and those of the private
respondents were physically quite remote from each other. 3

Petitioner then went on appeal to the Court of Appeals. In its Decision dated 28 June 1991,
however, the Court of Appeals affirmed the questioned Orders of the SEC En Banc. 4 Petitioner
filed a motion for reconsideration, without success.

Before this Court, petitioner asserts that the Court of Appeals committed the following errors:

1. The Court of Appeals erred in holding that the Resolution of the Supreme Court in G.R. No.
L-46595 did not constitute stare decisis as to apply to this case and in not holding that said
Resolution bound subsequent determinations on the right to exclusive use of the word
Lyceum.

2. The Court of Appeals erred in holding that respondent Western Pangasinan Lyceum, Inc. was
incorporated earlier than petitioner.

3. The Court of Appeals erred in holding that the word Lyceum has not acquired a secondary
meaning in favor of petitioner.

4. The Court of Appeals erred in holding that Lyceum as a generic word cannot be appropriated
by the petitioner to the exclusion of others. 5

We will consider all the foregoing ascribed errors, though not necessarily seriatim. We begin by
noting that the Resolution of the Court in G.R. No. L-46595 does not, of course, constitute res
adjudicata in respect of the case at bar, since there is no identity of parties. Neither is stare
decisis pertinent, if only because the SEC En Banc itself has re-examined Associate
Commissioner Sulit's ruling in the Lyceum of Baguio case. The Minute Resolution of the Court
in G.R. No. L-46595 was not a reasoned adoption of the Sulit ruling.

The Articles of Incorporation of a corporation must, among other things, set out the name of
the corporation. 6 Section 18 of the Corporation Code establishes a restrictive rule insofar as
corporate names are concerned:

"SECTION 18. Corporate name. — No corporate name may be allowed by the Securities an
Exchange Commission if the proposed name is identical or deceptively or confusingly similar to
that of any existing corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate of incorporation under the
amended name." (Emphasis supplied)

The policy underlying the prohibition in Section 18 against the registration of a corporate name
which is "identical or deceptively or confusingly similar" to that of any existing corporation or
which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the
avoidance of fraud upon the public which would have occasion to deal with the entity
concerned, the evasion of legal obligations and duties, and the reduction of difficulties of
administration and supervision over corporations. 7

We do not consider that the corporate names of private respondent institutions are "identical
with, or deceptively or confusingly similar" to that of the petitioner institution. True enough,
the corporate names of private respondent entities all carry the word "Lyceum" but confusion
and deception are effectively precluded by the appending of geographic names to the word
"Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general
public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be
confused with the Lyceum of the Philippines.

Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn
referred to a locality on the river Ilissius in ancient Athens "comprising an enclosure dedicated
to Apollo and adorned with fountains and buildings erected by Pisistratus, Pericles and
Lycurgus frequented by the youth for exercise and by the philosopher Aristotle and his
followers for teaching." 8 In time, the word "Lyceum" became associated with schools and
other institutions providing public lectures and concerts and public discussions. Thus today, the
word "Lyceum" generally refers to a school or an institution of learning. While the Latin word
"lyceum" has been incorporated into the English language, the word is also found in Spanish
(liceo) and in French (lycee). As the Court of Appeals noted in its Decision, Roman Catholic
schools frequently use the term; e.g., "Liceo de Manila," "Liceo de Baleno" (in Baleno,
Masbate), "Liceo de Masbate," "Liceo de Albay." 9 "Lyceum" is in fact as generic in character as
the word "university." In the name of the petitioner, "Lyceum" appears to be a substitute for
"university;" in other places, however, "Lyceum," or "Liceo" or "Lycee" frequently denotes a
secondary school or a college. It may be (though this is a question of fact which we need not
resolve) that the use of the word "Lyceum" may not yet be as widespread as the use of
"university," but it is clear that a not inconsiderable number of educational institutions have
adopted "Lyceum" or "Liceo" as part of their corporate names. Since "Lyceum" or "Liceo"
denotes a school or institution of learning, it is not unnatural to use this word to designate an
entity which is organized and operating as an educational institution.

It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary
meaning in relation to petitioner with the result that that word, although originally a generic,
has become appropriable by petitioner to the exclusion of other institutions like private
respondents herein.

The doctrine of secondary meaning originated in the field of trademark law. Its application has,
however, been extended to corporate names sine the right to use a corporate name to the
exclusion of others is based upon the same principle which underlies the right to use a
particular trademark or tradename. 10 In Philippine Nut Industry, Inc. v. Standard Brands, Inc.,
11 the doctrine of secondary meaning was elaborated in the following terms:

" . . . a word or phrase originally incapable of exclusive appropriation with reference to an

article on the market, because geographically or otherwise descriptive, might nevertheless
have been used so long and so exclusively by one producer with reference to his article that, in
that trade and to that branch of the purchasing public, the word or phrase has come to mean
that the article was his product." 12

The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its
corporate name has been for such length of time and with such exclusivity as to have become
associated or identified with the petitioner institution in the mind of the general public (or at
least that portion of the general public which has to do with schools). The Court of Appeals
recognized this issue and answered it in the negative:

"Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive
appropriation with reference to an article in the market, because geographical or otherwise
descriptive might nevertheless have been used so long and so exclusively by one producer with
reference to this article that, in that trade and to that group of the purchasing public, the word
or phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74
Phil. 56). This circumstance has been referred to as the distinctiveness into which the name or
phrase has evolved through the substantial and exclusive use of the same for a considerable
period of time. Consequently, the same doctrine or principle cannot be made to apply where
the evidence did not prove that the business (of the plaintiff) has continued for so long a time
that it has become of consequence and acquired a good will of considerable value such that its
articles and produce have acquired a well-known reputation, and confusion will result by the
use of the disputed name (by the defendant) (Ang Si Heng vs. Wellington Department Store,
Inc., 92 Phil. 448).

With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the
aforementioned requisites. No evidence was ever presented in the hearing before the
Commission which sufficiently proved that the word 'Lyceum' has indeed acquired secondary
meaning in favor of the appellant. If there was any of this kind, the same tend to prove only
that the appellant had been using the disputed word for a long period of time. Nevertheless,
its (appellant) exclusive use of the word (Lyceum) was never established or proven as in fact
the evidence tend to convey that the cross-claimant was already using the word 'Lyceum'
seventeen (17) years prior to the date the appellant started using the same word in its
corporate name. Furthermore, educational institutions of the Roman Catholic Church had been
using the same or similar word like 'Liceo de Manila,' 'Liceo de Baleno' (in Baleno, Masbate),
'Liceo de Masbate,' 'Liceo de Albay' long before appellant started using the word 'Lyceum'. The
appellant also failed to prove that the word 'Lyceum' has become so identified with its
educational institution that confusion will surely arise in the minds of the public if the same
word were to be used by other educational institutions.

In other words, while the appellant may have proved that it had been using the word 'Lyceum'
for a long period of time, this fact alone did not amount to mean that the said word had
acquired secondary meaning in its favor because the appellant failed to prove that it had been
using the same word all by itself to the exclusion of others. More so, there was no evidence
presented to prove that confusion will surely arise if the same word were to be used by other
educational institutions. Consequently, the allegations of the appellant in its first two assigned
errors must necessarily fail." 13 (Underscoring partly in the original and partly supplied)

We agree with the Court of Appeals. The number alone of the private respondents in the case
at bar suggests strongly that petitioner's use of the word "Lyceum" has not been attended with
the exclusivity essential for applicability of the doctrine of secondary meaning. It may be noted
also that at least one of the private respondents, i.e., the Western Pangasinan Lyceum, Inc.,
used the term "Lyceum" seventeen (17) years before the petitioner registered its own
corporate name with the SEC and began using the word "Lyceum." It follows that if any
institution had acquired an exclusive right to the word "Lyceum," that institution would have
been the Western Pangasinan Lyceum, Inc. rather than the petitioner institution.

In this connection, petitioner argues that because the Western Pangasinan Lyceum, Inc. failed
to reconstruct its records before the SEC in accordance with the provisions of R.A. No. 62,
which records had been destroyed during World War II, Western Pangasinan Lyceum should be
deemed to have lost all rights it may have acquired by virtue of its past registration. It might be
noted that the Western Pangasinan Lyceum, Inc. registered with the SEC soon after petitioner
had filed its own registration on 21 September 1950. Whether or not Western Pangasinan
Lyceum, Inc. must be deemed to have lost its rights under its original 1933 registration,
appears to us to be quite secondary in importance; we refer to this earlier registration simply
to underscore the fact that petitioner's use of the word "Lyceum" was neither the first use of
that term in the Philippines nor an exclusive use thereof. Petitioner's use of the word "Lyceum"
was not exclusive but was in truth shared with the Western Pangasinan Lyceum and a little
later with other private respondent institutions which registered with the SEC using "Lyceum"
as part of their corporation names. There may well be other schools using Lyceum or Liceo in
their names, but not registered with the SEC because they have not adopted the corporate
form of organization.

We conclude and so hold that petitioner institution is not entitled to a legally enforceable
exclusive right to use the word "Lyceum" in its corporate name and that other institutions may
use "Lyceum" as part of their corporate names. To determine whether a given corporate name
is "identical" or "confusingly or deceptively similar" with another entity's corporate name, it is
not enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must
evaluate corporate names in their entirety and when the name of petitioner is juxtaposed with
the names of private respondents, they are not reasonably regarded as "identical" or
"confusingly or deceptively similar" with each other.

WHEREFORE, the petitioner having failed to show any reversible error on the part of the public
respondent Court of Appeals, the Petition for Review is DENIED for lack of merit, and the
Decision of the Court of Appeals dated 28 June 1991 is hereby AFFIRMED. No pronouncement
as to costs.

SO ORDERED.

G.R. No. 129552 June 29, 2005

P.C. JAVIER & SONS, INC., SPS. PABLO C. JAVIER, SR. and ROSALINA F. JAVIER, petitioners,
vs.
HON. COURT OF APPEALS, PAIC SAVINGS & MORTGAGE BANK, INC., SHERIFFS GRACE BELVIS,
SOFRONIO VILLARIN, PIO MARTINEZ and NICANOR BLANCO, respondents.

DECISION

CHICO-NAZARIO, J.:

Before Us is an appeal by certiorari under Rule 45 of the Rules of Court which seeks to set
aside the decision1 of the Court of Appeals dated 31 January 1997 which affirmed in toto the
decision of Branch 62 of the Regional Trial Court (RTC) of Makati City, dismissing the complaint
for Annulment of Mortgage and Foreclosure with Preliminary Injunction, Prohibition and
Damages filed by petitioners, and its Resolution2 dated 20 June 1997 denying petitioners’
motion for reconsideration.

A complaint3 for Annulment of Mortgage and Foreclosure with Preliminary Injunction,

Prohibition and Damages was filed by petitioners P.C. Javier & Sons, Inc. and spouses Pablo C.
Javier, Sr. and Rosalina F. Javier against PAIC Savings & Mortgage Bank, Inc., Grace S. Belvis,
Acting Ex Officio Regional Sheriff of Pasig, Metro Manila and Sofronio M. Villarin, Deputy
Sheriff-in-Charge, before Branch 62 of the RTC of Makati City, on 07 May 1984. The case was
docketed as Civil Case No. 7184.
On 10 May 1984, a Supplemental Complaint4 was filed to include additional defendants,
namely: Pio Martinez, Acting Ex Officio Regional Sheriff of Antipolo, Rizal, and Nicanor D.
Blanco, Deputy Sheriff-in-Charge.

The facts that gave rise to the aforesaid complaint, as found by Branch 62 of the RTC of Makati
City, and adopted by the respondent court, are as follows:

In February, 1981, Plaintiff P.C. Javier and Sons Services, Inc., Plaintiff Corporation, for short,
applied with First Summa Savings and Mortgage Bank, later on renamed as PAIC Savings and
Mortgage Bank, Defendant Bank, for short, for a loan accommodation under the Industrial
Guarantee Loan Fund (IGLF) for ₱1.5 Million. On March 21, 1981, Plaintiff Corporation through
Plaintiff Pablo C. Javier, Plaintiff Javier for short, was advised that its loan application was
approved and that the same shall be forwarded to the Central Bank (CB) for processing and
release (Exhibit A also Exhibit 8).

The CB released the loan to Defendant Bank in two (2) tranches of ₱750,000 each. The first
tranche was released to the Plaintiff Corporation on May 18, 1981 in the amount of
₱750,000.00 and the second tranche was released to Plaintiff Corporation on November 21,
1981 in the amount of ₱750,000.00. From the second tranche release, the amount of
₱250,000.00 was deducted and deposited in the name of Plaintiff Corporation under a time
deposit.

Plaintiffs claim that the loan releases were delayed; that the amount of ₱250,000.00 was
deducted from the IGLF loan of ₱1.5 Million and placed under time deposit; that Plaintiffs were
never allowed to withdraw the proceeds of the time deposit because Defendant Bank intended
this time deposit as automatic payments on the accrued principal and interest due on the loan.
Defendant Bank, however, claims that only the final proceeds of the loan in the amount of
₱750,000.00 was delayed the same having been released to Plaintiff Corporation only on
November 20, 1981, but this was because of the shortfall in the collateral cover of Plaintiff’s
loan; that this second tranche of the loan was precisely released after a firm commitment was
made by Plaintiff Corporation to cover the collateral deficiency through the opening of a time
deposit using a portion of the loan proceeds in the amount of ₱250,000.00 for the purpose;
that in compliance with their commitment to submit additional security and open time
deposit, Plaintiff Javier in fact opened a time deposit for ₱250,000.00 and on February 15,
1983, executed a chattel mortgage over some machineries in favor of Defendant Bank; that
thereafter, Plaintiff Corporation defaulted in the payment of its IGLF loan with Defendant Bank
hence Defendant Bank sent a demand letter dated November 22, 1983, reminding Plaintiff
Javier to make payments because their accounts have been long overdue; that on May 2, 1984,
Defendant Bank sent another demand letter to Plaintiff spouses informing them that since
they have defaulted in paying their obligation, their mortgage will now be foreclosed; that
when Plaintiffs still failed to pay, Defendant Bank initiated extrajudicial foreclosure of the real
estate mortgage executed by Plaintiff spouses and accordingly the auction sale of the property
covered by TCT No. 473216 was scheduled by the Ex–Officio Sheriff on May 9, 1984. 5

The instant complaint was filed to forestall the extrajudicial foreclosure sale of a piece of land
covered by Transfer Certificate of Title (TCT) No. 4732166 mortgaged by petitioner corporation
in favor of First Summa Savings and Mortgage Bank which bank was later renamed as PAIC
Savings and Mortgage Bank, Inc.7 It likewise asked for the nullification of the Real Estate
Mortgages it entered into with First Summa Savings and Mortgage Bank. The supplemental
complaint added several defendants who scheduled for public auction other real estate
properties contained in the same real estate mortgages and covered by TCTs No. N-5510, No.
426872, No. 506346 and Original Certificate of Title No. 10146. 8

Several extrajudicial foreclosures of the mortgaged properties were scheduled but were
temporarily restrained by the RTC notwithstanding the denial9 of petitioners’ prayer for a writ
of preliminary injunction. In an Order10 dated 10 December 1990, the RTC ordered
respondents-sheriffs to maintain the status quo and to desist from further proceeding with the
extrajudicial foreclosure of the mortgaged properties.

Among the issues raised by petitioners at the RTC are whether or not First Summa Savings and
Mortgage Bank and PAIC Savings and Mortgage Bank, Inc. are one and the same entity, and
whether or not their obligation is already due and demandable at the time respondent bank
commenced to extrajudicially foreclose petitioners’ properties in April 1984.

The RTC declared that First Summa Savings and Mortgage Bank and PAIC Savings and Mortgage
Bank, Inc. are one and the same entity and that petitioner corporation is liable to respondent
bank for the unpaid balance of its Industrial Guarantee Loan Fund (IGLF) loans. The RTC further
ruled that respondent bank was justified in extrajudicially foreclosing the real estate mortgages
executed by petitioner corporation in its favor because the loans were already due and
demandable when it commenced foreclosure proceedings in April 1984.

In its decision dated 06 July 1993, the RTC disposed of the case as follows:

Premises considered, judgment is hereby rendered dismissing the Complaint against

Defendant Bank and ordering Plaintiffs to pay Defendant Bank jointly and severally, the
following:

1. The principal amount of P700,453.45 under P.N. No. 713 plus all the accrued interests,
liquidated damages and other fees due thereon from March 18, 1983 until fully paid as
provided in said PN;

2. The principal amount of P749,879.38 under P.N. No. 841 plus all the accrued interests,
liquidated damages and other fees due thereon from September 1, 1982 until fully paid
as provided in such PN;
 3. The amount of P40,000.00 as actual damages;

4. The amount of P30,000.00 as exemplary damages;

5. The amount of P50,000.00 as attorney’s fees; plus

6. Cost of suit.11

Petitioners filed a Motion for Reconsideration12 which was opposed13 by respondent bank. The
motion was denied in an Order dated 11 May 1994.

Petitioners appealed the decision to the Court of Appeals. The latter affirmed in toto the
decision of the lower court. It also denied petitioners’ motion for reconsideration.

Hence, this appeal by certiorari.

Petitioners assigned the following as errors:

a. PUBLIC RESPONDENT COURT GRAVELY ERRED WHEN IT SUSTAINED THE DISMISSAL OF

PETITIONERS’ COMPLAINT AND IN AFFIRMING THE RIGHT OF THE RESPONDENT BANK TO
COLLECT THE IGLF LOANS IN LIEU OF FIRST SUMMA SAVINGS AND MORTGAGE BANK WHICH
ORIGINALLY GRANTED SAID LOANS.

COROLLARY TO THE ABOVE ARGUMENT, THE PUBLIC RESPONDENT COURT ALSO GRAVELY
ERRED WHEN IT RULED THAT THE PETITIONERS CANNOT WITHHOLD THEIR PAYMENT TO THE
RESPONDENT BANK NOTWITHSTANDING THE ADMITTED INABILITY OF THE RESPONDENT BANK
TO FURNISH THE PETITIONERS THE SAID REQUESTED DOCUMENTS.

b. PUBLIC RESPONDENT COURT GRAVELY ERRED WHEN IT SUSTAINED THE COLLECTION OF THE
ENTIRE PROCEEDS OF THE IGLF LOANS OF P1,500,000.00 DESPITE THE FACT THAT THE
P250,000.00 OF THIS LOAN WAS WITHHELD BY THE FIRST SUMMA SAVINGS AND MORTGAGE
BANK TO BECOME PART OF THE COLLATERALS TO THE SAID P1,500,000.00 LOAN.

c. PUBLIC RESPONDENT COURT GRAVELY ERRED WHEN IT SUSTAINED THE DAMAGES

AWARDED TO THE RESPONDENT BANK DESPITE THE ABSENCE OF MALICE OR BAD FAITH ON
THE PART OF THE PETITIONERS IN FILING THIS CASE AGAINST THE RESPONDENT BANK.

On the first assigned error, petitioners argue that they are legally justified to withhold their
amortized payments to the respondent bank until such time they would have been properly
notified of the change in the corporate name of First Summa Savings and Mortgage Bank. They
claim that they have never received any formal notice of the alleged change of corporate name
of First Summa Savings and Mortgage Bank to PAIC Savings & Mortgage Bank, Inc. They further
claim that the only and first time they received formal evidence of a change in the corporate
name of First Summa Savings and Mortgage Bank surfaced when respondent bank presented
its witness, Michael Caguioa, on 03 April 1990, where he presented the Securities and
Exchange Commission (SEC) Certificate of Filing of the Amended Articles of Incorporation of
First Summa Savings and Mortgage Bank,14 the Central Bank (CB) Certificate of Authority15 to
change the name of First Summa Savings and Mortgage Bank to PAIC Savings and Mortgage
Bank, Inc., and the CB Circular Letter16 dated 27 June 1983.

Their argument does not hold water. Their defense that they should first be formally notified of
the change of corporate name of First Summa Savings and Mortgage Bank to PAIC Savings and
Mortgage Bank, Inc., before they will continue paying their loan obligations to respondent
bank presupposes that there exists a requirement under a law or regulation ordering a bank
that changes its corporate name to formally notify all its debtors. After going over the
Corporation Code and Banking Laws, as well as the regulations and circulars of both the SEC
and the Bangko Sentral ng Pilipinas (BSP), we find that there is no such requirement. This being
the case, this Court cannot impose on a bank that changes its corporate name to notify a
debtor of such change absent any law, circular or regulation requiring it. Such act would be
judicial legislation. The formal notification is, therefore, discretionary on the bank. Unless there
is a law, regulation or circular from the SEC or BSP requiring the formal notification of all
debtors of banks of any change in corporate name, such notification remains to be a mere
internal policy that banks may or may not adopt.

In the case at bar, though there was no evidence showing that petitioners were furnished
copies of official documents showing the First Summa Savings and Mortgage Bank’s change of
corporate name to PAIC Savings and Mortgage Bank, Inc., evidence abound that they had
notice or knowledge thereof. Several documents establish this fact. First, letter17 dated 16 July
1983 signed by Raymundo V. Blanco, Accountant of petitioner corporation, addressed to PAIC
Savings and Mortgage Bank, Inc. Part of said letter reads: "In connection with your inquiry as to
the utilization of funds we obtained from the former First Summa Savings and Mortgage
Bank, . . ." Second, Board Resolution18 of petitioner corporation signed by Pablo C. Javier, Sr. on
24 August 1983 authorizing him to execute a Chattel Mortgage over certain machinery in favor
of PAIC Savings and Mortgage Bank, Inc. Third, Secretary’s Certificate 19 signed by Fortunato E.
Gabriel, Corporate Secretary of petitioner corporation, on 01 September 1983, certifying that a
board resolution was passed authorizing Mr. Pablo C. Javier, Sr. to execute a chattel mortgage
on the corporation’s equipment that will serve as collateral to cover the IGLF loan with PAIC
Savings and Mortgage Bank, Inc. Fourth, undated letter20 signed by Pablo C. Javier, Sr. and
addressed to PAIC Savings and Mortgage Bank, Inc., authorizing Mr. Victor F. Javier, General
Manager of petitioner corporation, to secure from PAIC Savings and Mortgage Bank, Inc.
certain documents for his signature.

From the foregoing documents, it cannot be denied that petitioner corporation was aware of
First Summa Savings and Mortgage Bank’s change of corporate name to PAIC Savings and
Mortgage Bank, Inc. Knowing fully well of such change, petitioner corporation has no valid
reason not to pay because the IGLF loans were applied with and obtained from First Summa
Savings and Mortgage Bank. First Summa Savings and Mortgage Bank and PAIC Savings and
Mortgage Bank, Inc., are one and the same bank to which petitioner corporation is indebted. A
change in the corporate name does not make a new corporation, whether effected by a special
act or under a general law. It has no effect on the identity of the corporation, or on its
property, rights, or liabilities.21 The corporation, upon such change in its name, is in no sense a
new corporation, nor the successor of the original corporation. It is the same corporation with
a different name, and its character is in no respect changed.22

Anent the second assigned error, this Court rules that respondent court did not err when it
sustained the collection of the entire proceeds of the IGLF loans amounting to P1,500,000.00
despite the withholding of P250,000.00 to become part of the collaterals to the said
P1,500,000.00 IGLF loan.

Petitioners contend that the collaterals they submitted were more than sufficient to cover the
P1,500,000.00 IGLF loan. Such contention is untenable. Petitioner corporation was required to
place P250,000.00 in a time deposit with respondent bank for the simple reason that the
collateral it put up was insufficient to cover the IGLF loans it has received. It admitted the
shortfall of its collateral when it authorized petitioner Pablo C. Javier, Sr., via a board
resolution,23 to execute a chattel mortgage over certain machinery in favor of PAIC Savings and
Mortgage Bank, Inc. which was certified by its corporate secretary.24 If the collateral it put up
was sufficient, why then did it execute another chattel mortgage?

In his order dated 07 September 1984, Hon. Rafael T. Mendoza found that the loanable value
of the lands, buildings, machinery and equipment amounted only to P934,000.00. The order
reads in part:

The terms and conditions of the IGLF loan extended to plaintiff corporation are governed by
the loan and security documents evidencing said loan. Although the loan agreement was
approved by the defendant bank, the same has to be processed and be finally approved by the
Central Bank of the Philippines, in pursuance to the IGLF program, of which the defendant
bank is an accredited participant. The defendant had to await Central Bank’s advise (sic)
regarding the final approval of the loan before the release of the proceeds thereof. The
proceeds of the loan was released to the plaintiff on 6 April and November 20, 1981, and the
final proceeds was released only on November 20, 1981, on account of short fall in the
collateral covered by the lands and buildings as well as the machineries and equipment then
subject of the existing mortgages in favor of the defendant bank, having only a loanable value
of P934,000.00, and only after a firm commitment made by plaintiff corporation to the
defendant bank to correct the collateral deficiency thru the execution of a chattel mortgage on
additional machineries, equipment and tools and thru the opening of a time deposit with PAIC
Bank using a portion of the loan proceeds in the amount of P250,000.00 to answer for its
obligation to the defendant bank under the IGLF loan was the final proceeds of the loan
released in favor of the plaintiffs. The delay in the release of the final proceeds of the IGLF loan
was due to the aforestated collateral deficiency.25

As declared by the respondent court, the finding in said order was not disputed in the appeal
before it. It said that what was contained in petitioners’ brief was that "their loans were
‘overcollateralized,’ and fail to specify why or in what manner it was so." 26 Having failed to raise
this issue before the respondent court, petitioners thus cannot raise this issue before this
Court. Moreover, since the issue of whether or not the collateral put up by petitioners is
sufficient is factual, the same is not proper for this Court’s consideration. The basic rule is that
factual questions are beyond the province of the Supreme Court in a petition for review. 27

Petitioners maintain that to collect the P250,000.00 from them would be a clear case of unjust
enrichment because they have not availed or used said amount for the same was unlawfully
withheld from them.

We do not agree. The fundamental doctrine of unjust enrichment is the transfer of value
without just cause or consideration. The elements of this doctrine are: enrichment on the part
of the defendant; impoverishment on the part of the plaintiff; and lack of cause. The main
objective is to prevent one to enrich himself at the expense of another. 28 It is commonly
accepted that this doctrine simply means that a person shall not be allowed to profit or enrich
himself inequitably at another's expense.29 In the instant case, there is no unjust enrichment to
speak of. The amount of P225,905.79 was applied as payment for petitioner corporation’s loan
which was taken from the P250,000.00, together with its accrued interest, that was placed in
time deposit with First Summa Savings and Mortgage Bank. The use of said amount as
payment was approved by petitioner Pablo C. Javier, Sr. on 17 March 1983.30 As further found
by the RTC in its decision, the balance of the time deposit was withdrawn by petitioners. 31

Petitioner corporation faults respondent bank, then known as First Summa Savings and
Mortgage Bank, for requiring it to put up as additional collateral the amount of P250,000.00
inasmuch as the CB never required it to do so. It added that respondent bank took advantage
of its urgent and immediate need at the time for the proceeds of the IGLF loans that it had no
choice but to comply with respondent bank’s requirement to put in time deposits the said
amount as additional collateral.

We agree with respondent court that the questioning of the propriety of the placing of the
P250,000.00 in time deposits32 with respondent bank as additional collateral was belatedly
made. As above-discussed, the requirement to give additional collateral was warranted
because the collateral petitioner corporation put up failed to cover its IGLF loans. If petitioner
corporation was really bent on questioning the reasonableness of putting up the
aforementioned amount as additional collateral, it should have done immediately after it made
the time deposits on 26 November 1981. This, it did not do. It questioned the placing of the
time deposits only on 08 February 198433 or long after defendant bank had already demanded
full payment of the loans, then amounting to P2,045,401.79 as of 22 November 1983. It is too
late in the day for petitioner corporation to question the placing of the P250,000.00 in time
deposits after it failed to pay its loan obligations as scheduled, making them due and
demandable, and after a demand for full payment has been made. We will not allow petitioner
corporation to have one’s cake and eat it too.

As regards the payments made by petitioner corporation, respondent court has this to say:

The trial court held, based on plaintiffs’ own exhibits, that plaintiff[s] made the following
payments:

On Promissory Note No. 713:

Date Actual Date of Amount

(Per PN Schedule) Payment
July 6, 1981 August 3, 1981 ₱ 28,125.00
October 6, 1981 October 28, 1981 28,836.13
January 6, 1982 January 22, 1982 29,227.38
March 17, 1983 225,905.79

TOTAL ₱ 312,094.30

And on Promissory Note No. 841:

Date Actual Date of

Amount
(Per PN Schedule) Payment
February 20, 1982 April 13, 1982 ₱ 28,569.30
May 20, 1982 July 7, 1982 29,254.31
August 20, 1982 August 31, 1982 36,795.44

TOTAL ₱ 94,619.05

Plaintiff-appellant[s] does not dispute the finding, which is obvious from the foregoing
summary, that plaintiff[s] stopped payments on March 17, 1983 on Promissory Note No. 713,
and on August 31, 1982 on Promissory Note No. 841.

By simply looking at the amortization schedule attached to the two promissory notes, it is clear
that plaintiff[s] already defaulted on its loan obligations when the defendant Bank gave notice
of the foreclosure proceedings on April 28, 1984. On amortization payments alone, plaintiff[s]
should have paid a total of P459,339 as of April 6, 1984 on Promissory [Note] No. 713, and a
total of P328,173.00 as of February 20, 1984 on Promissory Note [No.] 841. No extended
computation is necessary to demonstrate that, even without imputing the liquidated damages
equivalent to 2% a month on the delayed payments (see second paragraph of the promissory
notes), the plaintiffs were grossly deficient in amortization payments, and already in default
when the foreclosure proceedings were commenced. Further, we note that under the terms of
the promissory note, "failure to pay an installment when due shall entitle the bank or its assign
to declare all the obligations as immediately due and payable" (second paragraph).34

As to the third assigned error, petitioners argue that there being no malice or bad faith on their
part when they filed the instant case, no damages should have been awarded to respondent
bank.

We cannot sustain such argument. The presence of malice or bad faith is very evident in the
case before us. By the documents it executed, petitioner corporation was well aware that First
Summa Savings and Mortgage Bank changed its corporate name to PAIC Savings and Mortgage
Bank, Inc. Despite knowledge that First Summa Savings and Mortgage Bank and PAIC Savings
and Mortgage Bank, Inc., are one and the same entity, it pretended otherwise. It used this
purported ignorance as an excuse to renege on its obligation to pay its loans after they became
due and after demands for payment were made, claiming that it never obtained the loans from
respondent bank.

No good faith was shown by petitioner corporation. If it were in good faith in complying with
its loan obligations since it believed that respondent bank had no right to the payment, it
should have made a valid consignation in court. This, it did not do. If petitioner corporation
were at a loss as to who should receive the payment, it could have easily taken steps and
inquired from the SEC, CB of the Philippines or from the bank itself from which it received the
loans and to where it made previous payments. Further, the fact that it was respondent bank
that was demanding payment for loans already due and demandable and not First Summa
Savings and Mortgage Bank is sufficient to make petitioner corporation wonder why this is so.
It never took any initiative to clear the matter. Instead, it paid no attention to the valid
demands of respondent bank.

The awarding of actual and compensatory damages, as well as attorney’s fees, is justified
under the circumstances. We quote with approval the reasons given by the RTC for the grant of
the same:

Considering that Defendant Bank had been prevented at least four (4) times from foreclosing
the mortgages (i.e., Temporary Restraining Orders of May 9 and 19 and October 22, 1984 and
status quo order of December 10, 1990 enjoining the extrajudicial foreclosure sales of May 9
and 16 and October 23, 1984 and December 20, 1990, respectively), it is proper that
Defendant Bank be reimbursed its actual expenses. The amount of P40,000.00 is reasonable
reimbursement for the publication and other expenses incurred in the four (4) extrajudicial
foreclosures which were enjoined by the Court. Considering the wanton and reckless filing of
this clearly unfounded and baseless legal action and the fact that Defendant Bank had to
defend itself against such suit, attorney’s fees in the amount of P50,000.00 should be paid by
the Plaintiffs to the Defendant Bank. Defendant Bank failed to adduce indubitable proof on the
moral and exemplary damages that it seeks. Nevertheless, since such proof is not absolutely
necessary and primarily as an example for the public good to deter others from filing a similar
clearly unfounded legal action, Defendant Bank should be entitled to an award of exemplary
damages.35

This Court finds that petitioners failed to comply with what is incumbent upon them – to pay
their loans when they became due. The lame excuse they belatedly advanced for their non-
payment cannot and should not prevent respondent bank from exercising its right to foreclose
the real estate mortgages executed in its favor.

WHEREFORE, premises considered, the Court of Appeals decision dated 31 January 1997 and
its resolution dated 20 June 1997 are hereby AFFIRMED in toto. Costs against petitioners.

SO ORDERED.

G.R. No. L-26370 July 31, 1970

PHILIPPINE FIRST INSURANCE COMPANY, INC., plaintiff-appellant,

vs.
MARIA CARMEN HARTIGAN, CGH, and O. ENGKEE, defendants-appellees.

Bausa, Ampil & Suarez for plaintiff-appellant.

Nicasio E. Martin for defendants-appellees.

BARREDO, J.:

Appeal from the decision dated 6 October 1962 of the Court of First Instance of Manila —
dismissing the action in its Civil Case No. 48925 — brought by the herein plaintiff-appellant
Philippine First Insurance Co., Inc. to the Court of Appeals which could, upon finding that the
said appeal raises purely questions of law, declared itself without jurisdiction to entertain the
same and, in its resolution dated 15 July 1966, certified the records thereof to this Court for
proper determination.
The antecedent facts are set forth in the pertinent portions of the resolution of the Court of
Appeals referred to as follows:

According to the complaint, plaintiff was originally organized as an insurance

corporation under the name of 'The Yek Tong Lin Fire and Marine Insurance Co.,
Ltd.' The articles of incorporation originally presented before the Security and
Exchange Commissioner and acknowledged before Notary Public Mr. E. D. Ignacio
on June 1, 1953 state that the name of the corporation was 'The Yek Tong Lin Fire
and Marine Insurance Co., Ltd.' On May 26, 1961 the articles of incorporation
were amended pursuant to a certificate of the Board of Directors dated March 8,
1961 changing the name of the corporation to 'Philippine First Insurance Co., Inc.'.

The complaint alleges that the plaintiff Philippine First Insurance Co., Inc., doing
business under the name of 'The Yek Tong Lin Fire and Marine Insurance Co., Lt.'
signed as co-maker together with defendant Maria Carmen Hartigan, CGH, a
promissory note for P5,000.00 in favor of the China Banking Corporation payable
within 30 days after the date of the promissory note with the usual banking
interest; that the plaintiff agreed to act as such co-maker of the promissory note
upon the application of the defendant Maria Carmen Hartigan, CGH, who together
with Antonio F. Chua and Chang Ka Fu, signed an indemnity agreement in favor of
the plaintiff, undertaking jointly and severally, to pay the plaintiff damages, losses
or expenses of whatever kind or nature, including attorney's fees and legal costs,
which the plaintiff may sustain as a result of the execution by the plaintiff and co-
maker of Maria Carmen Hartigan, CGH, of the promissory note above-referred to;
that as a result of the execution of the promissory note by the plaintiff and Maria
Carmen Hartigan, CGH, the China Banking Corporation delivered to the defendant
Maria Carmen Hartigan, CGH, the sum of P5,000.00 which said defendant failed to
pay in full, such that on August 31, 1961 the same was. renewed and as of
November 27, 1961 there was due on account of the promissory note the sum of
P4,559.50 including interest. The complaint ends with a prayer for judgment
against the defendants, jointly and severally, for the sum of P4,559.50 with
interest at the rate of 12% per annum from November 23, 1961 plus P911.90 by
way of attorney's fees and costs.

Although O. Engkee was made as party defendant in the caption of the complaint,
his name is not mentioned in the body of said complaint. However, his name
Appears in the Annex A attached to the complaint which is the counter indemnity
agreement supposed to have been signed according to the complaint by Maria
Carmen Hartigan, CGH, Antonio F. Chua and Chang Ka Fu.

In their answer the defendants deny the allegation that the plaintiff formerly
conducted business under the name and style of 'The Yek Tong Lin Fire and
 Marine Insurance Co., Ltd.' They admit the execution of the indemnity agreement
but they claim that they signed said agreement in favor of the Yek Tong Lin Fire
and Marine Insurance Co., Ltd.' and not in favor of the plaintiff. They likewise
admit that they failed to pay the promissory note when it fell due but they allege
that since their obligation with the China Banking Corporation based on the
promissory note still subsists, the surety who co-signed the promissory note is not
entitled to collect the value thereof from the defendants otherwise they will be
liable for double amount of their obligation, there being no allegation that the
surety has paid the obligation to the creditor.

By way of special defense, defendants claim that there is no privity of contract

between the plaintiff and the defendants and consequently, the plaintiff has no
cause of action against them, considering that the complaint does not allege that
the plaintiff and the 'Yek Tong Lin Fire and Marine Insurance Co., Ltd.' are one and
the same or that the plaintiff has acquired the rights of the latter. The parties after
the admission of Exhibit A which is the amended articles of incorporation and
Exhibit 1 which is a demand letter dated August 16, 1962 signed by the manager
of the loans and discount department of the China Banking Corporation showing
that the promissory note up to said date in the sum of P4,500.00 was still unpaid,
submitted the case for decision based on the pleadings.

Under date of 6 October 1962, the Court of First Instance of Manila rendered the decision
appealed. It dismissed the action with costs against the plaintiff Philippine First Insurance Co.,
Inc., reasoning as follows:

... With these undisputed facts in mind, the parties correctly concluded that the
issues for resolution by this Court are as follows:

(a) Whether or not the plaintiff is the real party in interest that may validly sue on
the indemnity agreement signed by the defendants and the Yek Tong Lin Fire &
Marine Insurance Co., Ltd. (Annex A to plaintiff's complaint ); and

(b) Whether or not a suit for indemnity or reimbursement may under said
indemnity agreement prosper without plaintiff having yet paid the amount due
under said promissory note.

In the first place, the change of name of the Yek Tong Lin Fire & Marine Insurance
Co., Ltd. to the Philippines First Insurance Co., Inc. is of dubious validity. Such
change of name in effect dissolved the original corporation by a process of
dissolution not authorized by our corporation law (see Secs. 62 and 67, inclusive,
of our Corporation Law). Moreover, said change of name, amounting to a
dissolution of the Yek Tong Lin Fire & Marine Insurance Co., Ltd., does not appear
to have been effected with the written note or assent of stockholders
representing at least two-thirds of the subscribed capital stock of the corporation,
a voting proportion required not only for the dissolution of a corporation but also
for any amendment of its articles of incorporation (Secs. 18 and 62, Corporation
Law). Furthermore, such change of corporate name appears to be against public
policy and may be effected only by express authority of law (Red Line
Transportation Co. v. Rural Transit Co., Ltd., 60 Phil. 549, 555; Cincinnati
Cooperage Co., Ltd. vs. Vate, 26 SW 538, 539; Pilsen Brewing Co. vs. Wallace, 125
NE 714), but there is nothing in our corporation law authorizing the change of
corporate name in this jurisdiction.

In the second place, assuming that the change of name of the Yek Tong Lin Fire &
Marine Insurance Co. Ltd., to Philippines pine First Insurance Co., Inc., as
accomplished on March 8, 1961, is valid, that would mean that the original
corporation, the Yek Tong Lin Fire & Marine Insurance Co., Ltd., became dissolved
and of no further existence since March 8, 1961, so that on May 15, 1961, the
date the indemnity agreement, Annex A, was executed, said original corporation
bad no more power to enter into any agreement with the defendants, and the
agreement entered into by it was ineffective for lack of capacity of said dissolved
corporation to enter into said agreement. At any rate, even if we hold that said
change of name is valid, the fact remains that there is no evidence showing that
the new entity, the Philippine First Insurance Co., Inc. has with the consent of the
original parties, assumed the obligations or was assigned the rights of action in
the original corporation, the Yek Tong Lin Fire & Marine Insurance Co., Ltd. In
other words, there is no evidence of conventional subrogation of the Plaintiffs in
the rights of the Yek Tong Lin Fire & Marine Insurance Co., Ltd. under said
indemnity agreement (Arts. 1300, 1301, New Civil Code). without such
subrogation assignment of rights, the herein plaintiff has no cause of action
against the defendants, and is, therefore, not the right party in interest as plaintiff.

Last, but not least, assuming that the said change of name was legal and operated
to dissolve the original corporation, the dissolved corporation, must pursuant to
Sec. 77 of our corporation law, be deemed as continuing as a body corporate for
three (3) years from March 8, 1961 for the purpose of prosecuting and defending
suits. It is, therefore, the Yek Tong Lin Fire & Marine Insurance Co., Ltd. that is the
proper party to sue the defendants under said indemnity agreement up to March
8, 1964.

Having arrived at the foregoing conclusions, this Court need not squarely pass
upon issue (b) formulated above.

WHEREFORE, plaintiff's action is hereby dismissed, with costs against the plaintiff.
In due time, the Philippine First Insurance Company, Inc. moved for reconsideration of the
decision aforesaid, but said motion was denied on December 3, 1962 in an order worded thus:

The motion for reconsideration, dated November 8, 1962, raises no new issue that
we failed to consider in rendering our decision of October 6, 1962. However, it
gives us an opportunity to amplify our decision as regards the question of change
of name of a corporation in this jurisdiction.

We find nothing in our Corporation Law authorizing a change of name of a

corporation organized pursuant to its provisions. Sec. 18 of the Corporation Law
authorizes, in our opinion, amendment to the Articles of Incorporation of a
corporation only as to matters other than its corporate name. Once a corporation
is organized in this jurisdiction by the execution and registration of its Articles of
Incorporation, it shall continue to exist under its corporate name for the lifetime
of its corporate existence fixed in its Articles of Incorporation, unless sooner
legally dissolved (Sec. 11, Corp. Law). Significantly, change of name is not one of
the methods of dissolution of corporations expressly authorized by our
Corporation Law. Also significant is the fact that the power to change its corporate
name is not one of the general powers conferred on corporations in this
jurisdiction (Sec. 13, Corp. Law). The enumeration of corporate powers made in
our Corporation Law implies the exclusion of all others (Thomas v. West Jersey R.
Co., 101 U.S. 71, 25 L. ed. 950). It is obvious, in this connection, that change of
name is not one of the powers necessary to the exercise of the powers conferred
on corporations by said Sec. 13 (see Sec. 14, Corp. Law).

To rule that Sec. 18 of our Corporation Law authorizes the change of name of a
corporation by amendment of its Articles of Incorporation is to indulge in judicial
legislation. We have examined the cases cited in Volume 13 of American
Jurisprudence in support of the proposition that the general power to alter or
amend the charter of a corporation necessarily includes the power to alter the
name of a corporation, and find no justification for said conclusion arrived at by
the editors of American Jurisprudence. On the contrary, the annotations in favor
of plaintiff's view appear to have been based on decisions in cases where the
statute itself expressly authorizes change of corporate name by amendment of its
Articles of Incorporation. The correct rule in harmony with the provisions of our
Corporation Law is well expressed in an English case as follows:

After a company has been completely register without defect or

omission, so as to be incorporated by the name set forth in the deed
of settlement, such incorporated company has not the power to
change its name ... Although the King by his prerogative might
incorporate by a new name, and the newly named corporation might
 retain former rights, and sometimes its former name also, ... it never
appears to be such an act as the corporation could do by itself, but
required the same power as created the corporation. (Reg. v.
Registrar of Joint Stock Cos 10 Q.B. 839, 59 E.C.L. 839).

The contrary view appears to represent the minority doctrine, judging from the
annotations on decided cases on the matter.

The movant invokes as persuasive precedent the action of the Securities

Commissioner in tacitly approving the Amended, Articles of Incorporation on May
26, 1961. We regret that we cannot in good conscience lend approval to this
action of the Securities and Exchange Commissioner. We find no justification,
legal, moral, or practical, for adhering to the view taken by the Securities and
Exchange Commissioner that the name of a corporation in the Philippines may be
changed by mere amendment of its Articles of Incorporation as to its corporate
name. A change of corporate name would serve no useful purpose, but on the
contrary would most probably cause confusion. Only a dubious purpose could
inspire a change of a corporate. name which, unlike a natural person's name, was
chosen by the incorporators themselves; and our Courts should not lend their
assistance to the accomplishment of dubious purposes.

WHEREFORE, we hereby deny plaintiff's motion for reconsideration, dated

November 8, 1962, for lack of merit.

In this appeal appellant contends that —

THE TRIAL COURT ERRED IN HOLDING THAT IN THIS JURISDICTION, THERE IS

NOTHING IN OUR CORPORATION LAW AUTHORIZING THE CHANGE OF
CORPORATE NAME;

II

THE TRIAL COURT ERRED IN DECLARING THAT A CHANGE OF CORPORATE NAME

APPEARS TO BE AGAINST PUBLIC POLICY;

III

THE TRIAL COURT ERRED IN HOLDING THAT A CHANGE OF CORPORATE NAME HAS
THE LEGAL EFFECT OF DISSOLVING THE ORIGINAL CORPORATION:

IV
 THE TRIAL COURT ERRED IN HOLDING THAT THE CHANGE OF NAME OF THE YEK
TONG LIN FIRE & MARINE INSURANCE CO., LTD. IS OF DUBIOUS VALIDITY;

THE TRIAL COURT ERRED IN HOLDING THAT THE APPELLANT HEREIN IS NOT THE
RIGHT PARTY INTEREST TO SUE DEFENDANTS-APPELLEES;

IV

THE TRIAL COURT FINALLY ERRED IN DISMISSING THE COMPLAINT.

Appellant's Position is correct; all the above assignments of error are well taken. The whole
case, however, revolves around only one question. May a Philippine corporation change its
name and still retain its original personality and individuality as such?

The answer is not difficult to find. True, under Section 6 of the Corporation Law, the first thing
required to be stated in the Articles of Incorporation of any corn corporation is its name, but it
is only one among many matters equally if not more important, that must be stated therein.
Thus, it is also required, for example, to state the number and names of and residences of the
incorporators and the residence or location of the principal office of the corporation, its term
of existence, the amount of its capital stock and the number of shares into which it is divided,
etc., etc.

On the other hand, Section 18 explicitly permits the articles of incorporation to be amended
thus:

Sec. 18. — Any corporation may for legitimate corporate purpose or purposes,
amend its articles of incorporation by a majority vote of its board of directors or
trustees and the vote or written assent of two-thirds of its members, if it be a
nonstock corporation or, if it be a stock corporation, by the vote or written assent
of the stockholders representing at least two-thirds of the subscribed capital stock
of the corporation Provided, however, That if such amendment to the articles of
incorporation should consist in extending the corporate existence or in any change
in the rights of holders of shares of any class, or would authorize shares with
preferences in any respect superior to those of outstanding shares of any class, or
would restrict the rights of any stockholder, then any stockholder who did not
vote for such corporate action may, within forty days after the date upon which
such action was authorized, object thereto in writing and demand Payment for his
shares. If, after such a demand by a stockholder, the corporation and the
stockholder cannot agree upon the value of his share or shares at the time such
corporate action was authorized, such values all be ascertained by three
disinterested persons, one of whom shall be named by the stockholder, another
 by the corporation, and the third by the two thus chosen. The findings of the
appraisers shall be final, and if their award is not paid by the corporation within
thirty days after it is made, it may be recovered in an action by the stockholder
against the corporation. Upon payment by the corporation to the stockholder of
the agreed or awarded price of his share or shares, the stockholder shall forthwith
transfer and assign the share or shares held by him as directed by the
corporation: Provided, however, That their own shares of stock purchased or
otherwise acquired by banks, trust companies, and insurance companies, should
be disposed of within six months after acquiring title thereto.

Unless and until such amendment to the articles of incorporation shall have been
abandoned or the action rescinded, the stockholder making such demand in
writing shall cease to be a stockholder and shall have no rights with respect to
such shares, except the right to receive payment therefor as aforesaid.

A stockholder shall not be entitled to payment for his shares under the provisions
of this section unless the value of the corporate assets which would remain after
such payment would be at least equal to the aggregate amount of its debts and
liabilities and the aggregate par value and/or issued value of the remaining
subscribed capital stock.

A copy of the articles of incorporation as amended, duly certified to be correct by

the president and the secretary of the corporation and a majority of the board of
directors or trustees, shall be filed with the Securities and Exchange
Commissioner, who shall attach the same to the original articles of incorporation,
on file in his office. From the time of filing such copy of the amended articles of
incorporation, the corporation shall have the same powers and it and the
members and stockholders thereof shall thereafter be subject to the same
liabilities as if such amendment had been embraced in the original articles of
incorporation: Provided, however, That should the amendment consist in
extending the corporate life, the extension shall not exceed 50 years in any one
instance. Provided, further, That the original articles and amended articles
together shall contain all provisions required by law to be set out in the articles of
incorporation: And provided, further, That nothing in this section shall be
construed to authorize any corporation to increase or diminish its capital stock or
so as to effect any rights or actions which accrued to others between the time of
filing the original articles of incorporation and the filing of the amended articles.

The Securities and, Exchange Commissioner shall be entitled to collect and receive the sum of
ten pesos for filing said copy of the amended articles of incorporation. Provided, however, That
when the amendment consists in extending the term of corporate existence, the Securities and
Exchange Commissioner shall be entitled to collect and receive for the filing of its amended
articles of incorporation the same fees collectible under existing law for the filing of articles of
incorporation. The Securities & Exchange Commissioner shall not hereafter file any
amendment to the articles of incorporation of any bank, banking institution, or building and
loan association unless accompanied by a certificate of the Monetary Board (of the Central
Bank) to the effect that such amendment is in accordance with law. (As further amended by
Act No. 3610, Sec. 2 and Sec. 9. R.A. No. 337 and R.A. No. 3531.)

It can be gleaned at once that this section does not only authorize corporations to amend their
charter; it also lays down the procedure for such amendment; and, what is more relevant to
the present discussion, it contains provisos restricting the power to amend when it comes to
the term of their existence and the increase or decrease of the capital stock. There is no
prohibition therein against the change of name. The inference is clear that such a change is
allowed, for if the legislature had intended to enjoin corporations from changing names, it
would have expressly stated so in this section or in any other provision of the law.

No doubt, "(the) name (of a corporation) is peculiarly important as necessary to the very
existence of a corporation. The general rule as to corporations is that each corporation shall
have a name by which it is to sue and be sued and do all legal acts. The name of a corporation
in this respect designates the corporation in the same manner as the name of an individual
designates the person."1 Since an individual has the right to change his name under certain
conditions, there is no compelling reason why a corporation may not enjoy the same right.
There is nothing sacrosanct in a name when it comes to artificial beings. The sentimental
considerations which individuals attach to their names are not present in corporations and
partnerships. Of course, as in the case of an individual, such change may not be made
exclusively. by the corporation's own act. It has to follow the procedure prescribed by law for
the purpose; and this is what is important and indispensably prescribed — strict adherence to
such procedure.

Local well known corporation law commentators are unanimous in the view that a corporation
may change its name by merely amending its charter in the manner prescribed by
law.2 American authorities which have persuasive force here in this regard because our
corporation law is of American origin, the same being a sort of codification of American
corporate law,3 are of the same opinion.

A general power to alter or amend the charter of a corporation necessarily

includes the power to alter the name of the corporation. Ft. Pitt Bldg., etc., Assoc.
v. Model Plan Bldg., etc., Assoc., 159 Pa. St. 308, 28 Atl. 215; In re Fidelity Mut. Aid
Assoc., 12 W.N.C. (Pa.) 271; Excelsior Oil Co., 3 Pa. Co. Ct. 184; Wetherill Steel
Casting Co., 5 Pa. Co. Ct. 337.

xxx xxx xxx

 Under the General Laws of Rhode Island, c 176, sec. 7, relating to an increase of
the capital stock of a corporation, it is provided that 'such agreement may be
amended in any other particular, excepting as provided in the following section',
which relates to a decrease of the capital stock This section has been held to
authorize a change in the name of a corporation. Armington v. Palmer, 21 R.I. 109,
42 Atl. 308, 43, L.R.A. 95, 79 Am. St. Rep. 786. (Vol. 19, American and English
Annotated Cases, p. 1239.)

Fletcher, a standard authority on American an corporation law also says:

Statutes are to be found in the various jurisdictions dealing with the matter of
change in corporate names. Such statutes have been subjected to judicial
construction and have, in the main, been upheld as constitutional. In direct terms
or by necessary implication, they authorize corporations new names and prescribe
the mode of procedure for that purpose. The same steps must be taken under
some statutes to effect a change in a corporate name, as when any other
amendment of the corporate charter is sought .... When the general law thus
deals with the subject, a corporation can change its name only in the manner
provided. (6 Fletcher, Cyclopedia of the Law of Private Corporations, 1968 Revised
Volume, pp. 212-213.) (Emphasis supplied)

The learned trial judge held that the above-quoted proposition are not supported by the
weight of authority because they are based on decisions in cases where the statutes expressly
authorize change of corporate name by amendment of the articles of incorporation. We have
carefully examined these authorities and We are satisfied of their relevance. Even Lord
Denman who has been quoted by His Honor from In Reg. v. Registrar of Joint Stock Cos. 10,
Q.B., 59 E.C.L. maintains merely that the change of its name never appears to be such an act as
the corporation could do for itself, but required ;the same Power as created a corporation."
What seems to have been overlooked, therefore, is that the procedure prescribes by Section
18 of our Corporation Law for the amendment of corporate charters is practically identical with
that for the incorporation itself of a corporation.

In the appealed order of dismissal, the trial court, made the observation that, according to this
Court in Red Line Transportation Co. v. Rural Transit Co., Ltd., 60 Phil, 549, 555, change of name
of a corporation is against public policy. We must clarify that such is not the import of Our said
decision. What this Court held in that case is simply that:

We know of no law that empowers the Public Service Commission or any court in
this jurisdiction to authorize one corporation to assume the name of another
corporation as a trade name. Both the Rural Transit Company, Ltd., and the
Bachrach Motor Co., Inc., are Philippine corporations and the very law of their
creation and continued existence requires each to adopt and certify a distinctive
name. The incorporators 'constitute a body politic and corporate under the name
 stated in the certificate.' (Section 11, Act No. 1459, as amended.) A corporation
has the power 'of succession by its corporate name.'(Section 13, ibid.) The name
of a corporation is therefore essential to its existence. It cannot change its name
except in the manner provided by the statute. By that name alone is it authorized
to transact business. The law gives a corporation no express or implied authority
to assume another name that is unappropriated; still less that of another
corporation, which is expressly set apart for it and protected by the law. If any
corporation could assume at pleasure as an unregistered trade name the name of
another corporation, this practice would result in confusion and open the door to
frauds and evasions and difficulties of administration and supervision. The policy
of the law as expressed our corporation statute and the Code of Commerce is
clearly against such a practice. (Cf. Scarsdale Pub. Co. — Colonial Press vs. Carter,
116 New York Supplement, 731; Svenska Nat. F. i. C. vs. Swedish Nat. Assn., 205
Illinois [Appellate Courts], 428, 434.)

In other words, what We have held to be contrary to public policy is the use by one corporation
of the name of another corporation as its trade name. We are certain no one will disagree that
such an act can only "result in confusion and open the door to frauds and evasions and
difficulties of administration and supervision." Surely, the Red Line case was not one of change
of name.

Neither can We share the posture of His Honor that the change of name of a corporation
results in its dissolution. There is unanimity of authorities to the contrary.

An authorized change in the name of a corporation has no more effect upon its
identity as a corporation than a change of name of a natural person has upon his
identity. It does not affect the rights of the corporation or lessen or add to its
obligations. After a corporation has effected a change in its name it should sue
and be sued in its new name .... (13 Am. Jur. 276-277, citing cases.)

A mere change in the name of a corporation, either by the legislature or by the

corporators or stockholders under legislative authority, does not, generally
speaking, affect the identity of the corporation, nor in any way affect the rights,
privileges, or obligations previously acquired or incurred by it. Indeed, it has been
said that a change of name by a corporation has no more effect upon the identity
of the corporation than a change of name by a natural person has upon the
identity of such person. The corporation, upon such change in its name, is in no
sense a new corporation, nor the successor of the original one, but remains and
continues to be the original corporation. It is the same corporation with a
different name, and its character is in no respect changed. ... (6 Fletcher,
Cyclopedia of the Law of Private Corporations, 224-225, citing cases.)
The change in the name of a corporation has no more effect upon its identity as a
corporation than a change of name of a natural person has upon his identity. It
does not affect the rights of the corporation, or lessen or add to its obligations.

England. — Doe v. Norton, 11 M. & W. 913, 7 Jur. 751, 12 L. J. Exch. 418.

United States. — Metropolitan Nat. Bank v. Claggett, 141 U.S. 520, 12 S. Ct. 60, 35
U.S. (L. ed.) 841.

Alabama. — Lomb v. Pioneer Sav., etc., Co., 106 Ala. 591, 17 So. 670; North
Birmingham Lumber Co. v. Sims, 157 Ala. 595, 48 So. 84.

Connecticut. — Trinity Church v. Hall, 22 Com. 125.

Illinois. — Mt. Palatine Academy v. Kleinschnitz 28 III, 133; St. Louis etc. R. Co. v.
Miller, 43 Ill. 199; Reading v. Wedder, 66 III. 80.

Indiana. — Rosenthal v. Madison etc., Plank Road Co., 10 Ind. 358.

Kentucky. — Cahill v. Bigger, 8 B. Mon. 211; Wilhite v. Convent of Good Shepherd,

177 Ky. 251, 78 S. W. 138.

Maryland. — Phinney v. Sheppard & Enoch Pratt Hospital, 88 Md. 633, 42 Atl. 58,
writ of error dismissed, 177 U.S. 170, 20 S. Ct. 573, 44 U.S. (L. ed.) 720.

Missouri. — Dean v. La Motte Lead Co., 59 Mo. 523.

Nebraska. — Carlon v. City Sav. Bank, 82 Neb. 582, 188 N. W. 334. New York First
Soc of M.E. Church v. Brownell, 5 Hun 464.

Pennsylvania. — Com. v. Pittsburgh, 41 Pa. St. 278.

South Carolina. — South Carolina Mut Ins. Co. v. Price 67 S.C. 207, 45 S.E. 173.

Virginia. — Wilson v. Chesapeake etc., R. Co., 21 Gratt 654; Wright-Caesar Tobacco

Co. v. Hoen, 105 Va. 327, 54 S.E. 309.

Washington. — King v. Ilwaco R. etc., Co., 1 Wash. 127. 23 Pac. 924.

Wisconsin. — Racine Country Bank v. Ayers, 12 Wis. 512.

The fact that the corporation by its old name makes a format transfer of its
property to the corporation by its new name does not of itself show that the
change in name has affected a change in the identity of the corporation. Palfrey v.
Association for Relief, etc., 110 La. 452, 34 So. 600. The fact that a corporation
 organized as a state bank afterwards becomes a national bank by complying with
the provisions of the National Banking Act, and changes its name accordingly, has
no effect on its right to sue upon obligations or liabilities incurred to it by its
former name. Michigan Ins. Bank v. Eldred 143 U.S. 293, 12 S. Ct. 450, 36 U.S. (L.
ed.) 162.

A deed of land to a church by a particular name has been held not to be affected
by the fact that the church afterwards took a different name. Cahill v. Bigger, 8 B.
Mon (ky) 211.

A change in the name of a corporation is not a divestiture of title or such a change

as requires a regular transfer of title to property, whether real or personal, from
the corporation under one name to the same corporation under another
name. McCloskey v. Doherty, 97 Ky. 300, 30 S. W. 649. (19 American and English
Annotated Cases 1242-1243.)

As was very aptly said in Pacific Bank v. De Ro 37 Cal. 538, "The changing of the
name of a corporation is no more the creation of a corporation than the changing
of the name of a natural person is the begetting of a natural person. The act, in
both cases, would seem to be what the language which we use to designate it
imports — a change of name, and not a change of being.

Having arrived at the above conclusion, We have agree with appellant's pose that the lower
court also erred in holding that it is not the right party in interest to sue defendants-
appellees.4 As correctly pointed out by appellant, the approval by the stockholders of the
amendment of its articles of incorporation changing the name "The Yek Tong Lin Fire & Marine
Insurance Co., Ltd." to "Philippine First Insurance Co., Inc." on March 8, 1961, did not
automatically change the name of said corporation on that date. To be effective, Section 18 of
the Corporation Law, earlier quoted, requires that "a copy of the articles of incorporation as
amended, duly certified to be correct by the president and the secretary of the corporation
and a majority of the board of directors or trustees, shall be filed with the Securities &
Exchange Commissioner", and it is only from the time of such filing, that "the corporation shall
have the same powers and it and the members and stockholders thereof shall thereafter be
subject to the same liabilities as if such amendment had been embraced in the original articles
of incorporation." It goes without saying then that appellant rightly acted in its old name when
on May 15, 1961, it entered into the indemnity agreement, Annex A, with the defendant-
appellees; for only after the filing of the amended articles of incorporation with the Securities
& Exchange Commission on May 26, 1961, did appellant legally acquire its new name; and it
was perfectly right for it to file the present case In that new name on December 6, 1961. Such
is, but the logical effect of the change of name of the corporation upon its actions.

Actions brought by a corporation after it has changed its name should be brought
under the new name although for the enforcement of rights existing at the time
 the change was made. Lomb v. Pioneer Sav., etc., Co., 106 Ala. 591, 17 So.
670: Newlan v. Lombard University, 62 III. 195; Thomas v. Visitor of Frederick
County School, 7 Gill & J (Md.) 388; Delaware, etc., R. Co. v. Trick, 23 N. J. L.
321; Northumberland Country Bank v. Eyer, 60 Pa. St. 436; Wilson v. Chesapeake
etc., R. Co., 21 Gratt (Va.) 654.

The change in the name of the corporation does not affect its right to bring an
action on a note given to the corporation under its former name. Cumberland
College v. Ish, 22. Cal. 641; Northwestern College v. Schwagler, 37 Ia. 577. (19
American and English Annotated Cases 1243.)

In consequence, We hold that the lower court erred in dismissing appellant's complaint. We
take this opportunity, however, to express the Court's feeling that it is apparent that appellee's
position is more technical than otherwise. Nowhere in the record is it seriously pretended that
the indebtedness sued upon has already been paid. If appellees entertained any fear that they
might again be made liable to Yek Tong Lin Fire & Marine Insurance Co. Ltd., or to someone
else in its behalf, a cursory examination of the records of the Securities & Exchange
Commission would have sufficed to clear up the fact that Yek Tong Lin had just changed its
name but it had not ceased to be their creditor. Everyone should realize that when the time of
the courts is utilized for cases which do not involve substantial questions and the claim of one
of the parties, therein is based on pure technicality that can at most delay only the ultimate
outcome necessarily adverse to such party because it has no real cause on the merits, grave
injustice is committed to numberless litigants whose meritorious cases cannot be given all the
needed time by the courts. We address this appeal once more to all members of the bar, in
particular, since it is their bounden duty to the profession and to our country and people at
large to help ease as fast as possible the clogged dockets of the courts. Let us not wait until the
people resort to other means to secure speedy, just and inexpensive determination of their
cases.

WHEREFORE, judgment of the lower court is reversed, and this case is remanded to the trial
court for further proceedings consistent herewith With costs against appellees.

G.R. No. 157900 July 22, 2013

ZUELLIG FREIGHT AND CARGO SYSTEMS, Petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION AND RONALDO V. SAN MIGUEL, Respondents.

DECISION
BERSAMIN, J.:

The mere change in the corporate name is not considered under the law as the creation of a
new corporation; hence, the renamed corporation remains liable for the illegal dismissal of its
employee separated under that guise.

The Case

Petitioner employer appeals the decision promulgated on November 6, 2001, 1 whereby the
Court of Appeals (CA) dismissed its petition for certiorari and upheld the adverse decision of
the National Labor Relations Commission (NLRC) finding respondent Ronaldo V. San Miguel to
have been illegally dismissed.

Antecedents

San Miguel brought a complaint for unfair labor practice, illegal dismissal, non-payment of
salaries and moral damages against petitioner, formerly known as Zeta Brokerage Corporation
(Zeta).2 He alleged that he had been a checker/customs representative of Zeta since December
16, 1985; that in January 1994, he and other employees of Zeta were informed that Zeta would
cease operations, and that all affected employees, including him, would be separated; that by
letter dated February 28, 1994, Zeta informed him of his termination effective March 31, 1994;
that he reluctantly accepted his separation pay subject to the standing offer to be hired to his
former position by petitioner; and that on April 15, 1994, he was summarily terminated,
without any valid cause and due process.

San Miguel contended that the amendments of the articles of incorporation of Zeta were for
the purpose of changing the corporate name, broadening the primary functions, and
increasing the capital stock; and that such amendments could not mean that Zeta had been
thereby dissolved.3

On its part, petitioner countered that San Miguel’s termination from Zeta had been for a cause
authorized by the Labor Code; that its non-acceptance of him had not been by any means
irregular or discriminatory; that its predecessor-in-interest had complied with the
requirements for termination due to the cessation of business operations; that it had no
obligation to employ San Miguel in the exercise of its valid management prerogative; that all
employees had been given sufficient time to make their decision whether to accept its offer of
employment or not, but he had not responded to its offer within the time set; that because of
his failure to meet the deadline, the offer had expired; that he had nonetheless been hired on
a temporary basis; and that when it decided to hire another employee instead of San Miguel,
such decision was not arbitrary because of seniority considerations.4

Decision of the Labor Arbiter

On November 15, 1999, Labor Arbiter Francisco A. Robles rendered a decision holding that San
Miguel had been illegally dismissed,5 to wit:

Contrary to respondents’ claim that Zeta ceased operations and closed its business, we believe
that there was merely a change of business name and primary purpose and upgrading of
stocks of the corporation. Zuellig and Zeta are therefore legally the same person and entity and
this was admitted by Zuellig’s counsel in its letter to the VAT Department of the Bureau of
Internal Revenue on 08 June 1994 (Reply, Annex "A"). As such, the termination of
complainant’s services allegedly due to cessation of business operations of Zeta is deemed
illegal. Notwithstanding his receipt of separation benefits from respondents, complainant is
not estopped from questioning the legality of his dismissal.6

xxxx

WHEREFORE, in view of the foregoing, complainant is found to have been illegally dismissed.
Respondent Zuellig Freight and Cargo Systems, Inc. is hereby ordered to pay complainant his
backwages from April 1, 1994 up to November 15, 1999, in the amount of THREE HUNDRED
TWENTY FOUR THOUSAND SIX HUNDRED FIFTEEN PESOS (₱324,615.00).

The same respondent is ordered to pay the complainant Ronaldo San Miguel attorney’s fees
equivalent to ten percent (10%) of the total award.

All other claims are dismissed.

SO ORDERED.7

Decision of the NLRC

Petitioner appealed, but the NLRC issued a resolution on April 4, 2001, 8 affirming the decision
of the Labor Arbiter.

The NLRC later on denied petitioner’s motion for reconsideration via its resolution dated June
15, 2001.9

Decision of the CA

Petitioner then filed a petition for certiorari in the CA, imputing to the NLRC grave abuse of
discretion amounting to lack or excess of jurisdiction, as follows:

1. In failing to consider the circumstances attendant to the cessation of business of Zeta;

2. In failing to consider that San Miguel failed to meet the deadline Zeta fixed for its
employees to accept the offer of petitioner for re-employment;
 3. In failing to consider that San Miguel’s employment with petitioner from April 1 to 15,
1994 could in no way be interpreted as a continuation of employment with Zeta;

4. In admitting in evidence the letter dated January 21, 1994 of petitioner’s counsel to
the Bureau of Internal Revenue; and

5. In awarding attorney’s fees to San Miguel based on Article 2208 of the Civil Code and
Article 111 of the Labor Code.

On November 6, 2002, the CA promulgated its assailed decision dismissing the petition for
certiorari,10 viz:

A careful perusal of the records shows that the closure of business operation was not validly
made. Consider the Certificate of Filing of the Amended Articles of Incorporation which clearly
shows that petitioner Zuellig is actually the former Zeta as per amendment dated January 21,
1994. The same observation can be deduced with respect to the Certificate of Filing of
Amended By-Laws dated May 10, 1994. As aptly pointed out by private respondent San Miguel,
the amendment of the articles of incorporation merely changed its corporate name,
broadened its primary purpose and increased its authorized capital stocks. The requirements
contemplated in Article 283 were not satisfied in this case. Good faith was not established by
mere registration with the Securities and Exchange Commission (SEC) of the Amended Articles
of Incorporation and ByLaws. The factual milleu of the case, considered in its totality, shows
that there was no closure to speak of. The termination of services allegedly due to cessation of
business operations of Zeta was illegal. Notwithstanding private respondent San Miguel’s
receipt of separation benefits from petitioner Zuellig, the former is not estopped from
questioning the legality of his dismissal.

Petitioner Zuellig’s allegation that the five employees who refused to receive the termination
letters were verbally informed that they had until 6:00 p.m. of March 1, 1994 to receive the
termination letters and sign the employment contracts, otherwise the former would be
constrained to withdraw its offer of employment and seek for replacements in order to ensure
the smooth operations of the new company from its opening date, is of no moment in view of
the foregoing circumstances. There being no valid closure of business operations, the dismissal
of private respondent San Miguel on alleged authorized cause of cessation of business
pursuant to Article 283 of the Labor Code, was utterly illegal. Despite verbal notice that the
employees had until 6:00 p.m. of March 1, 1994 to receive the termination letters and sign the
employment contracts, the dismissal was still illegal for the said condition is null and void. In
point of facts and law, private respondent San Miguel remained an employee of petitioner
Zuellig. If at all, the alleged closure of business operations merely operates to suspend
employment relation since it is not permanent in character.
Where there is no showing of a clear, valid, and legal cause for the termination of employment,
the law considers the matter a case of illegal dismissal and the burden is on the employer to
prove that the termination was for a valid or authorized cause.

Findings of facts of the NLRC, particularly when both the NLRC and Labor Arbiter are in
agreement, are deemed binding and conclusive upon the Supreme Court.

As regards the second and last argument advanced by petitioner Zuellig that private
respondent San Miguel is not entitled to attorney’s fees, this Court finds no reason to disturb
the ruling of the public respondent NLRC. Petitioner Zuellig maintains that the factual backdraft
(sic) of this petition does not call for the application of Article 2208 of the Civil Code and Article
111 of the Labor Code as private respondent’s wages were not withheld. On the other hand,
public respondent NLRC argues that paragraphs 2 and 3, Article 2208 of the Civil Code and
paragraph (a), Article 111 of the Labor Code justify the award of attorney’s fees. NLRC was
saying to the effect that by petitioner Zuellig’s act of illegally dismissing private respondent San
Miguel, the latter was compelled to litigate and thus incurred expenses to protect his interest.
In the same passion, private respondent San Miguel contends that petitioner Zuellig acted in
gross and evident bad faith in refusing to satisfy his plainly valid, just and demandable claim.

After careful and judicious evaluation of the arguments advanced to support the propriety or
impropriety of the award of attorney’s fees to private respondent San Miguel, this Court finds
the resolutions of public respondent NLRC supported by laws and jurisprudence. It does not
need much imagination to see that by reason of petitioner Zuellig’s feigned closure of business
operations, private respondent San Miguel incurred expenses to protect his rights and
interests. Therefore, the award of attorney’s fees is in order.

WHEREFORE, in view of the foregoing, the resolutions dated April 4, 2001 and June 15, 2001 of
the National Labor Relations Commission affirming the November 15, 1999 decision of the
Labor

Arbiter in NLRC NCR 05-03639-94 (CA No. 022861-00) are hereby AFFIRMED and the instant
petition for certiorari is hereby DENIED and ordered DISMISSED.

SO ORDERED.

Hence, petitioner appeals.

Issues

Petitioner asserts that the CA erred in holding that the NLRC did not act with grave abuse of
discretion in ruling that the closure of the business operation of Zeta had not been bona fide,
thereby resulting in the illegal dismissal of San Miguel; and in holding that the NLRC did not act
with grave abuse of discretion in ordering it to pay San Miguel attorney’s fees.11
In his comment,12 San Miguel counters that the CA correctly found no grave abuse of discretion
on the part of the NLRC because the ample evidence on record showed that he had been
illegally terminated; that such finding accorded with applicable laws and jurisprudence; and
that he was entitled to back wages and attorney’s fees.

In its reply,13 petitioner reiterates that the cessation of Zeta’s business, which resulted in the
severance of San Miguel from his employment, was valid; that the CA erred in upholding the
NLRC’s finding that San Miguel had been illegally terminated; that his acknowledgment of the
validity of his separation from Zeta by signing a quitclaim and waiver estopped him from
claiming that it had subsequently employed him; and that the award of attorney’s fees had no
basis in fact and in law.

Ruling

The petition for review on certiorari is denied for its lack of merit.

First of all, the outcome reached by the CA that the NLRC did not commit any grave abuse of
discretion was borne out by the records of the case. We cannot undo such finding without
petitioner making a clear demonstration to the Court now that the CA gravely erred in passing
upon the petition for certiorari of petitioner.

Indeed, in a special civil action for certiorari brought against a court or quasi-judicial body with
jurisdiction over a case, petitioner carries the burden of proving that the court or quasi-judicial
body committed not a merely reversible error but a grave abuse of discretion amounting to
lack or excess of jurisdiction in issuing the impugned order. 14Showing mere abuse of discretion
is not enough, for it is necessary to demonstrate that the abuse of discretion was grave. Grave
abuse of discretion means either that the judicial or quasi-judicial power was exercised in an
arbitrary or despotic manner by reason of passion or personal hostility, or that the respondent
judge, tribunal or board evaded a positive duty, or virtually refused to perform the duty
enjoined or to act in contemplation of law, such as when such judge, tribunal or board
exercising judicial or quasi-judicial powers acted in a capricious or whimsical manner as to be
equivalent to lack of jurisdiction.15 Under the circumstances, the CA committed no abuse of
discretion, least of all grave, because its justifications were supported by the records and by
the applicable laws and jurisprudence.

Secondly, it is worthy to point out that the Labor Arbiter, the NLRC, and the CA were united in
concluding that the cessation of business by Zeta was not a bona fide closure to be regarded as
a valid ground for the termination of employment of San Miguel within the ambit of Article
283 of the Labor Code. The provision pertinently reads:

Article 283. Closure of establishment and reduction of personnel. — The employer may also
terminate the employment of any employee due to the installation of labor-saving devices,
redundancy, retrenchment to prevent losses or the closing or cessation of operation of the
establishment or undertaking unless the closing is for the purpose of circumventing the
provisions of this Title, by serving a written notice on the workers and the Department of Labor
and Employment at least one (1) month before the intended date thereof. x x x.

The unanimous conclusions of the CA, the NLRC and the Labor Arbiter, being in accord with
law, were not tainted with any abuse of discretion, least of all grave, on the part of the NLRC.
Verily, the amendments of the articles of incorporation of Zeta to change the corporate name
to Zuellig Freight and Cargo Systems, Inc. did not produce the dissolution of the former as a
corporation. For sure, the Corporation Code defined and delineated the different modes of
dissolving a corporation, and amendment of the articles of incorporation was not one of such
modes. The effect of the change of name was not a change of the corporate being, for, as well
stated in Philippine First Insurance Co., Inc. v. Hartigan:16 "The changing of the name of a
corporation is no more the creation of a corporation than the changing of the name of a
natural person is begetting of a natural person. The act, in both cases, would seem to be what
the language which we use to designate it imports – a change of name, and not a change of
being."

The consequences, legal and otherwise, of the change of name were similarly dealt with in P.C.
Javier & Sons, Inc. v. Court of Appeals,17 with the Court holding thusly:

From the foregoing documents, it cannot be denied that petitioner corporation was aware of
First Summa Savings and Mortgage Bank’s change of corporate name to PAIC Savings and
Mortgage Bank, Inc. Knowing fully well of such change, petitioner corporation has no valid
reason not to pay because the IGLF loans were applied with and obtained from First Summa
Savings and Mortgage Bank. First Summa Savings and Mortgage Bank and PAIC Savings and
Mortgage Bank, Inc., are one and the same bank to which petitioner corporation is indebted. A
change in the corporate name does not make a new corporation, whether effected by a special
act or under a general law. It has no effect on the identity of the corporation, or on its
property, rights, or liabilities. The corporation, upon to change in its name, is in no sense a new
corporation, nor the successor of the original corporation. It is the same corporation with a
different name, and its character is in no respect changed. (Bold underscoring supplied for
emphasis)

In short, Zeta and petitioner remained one and the same corporation. The change of name did
not give petitioner the license to terminate employees of Zeta like San Miguel without just or
authorized cause. The situation was not similar to that of an enterprise buying the business of
another company where the purchasing company had no obligation to rehire terminated
employees of the latter.18 Petitioner, despite its new name, was the mere continuation of Zeta's
corporate being, and still held the obligation to honor all of Zeta's obligations, one of which
was to respect San Miguel's security of tenure. The dismissal of San Miguel from employment
on the pretext that petitioner, being a different corporation, had no obligation to accept him as
its employee, was illegal and ineffectual.
And, lastly, the CA rightfully upheld the NLRC's affirmance of the grant of attorney's fees to San
Miguel. Thereby, the NLRC did not commit any grave abuse of its discretion, considering that
San Miguel had been compelled to litigate and to incur expenses to protect his rights and
interest. In Producers Bank of the Philippines v. Court of Appeals,19the Court ruled that
attorney's fees could be awarded to a party whom an unjustified act of the other party
compelled to litigate or to incur expenses to protect his interest. It was plain that petitioner's
refusal to reinstate San Miguel with backwages and other benefits to which he had been
legally entitled was unjustified, thereby entitling him to recover attorney's fees.

WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals promulgated on
November 6, 2002; and ORDERS petitioner to pay the costs of suit.

SO ORDERED.

G.R. No. L-28113 March 28, 1969

THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER MACAORAO

BALINDONG, petitioners,
vs.
PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI HASAN MACARAMPAD,
FREDERICK V. DUJERTE MONDACO ONTAL, MARONSONG ANDOY, MACALABA INDAR
LAO. respondents.

L. Amores and R. Gonzales for petitioners.

Jose W. Diokno for respondents.

CASTRO, J.:

The petitioner Amer Macaorao Balindong is the mayor of Malabang, Lanao del Sur, while the
respondent Pangandapun Bonito is the mayor, and the rest of the respondents are the
councilors, of the municipality of Balabagan of the same province. Balabagan was formerly a
part of the municipality of Malabang, having been created on March 15, 1960, by Executive
Order 386 of the then President Carlos P. Garcia, out of barrios and sitios 1 of the latter
municipality.

The petitioners brought this action for prohibition to nullify Executive Order 386 and to
restrain the respondent municipal officials from performing the functions of their respective
office relying on the ruling of this Court in Pelaez v. Auditor General 2 and Municipality of San
Joaquin v. Siva. 3
 In Pelaez this Court, through Mr. Justice (now Chief Justice) Concepcion, ruled: (1) that section
23 of Republic Act 2370 [Barrio Charter Act, approved January 1, 1960], by vesting the power
to create barrios in the provincial board, is a "statutory denial of the presidential authority to
create a new barrio [and] implies a negation of the bigger power to create municipalities," and
(2) that section 68 of the Administrative Code, insofar as it gives the President the power to
create municipalities, is unconstitutional (a) because it constitutes an undue delegation of
legislative power and (b) because it offends against section 10 (1) of article VII of the
Constitution, which limits the President's power over local governments to mere supervision.
As this Court summed up its discussion: "In short, even if it did not entail an undue delegation
of legislative powers, as it certainly does, said section 68, as part of the Revised Administrative
Code, approved on March 10, 1917, must be deemed repealed by the subsequent adoption of
the Constitution, in 1935, which is utterly incompatible and inconsistent with said statutory
enactment."

On the other hand, the respondents, while admitting the facts alleged in the petition,
nevertheless argue that the rule announced in Pelaez can have no application in this case
because unlike the municipalities involved in Pelaez, the municipality of Balabagan is at least
a de facto corporation, having been organized under color of a statute before this was declared
unconstitutional, its officers having been either elected or appointed, and the municipality
itself having discharged its corporate functions for the past five years preceding the institution
of this action. It is contended that as a de facto corporation, its existence cannot be collaterally
attacked, although it may be inquired into directly in an action for quo warranto at the instance
of the State and not of an individual like the petitioner Balindong.

It is indeed true that, generally, an inquiry into the legal existence of a municipality is reserved
to the State in a proceeding for quo warranto or other direct proceeding, and that only in a few
exceptions may a private person exercise this function of government. 4 But the rule disallowing
collateral attacks applies only where the municipal corporation is at least a de
facto corporations. 5 For where it is neither a corporation de jure nor de facto, but a nullity, the
rule is that its existence may be, questioned collaterally or directly in any action or proceeding
by any one whose rights or interests ate affected thereby, including the citizens of the territory
incorporated unless they are estopped by their conduct from doing so. 6

And so the threshold question is whether the municipality of Balabagan is a de

facto corporation. As earlier stated, the claim that it is rests on the fact that it was organized
before the promulgation of this Court's decision in Pelaez. 7

Accordingly, we address ourselves to the question whether a statute can lend color of validity
to an attempted organization of a municipality despite the fact that such statute is
subsequently declared unconstitutional.lawphi1.ñet

This has been a litigiously prolific question, sharply dividing courts in the United States. Thus,
some hold that a de facto corporation cannot exist where the statute or charter creating it is
unconstitutional because there can be no de facto corporation where there can be no de
jure one, 8 while others hold otherwise on the theory that a statute is binding until it is
condemned as unconstitutional. 9

An early article in the Yale Law Journal offers the following analysis:

It appears that the true basis for denying to the corporation a de facto status lay in the
absence of any legislative act to give vitality to its creation. An examination of the cases
holding, some of them unreservedly, that a de facto office or municipal corporation can
exist under color of an unconstitutional statute will reveal that in no instance did the
invalid act give life to the corporation, but that either in other valid acts or in the
constitution itself the office or the corporation was potentially created....

The principle that color of title under an unconstitutional statute can exist only where
there is some other valid law under which the organization may be effected, or at least
an authority in potentia by the state constitution, has its counterpart in the negative
propositions that there can be no color of authority in an unconstitutional statute that
plainly so appears on its face or that attempts to authorize the ousting of a de jure or de
facto municipal corporation upon the same territory; in the one case the fact would
imply the imputation of bad faith, in the other the new organization must be regarded as
a mere usurper....

As a result of this analysis of the cases the following principles may be deduced which
seem to reconcile the apparently conflicting decisions:

I. The color of authority requisite to the organization of a de facto municipal

corporation may be:

1. A valid law enacted by the legislature.

2. An unconstitutional law, valid on its face, which has either (a) been
upheld for a time by the courts or (b) not yet been declared
void; provided that a warrant for its creation can be found in some other
valid law or in the recognition of its potential existence by the general laws
or constitution of the state.

II. There can be no de facto municipal corporation unless either directly or

potentially, such a de jurecorporation is authorized by some legislative fiat.

III. There can be no color of authority in an unconstitutional statute alone, the

invalidity of which is apparent on its face.
 IV. There can be no de facto corporation created to take the place of an existing de
jure corporation, as such organization would clearly be a usurper.10

In the cases where a de facto municipal corporation was recognized as such despite the fact
that the statute creating it was later invalidated, the decisions could fairly be made to rest on
the consideration that there was some other valid law giving corporate vitality to the
organization. Hence, in the case at bar, the mere fact that Balabagan was organized at a time
when the statute had not been invalidated cannot conceivably make it a de factocorporation,
as, independently of the Administrative Code provision in question, there is no other valid
statute to give color of authority to its creation. Indeed, in Municipality of San Joaquin v.
Siva, 11 this Court granted a similar petition for prohibition and nullified an executive order
creating the municipality of Lawigan in Iloilo on the basis of thePelaez ruling, despite the fact
that the municipality was created in 1961, before section 68 of the Administrative Code, under
which the President had acted, was invalidated. 'Of course the issue of de facto municipal
corporation did not arise in that case.

In Norton v. Shelby Count, 12 Mr. Justice Field said: "An unconstitutional act is not a law; it
confers no rights; it imposes no duties; it affords no protection; it creates no office; it is, in legal
contemplation, as inoperative as though it had never been passed." Accordingly, he held that
bonds issued by a board of commissioners created under an invalid statute were
unenforceable.

Executive Order 386 "created no office." This is not to say, however, that the acts done by the
municipality of Balabagan in the exercise of its corporate powers are a nullity because the
executive order "is, in legal contemplation, as inoperative as though it had never been passed."
For the existence of Executive, Order 386 is "an operative fact which cannot justly be ignored."
As Chief Justice Hughes explained in Chicot County Drainage District v. Baxter State Bank: 13

The courts below have proceeded on the theory that the Act of Congress, having been
found to be unconstitutional, was not a law; that it was inoperative, conferring no rights
and imposing no duties, and hence affording no basis for the challenged decree. Norton
v. Shelby County, 118 U.S. 425, 442; Chicago, I. & L. Ry. Co. v. Hackett, 228 U.S. 559, 566.
It is quite clear, however, that such broad statements as to the effect of a determination
of unconstitutionality must be taken with qualifications. The actual existence of a
statute, prior to such a determination, is an operative fact and may have consequences
which cannot justly be ignored. The past cannot always be erased by a new judicial
declaration. The effect of the subsequent ruling as to invalidity may have to be
considered in various aspects — with respect to particular relations, individual and
corporate, and particular conduct, private and official. Questions of rights claimed to
have become vested, of status of prior determinations deemed to have finality and
acted upon accordingly, of public policy in the light of the nature both of the statute and
of its previous application, demand examination. These questions are among the most
 difficult of those which have engaged the attention of courts, state and federal, and it is
manifest from numerous decisions that an all-inclusive statement of a principle of
absolute retroactive invalidity cannot be justified.

There is then no basis for the respondents' apprehension that the invalidation of the
executive order creating Balabagan would have the effect of unsettling many an act done in
reliance upon the validity of the creation of that municipality. 14

ACCORDINGLY, the petition is granted, Executive Order 386 is declared void, and the
respondents are hereby permanently restrained from performing the duties and functions of
their respective offices. No pronouncement as to costs.

Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez and Capistrano, JJ., concur.
Teehankee and Barredo, JJ., took no part.

G.R. No. L-2598 June 29, 1950

C. ARNOLD HALL and BRADLEY P. HALL, petitioners,

vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN, EMMA
BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern Lumber and
Commercial Co., Inc.,respondents.

Claro M. Recto for petitioners.

Ramon Diokno and Jose W. Diokno for respondents.

BENGZON, J.:

This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First
Instance of Leyte and to enjoin the respondent judge from further acting upon the same.

Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the
respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed
and acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber and
Commercial Co., Inc., organized to engage in a general lumber business to carry on as general
contractors, operators and managers, etc. Attached to the article was an affidavit of the
treasurer stating that 23,428 shares of stock had been subscribed and fully paid with certain
properties transferred to the corporation described in a list appended thereto.
(2) Immediately after the execution of said articles of incorporation, the corporation proceeded
to do business with the adoption of by-laws and the election of its officers.

(3) On December 2, 1947, the said articles of incorporation were filed in the office of the
Securities and Exchange Commissioner, for the issuance of the corresponding certificate of
incorporation.

(4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid
governmental office, the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and
Ceferino S. Abella filed before the Court of First Instance of Leyte the civil case numbered 381,
entitled "Fred Brown et al. vs. Arnold C. Hall et al.", alleging among other things that the Far
Eastern Lumber and Commercial Co. was an unregistered partnership; that they wished to
have it dissolved because of bitter dissension among the members, mismanagement and fraud
by the managers and heavy financial losses.

(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to
dismiss, contesting the court's jurisdiction and the sufficiently of the cause of action.

(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the
company; and at the request of plaintiffs, appointed of the properties thereof, upon the filing
of a P20,000 bond.

(7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge
of the receiver, but the respondent judge refused to accept the offer and to discharge the
receiver. Whereupon, the present special civil action was instituted in this court. It is based
upon two main propositions, to wit:

(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company,
because it being a de facto corporation, dissolution thereof may only be ordered in a quo
warranto proceeding instituted in accordance with section 19 of the Corporation Law.

(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of
incorporation but only a partnership.

Discussion: The second proposition may at once be dismissed. All the parties are informed that
the Securities and Exchange Commission has not, so far, issued the corresponding certificate of
incorporation. All of them know, or sought to know, that the personality of a corporation
begins to exist only from the moment such certificate is issued — not before (sec. 11,
Corporation Law). The complaining associates have not represented to the others that they
were incorporated any more than the latter had made similar representations to them. And as
nobody was led to believe anything to his prejudice and damage, the principle of estoppel
does not apply. Obviously this is not an instance requiring the enforcement of contracts with
the corporation through the rule of estoppel.
The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern
Lumber and Commercial Co., is a de facto corporation, section 19 of the Corporation Law
applies, and therefore the court had not jurisdiction to take cognizance of said civil case
number 381. Section 19 reads as follows:

. . . The due incorporation of any corporations claiming in good faith to be a corporation

under this Act and its right to exercise corporate powers shall not be inquired into
collaterally in any private suit to which the corporation may be a party, but such inquiry
may be had at the suit of the Insular Government on information of the Attorney-
General.

There are least two reasons why this section does not govern the situation. Not having
obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even
its stockholders — may not probably claim "in good faith" to be a corporation.

Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a
certificate of incorporation by the Director of the Bureau of Commerce and Industry
which calls a corporation into being. The immunity if collateral attack is granted to
corporations "claiming in good faith to be a corporation under this act." Such a claim is
compatible with the existence of errors and irregularities; but not with a total or
substantial disregard of the law. Unless there has been an evident attempt to comply
with the law the claim to be a corporation "under this act" could not be made "in good
faith." (Fisher on the Philippine Law of Stock Corporations, p. 75. See also Humphreys vs.
Drew, 59 Fla., 295; 52 So., 362.)

Second, this is not a suit in which the corporation is a party. This is a litigation between
stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the
existence of a de jure corporation may be terminated in a private suit for its dissolution
between stockholders, without the intervention of the state.

There might be room for argument on the right of minority stockholders to sue for
dissolution;1 but that question does not affect the court's jurisdiction, and is a matter for
decision by the judge, subject to review on appeal. Whkch brings us to one principal reason
why this petition may not prosper, namely: the petitioners have their remedy by appealing the
order of dissolution at the proper time.

There is a secondary issue in connection with the appointment of a receiver. But it must be
admitted that receivership is proper in proceedings for dissolution of a company or
corporation, and it was no error to reject the counter-bond, the court having declared the
dissolution. As to the amount of the bond to be demanded of the receiver, much depends
upon the discretion of the trial court, which in this instance we do not believe has been clearly
abused.
Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction
heretofore issued will be dissolved.

Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.

G.R. No. 22106 September 11, 1924

ASIA BANKING CORPORATION, plaintiff-appellee,

vs.
STANDARD PRODUCTS, CO., INC., defendant-appellant.

Charles C. De Selms for appellant.

Gibbs & McDonough and Roman Ozaeta for appellee.

OSTRAND, J.:

This action is brought to recover the sum of P24,736.47, the balance due on the following
promissory note:

P37,757.22

MANILA, P. I., Nov. 28, 1921.

MANILA, P. I., Nov. 28, 1921.

On demand, after date we promise to pay to the Asia Banking Corporation, or order, the
sum of thirty-seven thousand seven hundred fifty-seven and 22/100 pesos at their office
in Manila, for value received, together with interest at the rate of ten per cent per
annum.

No. ________ Due __________

THE STANDARD PRODUCTS CO., INC.

By (Sgd.) GEORGE H. SEAVER

By President
The court below rendered judgment in favor of the plaintiff for the sum demanded in the
complaint, with interest on the sum of P24,147.34 from November 1, 1923, at the rate of 10
per cent per annum, and the costs. From this judgment the defendant appeals to this court.

At the trial of the case the plaintiff failed to prove affirmatively the corporate existence of the
parties and the appellant insists that under these circumstances the court erred in finding that
the parties were corporations with juridical personality and assigns same as reversible error.

There is no merit whatever in the appellant's contention. The general rule is that in the
absence of fraud a person who has contracted or otherwise dealt with an association in such a
way as to recognize and in effect admit its legal existence as a corporate body is thereby
estopped to deny its corporate existence in any action leading out of or involving such contract
or dealing, unless its existence is attacked for cause which have arisen since making the
contract or other dealing relied on as an estoppel and this applies to foreign as well as to
domestic corporations. (14 C. J., 227; Chinese Chamber of Commerce vs. Pua Te Ching, 14 Phil.,
222.)

The defendant having recognized the corporate existence of the plaintiff by making a
promissory note in its favor and making partial payments on the same is therefore estopped to
deny said plaintiff's corporate existence. It is, of course, also estopped from denying its own
corporate existence. Under these circumstances it was unnecessary for the plaintiff to present
other evidence of the corporate existence of either of the parties. It may be noted that there is
no evidence showing circumstances taking the case out of the rules stated.

The judgment appealed from is affirmed, with the costs against the appellant. So ordered.

Street, Malcolm, Avanceña, Villamor and Romualdez, JJ., concur.

CRANSON
v.
INTERNATIONAL BUSINESS MACHINES CORPORATION
[No. 245, September Term, 1963.]
Court of Appeals of Maryland.
Decided April 30, 1964.
*479 The cause was argued before HENDERSON, HAMMOND, HORNEY, MARBURY and SYBERT,
JJ.
William J. Brannan, Jr., with whom were Kardy, Brannan & Neumann on the brief, for the
appellant.
Henry J. Noyes for the appellee.
HORNEY, J., delivered the opinion of the Court.
On the theory that the Real Estate Service Bureau was neither a de jure nor a de
facto corporation and that Albion C. Cranson, Jr., was a partner in the business conducted by
the Bureau and as such was personally liable for its debts, the International Business Machines
Corporation brought this action against Cranson for the balance due on electric typewriters
purchased by the Bureau. At the same time it moved for summary judgment and supported
the motion by affidavit. In due course, Cranson filed a general issue plea and an affidavit in
opposition to summary judgment in which he asserted in effect that the Bureau was a de
facto corporation and that he was not personally liable for its debts.
The agreed statement of facts shows that in April 1961, Cranson was asked to invest in a new
business corporation which was about to be created. Towards this purpose he met with other
interested individuals and an attorney and agreed to purchase stock and become an officer and
director. Thereafter, upon being advised by the attorney that the corporation had been formed
under the laws of Maryland, he paid for and received a stock certificate evidencing ownership
of shares in the corporation, and was shown the corporate seal and minute book. The business
of the new venture was conducted as if it were a corporation, through corporate bank
accounts, with auditors maintaining corporate books and records, and under a
lease *480 entered into by the corporation for the office from which it operated its business.
Cranson was elected president and all transactions conducted by him for the corporation,
including the dealings with I.B.M., were made as an officer of the corporation. At no time did
he assume any personal obligation or pledge his individual credit to I.B.M. Due to an oversight
on the part of the attorney, of which Cranson was not aware, the certificate of incorporation,
which had been signed and acknowledged prior to May 1, 1961, was not filed until November
24, 1961. Between May 17 and November 8, the Bureau purchased eight typewriters from
I.B.M., on account of which partial payments were made, leaving a balance due of $4,333.40,
for which this suit was brought.
Although a question is raised as to the propriety of making use of a motion for summary
judgment as the means of determining the issues presented by the pleadings, we think the
motion was appropriate. Since there was no genuine dispute as to the material facts, the only
question was whether I.B.M. was entitled to judgment as a matter of law. The trial court found
that it was, but we disagree.
The fundamental question presented by the appeal is whether an officer[1] of a defectively
incorporated association may be subjected to personal liability under the circumstances of this
case. We think not.
Traditionally, two doctrines have been used by the courts to clothe an officer of a defectively
incorporated association with the corporate attribute of limited liability. The first, often
referred to as the doctrine of de facto corporations, has been applied in those cases where
there are elements showing: (1) the existence of law authorizing incorporation: (2) an effort in
good faith to incorporate under the existing law; and (3) actual user or exercise of corporate
powers. Ballantine, Private Corporations, § 23; 8 Fletcher, Cyclopedia of the Law of
Private *481 Corporations, § 3777; 13 Am. Jur., Corporations, §§ 49-56; 18
C.J.S., Corporations, § 99. The second, the doctrine of estoppel to deny the corporate
existence, is generally employed where the person seeking to hold the officer personally liable
has contracted or otherwise dealt with the association in such a manner as to recognize and in
effect admit its existence as a corporate body. Ballantine, op.cit., § 29; Machen, Modern Law of
Corporations, §§ 278-282; 18 C.J.S., op.cit., § 109.
It is not at all clear what Maryland has done with respect to the two doctrines. There have
been no recent cases in this State on the subject and some of the seemingly irreconcilable
earlier cases offer little to clarify the problem.[2]
In one line of cases, the Court, in determining the rights and liabilities of a defectively
organized corporation, or a member or stockholder thereof, seems to have drawn a distinction
between those acts or requirements which are a condition precedent to corporate existence
and those acts prescribed by law to be done after incorporation. In so doing, it has been
generally held that where there had been a failure to comply with a requirement which the law
declared to be a condition precedent to the existence of the corporation, the corporation was
not a legal entity and was therefore precluded from suing or being sued as such. Boyce v. M.E.
Church, 46 Md. 359 (1877); Regester v. Medcalf, 71 Md. 528, 18 A. 966 (1889); Bonaparte v.
Lake Roland R.R. Co., 75 Md. 340, 23 A. 784 (1892); Jones v. Linden Building Asso., 79 Md.
73, 29 A. 76 (1894); Maryland Tube Works v. West End Imp. Co., 87 Md. 207, 39 A.
620(1898); Cleaveland v. Mullin, 96 Md. *482 598, 54 A. 665 (1903); National Shutter Bar Co. v.
Zimmerman, 110 Md. 313, 73 A. 19 (1909). These cases appear to stand for the proposition
that substantial compliance with those formalities of the corporation law, which are made a
condition precedent to corporate existence, was not only necessary for the creation of a
corporation de jure, but was also a prerequisite to the existence of a de facto corporation or a
corporation by estoppel.
In the Boyce case, an action in assumpsit against a defectively incorporated religious society,
the Court (at p. 373 and p. 374), in holding that the society was not estopped to deny its
corporate existence, said:
"We think it would be extending the doctrine of estoppel to an extent, not justified by the
principles of public policy, to allow it to operate through the conduct of the parties concerned,
to create substantially a de facto corporation, with just such powers as the parties may by their
acts give to it.
***
"The statute law of the State, expressly requiring certain prescribed acts to be done to
constitute a corporation, to permit parties indirectly, or upon the principle of estoppel,
virtually to create a corporation for any purpose, or to have acts so construed, would be in
manifest opposition to the statute law, and clearly against its policy, and justified upon no
sound principle in the administration of justice."
In the Maryland Tube case, an action by a corporation for specific performance of a contract to
convey land which it had entered into prior to its becoming a legal entity, the Court, having
cited (at p. 217) the statements in Jones v. Aspen Hardware Co., 40 P. 457 (Colo. 1895),[3] with
approval for the *483proposition that "`the doctrine of estoppel cannot be successfully
invoked, unless the corporation has at least a de facto existence,'" that "`a de factocorporation
can never be recognized in violation of a positive law'" and that "`there is a broad distinction
between those acts made necessary by the statute as a prerequisite to the exercise of
corporate powers, and those acts required of individuals seeking incorporation but not made
prerequisite to the exercise of such powers,'" went on to say (at p. 218) that "these principles
were clearly recognized and applied" in the Boyce case.
In the National Shutter Bar case, an action by a corporation for an alleged libel which had
occurred before the performance of a condition precedent necessary for legal incorporation, it
was held — citing the Maryland Tube case for the proposition that statutory conditions
precedent must have been complied with to give existence to corporations formed under
general laws — that the corporation had no legal existence at the time of the alleged libel. In
referring to the Boycecase, it was said (at p. 320) that "it has been held by our predecessors
that a corporation cannot be actually or virtually created by estoppel in Maryland." And, on
the basis of the statements in Jones v. Aspen Hardware Co., supra (also relied on in
the Maryland Tube case), it was concluded that the corporation could not maintain the action.
On the other hand, where the corporation has obtained legal existence but has failed to
comply with a condition subsequent to corporate existence, this Court has held that such
nonperformance afforded the State the right to institute proceedings for the forfeiture of the
charter, but that such neglect or omission could never be set up by the corporation itself, or by
its members and stockholders, as a defense to an action to enforce their liabilities. C. & O.
Canal Co. v. B. & O. Railroad Co., 4 G. & J. 1 (1832); Hammond v. Straus, 53 Md.
1 (1880); Murphy v. Wheatley, 102 Md. 501, 63 A. 62 (1906).
*484 In the Hammond case, an action by a creditor against a stockholder of a state bank on his
statutory liability, the Court, after stating that a corporation or a stockholder could not defeat
an action by showing noncompliance with the requirements of the corporation law unless the
acts required are conditions precedent to corporate existence, said (at p. 15):
"By holding otherwise, parties might avail themselves of the powers and privileges of a
corporation, without in any manner subjecting themselves to its duties and obligations, and
might set up their own neglect of duty, of wilful omission to comply with the requirements of
the statute, as means of discharge from all their just obligations under the law. This is
forbidden by every principle of law and justice, and hence such a defense could never be
tolerated."
It seems clear therefore that when a defect in the incorporation process resulted from a failure
to comply with a condition subsequent, the doctrine of estoppel may be applied for the benefit
of a creditor to estop the corporation, or the members or stockholders thereof, from denying
its corporate existence. See Brune (Herbert M., Jr.), Maryland Corporation Law and
Practice (rev. ed.), § 339.
In another line of Maryland cases which determined the rights and liabilities of a defectively
organized corporation, or a member or stockholder thereof, the Court, apparently disregarding
the distinction made between those requirements which are conditions precedent and those
which are conditions subsequent to corporate existence, has generally precluded, on the
grounds of estoppel or collateral attack, inquiry into the question of corporate
existence. Maltby v. Northwestern Va. R.R. Co., 16 Md. 422 (1860); Franz v. Teutonia Building
Asso., 24 Md. 259 (1866); Grape Sugar & Vinegar Mfg. Co. v. Small,40 Md. 395 (1874); Laflin &
Rand Powder Co. v. Sinsheimer, 46 Md. 315 (1877); Keene v. Van Reuth, 48 Md.
184 (1878); Bartlett v. Wilbur,53 Md. 485 (1880); Pott & Co. v. Schmucker, 84 Md. 535, 36 A.
592 (1897). In the Grape Sugar case, an action against a defectively organized corporation
to *485 recover the balance due for work done and materials furnished, the Court said (at p.
400):
"The second prayer proceeds upon the assumption that the [corporation] is not liable,
provided the work was done prior to the recording of the certificate of incorporation. It is true,
that under the general incorporation law of this State, the recording of the certificate was
necessary to constitute the [corporation] a body politic. If, however, the contract was made
with the [creditor] through * * * [the] President of the [corporation], after the certificate had
been signed by the members of the proposed corporation, but before it was recorded, and the
company, after its incorporation was complete, accepted the work done under the contract, it
will be estopped, both in law and equity, from denying its liability, on account of the same."
Cf. Hammond v. Straus, supra. And see to the contrary Boyce v. M.E. Church, supra, which
might be distinguishable in that it involved an effort to impose liability on a religious society
and not a business corporation.
In the Laflin & Rand case, decided in the same year (1877) as the Boyce case, the Court, in an
action against certain members of a corporation to make them individually liable for goods
sold and delivered to the corporation, said (at p. 321):
"[The company] has been clothed with all the forms of a corporation by the laws of a
neighboring State, and was in the exercise and use of the franchises conferred upon it. It was a
corporation de facto at the time the goods were sold and delivered to it * * * and its existence
as a corporation cannot be collaterally drawn into question.
"To permit a recovery against the defendants, and thereby to say that they are to be regarded
in law as a voluntary unincorporated association, would be a departure from all the cases. The
debt was not created with them individually, but with a company acting *486 under a formal
incorporation, and in the exercise of its corporate powers. This [creditor] dealt with it and gave
it credit as a corporation. If its assets are not ample to pay, it is the misfortune of the
creditor."[4]
See also the Franz case at p. 270 (of 24 Md.) and the Bartlett case at p. 498 (of 53 Md.) for
similar statements of the law. From these cases it appears that where the parties have
assumed corporate existence and dealt with each other on that basis, the Court will apply the
estoppel doctrine on the theory that the parties by recognizing the organization as a
corporation were thereafter prevented from raising a question as to its corporate existence.
When summarized, the law in Maryland pertaining to the de facto and estoppel doctrines
reveals that the cases seem to fall into one or the other of two categories. In one line of cases,
the Court, choosing to disregard the nature of the dealings between the parties, refused to
recognize both doctrines where there had been a failure to comply with a condition precedent
to corporate existence, but, whenever such noncompliance concerned a condition subsequent
to incorporation, the Court often applied the estoppel doctrine. In the other line of cases, the
Court, choosing to make no distinction between defects which *487were conditions precedent
and those which were conditions subsequent, emphasized the course of conduct between the
parties and applied the estoppel doctrine when there had been substantial dealings between
them on a corporate basis.
Whether or not the decisions in the Boyce and Maryland Tube cases had the effect of
repudiating the de facto doctrine in this state, as some of the text writers seem to think, is a
question we do not reach in this case and therefore need not consider at this time. On the
other hand, since it is clear that the Maryland Tube and National Shutter Bar cases are
inconsistent with other Maryland cases insofar as they held (in relying on the statements
in Jones v. Aspen Hardware Co., supra) that the doctrine of estoppel cannot be invoked unless
a corporation has at least a de facto existence, both cases — Maryland Tube and National
Shutter Bar — should be, and are hereby, overruled to the extent of the inconsistency. There is,
as we see it, a wide difference between creating a corporation by means of the de
facto doctrine and estopping a party, due to his conduct in a particular case, from setting up
the claim of no incorporation. Although some cases tend to assimilate the doctrines of
incorporation de facto and by estoppel, each is a distinct theory and they are not dependent
on one another in their application. See 8 Fletcher, op.cit., § 3763; France on Corporations (2nd
ed.), § 29; 18 C.J.S., op.cit., § 111h. Where there is a concurrence of the three elements
necessary for the application of the de facto corporation doctrine, there exists an entity which
is a corporation de jure against all persons but the state. On the other hand, the estoppel
theory is applied only to the facts of each particular case and may be invoked even where
there is no corporation de facto.Accordingly, even though one or more of the requisites of a de
facto corporation are absent, we think that this factor does not preclude the application of the
estoppel doctrine[5] in a proper case, such as the one at bar.
*488 I.B.M. contends that the failure of the Bureau to file its certificate of incorporation
debarred all corporate existence. But, in spite of the fact that the omission might have
prevented the Bureau from being either a corporation de jure or de facto,[6]Jones v. Linden
Building Asso., supra, we think that I.B.M. having dealt with the Bureau as if it were a
corporation and relied on its credit rather than that of Cranson, is estopped to assert that the
Bureau was not incorporated at the time the typewriters were purchased. Laflin & Rand
Powder Co. v. Sinsheimer, supra. See also Tulane Improvement Co. v. S.A. Chapman & Co., 56
So. 509 (La. 1911). In 1 Clark and Marshall, Private Corporations, § 89, it is stated:
"The doctrine in relation to estoppel is based upon the ground that it would generally be
inequitable to *489 permit the corporate existence of an association to be denied by persons
who have represented it to be a corporation, or held it out as a corporation, or by any persons
who have recognized it as a corporation by dealing with it as such; and by the overwhelming
weight of authority, therefore, a person may be estopped to deny the legal incorporation of an
association which is not even a corporation de facto."
In cases similar to the one at bar, involving a failure to file articles of incorporation, the courts
of other jurisdictions have held that where one has recognized the corporate existence of an
association, he is estopped to assert the contrary with respect to a claim arising out of such
dealings. See, for example, Tarbell v. Page, 24 Ill. 46 (1860); Magnolia Shingle Co. v. J.
Zimmern's Co., 58 So. 90 (Ala. 1912); Lockwood v. Wynkoop, 144 N.W. 846 (Mich. 1914); John
Lucas Co. v. Bernhardt's Estate, 100 So. 399 (La. 1924).
Since I.B.M. is estopped to deny the corporate existence of the Bureau, we hold that Cranson
was not liable for the balance due on account of the typewriters.
Judgment reversed; the appellee to pay the costs.

G.R. No. L-11442 May 23, 1958

MANUELA T. VDA. DE SALVATIERRA, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte,
Branch II, and SEGUNDINO REFUERZO, respondents.

Jimenez, Tantuico, Jr. and Tolete for petitioner.

Francisco Astilla for respondent Segundino Refuerzo.

FELIX, J.:
This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify the
order of the Court of First Instance of Leyte in Civil Case No. 1912, dated March 21, 1956,
relieving Segundino Refuerzo of liability for the contract entered into between the former and
the Philippine Fibers Producers Co., Inc., of which Refuerzo is the president. The facts of the
case are as follows:

Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at

Maghobas, Poblacion, Burauen, Teyte. On March 7, 1954, said landholder entered into a
contract of lease with the Philippine Fibers Producers Co., Inc., allegedly a corporation "duly
organized and existing under the laws of the Philippines, domiciled at Burauen, Leyte,
Philippines, and with business address therein, represented in this instance by Mr. Segundino
Q. Refuerzo, the President". It was provided in said contract, among other things, that the
lifetime of the lease would be for a period of 10 years; that the land would be planted to kenaf,
ramie or other crops suitable to the soil; that the lessor would be entitled to 30 per cent of the
net income accruing from the harvest of any, crop without being responsible for the cost of
production thereof; and that after every harvest, the lessee was bound to declare at the
earliest possible time the income derived therefrom and to deliver the corresponding share
due the lessor.

Apparently, the aforementioned obligations imposed on the alleged corporation were not
complied with because on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with the Court of
First Instance of Leyte a complaint against the Philippine Fibers Producers Co., Inc., and
Segundino Q. Refuerzo, for accounting, rescission and damages (Civil Case No. 1912). She
averred that sometime in April, 1954, defendants planted kenaf on 3 hectares of the leased
property which crop was, at the time of the commencement of the action, already harvested,
processed and sold by defendants; that notwithstanding that fact, defendants refused to
render an accounting of the income derived therefrom and to deliver the lessor's share; that
the estimated gross income was P4,500, and the deductible expenses amounted to P1,000;
that as defendants' refusal to undertake such task was in violation of the terms of the covenant
entered into between the plaintiff and defendant corporation, a rescission was but proper.

As defendants apparently failed to file their answer to the complaint, of which they were
allegedly notified, the Court declared them in default and proceeded to receive plaintiff's
evidence. On June 8, 1955, the lower Court rendered judgment granting plaintiff's prayer, and
required defendants to render a complete accounting of the harvest of the land subject of the
proceeding within 15 days from receipt of the decision and to deliver 30 per cent of the net
income realized from the last harvest to plaintiff, with legal interest from the date defendants
received payment for said crop. It was further provide that upon defendants' failure to abide
by the said requirement, the gross income would be fixed at P4,200 or a net income of P3,200
after deducting the expenses for production, 30 per cent of which or P960 was held to be due
the plaintiff pursuant to the aforementioned contract of lease, which was declared rescinded.
No appeal therefrom having been perfected within the reglementary period, the Court, upon
motion of plaintiff, issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte
caused the attachment of 3 parcels of land registered in the name of Segundino Refuerzo. No
property of the Philippine Fibers Producers Co., Inc., was found available for attachment. On
January 31, 1956, defendant Segundino Refuerzo filed a motion claiming that the decision
rendered in said Civil Case No. 1912 was null and void with respect to him, there being no
allegation in the complaint pointing to his personal liability and thus prayed that an order be
issued limiting such liability to defendant corporation. Over plaintiff's opposition, the Court a
quo granted the same and ordered the Provincial Sheriff of Leyte to release all properties
belonging to the movant that might have already been attached, after finding that the
evidence on record made no mention or referred to any fact which might hold movant
personally liable therein. As plaintiff's petition for relief from said order was denied, Manuela T.
Vda. de Salvatierra instituted the instant action asserting that the trial Judge in issuing the
order complained of, acted with grave abuse of discretion and prayed that same be declared a
nullity.

From the foregoing narration of facts, it is clear that the order sought to be nullified was issued
by tile respondent Judge upon motion of defendant Refuerzo, obviously pursuant to Rule 38 of
the Rules of Court. Section 3 of said Rule, however, in providing for the period within which
such a motion may be filed, prescribes that:

SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. — A petition provided for
in either of the preceding sections of this rule must be verified, filed within sixty days
after the petitioner learns of the judgment, order, or other proceeding to be set aside,
and not more than six months after such judgment or order was entered, or such
proceeding was taken; and must be must be accompanied with affidavit showing the
fraud, accident, mistake, or excusable negligence relied upon, and the facts constituting
the petitioner is good and substantial cause of action or defense, as the case may be,
which he may prove if his petition be granted". (Rule 38)

The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the
judgment, and not more than 6 months after the judgment or order was rendered, both of
which must be satisfied. As the decision in the case at bar was under date of June 8, 1955,
whereas the motion filed by respondent Refuerzo was dated January 31, 1956, or after the
lapse of 7 months and 23 days, the filing of the aforementioned motion was clearly made
beyond the prescriptive period provided for by the rules. The remedy allowed by Rule 38 to a
party adversely affected by a decision or order is certainly an alert of grace or benevolence
intended to afford said litigant a penultimate opportunity to protect his interest. Considering
the nature of such relief and the purpose behind it, the periods fixed by said rule are non-
extendible and never interrupted; nor could it be subjected to any condition or contingency
because it is of itself devised to meet a condition or contingency (Palomares vs. Jimenez, * G.R.
No. L-4513, January 31, 1952). On this score alone, therefore, the petition for a writ
of certiorari filed herein may be granted. However, taking note of the question presented by
the motion for relief involved herein, We deem it wise to delve in and pass upon the merit of
the same.

Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment of
the obligation imposed on defendant Philippine Fibers Producers Co., Inc., interposed the
defense that the complaint filed with the lower court contained no allegation which would
hold him liable personally, for while it was stated therein that he was a signatory to the lease
contract, he did so in his capacity as president of the corporation. And this allegation was
found by the Court a quo to be supported by the records. Plaintiff on the other hand tried to
refute this averment by contending that her failure to specify defendant's personal liability was
due to the fact that all the time she was under the impression that the Philippine Fibers
Producers Co., Inc., represented by Refuerzo was a duly registered corporation as appearing in
the contract, but a subsequent inquiry from the Securities and Exchange Commission yielded
otherwise. While as a general rule a person who has contracted or dealt with an association in
such a way as to recognize its existence as a corporate body is estopped from denying the
same in an action arising out of such transaction or dealing, (Asia Banking Corporation vs.
Standard Products Co., 46 Phil., 114; Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta
Development Co.; vs. Steamship Pompey, 49 Phil., 117), yet this doctrine may not be held to be
applicable where fraud takes a part in the said transaction. In the instant case, on plaintiff's
charge that she was unaware of the fact that the Philippine Fibers Producers Co., Inc., had no
juridical personality, defendant Refuerzo gave no confirmation or denial and the circumstances
surrounding the execution of the contract lead to the inescapable conclusion that plaintiff
Manuela T. Vda. de Salvatierra was really made to believe that such corporation was duly
organized in accordance with law.

There can be no question that a corporation with registered has a juridical personality separate
and distinct from its component members or stockholders and officers such that a corporation
cannot be held liable for the personal indebtedness of a stockholder even if he should be its
president (Walter A. Smith Co. vs. Ford, SC-G.R. No. 42420) and conversely, a stockholder or
member cannot be held personally liable for any financial obligation be, the corporation in
excess of his unpaid subscription. But this rule is understood to refer merely to registered
corporations and cannot be made applicable to the liability of members of an unincorporated
association. The reason behind this doctrine is obvious-since an organization which before the
law is non-existent has no personality and would be incompetent to act and appropriate for
itself the powers and attribute of a corporation as provided by law; it cannot create agents or
confer authority on another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk. And as it is an
elementary principle of law that a person who acts as an agent without authority or without a
principal is himself regarded as the principal, possessed of all the rights and subject to all the
liabilities of a principal, a person acting or purporting to act on behalf of a corporation which
has no valid existence assumes such privileges and obligations and comes personally liable for
contracts entered into or for other acts performed as such, agent (Fay vs. Noble, 7 Cushing
[Mass.] 188. Cited in II Tolentino's Commercial Laws of the Philippines, Fifth Ed., P. 689-690).
Considering that defendant Refuerzo, as president of the unregistered corporation Philippine
Fibers Producers Co., Inc., was the moving spirit behind the consummation of the lease
agreement by acting as its representative, his liability cannot be limited or restricted that
imposed upon corporate shareholders. In acting on behalf of a corporation which he knew to
be unregistered, he assumed the risk of reaping the consequential damages or resultant rights,
if any, arising out of such transaction.

Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision on
this matter and ordering the Provincial Sheriff of Leyte to release any and all properties of
movant therein which might have been attached in the execution of such judgment, is hereby
set aside and nullified as if it had never been issued. With costs against respondent Segundino
Refuerzo. It is so ordered.

G.R. No. L-58028 April 18, 1989

CHIANG KAI SHEK SCHOOL, petitioner,

vs.
COURT OF APPEALS and FAUSTINA FRANCO OH, respondents.

CRUZ, J.:

An unpleasant surprise awaited Fausta F. Oh when she reported for work at the Chiang Kai
Shek School in Sorsogon on the first week of July, 1968. She was told she had no assignment
for the next semester. Oh was shocked. She had been teaching in the school since 1932 for a
continuous period of almost 33 years. And now, out of the blue, and for no apparent or given
reason, this abrupt dismissal.

Oh sued. She demanded separation pay, social security benefits, salary differentials, maternity
benefits and moral and exemplary damages. 1 The original defendant was the Chiang Kai Shek
School but when it filed a motion to dismiss on the ground that it could not be sued, the
complaint was amended. 2 Certain officials of the school were also impleaded to make them
solidarily liable with the school.

The Court of First Instance of Sorsogon dismissed the complaint. 3 On appeal, its decision was
set aside by the respondent court, which held the school suable and liable while absolving the
other defendants. 4 The motion for reconsideration having been denied, 5 the school then
came to this Court in this petition for review on certiorari.

The issues raised in the petition are:

1. Whether or not a school that has not been incorporated may be sued by reason alone of its
long continued existence and recognition by the government,

2. Whether or not a complaint filed against persons associated under a common name will
justify a judgment against the association itself and not its individual members.

3. Whether or not the collection of tuition fees and book rentals will make a school profit-
making and not charitable.

4. Whether or not the Termination Pay Law then in force was available to the private
respondent who was employed on a year-to-year basis.

5. Whether or not the awards made by the respondent court were warranted.

We hold against the petitioner on the first question. It is true that Rule 3, Section 1, of the
Rules of Court clearly provides that "only natural or juridical persons may be parties in a civil
action." It is also not denied that the school has not been incorporated. However, this omission
should not prejudice the private respondent in the assertion of her claims against the school.

As a school, the petitioner was governed by Act No. 2706 as amended by C.A. No. 180, which
provided as follows:

Unless exempted for special reasons by the Secretary of Public Instruction, any
private school or college recognized by the government shall be incorporated
under the provisions of Act No. 1459 known as the Corporation Law, within 90
days after the date of recognition, and shall file with the Secretary of Public
Instruction a copy of its incorporation papers and by-laws.

Having been recognized by the government, it was under obligation to incorporate under the
Corporation Law within 90 days from such recognition. It appears that it had not done so at the
time the complaint was filed notwithstanding that it had been in existence even earlier than
1932. The petitioner cannot now invoke its own non-compliance with the law to immunize it
from the private respondent's complaint.

There should also be no question that having contracted with the private respondent every
year for thirty two years and thus represented itself as possessed of juridical personality to do
so, the petitioner is now estopped from denying such personality to defeat her claim against it.
According to Article 1431 of the Civil Code, "through estoppel an admission or representation
is rendered conclusive upon the person making it and cannot be denied or disproved as against
the person relying on it."

As the school itself may be sued in its own name, there is no need to apply Rule 3, Section 15,
under which the persons joined in an association without any juridical personality may be sued
with such association. Besides, it has been shown that the individual members of the board of
trustees are not liable, having been appointed only after the private respondent's dismissal. 6

It is clear now that a charitable institution is covered by the labor laws 7 although the question
was still unsettled when this case arose in 1968. At any rate, there was no law even
then exempting such institutions from the operation of the labor laws (although they were
exempted by the Constitution from ad valorem taxes). Hence, even assuming that the
petitioner was a charitable institution as it claims, the private respondent was nonetheless still
entitled to the protection of the Termination Pay Law, which was then in force.

While it may be that the petitioner was engaged in charitable works, it would not necessarily
follow that those in its employ were as generously motivated. Obviously, most of them would
not have the means for such charity. The private respondent herself was only a humble school
teacher receiving a meager salary of Pl80. 00 per month.

At that, it has not been established that the petitioner is a charitable institution, considering
especially that it charges tuition fees and collects book rentals from its students. 8 While this
alone may not indicate that it is profit-making, it does weaken its claim that it is a non-profit
entity.

The petitioner says the private respondent had not been illegally dismissed because her
teaching contract was on a yearly basis and the school was not required to rehire her in 1968.
The argument is that her services were terminable at the end of each year at the discretion of
the school. Significantly, no explanation was given by the petitioner, and no advance notice
either, of her relief after teaching year in and year out for all of thirty-two years, the private
respondent was simply told she could not teach any more.

The Court holds, after considering the particular circumstance of Oh's employment, that she
had become a permanent employee of the school and entitled to security of tenure at the time
of her dismissal. Since no cause was shown and established at an appropriate hearing, and the
notice then required by law had not been given, such dismissal was invalid.

The private respondent's position is no different from that of the rank-and-file employees
involved in Gregorio Araneta University Foundation v. NLRC, 9 of whom the Court had the
following to say:

Undoubtedly, the private respondents' positions as deans and department heads

of the petitioner university are necessary in its usual business. Moreover, all the
 private respondents have been serving the university from 18 to 28 years. All of
them rose from the ranks starting as instructors until they became deans and
department heads of the university. A person who has served the University for 28
years and who occupies a high administrative position in addition to teaching
duties could not possibly be a temporary employee or a casual.

The applicable law is the Termination Pay Law, which provided:

SECTION 1. In cases of employment, without a definite period, in a commercial,

industrial, or agricultural establishment or enterprise, the employer or the
employee may terminate at any time the employment with just cause; or without
just cause in the case of an employee by serving written notice on the employer at
least one month in advance, or in the case of an employer, by serving such notice
to the employee at least one month in advance or one-half month for every year
of service of the employee, whichever, is longer, a fraction of at least six months
being considered as one whole year.

The employer, upon whom no such notice was served in case of termination of
employment without just cause may hold the employee liable for damages.

The employee, upon whom no such notice was served in case of termination of
employment without just cause shall be entitled to compensation from the date
of termination of his employment in an I amount equivalent to his salaries or
wages correspond to the required period of notice. ... .

The respondent court erred, however, in awarding her one month pay instead of only one-half
month salary for every year of service. The law is quite clear on this matter. Accordingly, the
separation pay should be computed at P90.00 times 32 months, for a total of P2,880.00.

Parenthetically, R.A. No. 4670, otherwise known as the Magna Carta for Public School
Teachers, confers security of tenure on the teacher upon appointment as long as he possesses
the required qualification. 10 And under the present policy of the Department of Education,
Culture and Sports, a teacher becomes permanent and automatically acquires security of
tenure upon completion of three years in the service. 11

While admittedly not applicable to the case at bar, these I rules nevertheless reflect the
attitude of the government on the protection of the worker's security of tenure, which is now
guaranteed by no less than the Constitution itself. 12

We find that the private respondent was arbitrarily treated by the petitioner, which has shown
no cause for her removal nor had it given her the notice required by the Termination Pay Law.
As the respondent court said, the contention that she could not report one week before the
start of classes is a flimsy justification for replacing her. 13 She had been in its employ for all of
thirty-two years. Her record was apparently unblemished. There is no showing of any previous
strained relations between her and the petitioner. Oh had every reason to assume, as she had
done in previous years, that she would continue teaching as usual.

It is easy to imagine the astonishment and hurt she felt when she was flatly and without
warning told she was dismissed. There was not even the amenity of a formal notice of her
replacement, with perhaps a graceful expression of thanks for her past services. She was
simply informed she was no longer in the teaching staff. To put it bluntly, she was fired.

For the wrongful act of the petitioner, the private respondent is entitled to moral
damages. 14 As a proximate result of her illegal dismissal, she suffered mental anguish, serious
anxiety, wounded feelings and even besmirched reputation as an experienced teacher for
more than three decades. We also find that the respondent court did not err in awarding her
exemplary damages because the petitioner acted in a wanton and oppressive manner when it
dismissed her. 15

The Court takes this opportunity to pay a sincere tribute to the grade school teachers, who are
always at the forefront in the battle against illiteracy and ignorance. If only because it is they
who open the minds of their pupils to an unexplored world awash with the magic of letters
and numbers, which is an extraordinary feat indeed, these humble mentors deserve all our
respect and appreciation.

WHEREFORE, the petition is DENIED. The appealed decision is AFFIRMED except for the award
of separation pay, which is reduced to P2,880.00. All the other awards are approved. Costs
against the petitioner.

This decision is immediately executory.

SO ORDERED.

[G.R. No. 125221. June 19, 1997]

REYNALDO M. LOZANO, petitioner, vs. HON. ELIEZER R. DE LOS SANTOS, Presiding Judge, RTC,
Br. 58, Angeles City; and ANTONIO ANDA, respondents.

DECISION
PUNO, J.:
 This petition for certiorari seeks to annul and set aside the decision of the Regional Trial
Court, Branch 58, Angeles City which ordered the Municipal Circuit Trial Court, Mabalacat and
Magalang, Pampanga to dismiss Civil Case No. 1214 for lack of jurisdiction.
The facts are undisputed. On December 19, 1995, petitioner Reynaldo M. Lozano filed Civil
Case No. 1214 for damages against respondent Antonio Anda before the Municipal Circuit Trial
Court (MCTC), Mabalacat and Magalang, Pampanga. Petitioner alleged that he was the
president of the Kapatirang Mabalacat-Angeles Jeepney Drivers' Association, Inc. (KAMAJDA)
while respondent Anda was the president of the Samahang Angeles-Mabalacat Jeepney
Operators' and Drivers' Association, Inc. (SAMAJODA); in August 1995, upon the request of the
Sangguniang Bayan of Mabalacat, Pampanga, petitioner and private respondent agreed to
consolidate their respective associations and form the Unified Mabalacat-Angeles Jeepney
Operators' and Drivers' Association, Inc. (UMAJODA); petitioner and private respondent also
agreed to elect one set of officers who shall be given the sole authority to collect the daily
dues from the members of the consolidated association; elections were held on October 29,
1995 and both petitioner and private respondent ran for president; petitioner won; private
respondent protested and, alleging fraud, refused to recognize the results of the
election; private respondent also refused to abide by their agreement and continued collecting
the dues from the members of his association despite several demands to desist. Petitioner
was thus constrained to file the complaint to restrain private respondent from collecting the
dues and to order him to pay damages in the amount of P25,000.00 and attorney's fees
of P500.00.[1]
Private respondent moved to dismiss the complaint for lack of jurisdiction, claiming that
jurisdiction was lodged with the Securities and Exchange Commission (SEC). The MCTC denied
the motion on February 9, 1996.[2] It denied reconsideration on March 8, 1996.[3]
Private respondent filed a petition for certiorari before the Regional Trial Court, Branch 58,
Angeles City.[4] The trial court found the dispute to be intracorporate, hence, subject to the
jurisdiction of the SEC, and ordered the MCTC to dismiss Civil Case No. 1214 accordingly. [5] It
denied reconsideration on May 31, 1996.[6]
Hence this petition. Petitioner claims that:

"THE RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION AND SERIOUS ERROR OF LAW IN CONCLUDING THAT THE
SECURITIES AND EXCHANGE COMMISSION HAS JURISDICTION OVER A CASE OF DAMAGES
BETWEEN HEADS/PRESIDENTS OF TWO (2) ASSOCIATIONS WHO INTENDED TO
CONSOLIDATE/MERGE THEIR ASSOCIATIONS BUT NOT YET [SIC] APPROVED AND REGISTERED
WITH THE SECURITIES AND EXCHANGE COMMISSION."[7]

The jurisdiction of the Securities and Exchange Commission (SEC) is set forth in Section 5 of
Presidential Decree No. 902-A. Section 5 reads as follows:
"Section 5. x x x [T]he Securities and Exchange Commission [has] original and exclusive
jurisdiction to hear and decide cases involving:

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

(b) Controversies arising out of intracorporate or partnership relations, between and among
stockholders, members or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members, or associates,
respectively; and between such corporation, partnership or association and the state insofar as
it concerns their individual franchise or right to exist as such entity.

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

such corporations, partnerships or associations.

(d) Petitions of corporations, partnerships or associations to be declared in the state of

suspension of payments in cases where the corporation, partnership or association possesses
sufficient property to cover all its debts but foresees the impossibility of meeting them when
they respect very fall due or in cases where the corporation, partnership or association has no
sufficient assets to cover its liabilities, but is under the management of a Rehabilitation
Receiver or Management Committee created pursuant to this Decree."

The grant of jurisdiction to the SEC must be viewed in the light of its nature and function under
the law.[8] This jurisdiction is determined by a concurrence of two elements: (1) the status or
relationship of the parties; and (2) the nature of the question that is the subject of their
controversy.[9]
The first element requires that the controversy must arise out of intracorporate or
partnership relations between and among stockholders, members, or associates; between any
or all of them and the corporation, partnership or association of which they are stockholders,
members or associates, respectively; and between such corporation, partnership or association
and the State in so far as it concerns their individual franchises. [10] The second element requires
that the dispute among the parties be intrinsically connected with the regulation of the
corporation, partnership or association or deal with the internal affairs of the corporation,
partnership or association.[11] After all, the principal function of the SEC is the supervision and
control of corporations, partnerships and associations with the end in view that investments in
these entities may be encouraged and protected, and their activities pursued for the
promotion of economic development.[12]
There is no intracorporate nor partnership relation between petitioner and private
respondent. The controversy between them arose out of their plan to consolidate their
respective jeepney drivers' and operators' associations into a single common association. This
unified association was, however, still a proposal. It had not been approved by the SEC, neither
had its officers and members submitted their articles of consolidation in accordance with
Sections 78 and 79 of the Corporation Code. Consolidation becomes effective not upon mere
agreement of the members but only upon issuance of the certificate of consolidation by the
SEC.[13] When the SEC, upon processing and examining the articles of consolidation, is satisfied
that the consolidation of the corporations is not inconsistent with the provisions of the
Corporation Code and existing laws, it issues a certificate of consolidation which makes the
reorganization official.[14] The new consolidated corporation comes into existence and the
constituent corporations dissolve and cease to exist.[15]
The KAMAJDA and SAMAJODA to which petitioner and private respondent belong are duly
registered with the SEC, but these associations are two separate entities. The dispute between
petitioner and private respondent is not within the KAMAJDA nor the SAMAJODA. It is
between members of separate and distinct associations. Petitioner and private respondent
have no intracorporate relation much less do they have an intracorporate dispute. The SEC
therefore has no jurisdiction over the complaint.
The doctrine of corporation by estoppel[16] advanced by private respondent cannot override
jurisdictional requirements. Jurisdiction is fixed by law and is not subject to the agreement of
the parties.[17] It cannot be acquired through or waived, enlarged or diminished by, any act or
omission of the parties, neither can it be conferred by the acquiescence of the court. [18]
Corporation by estoppel is founded on principles of equity and is designed to prevent
injustice and unfairness.[19] It applies when persons assume to form a corporation and exercise
corporate functions and enter into business relations with third persons. Where there is no
third person involved and the conflict arises only among those assuming the form of a
corporation, who therefore know that it has not been registered, there is no corporation by
estoppel.[20]
IN VIEW WHEREOF, the petition is granted and the decision dated April 18, 1996 and the
order dated May 31, 1996 of the Regional Trial Court, Branch 58, Angeles City are set aside.The
Municipal Circuit Trial Court of Mabalacat and Magalang, Pampanga is ordered to proceed with
dispatch in resolving Civil Case No. 1214. No costs.
SO ORDERED.

[G.R. No. 136448. November 3, 1999]

LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

DECISION
PANGANIBAN, J.:

A partnership may be deemed to exist among parties who agree to borrow money to
pursue a business and to divide the profits or losses that may arise therefrom, even if it is
shown that they have not contributed any capital of their own to a "common fund." Their
contribution may be in the form of credit or industry, not necessarily cash or fixed assets. Being
partners, they are all liable for debts incurred by or on behalf of the partnership. The liability
for a contract entered into on behalf of an unincorporated association or ostensible
corporation may lie in a person who may not have directly transacted on its behalf, but reaped
benefits from that contract.

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998
Decision of the Court of Appeals in CA-GR CV 41477,[1] which disposed as follows:

WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby
affirmed.[2]

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was
affirmed by the CA, reads as follows:

WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on
September 20, 1990;

2. That defendants are jointly liable to plaintiff for the following amounts, subject to the
modifications as hereinafter made by reason of the special and unique facts and circumstances
and the proceedings that transpired during the trial of this case;

a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the
Agreement plus P68,000.00 representing the unpaid price of the floats not covered by said
Agreement;

b. 12% interest per annum counted from date of plaintiffs invoices and computed on their
respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated February 9,
1990;

ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated February 13,
1990;

iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February 19,
1990;

c. P50,000.00 as and for attorneys fees, plus P8,500.00 representing P500.00 per appearance in
court;

d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets counted
from September 20, 1990 (date of attachment) to September 12, 1991 (date of auction sale);

e. Cost of suit.

With respect to the joint liability of defendants for the principal obligation or for the unpaid
price of nets and floats in the amount of P532,045.00 and P68,000.00, respectively, or for the
total amount of P600,045.00, this Court noted that these items were attached to guarantee
any judgment that may be rendered in favor of the plaintiff but, upon agreement of the
parties, and, to avoid further deterioration of the nets during the pendency of this case, it was
ordered sold at public auction for not less than P900,000.00 for which the plaintiff was the sole
and winning bidder. The proceeds of the sale paid for by plaintiff was deposited in court. In
effect, the amount of P900,000.00 replaced the attached property as a guaranty for any
judgment that plaintiff may be able to secure in this case with the ownership and possession of
the nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder in the
public auction sale. It has also been noted that ownership of the nets [was] retained by the
plaintiff until full payment [was] made as stipulated in the invoices; hence, in effect, the
plaintiff attached its own properties. It [was] for this reason also that this Court earlier ordered
the attachment bond filed by plaintiff to guaranty damages to defendants to be cancelled and
for the P900,000.00 cash bidded and paid for by plaintiff to serve as its bond in favor of
defendants.

From the foregoing, it would appear therefore that whatever judgment the plaintiff may be
entitled to in this case will have to be satisfied from the amount of P900,000.00 as this amount
replaced the attached nets and floats. Considering, however, that the total judgment obligation
as computed above would amount to only P840,216.92, it would be inequitable, unfair and
unjust to award the excess to the defendants who are not entitled to damages and who did not
put up a single centavo to raise the amount of P900,000.00 aside from the fact that they are
not the owners of the nets and floats. For this reason, the defendants are hereby relieved from
any and all liabilities arising from the monetary judgment obligation enumerated above and for
plaintiff to retain possession and ownership of the nets and floats and for the reimbursement
of the P900,000.00 deposited by it with the Clerk of Court.

SO ORDERED. [3]

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into
a Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the
Philippine Fishing Gear Industries, Inc. (herein respondent). They claimed that they were
engaged in a business venture with Petitioner Lim Tong Lim, who however was not a signatory
to the agreement. The total price of the nets amounted to P532,045. Four hundred pieces of
floats worth P68,000 were also sold to the Corporation.[4]
The buyers, however, failed to pay for the fishing nets and the floats; hence, private
respondent filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer
for a writ of preliminary attachment. The suit was brought against the three in their capacities
as general partners, on the allegation that Ocean Quest Fishing Corporation was a nonexistent
corporation as shown by a Certification from the Securities and Exchange Commission. [5] On
September 20, 1990, the lower court issued a Writ of Preliminary Attachment, which the
sheriff enforced by attaching the fishing nets on board F/B Lourdes which was then docked at
the Fisheries Port, Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and
requesting a reasonable time within which to pay. He also turned over to respondent some of
the nets which were in his possession. Peter Yao filed an Answer, after which he was deemed
to have waived his right to cross-examine witnesses and to present evidence on his behalf,
because of his failure to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed
an Answer with Counterclaim and Crossclaim and moved for the lifting of the Writ of
Attachment.[6] The trial court maintained the Writ, and upon motion of private respondent,
ordered the sale of the fishing nets at a public auction. Philippine Fishing Gear Industries won
the bidding and deposited with the said court the sales proceeds of P900,000.[7]
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing
Gear Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general
partners, were jointly liable to pay respondent.[8]
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the
testimonies of the witnesses presented and (2) on a Compromise Agreement executed by the
three[9] in Civil Case No. 1492-MN which Chua and Yao had brought against Lim in the RTC of
Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b) a
reformation of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and
(e) damages.[10] The Compromise Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in the
amount of P5,750,000.00 including the fishing net. This P5,750,000.00 shall be applied as full
payment for P3,250,000.00 in favor of JL Holdings Corporation and/or Lim Tong Lim;

b) If the four (4) vessel[s] and the fishing net will be sold at a higher price than P5,750,000.00
whatever will be the excess will be divided into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3
Peter Yao;

c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the
deficiency shall be shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3
Antonio Chua; 1/3 Peter Yao.[11]

The trial court noted that the Compromise Agreement was silent as to the nature of their
obligations, but that joint liability could be presumed from the equal distribution of the profit
and loss.[12]
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a
fishing business and may thus be held liable as a such for the fishing nets and floats purchased
by and for the use of the partnership. The appellate court ruled:

The evidence establishes that all the defendants including herein appellant Lim Tong Lim
undertook a partnership for a specific undertaking, that is for commercial fishing x x
x. Obviously, the ultimate undertaking of the defendants was to divide the profits among
themselves which is what a partnership essentially is x x x. By a contract of partnership, two or
more persons bind themselves to contribute money, property or industry to a common fund
with the intention of dividing the profits among themselves (Article 1767, New Civil Code). [13]

Hence, petitioner brought this recourse before this Court.[14]

The Issues

In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on
the following grounds:

I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE AGREEMENT THAT

CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP
AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN QUEST
FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT
OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM AS WELL.

III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF PETITIONER
LIMS GOODS.

In determining whether petitioner may be held liable for the fishing nets and floats
purchased from respondent, the Court must resolve this key issue: whether by their acts, Lim,
Chua and Yao could be deemed to have entered into a partnership.

This Courts Ruling

The Petition is devoid of merit.

First and Second Issues: Existence of a Partnership and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from respondent,
petitioner controverts the CA finding that a partnership existed between him, Peter Yao and
Antonio Chua. He asserts that the CA based its finding on the Compromise Agreement
alone. Furthermore, he disclaims any direct participation in the purchase of the nets, alleging
that the negotiations were conducted by Chua and Yao only, and that he has not even met the
representatives of the respondent company. Petitioner further argues that he was a lessor, not
a partner, of Chua and Yao, for the "Contract of Lease" dated February 1, 1990, showed that he
had merely leased to the two the main asset of the purported partnership -- the fishing
boat F/B Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25
percent of the gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two lower
courts clearly showed that there existed a partnership among Chua, Yao and him, pursuant to
Article 1767 of the Civil Code which provides:

Article 1767 - By the contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the
profits among themselves.

Specifically, both lower courts ruled that a partnership among the three existed based on
the following factual findings:[15]

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing
to join him, while Antonio Chua was already Yaos partner;
(2) That after convening for a few times, Lim Chua, and Yao verbally agreed to acquire two
fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;

(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to
finance the venture.

(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of Sale
over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security for the
loan extended by Jesus Lim;

(5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing, dry docking
and other expenses for the boats would be shouldered by Chua and Yao;

(6) That because of the unavailability of funds, Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured by a check, because of which, Yao and Chua
entrusted the ownership papers of two other boats, Chuas FB Lady Anne Mel and Yaos FB
Tracy to Lim Tong Lim.

(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets
from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing Corporation," their
purported business name.

(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72 by
Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of commercial
documents; (b) reformation of contracts; (c) declaration of ownership of fishing boats; (4)
injunction; and (e) damages.

(9) That the case was amicably settled through a Compromise Agreement executed between
the parties-litigants the terms of which are already enumerated above.

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had
decided to engage in a fishing business, which they started by buying boats worth P3.35
million, financed by a loan secured from Jesus Lim who was petitioners brother. In their
Compromise Agreement, they subsequently revealed their intention to pay the loan with the
proceeds of the sale of the boats, and to divide equally among them the excess or loss. These
boats, the purchase and the repair of which were financed with borrowed money, fell under
the term common fund under Article 1767. The contribution to such fund need not be cash or
fixed assets; it could be an intangible like credit or industry. That the parties agreed that any
loss or profit from the sale and operation of the boats would be divided equally among them
also shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the boat,
but also to that of the nets and the floats. The fishing nets and the floats, both essential to
fishing, were obviously acquired in furtherance of their business. It would have been
inconceivable for Lim to involve himself so much in buying the boat but not in the acquisition
of the aforesaid equipment, without which the business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a
partnership engaged in the fishing business. They purchased the boats, which constituted the
main assets of the partnership, and they agreed that the proceeds from the sales and
operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present case should involve only
questions of law. Thus, the foregoing factual findings of the RTC and the CA are binding on this
Court, absent any cogent proof that the present action is embraced by one of the exceptions to
the rule.[16] In assailing the factual findings of the two lower courts, petitioner effectively goes
beyond the bounds of a petition for review under Rule 45.

Compromise Agreement Not the Sole Basis of Partnership

Petitioner argues that the appellate courts sole basis for assuming the existence of a
partnership was the Compromise Agreement. He also claims that the settlement was entered
into only to end the dispute among them, but not to adjudicate their preexisting rights and
obligations. His arguments are baseless. The Agreement was but an embodiment of the
relationship extant among the parties prior to its execution.
A proper adjudication of claimants rights mandates that courts must review and
thoroughly appraise all relevant facts. Both lower courts have done so and have found,
correctly, a preexisting partnership among the parties. In implying that the lower courts have
decided on the basis of one piece of document alone, petitioner fails to appreciate that the CA
and the RTC delved into the history of the document and explored all the possible
consequential combinations in harmony with law, logic and fairness. Verily, the two lower
courts factual findings mentioned above nullified petitioners argument that the existence of a
partnership was based only on the Compromise Agreement.

Petitioner Was a Partner, Not a Lessor

We are not convinced by petitioners argument that he was merely the lessor of the boats
to Chua and Yao, not a partner in the fishing venture. His argument allegedly finds support in
the Contract of Lease and the registration papers showing that he was the owner of the boats,
including F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he consented to
the sale of his own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be
divided among the three of them. No lessor would do what petitioner did. Indeed, his consent
to the sale proved that there was a preexisting partnership among all three.
 Verily, as found by the lower courts, petitioner entered into a business agreement with
Chua and Yao, in which debts were undertaken in order to finance the acquisition and the
upgrading of the vessels which would be used in their fishing business. The sale of the boats,
as well as the division among the three of the balance remaining after the payment of their
loans, proves beyond cavil that F/B Lourdes, though registered in his name, was not his own
property but an asset of the partnership. It is not uncommon to register the properties
acquired from a loan in the name of the person the lender trusts, who in this case is the
petitioner himself. After all, he is the brother of the creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd -- for petitioner to sell his property to
pay a debt he did not incur, if the relationship among the three of them was merely that of
lessor-lessee, instead of partners.

Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be
imputed only to Chua and Yao, and not to him. Again, we disagree.
Section 21 of the Corporation Code of the Philippines provides:

Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided however, That when any such
ostensible corporation is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of corporate
personality.

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

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

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party
may be estopped from denying its corporate existence. The reason behind this doctrine is
obvious - an unincorporated association has no personality and would be incompetent to act
and appropriate for itself the power and attributes of a corporation as provided by law; it
cannot create agents or confer authority on another to act in its behalf; thus, those who act or
purport to act as its representatives or agents do so without authority and at their own
risk. And as it is an elementary principle of law that a person who acts as an agent without
authority or without a principal is himself regarded as the principal, possessed of all the right
and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of
a corporation which has no valid existence assumes such privileges and obligations and
becomes personally liable for contracts entered into or for other acts performed as such agent.
[17]
 The doctrine of corporation by estoppel may apply to the alleged corporation and to a third
party. In the first instance, an unincorporated association, which represented itself to be a
corporation, will be estopped from denying its corporate capacity in a suit against it by a third
person who relied in good faith on such representation. It cannot allege lack of personality to
be sued to evade its responsibility for a contract it entered into and by virtue of which
it received advantages and benefits.
On the other hand, a third party who, knowing an association to be unincorporated,
nonetheless treated it as a corporation and received benefits from it, may be barred from
denying its corporate existence in a suit brought against the alleged corporation. In such case,
all those who benefited from the transaction made by the ostensible corporation, despite
knowledge of its legal defects, may be held liable for contracts they impliedly assented to or
took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be
paid for the nets it sold. The only question here is whether petitioner should be held
jointly[18] liable with Chua and Yao. Petitioner contests such liability, insisting that only those
who dealt in the name of the ostensible corporation should be held liable. Since his name does
not appear on any of the contracts and since he never directly transacted with the respondent
corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B
Lourdes, the boat which has earlier been proven to be an asset of the partnership. He in fact
questions the attachment of the nets, because the Writ has effectively stopped his use of the
fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for unknown reasons, this fact alone does
not preclude the liabilities of the three as contracting parties in representation of it. Clearly,
under the law on estoppel, those acting on behalf of a corporation and those benefited by it,
knowing it to be without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the
corporation. However, having reaped the benefits of the contract entered into by persons with
whom he previously had an existing relationship, he is deemed to be part of said association
and is covered by the scope of the doctrine of corporation by estoppel. We reiterate the ruling
of the Court in Alonso v. Villamor:[19]

A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the
subtle art of movement and position , entraps and destroys the other. It is, rather, a contest in
which each contending party fully and fairly lays before the court the facts in issue and then,
brushing aside as wholly trivial and indecisive all imperfections of form and technicalities of
procedure, asks that justice be done upon the merits. Lawsuits, unlike duels, are not to be won
by a rapiers thrust. Technicality, when it deserts its proper office as an aid to justice and
becomes its great hindrance and chief enemy, deserves scant consideration from courts. There
should be no vested rights in technicalities.

Third Issue: Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued against the
nets. We agree with the Court of Appeals that this issue is now moot and academic. As
previously discussed, F/B Lourdes was an asset of the partnership and that it was placed in the
name of petitioner, only to assure payment of the debt he and his partners owed. The nets and
the floats were specifically manufactured and tailor-made according to their own design, and
were bought and used in the fishing venture they agreed upon. Hence, the issuance of the Writ
to assure the payment of the price stipulated in the invoices is proper. Besides, by specific
agreement, ownership of the nets remained with Respondent Philippine Fishing Gear, until full
payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.

G.R. No. 119002 October 19, 2000

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner,

vs.
HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION, respondents.

DECISION

KAPUNAN, J.:

On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its
managing director, wrote a letter to the Philippine Football Federation (Federation), through its
president private respondent Henri Kahn, wherein the former offered its services as a travel
agency to the latter.1 The offer was accepted.

Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation
to the South East Asian Games in Kuala Lumpur as well as various other trips to the People's
Republic of China and Brisbane. The total cost of the tickets amounted to P449,654.83. For the
tickets received, the Federation made two partial payments, both in September of 1989, in the
total amount of P176,467.50.2

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

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

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

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

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

In due course, the trial court rendered judgment and ruled in favor of the petitioner and
declared Henri Kahn personally liable for the unpaid obligation of the Federation. In arriving at
the said ruling, the trial court rationalized:

Defendant Henri Kahn would have been correct in his contentions had it been duly established
that defendant Federation is a corporation. The trouble, however, is that neither the plaintiff
nor the defendant Henri Kahn has adduced any evidence proving the corporate existence of
the defendant Federation. In paragraph 2 of its complaint, plaintiff asserted that "Defendant
Philippine Football Federation is a sports association xxx." This has not been denied by
defendant Henri Kahn in his Answer. Being the President of defendant Federation, its corporate
existence is within the personal knowledge of defendant Henri Kahn. He could have easily
denied specifically the assertion of the plaintiff that it is a mere sports association, if it were a
domestic corporation. But he did not.

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

x x x9

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

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

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

With the costs against defendant Henri Kahn.10

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

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET
ASIDE and another one is rendered dismissing the complaint against defendant Henri S. Kahn. 11

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the
Federation. It rationalized that since petitioner failed to prove that Henri Kahn guaranteed the
obligation of the Federation, he should not be held liable for the same as said entity has a
separate and distinct personality from its officers.

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

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

Petitioner now seeks recourse to this Court and alleges that the respondent court committed
the following assigned errors:13

A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD

DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE ENTITY AND
IN NOT HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE ONE WHO
REPRESENTED THE PFF AS HAVING A CORPORATE PERSONALITY.

B. THE HONORABLE COURT OF APPEALS ERRED IN NOT 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.

C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY

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

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

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

SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall
have the following functions, powers and duties:

1. To adopt a constitution and by-laws for their internal organization and government;

2. To raise funds by donations, benefits, and other means for their purposes.

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

4. To affiliate with international or regional sports' Associations after due consultation

with the executive committee;
 xxx

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

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

SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports
associations shall have the following functions, powers, and duties:

1. Adopt a Constitution and By-Laws for their internal organization and government
which shall be submitted to the Department and any amendment thereto shall take
effect upon approval by the Department: Provided, however, That no team, school, club,
organization, or entity shall be admitted as a voting member of an association unless 60
per cent of the athletes composing said team, school, club, organization, or entity are
Filipino citizens;

2. Raise funds by donations, benefits, and other means for their purpose subject to the
approval of the Department;

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

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

5. Affiliate with international or regional sports associations after due consultation with
the Department;

xxx

13. Perform such other functions as may be provided by law.

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

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

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

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

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

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

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

The Department shall give the recognition applied for if it is satisfied that the national sports
association to be organized will promote the objectives of this Decree and has substantially
complied with the rules and regulations of the Department: Provided, That the Department
may withdraw accreditation or recognition for violation of this Decree and such rules and
regulations formulated by it.

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

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

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

SO ORDERED.

G.R. No. 117188 August 7, 1997

LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC., petitioner,

vs.
HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY CORPORATION, EMDEN
ENCARNACION and HORATIO AYCARDO, respondents.
ROMERO, J.:

May the failure of a corporation to file its by-laws within one month from the date of its
incorporation, as mandated by Section 46 of the Corporation Code, result in its automatic
dissolution?

This is the issue raised in this petition for review on certiorari of the Decision1 of the Court of
Appeals affirming the decision of the Home Insurance and Guaranty Corporation (HIGC). This
quasi-judicial body recognized Loyola Grand Villas Homeowners Association (LGVHA) as the
sole homeowners' association in Loyola Grand Villas, a duly registered subdivision in Quezon
City and Marikina City that was owned and developed by Solid Homes, Inc. It revoked the
certificates of registration issued to Loyola Grand Villas homeowners (North) Association
Incorporated (the North Association for brevity) and Loyola Grand Villas Homeowners (South)
Association Incorporated (the South Association).

LGVHAI was organized on February 8, 1983 as the association of homeowners and residents of
the Loyola Grand Villas. It was registered with the Home Financing Corporation, the
predecessor of herein respondent HIGC, as the sole homeowners' organization in the said
subdivision under Certificate of Registration No. 04-197. It was organized by the developer of
the subdivision and its first president was Victorio V. Soliven, himself the owner of the
developer. For unknown reasons, however, LGVHAI did not file its corporate by-laws.

Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. They failed to do
so. 2 To the officers' consternation, they discovered that there were two other organizations
within the subdivision — the North Association and the South Association. According to private
respondents, a non-resident and Soliven himself, respectively headed these associations. They
also discovered that these associations had five (5) registered homeowners each who were
also the incorporators, directors and officers thereof. None of the members of the LGVHAI was
listed as member of the North Association while three (3) members of LGVHAI were listed as
members of the South Association.3 The North Association was registered with the HIGC on
February 13, 1989 under Certificate of Registration No. 04-1160 covering Phases West II, East
III, West III and East IV. It submitted its by-laws on December 20, 1988.

In July, 1989, when Soliven inquired about the status of LGVHAI, Atty. Joaquin A. Bautista, the
head of the legal department of the HIGC, informed him that LGVHAI had been automatically
dissolved for two reasons. First, it did not submit its by-laws within the period required by the
Corporation Code and, second, there was non-user of corporate charter because HIGC had not
received any report on the association's activities. Apparently, this information resulted in the
registration of the South Association with the HIGC on July 27, 1989 covering Phases West I,
East I and East II. It filed its by-laws on July 26, 1989.
These developments prompted the officers of the LGVHAI to lodge a complaint with the HIGC.
They questioned the revocation of LGVHAI's certificate of registration without due notice and
hearing and concomitantly prayed for the cancellation of the certificates of registration of the
North and South Associations by reason of the earlier issuance of a certificate of registration in
favor of LGVHAI.

On January 26, 1993, after due notice and hearing, private respondents obtained a favorable
ruling from HIGC Hearing Officer Danilo C. Javier who disposed of HIGC Case No. RRM-5-89 as
follows:

WHEREFORE, judgment is hereby rendered recognizing the Loyola Grand Villas

Homeowners Association, Inc., under Certificate of Registration No. 04-197 as the duly
registered and existing homeowners association for Loyola Grand Villas homeowners,
and declaring the Certificates of Registration of Loyola Grand Villas Homeowners (North)
Association, Inc. and Loyola Grand Villas Homeowners (South) Association, Inc. as
hereby revoked or cancelled; that the receivership be terminated and the Receiver is
hereby ordered to render an accounting and turn-over to Loyola Grand Villas
Homeowners Association, Inc., all assets and records of the Association now under his
custody and possession.

The South Association appealed to the Appeals Board of the HIGC. In its Resolution of
September 8, 1993, the Board 4 dismissed the appeal for lack of merit.

Rebuffed, the South Association in turn appealed to the Court of Appeals, raising two
issues. First, whether or not LGVHAI's failure to file its by-laws within the period prescribed by
Section 46 of the Corporation Code resulted in the automatic dissolution of LGVHAI. Second,
whether or not two homeowners' associations may be authorized by the HIGC in one
"sprawling subdivision." However, in the Decision of August 23, 1994 being assailed here, the
Court of Appeals affirmed the Resolution of the HIGC Appeals Board.

In resolving the first issue, the Court of Appeals held that under the Corporation Code, a
private corporation commences to have corporate existence and juridical personality from the
date the Securities and Exchange Commission (SEC) issues a certificate of incorporation under
its official seal. The requirement for the filing of by-laws under Section 46 of the Corporation
Code within one month from official notice of the issuance of the certificate of incorporation
presupposes that it is already incorporated, although it may file its by-laws with its articles of
incorporation. Elucidating on the effect of a delayed filing of by-laws, the Court of Appeals said:

We also find nothing in the provisions cited by the petitioner, i.e., Section 46 and 22,
Corporation Code, or in any other provision of the Code and other laws which provide or
at least imply that failure to file the by-laws results in an automatic dissolution of the
corporation. While Section 46, in prescribing that by-laws must be adopted within the
period prescribed therein, may be interpreted as a mandatory provision, particularly
 because of the use of the word "must," its meaning cannot be stretched to support the
argument that automatic dissolution results from non-compliance.

We realize that Section 46 or other provisions of the Corporation Code are silent on the
result of the failure to adopt and file the by-laws within the required period. Thus,
Section 46 and other related provisions of the Corporation Code are to be construed
with Section 6 (1) of P.D. 902-A. This section empowers the SEC to suspend or revoke
certificates of registration on the grounds listed therein. Among the grounds stated is
the failure to file by-laws (see also II Campos: The Corporation Code, 1990 ed., pp. 124-
125). Such suspension or revocation, the same section provides, should be made upon
proper notice and hearing. Although P.D. 902-A refers to the SEC, the same principles
and procedures apply to the public respondent HIGC as it exercises its power to revoke
or suspend the certificates of registration or homeowners association. (Section 2 [a],
E.O. 535, series 1979, transferred the powers and authorities of the SEC over
homeowners associations to the HIGC.)

We also do not agree with the petitioner's interpretation that Section 46, Corporation
Code prevails over Section 6, P.D. 902-A and that the latter is invalid because it
contravenes the former. There is no basis for such interpretation considering that these
two provisions are not inconsistent with each other. They are, in fact, complementary to
each other so that one cannot be considered as invalidating the other.

The Court of Appeals added that, as there was no showing that the registration of LGVHAI had
been validly revoked, it continued to be the duly registered homeowners' association in the
Loyola Grand Villas. More importantly, the South Association did not dispute the fact that
LGVHAI had been organized and that, thereafter, it transacted business within the period
prescribed by law.

On the second issue, the Court of Appeals reiterated its previous ruling 5 that the HIGC has the
authority to order the holding of a referendum to determine which of two contending
associations should represent the entire community, village or subdivision.

Undaunted, the South Association filed the instant petition for review on certiorari. It elevates
as sole issue for resolution the first issue it had raised before the Court of Appeals, i.e.,
whether or not the LGVHAI's failure to file its by-laws within the period prescribed by Section
46 of the Corporation Code had the effect of automatically dissolving the said corporation.

Petitioner contends that, since Section 46 uses the word "must" with respect to the filing of by-
laws, noncompliance therewith would result in "self-extinction" either due to non-occurrence
of a suspensive condition or the occurrence of a resolutory condition "under the hypothesis
that (by) the issuance of the certificate of registration alone the corporate personality is
deemed already formed." It asserts that the Corporation Code provides for a "gradation of
violations of requirements." Hence, Section 22 mandates that the corporation must be
formally organized and should commence transaction within two years from date of
incorporation. Otherwise, the corporation would be deemed dissolved. On the other hand, if
the corporation commences operations but becomes continuously inoperative for five years,
then it may be suspended or its corporate franchise revoked.

Petitioner concedes that Section 46 and the other provisions of the Corporation Code do not
provide for sanctions for non-filing of the by-laws. However, it insists that no sanction need be
provided "because the mandatory nature of the provision is so clear that there can be no
doubt about its being an essential attribute of corporate birth." To petitioner, its submission is
buttressed by the facts that the period for compliance is "spelled out distinctly;" that the
certification of the SEC/HIGC must show that the by-laws are not inconsistent with the Code,
and that a copy of the by-laws "has to be attached to the articles of incorporation." Moreover,
no sanction is provided for because "in the first place, no corporate identity has been
completed." Petitioner asserts that "non-provision for remedy or sanction is itself the tacit
proclamation that non-compliance is fatal and no corporate existence had yet evolved," and
therefore, there was "no need to proclaim its demise." 6 In a bid to convince the Court of its
arguments, petitioner stresses that:

. . . the word MUST is used in Sec. 46 in its universal literal meaning and corollary human
implication — its compulsion is integrated in its very essence — MUST is always
enforceable by the inevitable consequence — that is, "OR ELSE". The use of the
word MUST in Sec. 46 is no exception — it means file the by-laws within one month after
notice of issuance of certificate of registration OR ELSE. The OR ELSE, though not
specified, is inextricably a part of MUST . Do this or if you do not you are "Kaput". The
importance of the by-laws to corporate existence compels such meaning for as decreed
the by-laws is "the government" of the corporation. Indeed, how can the corporation do
any lawful act as such without by-laws. Surely, no law is indeed to create chaos. 7

Petitioner asserts that P.D. No. 902-A cannot exceed the scope and power of the Corporation
Code which itself does not provide sanctions for non-filing of by-laws. For the petitioner, it is
"not proper to assess the true meaning of Sec. 46 . . . on an unauthorized provision on such
matter contained in the said decree."

In their comment on the petition, private respondents counter that the requirement of
adoption of by-laws is not mandatory. They point to P.D. No. 902-A as having resolved the issue
of whether said requirement is mandatory or merely directory. Citing Chung Ka Bio
v. Intermediate Appellate Court, 8 private respondents contend that Section 6(I) of that decree
provides that non-filing of by-laws is only a ground for suspension or revocation of the
certificate of registration of corporations and, therefore, it may not result in automatic
dissolution of the corporation. Moreover, the adoption and filing of by-laws is a condition
subsequent which does not affect the corporate personality of a corporation like the LGVHAI.
This is so because Section 9 of the Corporation Code provides that the corporate existence and
juridical personality of a corporation begins from the date the SEC issues a certificate of
incorporation under its official seal. Consequently, even if the by-laws have not yet been filed,
a corporation may be considered a de facto corporation. To emphasize the fact the LGVHAI was
registered as the sole homeowners' association in the Loyola Grand Villas, private respondents
point out that membership in the LGVHAI was an "unconditional restriction in the deeds of
sale signed by lot buyers."

In its reply to private respondents' comment on the petition, petitioner reiterates its argument
that the word " must" in Section 46 of the Corporation Code is mandatory. It adds that, before
the ruling in Chung Ka Bio v. Intermediate Appellate Court could be applied to this case, this
Court must first resolve the issue of whether or not the provisions of P.D. No. 902-A prescribing
the rules and regulations to implement the Corporation Code can "rise above and change" the
substantive provisions of the Code.

The pertinent provision of the Corporation Code that is the focal point of controversy in this
case states:

Sec. 46. Adoption of by-laws. — Every corporation formed under this Code, must within
one (1) month after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission, adopt a code of by-laws for
its government not inconsistent with this Code. For the adoption of by-laws by the
corporation, the affirmative vote of the stockholders representing at least a majority of
the outstanding capital stock, or of at least a majority of the members, in the case of
non-stock corporations, shall be necessary. The by-laws shall be signed by the
stockholders or members voting for them and shall be kept in the principal office of the
corporation, subject to the stockholders or members voting for them and shall be kept in
the principal office of the corporation, subject to inspection of the stockholders or
members during office hours; and a copy thereof, shall be filed with the Securities and
Exchange Commission which shall be attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted

and filed prior to incorporation; in such case, such by-laws shall be approved and signed
by all the incorporators and submitted to the Securities and Exchange Commission,
together with the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the Securities and
Exchange Commission of a certification that the by-laws are not inconsistent with this
Code.

The Securities and Exchange Commission shall not accept for filing the by-laws or any
amendment thereto of any bank, banking institution, building and loan association, trust
company, insurance company, public utility, educational institution or other special
corporations governed by special laws, unless accompanied by a certificate of the
 appropriate government agency to the effect that such by-laws or amendments are in
accordance with law.

As correctly postulated by the petitioner, interpretation of this provision of law begins with the
determination of the meaning and import of the word "must" in this section Ordinarily, the
word "must" connotes an imperative act or operates to impose a duty which may be
enforced. 9 It is synonymous with "ought" which connotes compulsion or
mandatoriness. 10 However, the word "must" in a statute, like "shall," is not always imperative.
It may be consistent with an exercise of discretion. In this jurisdiction, the tendency has been
to interpret "shall" as the context or a reasonable construction of the statute in which it is used
demands or requires. 11 This is equally true as regards the word "must." Thus, if the languages
of a statute considered as a whole and with due regard to its nature and object reveals that the
legislature intended to use the words "shall" and "must" to be directory, they should be given
that meaning.12

In this respect, the following portions of the deliberations of the Batasang Pambansa No. 68
are illuminating:

MR. FUENTEBELLA. Thank you, Mr. Speaker.

On page 34, referring to the adoption of by-laws, are we made to understand here, Mr.
Speaker, that by-laws must immediately be filed within one month after the issuance? In
other words, would this be mandatory or directory in character?

MR. MENDOZA. This is mandatory.

MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the effect of the
failure of the corporation to file these by-laws within one month?

MR. MENDOZA. There is a provision in the latter part of the Code which identifies and
describes the consequences of violations of any provision of this Code. One such
consequences is the dissolution of the corporation for its inability, or perhaps, incurring
certain penalties.

MR. FUENTEBELLA. But it will not automatically amount to a dissolution of the

corporation by merely failing to file the by-laws within one month. Supposing the
corporation was late, say, five days, what would be the mandatory penalty?

MR. MENDOZA. I do not think it will necessarily result in the automatic or ipso
facto dissolution of the corporation. Perhaps, as in the case, as you suggested, in the
case of El Hogar Filipino where a quo warrantoaction is brought, one takes into account
the gravity of the violation committed. If the by-laws were late — the filing of the by-
laws were late by, perhaps, a day or two, I would suppose that might be a tolerable
 delay, but if they are delayed over a period of months — as is happening now — because
of the absence of a clear requirement that by-laws must be completed within a specified
period of time, the corporation must suffer certain consequences. 13

This exchange of views demonstrates clearly that automatic corporate dissolution for failure to
file the by-laws on time was never the intention of the legislature. Moreover, even without
resorting to the records of deliberations of the Batasang Pambansa, the law itself provides the
answer to the issue propounded by petitioner.

Taken as a whole and under the principle that the best interpreter of a statute is the statute
itself (optima statuli interpretatix est ipsum statutum), 14 Section 46 aforequoted reveals the
legislative intent to attach a directory, and not mandatory, meaning for the word "must" in the
first sentence thereof. Note should be taken of the second paragraph of the law which allows
the filing of the by-laws even prior to incorporation. This provision in the same section of the
Code rules out mandatory compliance with the requirement of filing the by-laws "within one
(1) month after receipt of official notice of the issuance of its certificate of incorporation by the
Securities and Exchange Commission." It necessarily follows that failure to file the by-laws
within that period does not imply the "demise" of the corporation. By-laws may be necessary
for the "government" of the corporation but these are subordinate to the articles of
incorporation as well as to the Corporation Code and related statutes.15 There are in fact cases
where by-laws are unnecessary to corporate existence or to the valid exercise of corporate
powers, thus:

In the absence of charter or statutory provisions to the contrary, by-laws are not
necessary either to the existence of a corporation or to the valid exercise of the powers
conferred upon it, certainly in all cases where the charter sufficiently provides for the
government of the body; and even where the governing statute in express terms confers
upon the corporation the power to adopt by-laws, the failure to exercise the power will
be ascribed to mere nonaction which will not render void any acts of the corporation
which would otherwise be valid. 16 (Emphasis supplied.)

As Fletcher aptly puts it:

It has been said that the by-laws of a corporation are the rule of its life, and that until by-
laws have been adopted the corporation may not be able to act for the purposes of its
creation, and that the first and most important duty of the members is to adopt them.
This would seem to follow as a matter of principle from the office and functions of by-
laws. Viewed in this light, the adoption of by-laws is a matter of practical, if not one of
legal, necessity. Moreover, the peculiar circumstances attending the formation of a
corporation may impose the obligation to adopt certain by-laws, as in the case of a close
corporation organized for specific purposes. And the statute or general laws from which
the corporation derives its corporate existence may expressly require it to make and
adopt by-laws and specify to some extent what they shall contain and the manner of
 their adoption. The mere fact, however, of the existence of power in the corporation to
adopt by-laws does not ordinarily and of necessity make the exercise of such power
essential to its corporate life, or to the validity of any of its acts. 17

Although the Corporation Code requires the filing of by-laws, it does not expressly provide for
the consequences of the non-filing of the same within the period provided for in Section 46.
However, such omission has been rectified by Presidential Decree No. 902-A, the pertinent
provisions on the jurisdiction of the SEC of which state:

Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the
following powers:

xxx xxx xxx

(1) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of
registration of corporations, partnerships or associations, upon any of the grounds
provided by law, including the following:

xxx xxx xxx

5. Failure to file by-laws within the required period;

xxx xxx xxx

In the exercise of the foregoing authority and jurisdiction of the Commission or by a

Commissioner or by such other bodies, boards, committees and/or any officer as may be
created or designated by the Commission for the purpose. The decision, ruling or order
of any such Commissioner, bodies, boards, committees and/or officer may be appealed
to the Commission sitting en banc within thirty (30) days after receipt by the appellant of
notice of such decision, ruling or order. The Commission shall promulgate rules of
procedures to govern the proceedings, hearings and appeals of cases falling with its
jurisdiction.

The aggrieved party may appeal the order, decision or ruling of the Commission
sitting en banc to the Supreme Court by petition for review in accordance with the
pertinent provisions of the Rules of Court.

Even under the foregoing express grant of power and authority, there can be no automatic
corporate dissolutionsimply because the incorporators failed to abide by the required filing of
by-laws embodied in Section 46 of the Corporation Code. There is no outright "demise" of
corporate existence. Proper notice and hearing are cardinal components of due process in any
democratic institution, agency or society. In other words, the incorporators must be given the
chance to explain their neglect or omission and remedy the same.
That the failure to file by-laws is not provided for by the Corporation Code but in another law is
of no moment. P.D. No. 902-A, which took effect immediately after its promulgation on March
11, 1976, is very much apposite to the Code. Accordingly, the provisions abovequoted supply
the law governing the situation in the case at bar, inasmuch as the Corporation Code and P.D.
No. 902-A are statutes in pari materia. Interpretare et concordare legibus est optimus
interpretandi. Every statute must be so construed and harmonized with other statutes as to
form a uniform system of jurisprudence. 18

As the "rules and regulations or private laws enacted by the corporation to regulate, govern
and control its own actions, affairs and concerns and its stockholders or members and directors
and officers with relation thereto and among themselves in their relation to it," 19 by-laws are
indispensable to corporations in this jurisdiction. These may not be essential to corporate birth
but certainly, these are required by law for an orderly governance and management of
corporations. Nonetheless, failure to file them within the period required by law by no means
tolls the automatic dissolution of a corporation.

In this regard, private respondents are correct in relying on the pronouncements of this Court
in Chung Ka Bio v.Intermediate Appellate Court, 20 as follows:

. . . . Moreover, failure to file the by-laws does not automatically operate to dissolve a
corporation but is now considered only a ground for such dissolution.

Section 19 of the Corporation Law, part of which is now Section 22 of the Corporation
Code, provided that the powers of the corporation would cease if it did not formally
organize and commence the transaction of its business or the continuation of its works
within two years from date of its incorporation. Section 20, which has been reproduced
with some modifications in Section 46 of the Corporation Code, expressly declared that
"every corporation formed under this Act, must within one month after the filing of the
articles of incorporation with the Securities and Exchange Commission, adopt a code of
by-laws." Whether this provision should be given mandatory or only directory effect
remained a controversial question until it became academic with the adoption of PD
902-A. Under this decree, it is now clear that the failure to file by-laws within the
required period is only a ground for suspension or revocation of the certificate of
registration of corporations.

Non-filing of the by-laws will not result in automatic dissolution of the corporation.
Under Section 6(I) of PD 902-A, the SEC is empowered to "suspend or revoke, after
proper notice and hearing, the franchise or certificate of registration of a corporation"
on the ground inter alia of "failure to file by-laws within the required period." It is clear
from this provision that there must first of all be a hearing to determine the existence of
the ground, and secondly, assuming such finding, the penalty is not necessarily
revocation but may be only suspension of the charter. In fact, under the rules and
regulations of the SEC, failure to file the by-laws on time may be penalized merely with
 the imposition of an administrative fine without affecting the corporate existence of the
erring firm.

It should be stressed in this connection that substantial compliance with conditions

subsequent will suffice to perfect corporate personality. Organization and
commencement of transaction of corporate business are but conditions subsequent and
not prerequisites for acquisition of corporate personality. The adoption and filing of by-
laws is also a condition subsequent. Under Section 19 of the Corporation Code, a
Corporation commences its corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange Commission issues certificate of
incorporation under its official seal. This may be done even before the filing of the by-
laws, which under Section 46 of the Corporation Code, must be adopted "within one
month after receipt of official notice of the issuance of its certificate of incorporation." 21

That the corporation involved herein is under the supervision of the HIGC does not alter the
result of this case. The HIGC has taken over the specialized functions of the former Home
Financing Corporation by virtue of Executive Order No. 90 dated December 17, 1989. 22 With
respect to homeowners associations, the HIGC shall "exercise all the powers, authorities and
responsibilities that are vested on the Securities and Exchange Commission . . . , the provision
of Act 1459, as amended by P.D. 902-A, to the contrary notwithstanding." 23

WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned
Decision of the Court of Appeals AFFIRMED. This Decision is immediately executory. Costs
against petitioner.

SO ORDERED.

G.R. No. L-23241 March 14, 1925

HENRY FLEISCHER, plaintiff-appellee,

vs.
BOTICA NOLASCO CO., INC., defendant-appellant.

Antonio Gonzalez for appellant.

Emilio M. Javier for appellee.

JOHNSON, J.:

This action was commenced in the Court of First Instance of the Province of Oriental Negros on
the 14th day of August, 1923, against the board of directors of the Botica Nolasco, Inc., a
corporation duly organized and existing under the laws of the Philippine Islands. The plaintiff
prayed that said board of directors be ordered to register in the books of the corporation five
shares of its stock in the name of Henry Fleischer, the plaintiff, and to pay him the sum of P500
for damages sustained by him resulting from the refusal of said body to register the shares of
stock in question. The defendant filed a demurrer on the ground that the facts alleged in the
complaint did not constitute sufficient cause of action, and that the action was not brought
against the proper party, which was the Botica Nolasco, Inc. The demurrer was sustained, and
the plaintiff was granted five days to amend his complaint.

On November 15, 1923, the plaintiff filed an amended complaint against the Botica Nolasco,
Inc., alleging that he became the owner of five shares of stock of said corporation, by purchase
from their original owner, one Manuel Gonzalez; that the said shares were fully paid; and that
the defendant refused to register said shares in his name in the books of the corporation in
spite of repeated demands to that effect made by him upon said corporation, which refusal
caused him damages amounting to P500. Plaintiff prayed for a judgment ordering the Botica
Nolasco, Inc. to register in his name in the books of the corporation the five shares of stock
recorded in said books in the name of Manuel Gonzalez, and to indemnify him in the sum of
P500 as damages, and to pay the costs. The defendant again filed a demurrer on the ground
that the amended complaint did not state facts sufficient to constitute a cause of action, and
that said amended complaint was ambiguous, unintelligible, uncertain, which demurrer was
overruled by the court.

The defendant answered the amended complaint denying generally and specifically each and
every one of the material allegations thereof, and, as a special defense, alleged that the
defendant, pursuant to article 12 of its by-laws, had preferential right to buy from the plaintiff
said shares at the par value of P100 a share, plus P90 as dividends corresponding to the year
1922, and that said offer was refused by the plaintiff. The defendant prayed for a judgment
absolving it from all liability under the complaint and directing the plaintiff to deliver to the
defendant the five shares of stock in question, and to pay damages in the sum of P500, and the
costs.

Upon the issue presented by the pleadings above stated, the cause was brought on for trial, at
the conclusion of which, and on August 21, 1924, the Honorable N. Capistrano, judge, held
that, in his opinion, article 12 of the by-laws of the corporation which gives it preferential right
to buy its shares from retiring stockholders, is in conflict with Act No. 1459 (Corporation Law),
especially with section 35 thereof; and rendered a judgment ordering the defendant
corporation, through its board of directors, to register in the books of said corporation the said
five shares of stock in the name of the plaintiff, Henry Fleischer, as the shareholder or owner
thereof, instead of the original owner, Manuel Gonzalez, with costs against the defendant.
The defendant appealed from said judgment, and now makes several assignment of error, all of
which, in substance, raise the question whether or not article 12 of the by-laws of the
corporation is in conflict with the provisions of the Corporation Law (Act No. 1459).

There is no controversy as to the facts of the present case. They are simple and may be stated
as follows:

That Manuel Gonzalez was the original owner of the five shares of stock in question, Nos. 16,
17, 18, 19 and 20 of the Botica Nolasco, Inc.; that on March 11, 1923, he assigned and
delivered said five shares to the plaintiff, Henry Fleischer, by accomplishing the form of
endorsement provided on the back thereof, together with other credits, in consideration of a
large sum of money owed by Gonzalez to Fleischer (Exhibits A, B, B-1, B-2, B-3, B-4); that on
March 13, 1923, Dr. Eduardo Miciano, who was the secretary-treasurer of said corporation,
offered to buy from Henry Fleischer, on behalf of the corporation, said shares of stock, at their
par value of P100 a share, for P500; that by virtue of article 12 of the by-laws of Botica Nolasco,
Inc., said corporation had the preferential right to buy from Manuel Gonzalez said shares
(Exhibit 2); that the plaintiff refused to sell them to the defendant; that the plaintiff requested
Doctor Miciano to register said shares in his name; that Doctor Miciano refused to do so,
saying that it would be in contravention of the by-laws of the corporation.

It also appears from the record that on the 13th day of March, 1923, two days after the
assignment of the shares to the plaintiff, Manuel Gonzales made a written statement to the
Botica Nolasco, Inc., requesting that the five shares of stock sold by him to Henry Fleischer be
noted transferred to Fleischer's name. He also acknowledged in said written statement the
preferential right of the corporation to buy said five shares (Exhibit 3). On June 14, 1923,
Gonzalez wrote a letter to the Botica Nolasco, withdrawing and cancelling his written
statement of March 13, 1923 (Exhibit C), to which letter the Botica Nolasco on June 15, 1923,
replied, declaring that his written statement was in conformity with the by-laws of the
corporation; that his letter of June 14th was of no effect, and that the shares in question had
been registered in the name of the Botica Nolasco, Inc., (Exhibit X).

As indicated above, the important question raised in this appeal is whether or not article 12 of
the by-laws of the Botica Nolasco, Inc., is in conflict with the provisions of the Corporation Law
(Act No. 1459). Appellant invoked said article as its ground for denying the request of the
plaintiff that the shares in question be registered in his (plaintiff's) name, and for claiming that
it (Botica Nolasco, Inc.) had the preferential right to buy said shares from Gonzalez. Appellant
now contends that article 12 of the said by-laws is in conformity with the provisions of Act No.
1459. Said article is as follows:

ART. 12. Las acciones de la Corporacion pueden ser transferidas a otra persona, pero
para que estas transferencias tengan validez legal, deben constar en los registros de la
Corporacion con el debido endoso del accionista a cuyo nombre se ha expedido la accion
o acciones que se transfieran, o un documento de transferencia. Entendiendose que,
 ningun accionista transferira accion alguna a otra persona sin participar antes por escrito
al Secretario-Tesorero. En igualdad de condiciones, la sociedad tendra el derecho de
adquirir para si la accion o acciones que se traten de transferir. (Exhibit 2.)

The above-quoted article constitutes a by-law or regulation adopted by the Botica Nolasco,
Inc., governing the transfer of shares of stock of said corporation. The latter part of said article
creates in favor of the Botica Nolasco, Inc., a preferential right to buy, under the same
conditions, the share or shares of stock of a retiring shareholder. Has said corporation any
power, under the Corporation Law (Act. No. 1459), to adopt such by-law?

The particular provisions of the Corporation Law referring to transfer of shares of stock are as
follows:

SEC. 13. Every corporation has the power:

xxx xxx xxx

(7) To make by-laws, not inconsistent with any existing law, for the fixing or changing of
the number of its officers and directors within the limits prescribed by law, and for
the transferring of its stock, the administration of its corporate affairs, etc.

xxx xxx xxx

SEC. 35. The capital stock of stock corporations shall de divided into shares for which
certificates signed by the president or the vice-president, countersigned by the secretary
or clerk and sealed with the seal of the corporation, shall be issued in accordance with
the by-laws. Shares of stock so issued are personal property and may be transferred by
delivery of the certificate indorsed by the owner or his attorney in fact or other person
legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the transaction, that date of the
transfer, the number of the certificate, and the number of shares transferred.

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

Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, not

inconsistent with any existing law, for the transferring of its stock. It follows from said
provision, that a by-law adopted by a corporation relating to transfer of stock should be in
harmony with the law on the subject of transfer of stock. The law on this subject is found in
section 35 of Act No. 1459 above quoted. Said section specifically provides that the shares of
stock "are personal property and may be transferred by delivery of the certificate indorsed by
the owner, etc." Said section 35 defines the nature, character and transferability of shares of
stock. Under said section they are personal property and may be transferred as therein
provided. Said section contemplates no restriction as to whom they may be transferred or sold.
It does not suggest that any discrimination may be created by the corporation in favor or
against a certain purchaser. The holder of shares, as owner of personal property, is at liberty,
under said section, to dispose of them in favor of whomsoever he pleases, without any other
limitation in this respect, than the general provisions of law. Therefore, a stock corporation in
adopting a by-law governing transfer of shares of stock should take into consideration the
specific provisions of section 35 of Act No. 1459, and said by-law should be made to harmonize
with said provisions. It should not be inconsistent therewith.

The by-law now in question was adopted under the power conferred upon the corporation by
section 13, paragraph 7, above quoted; but in adopting said by-law the corporation has
transcended the limits fixed by law in the same section, and has not taken into consideration
the provisions of section 35 of Act No. 1459.

As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to
carry into effect the objects of the corporation, and are not contradictory to the general policy
of the laws of the land. (Supreme Commandery of the Knights of the Golden Rule vs.
Ainsworth, 71 Ala., 436; 46 Am. Rep., 332.)

On the other hand, it is equally well settled that by-laws of a corporation must be reasonable
and for a corporate purpose, and always within the charter limits. They must always be strictly
subordinate to the constitution and the general laws of the land. They must not infringe the
policy of the state, nor be hostile to public welfare. (46 Am. Rep., 332.) They must not disturb
vested rights or impair the obligation of a contract, take away or abridge the substantial rights
of stockholder or member, affect rights of property or create obligations unknown to the law.
(People's Home Savings Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs.
Globe Milling Co., 79 Am. St. Rep., 769.)

The validity of the by-law of a corporation is purely a question of law. (South Florida Railroad
Co. vs. Rhodes, 25 Fla., 40.)

The power to enact by-laws restraining the sale and transfer of stock must be found in
the governing statute or the charter. Restrictions upon the traffic in stock must have
their source in legislative enactment, as the corporation itself cannot create such
impediments. By-law are intended merely for the protection of the corporation, and
prescribe regulation and not restriction; they are always subject to the charter of the
corporation. The corporation, in the absence of such a power, cannot ordinarily inquire
into or pass upon the legality of the transaction by which its stock passes from one
person to another, nor can it question the consideration upon which a sale is based. A
by-law cannot take away or abridge the substantial rights of stockholder. Under a statute
authorizing by- laws for the transfer of stock, a corporation can do no more than
prescribe a general mode of transfer on the corporate books and cannot justify an
 unreasonable restriction upon the right of sale. (4 Thompson on Corporations, sec. 4137,
p. 674.

The right of unrestrained transfer of shares inheres in the very nature of a corporation,
and courts will carefully scrutinize any attempt to impose restrictions or limitations upon
the right of stockholders to sell and assign their stock. The right to impose any restraint
in this respect must be conferred upon the corporation either by the governing statute or
by the articles of the corporation. It cannot be done by a by-law without statutory or
charter authority. (4 Thompson on Corporations, sec. 4334, pp. 818, 819.)

The jus disponendi, being an incident of the ownership of property, the general rule
(subject to exceptions hereafter pointed out and discussed) is that every owner of
corporate shares has the same uncontrollable right to alien them which attaches to the
ownership of any other species of property. A shareholder is under no obligation to
refrain from selling his shares at the sacrifice of his personal interest, in order to secure
the welfare of the corporation, or to enable another shareholder to make gains and
profits. (10 Cyc., p. 577.)

It follows from the foregoing that a corporation has no power to prevent or to restrain
transfers of its shares, unless such power is expressly conferred in its charter or
governing statute. This conclusion follows from the further consideration that by-laws or
other regulations restraining such transfers, unless derived from authority expressly
granted by the legislature, would be regarded as impositions in restraint of trade. (10
Cyc., p. 578.)

The foregoing authorities go farther than the stand we are taking on this question. They hold
that the power of a corporation to enact by-laws restraining the sale and transfer of shares,
should not only be in harmony with the law or charter of the corporation, but such power
should be expressly granted in said law or charter.

The only restraint imposed by the Corporation Law upon transfer of shares is found in section
35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except as
between the parties, until the transfer is entered and noted upon the books of the corporation
so as to show the names of the parties to the transaction, the date of the transfer, the number
of the certificate, and the number of shares transferred." This restriction is necessary in order
that the officers of the corporation may know who are the stockholders, which is essential in
conducting elections of officers, in calling meeting of stockholders, and for other purposes. but
any restriction of the nature of that imposed in the by-law now in question, is ultra vires,
violative of the property rights of shareholders, and in restraint of trade.

And moreover, the by-laws now in question cannot have any effect on the appellee. He had no
knowledge of such by-law when the shares were assigned to him. He obtained them in good
faith and for a valuable consideration. He was not a privy to the contract created by said by-law
between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot
operate to defeat his rights as a purchaser.

An unauthorized by-law forbidding a shareholder to sell his shares without first offering
them to the corporation for a period of thirty days is not binding upon an assignee of the
stock as a personal contract, although his assignor knew of the by-law and took part in
its adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)

When no restriction is placed by public law on the transfer of corporate stock, a

purchaser is not affected by any contractual restriction of which he had no notice.
(Brinkerhoff-Farris Trust and Savings Co. vs. Home Lumber Co., 118 Mo., 447.)

The assignment of shares of stock in a corporation by one who has assented to an

unauthorized by-law has only the effect of a contract by, and enforceable against, the
assignor; the assignee is not bound by such by-law by virtue of the assignment alone.
(Ireland vs. Globe Milling Co., 21 R.I., 9.)

A by-law of a corporation which provides that transfers of stock shall not be valid unless
approved by the board of directors, while it may be enforced as a reasonable regulation
for the protection of the corporation against worthless stockholders, cannot be made
available to defeat the rights of third persons. (Farmers' and Merchants' Bank of
Lineville vs. Wasson, 48 Iowa, 336.)

Counsel for defendant incidentally argues in his brief, that the plaintiff does not have any right
of action against the defendant corporation, but against the president and secretary thereof,
inasmuch as the signing and registration of shares is incumbent upon said officers pursuant to
section 35 of the Corporation Law. This contention cannot be sustained now. The question
should have been raised in the lower court. It is too late to raise it now in this appeal. Besides,
as stated above, the corporation was made defendant in this action upon the demurrer of the
attorney of the original defendant in the lower court, who contended that the Botica Nolasco,
Inc., should be made the party defendant in this action. Accordingly, upon order of the court,
the complaint was amended and the said corporation was made the party defendant.

Whenever a corporation refuses to transfer and register stock in cases like the present,
mandamus will lie to compel the officers of the corporation to transfer said stock upon the
books of the corporation. (26 Cyc. 347; Hager vs. Bryan, 19 Phil., 138.)

In view of all the foregoing, we are of the opinion, and so hold, that the decision of the lower
court is in accordance with law and should be and is hereby affirmed, with costs. So ordered.
G.R. No. L-26649 July 13, 1927

THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the Attorney-

General), plaintiff,
vs.
EL HOGAR FILIPINO, defendant.

Attorney-General Jaranilla and Solicitor-General Reyes for plaintiff.

Fisher, DeWitt, Perkins and Brady; Camus, Delgado and Recto and Antonio Sanz for defendant.
Wm. J. Rohde as amicus curiae.

STREET, J.:

This is a quo warranto proceeding instituted originally in this court by the Government of the
Philippine Islands on the relation of the Attorney-General against the building and loan
association known as El Hogar Filipino, for the purpose of depriving it of its corporate
franchise, excluding it from all corporate rights and privileges, and effecting a final dissolution
of said corporation. The complaint enumerates seventeen distinct causes of action, to all of
which the defendant has answered upon the merits, first admitting the averments of the first
paragraph in the statement of the first cause of action, wherein it is alleged that the defendant
was organized in the year 1911 as a building and loan association under the laws of the
Philippine Islands, and that, since its organization, the corporation has been doing business in
the Philippine Islands, with its principal office in the City of Manila. Other facts alleged in the
various causes of action in the complaint are either denied in the answer or controverted in
legal effect by other facts.

After issue had been thus joined upon the merits, the attorneys entered into an elaborate
agreement as to the fact, thereby removing from the field of dispute such matters of fact as
are necessary to the solution of the controversy. It follows that we are here confronted only
with the legal questions arising upon the agreed statement.

On March 1, 1906, the Philippine Commission enacted what is known as the Corporation Law
(Act No. 1459) effective upon April 1 of the same year. Section 171 to 190, inclusive, of this Act
are devoted to the subject of building and loan associations, defining their objects making
various provisions governing their organization and administration, and providing for the
supervision to be exercised over them. These provisions appear to be adopted from American
statutes governing building and loan associations and they of course reflect the ideals and
principles found in American law relative to such associations. The respondent, El Hogar
Filipino, was apparently the first corporation organized in the Philippine Islands under the
provisions cited, and the association has been favored with extraordinary success. The articles
of incorporation bear the date of December 28, 1910, at which time capital stock in the
association had been subscribed to the amount of P150,000 of which the sum of P10,620 had
been paid in. Under the law as it then stood, the capital of the Association was not permitted
to exceed P3,000,000, but by Act No. 2092, passed December 23, 1911, the statute was so
amended as to permit the capitalization of building and loan associations to the amount of ten
millions. Soon thereafter the association took advantage of this enactment by amending its
articles so as to provide that the capital should be in an amount not exceeding the then lawful
limit. From the time of its first organization the number of shareholders has constantly
increased, with the result that on December 31, 1925, the association had 5,826 shareholders
holding 125,750 shares, with a total paid-up value of P8,703,602.25. During the period of its
existence prior to the date last above-mentioned the association paid to withdrawing
stockholders the amount of P7,618,257,.72; and in the same period it distributed in the form
of dividends among its stockholders the sum of P7,621,565.81.

First cause of action. — The first cause of action is based upon the alleged illegal holding by the
respondent of the title to real property for a period in excess of five years after the property
had been bought in by the respondent at one of its own foreclosure sales. The provision of law
relevant to the matter is found in section 75 of Act of Congress of July 1, 1902 (repeated in
subsection 5 of section 13 of the Corporation Law.) In both of these provisions it is in substance
declared that while corporations may loan funds upon real estate security and purchase real
estate when necessary for the collection of loans, they shall dispose of real estate so obtained
within five years after receiving the title.

In this connection it appears that in the year 1920 El Hogar Filipino was the holder of a
recorded mortgage upon a tract of land in the municipality of San Clemente, Province of Tarlac,
as security for a loan of P24,000 to the shareholders of El Hogar Filipino who were the owners
of said property. The borrowers having defaulted in their payments, El Hogar Filipino
foreclosed the mortgage and purchased the land at the foreclosure sale for the net amount of
the indebtedness, namely, the sum of P23,744.18. The auction sale of the mortgaged property
took place November 18, 1920, and the deed conveying the property to El Hogar Filipino was
executed and delivered December 22, 1920. On December 27, 1920, the deed conveying the
property to El Hogar Filipino was sent to the register of deeds of the Province of Tarlac, with
the request that the certificate of title then standing in the name of the former owners be
cancelled and that a new certificate of title be issued in the name of El Hogar Filipino. Said
deed was received in the office of the register of deeds of Tarlac on December 28, 1920,
together with the old certificate of title, and thereupon the register made upon the said deed
the following annotation:

The foregoing document was received in this office at 4.10 p. m., December 28, 1920,
according to entry 1898, page 50 of Book One of the Day Book and registered on the
back of certificate of title No. 2211 and its duplicate, folio 193 of Book A-10 of the
register of original certificate. Tarlac, Tarlac, January 12, 1921. (Sgd.) SILVINO LOPEZ DE
JESUS, Register of Deeds.
For months no reply was received by El Hogar Filipino from the register of deeds of Tarlac, and
letters were written to him by El Hogar Filipino on the subject in March and April, 1921,
requesting action. No answer having been received to these letters, a complaint was made by
El Hogar Filipino to the Chief of the General Land Registration Office; and on May 7, 1921, the
certificate of title to the San Clemente land was received by El Hogar Filipino from the register
of deeds of Tarlac.

On March 10, 1921, the board of directors of El Hogar Filipino adopted a resolution authorizing
Vicente Bengzon, an agent of the corporation, to endeavor to find a buyer for the San
Clemente land. On July 27, 1921, El Hogar Filipino authorized one Jose Laguardia to endeavor
to find a purchaser for the San Clemente land for the sum of P23,000 undertaking to pay the
said Laguardia a commission of 5 per centum of the selling price for his services, but no offers
to purchase were obtained through this agent or through the agent Bengzon. In July, 1923,
plans of the San Clemente land were sent to Mr. Luis Gomez, Mr. J. Gonzalez and Mr. Alfonso
de Castelvi, as prospective purchasers, but no offers were received from them. In January,
1926, the agent not having succeeded in finding a buyer, the San Clemente land was advertised
for sale by El Hogar Filipino in El Debate, La Vanguardia and Taliba, three newspapers of
general circulation in the Philippine Islands published in the City of Manila. On March 16, 1926,
the first offer for the purchase of the San Clemente land was received by El Hogar Filipino. This
offer was made to it in writing by one Alcantara, who offered to buy it for the sum of P4,000,
Philippine currency, payable P500 in cash, and the remainder within thirty days. Alcantara's
offer having been reported by the manager of El Hogar Filipino to its board of directors, it was
decided, by a resolution adopted at a meeting of the board held on March 25, 1926, to accept
the offer, and this acceptance was communicated to the prospective buyer. Alcantara was
given successive extensions of the time, the last of which expired April 30, 1926, within which
to make the payment agreed upon; and upon his failure to do so El Hogar Filipino treated the
contract with him as rescinded, and efforts were made at once to find another buyer. Finally
the land was sold to Doña Felipa Alberto for P6,000 by a public instrument executed before a
notary public at Manila, P. I., on July 30, 1926.

Upon consideration of the facts above set forth it is evident that the strict letter of the law was
violated by the respondent; but it is equally obvious that its conduct has not been
characterized by obduracy or pertinacity in contempt of the law. Moreover, several facts
connected with the incident tend to mitigate the offense. The Attorney-General points out that
the respondent acquired title on December 22, 1920, when the deed was executed and
delivered, by which the property was conveyed to it as purchaser at its foreclosure sale, and
this title remained in it until July 30, 1926, when the property was finally sold to Felipa Alberto.
The interval between these two conveyances is thus more than five years; and it is contended
that the five year period did not begin to run against the respondent until May 7, 1921, when
the register of deeds of Tarlac delivered the new certificate of title to the respondent pursuant
to the deed by which the property was acquired. As an equitable consideration affecting the
case this contention, though not decisive, is in our opinion more than respectable. It has been
held by this court that a purchaser of land registered under the Torrens system cannot acquire
the status of an innocent purchaser for value unless his vendor is able to place in his hands an
owner's duplicate showing the title of such land to be in the vendor (Director of
Lands vs. Addison, 49, Phil., 19; Rodriguez vs. Llorente, G. R. No. 266151). It results that prior to
May 7, 1921, El Hogar Filipino was not really in a position to pass an indefeasible title to any
purchaser. In this connection it will be noted that section 75 of the Act of Congress of July 1,
1902, and the similar provision in section 13 of the Corporation Law, allow the corporation
"five years after receiving the title," within which to dispose of the property. A fair
interpretation of these provisions would seem to indicate that the date of the receiving of the
title in this case was the date when the respondent received the owner's certificate, or May 7,
1921, for it was only after that date that the respondent had an unequivocal and
unquestionable power to pass a complete title. The failure of the respondent to receive the
certificate sooner was not due in any wise to its fault, but to unexplained delay on the part of
the register of deeds. For this delay the respondent cannot be held accountable.

Again, it is urged for the respondent that the period between March 25, 1926, and April 30,
1926, should not be counted as part of the five-year period. This was the period during which
the respondent was under obligation to sell the property to Alcantara, prior to the rescission of
the contract by reason of Alcantara's failure to make the stipulated first payment. Upon this
point the contention of the respondent is, in our opinion, well founded. The acceptance by it of
Alcantara's offer obligated the respondent to Alcantara; and if it had not been for the default of
Alcantara, the effective sale of the property would have resulted. The respondent was not at all
chargeable with the collapse of these negotiations; and hence in any equitable application of
the law this period should be deducted from the five-year period within which the respondent
ought to have made the sale. Another circumstance explanatory of the respondent's delay in
selling the property is found in the fact that it purchased the property for the full amount of
the indebtedness due to it from the former owner, which was nearly P24,000. It was
subsequently found that the property was not salable for anything like that amount and in the
end it had to be sold for P6,000, notwithstanding energetic efforts on the part of the
respondent to find a purchaser upon better terms.

The question then arises whether the failure of the respondent to get rid of the San Clemente
property within five years after it first acquired the deed thereto, even supposing the five-year
period to be properly counted from that date, is such a violation of law as should work a
forfeiture of its franchise and require a judgment to be entered for its dissolution in this action
of quo warranto. Upon this point we do not hesitate to say that in our opinion the corporation
has not been shown to have offended against the law in a manner that should entail a
forfeiture of its charter. Certainly no court with any discretion to use in the matter would visit
upon the respondent and its thousands of shareholders the extreme penalty of the law as a
consequence of the delinquency here shown to have been committed.
The law applicable to the case is in our opinion found in section 212 of the Code of Civil
Procedure, as applied by this court in Government of the Philippine Islands vs. Philippine Sugar
Estates Development Co. (38 Phil., 15). This section (212), in prescribing the judgment to be
rendered against a corporation in an action of quo warranto, among other things says:

. . . When it is found and adjudged that a corporation has offended in any matter or
manner which does not by law work as a surrender or forfeiture, or has misused a
franchise or exercised a power not conferred by law, but not of such a character as to
work a surrender or forfeiture of its franchise, judgment shall be rendered that it be
outset from the continuance of such offense or the exercise of such power.

This provision clearly shows that the court has a discretion with respect to the infliction of
capital punishment upon corporation and that there are certain misdemeanors and misuses of
franchises which should not be recognized as requiring their dissolution. In Government of the
Philippine Islands vs. Philippine Sugar Estates Development Co.(38 Phil., 15), it was found that
the offending corporation had been largely (though indirectly) engaged in the buying and
holding or real property for speculative purposes in contravention of its charter and contrary to
the express provisions of law. Moreover, in that case the offending corporation was found to be
still interested in the properties so purchased for speculative at the time the action was
brought. Nevertheless, instead of making an absolute and unconditional order for the
dissolution of the corporation, the judgment of ouster was made conditional upon the failure
of the corporation to discontinue its unlawful conduct within six months after final decision. In
the case before us the respondent appears to have rid itself of the San Clemente property
many months prior to the institution of this action. It is evident from this that the dissolution
of the respondent would not be an appropriate remedy in this case. We do not of course
undertake to say that a corporation might not be dissolved for offenses of this nature
perpetrated in the past, especially if its conduct had exhibited a willful obduracy and contempt
of law. We content ourselves with holding that upon the facts here before us the penalty of
dissolution would be excessively severe and fraught with consequences altogether
disproportionate to the offense committed.

The evident purpose behind the law restricting the rights of corporations with respect to the
tenure of land was to prevent the revival of the entail (mayorazgo) or other similar institution
by which land could be fettered and its alienation hampered over long periods of time. In the
case before us the respondent corporation has in good faith disposed of the piece of property
which appears to have been in its hands at the expiration of the period fixed by law, and a fair
explanation is given of its failure to dispose of it sooner. Under these circumstances the
destruction of the corporation would bring irreparable loss upon the thousand of innocent
shareholders of the corporation without any corresponding benefit to the public. The
discretion permitted to this court in the application of the remedy of quo warranto forbids so
radical a use of the remedy.
But the case for the plaintiff supposes that the discretion of this court in matters like that now
before us has been expressly taken away by the third section of Act No. 2792, and that the
dissolution of the corporation is obligatory upon the court a mere finding that the respondent
has violated the provision of the Corporation Law in any respect. This makes necessary to
examine the Act last above-mentioned with some care. Upon referring thereto, we find that it
consists of three sections under the following style:

No. 2792. — An Act to amend certain sections of the Corporation Law, Act Numbered
Fourteen hundred and fifty-nine, providing for the publication of the assets and liabilities
of corporations registering in the Bureau of Commerce and Industry, determining the
liability of the officers of corporations with regard to the issuance of stock or bonus,
establishing penalties for certain things, and for other purposes.

The first two section contain amendments to the Corporation Law with respect to matters with
which we are not here concurred. The third section contains anew enactment to be inserted as
section 190 (A) in the corporation Law immediately following section 190. This new section
reads as follows:

SEC. 190. (A). Penalties. — The violation of any of the provisions of this Act and its
amendments not otherwise penalized therein, shall be punished by a fine of not more
than one thousand pesos, or by imprisonment for not more than five years, or both, in
the discretion of the court. If the violation being proved, be dissolved by quo
warranto proceedings instituted by the Attorney-General or by any provincial fiscal, by
order of said Attorney-General: Provided, That nothing in this section provided shall be
construed to repeal the other causes for the dissolution of corporation prescribed by
existing law, and the remedy provided for in this section shall be considered as
additional to the remedies already existing.

The contention for the plaintiff is to the effect that the second sentence in this enactment has
entirely abrogated the discretion of this court with respect to the application of the remedy
of qou warranto, as expressed in section 212 of the Code of Civil Procedure, and that it is now
mandatory upon us to dissolved any corporation whenever we find that it has committed any
violation of the Corporation Law, however trivial. In our opinion in this radical view of the
meaning of the enactment is untenable. When the statute says, "If the violation is committed
by a corporation, the same shall, upon such violation being proved, be dissolved by quo
warranto proceedings . . .," the intention was to indicate that the remedy against the
corporation shall be by action of quo warranto. There was no intention to define the principles
governing said remedy, and it must be understood that in applying the remedy the court is still
controlled by the principles established in immemorial jurisprudence. The interpretation
placed upon this language in the brief of the Attorney-General would be dangerous in the
extreme, since it would actually place the life of all corporate investments in the official. No
corporate enterprise of any moment can be conducted perpetually without some trivial
misdemeanor against corporate law being committed by some one or other of its numerous
employees. As illustrations of the preposterous effects of the provision, in the sense contended
for by the Attorney-General, the attorneys for the respondent have called attention to the fact
that under section 52 of the Corporation Law, a business corporation is required to keep a
stock book and a transfer book in which the names of stockholders shall kept in alphabetical
order. Again, under section 94, railroad corporations are required to cause all employees
working on passenger trains or at a station for passengers to wear a badge on his cap or hat
which will indicate his office. Can it be supposed that the Legislature intended to penalize the
violation of such provisions as these by dissolution of the corporation involved? Evidently such
could not have been the intention; and the only way to avoid the consequence suggested is to
hold, as we now hold, that the provision now under consideration has not impaired the
discretion of this court in applying the writ of quo warranto.

Another way to put the same conclusion is to say that the expression "shall be dissolved
by quo warrantoproceedings" means in effect, "may be dissolved by quo warranto proceedings
in the discretion of the court." The proposition that the word "shall" may be construed as
"may", when addressed by the Legislature to the courts, is well supported in jurisprudence. In
the case of Becker vs. Lebanon and M. St. Ry. Co., (188 Pa., 484), the Supreme Court of
Pennsylvania had under consideration a statute providing as follows:

It shall be the duty of the court . . . to examine, inquire and ascertain whether such
corporation does in fact posses the right or franchise to do the act from which such
alleged injury to private rights or to the rights and franchises of other corporations
results; and if such rights or franchises have not been conferred upon such corporations,
such courts, it exercising equitable power, shall, by injunction, at suit of the private
parties or other corporations, restrain such injurious acts.

In an action based on this statute the plaintiff claimed injunctive relief as a matter of right. But
this was denied the court saying:

Notwithstanding, therefore, the use of the imperative "shall" the injunction is not to be
granted unless a proper case for injunction be made out, in accordance with the
principles and practice of equity. The word "shall" when used by the legislature to a
court, is usually a grant of authority and means "may", and even if it be intended to be
mandatory it must be subject to the necessary limitation that a proper case has been
made out for the exercise of the power.

Other authorities amply sustain this view (People vs. Nusebaum, 66 N. Y. Supp., 129, 133; West
Wisconsin R. Co. vs. Foley, 94 U. S., 100, 103; 24 Law. Ed., 71; Clancy vs. McElroy, 30 Wash.,
567; 70 Pac., 1095; State vs. West, 3 Ohio State, 509, 511; In re Lent, 40 N. Y. Supp., 570, 572;
16 Misc. Rep., 606; Ludlow vs. Ludlow's Executors, 4 N. J. Law [1 Sothard], 387, 394;
Whipple vs. Eddy, 161 Ill., 114;43 N. E., 789, 790; Borkheim vs. Fireman's Fund Ins. Co., 38 Cal.,
505, 506; Beasley vs. People, 89 Ill., 571, 575; Donnelly vs. Smith, 128 Iowa, 257; 103 N. W.,
776).

But section 3 of Act No. 2792 is challenged by the respondent on the ground that the subject-
matter of this section is not expressed in the title of the Act, with the result that the section is
invalid. This criticism is in our opinion well founded. Section 3 of our organic law (Jones Bill)
declares, among other things, that "No bill which may be enacted into law shall embrace more
than one subject, and that subject shall be expressed in the title of the bill." Any law or part of
a law passed by the Philippine Legislature since this provision went into effect and offending
against its requirement is necessarily void.

Upon examining the entire Act (No. 2792), we find that it is directed to three ends which are
successively dealt with in the first three sections of the Act. But it will be noted that these
three matters all relate to the Corporation Law; and it is at once apparent that they might
properly have been embodied in a single Act if a title of sufficient unity and generality had
been prefixed thereto. Furthermore, it is obvious, even upon casual inspection, that the
subject-matter of each of the first two sections is expressed and defined with sufficient
precision in the title. With respect to the subject-matter of section 3 the only words in the title
which can be taken to refer to the subject-matter of said section are these, "An Act . . .
establishing penalties for certain things, and for other purposes." These words undoubtedly
have sufficient generality to cover the subject-matter of section 3 of the Act. But this is not
enough. The Jones Law requires that the subject-matter of the bill "shall be expressed in the
title of the bill."

When reference is had to the expression "establishing penalties for certain things," it is obvious
that these words express nothing. The constitutional provision was undoubtedly adopted in
order that the public might be informed as to what the Legislature is about while bills are in
process of passage. The expression "establishing penalties for certain things" would give no
definite information to anybody as to the project of legislation intended under this expression.
An examination of the decided cases shows that courts have always been indulgent of the
practices of the Legislature with respect to the form and generality of title, for if extreme
refinements were indulged by the courts, the work of legislation would be unnecessarily
hampered. But, as has been observed by the California court, there must be some reasonable
limit to the generality of titles that will be allowed. The measure of legality is whether the title
is sufficient to give notice of the general subject of the proposed legislation to the persons and
interests likely to be affected.

In Lewis vs. Dunne (134 Cal., 291), the court had before it a statute entitled "An Act to revise
the Code of Civil Procedure of the State of California, by amending certain sections, repealing
others, and adding certain new sections." This title was held to embrace more than one
subject, which were not sufficiently expressed in the title. In discussing the question the court
said:
 * * * It is apparent that the language of the title of the act in question, in and of itself,
express no subject whatever. No one could tell from the title alone what subject of
legislation was dealt with in the body of the act; such subject so far as the title of the act
informs us, might have been entirely different from anything to be found in the act itself.

We cannot agree with the contention of some of respondent's counsel — apparently to

some extent countenanced by a few authorities — that the provision of the constitution
in question can be entirely avoided by the simple device of putting into the title of an act
words which denote a subject "broad" enough to cover everything. Under that view, the
title, "An act concerning the laws of the state," would be good, and the convention and
people who framed and adopted the constitution would be convicted of the folly of
elaborately constructing a grave constitutional limitation of legislative power upon a
most important subject, which the legislature could at once circumvent by a mere verbal
trick. The word "subject" is used in the constitution embrace but "one subject" it
necessarily implies — what everybody knows — that there are numerous subjects of the
legislation, and declares that only one of these subjects shall embraced in any one act.
All subjects cannot be conjured into one subject by the mere magic of a word in a title.

In Rader vs. Township of Union (39 N. J. L., 509, 515), the Supreme Court of New Jersey made
the following observation:

* * * It is true, that it may be difficult to indicate, by a formula, how specialized the title
of a statute must be; but it is not difficult to conclude that it must mean something in
the way of being a notice of what is doing. Unless it does not enough that it embraces
the legislative purpose — it must express it; and where the language is too general, it
will accomplish the former, but not the latter. Thus, a law entitled "An act for a certain
purpose," would embrace any subject, but would express none, and, consequently, it
would not stand the constitutional test.

The doctrine properly applicable in matters of this kind is, we think, fairly summed up in a
current repository of jurisprudence in the following language:

* * * While it may be difficult to formulate a rule by which to determine the extent to

which the title of a bill must specialize its object, it may be safely assumed that the title
must not only embrace the subject of proposed legislation, but also express it clearly
and fully enough to give notice of the legislative purpose. (25 R. C. L., p. 853.)

In dealing with the problem now before us the words "and for other purposes "found at the
end of the caption of Act No. 2792, must be laid completely out of consideration. They express
nothing, and amount to nothing as a compliance with the constitutional requirement to which
attention has been directed. This expression "(for other purposes") is frequently found in the
title of acts adopted by the Philippine Legislature; and its presence in our laws is due to the
adoption by our Legislature of the style used in Congression allegation. But it must be
remembered that the legislation of Congress is subject to no constitutional restriction with
respect to the title of bills. Consequently, in Congressional legislation the words "and for other
purposes" at least serve the purpose of admonishing the public that the bill whose heading
contains these words contains legislation upon other subjects than that expressed in the title.
Now, so long as the Philippine Legislature was subject to no restriction with respect to the title
of bills intended for enactment into general laws, the expression "for other purposes" could be
appropriately used in titles, not precisely for the purpose of conveying information as to the
matter legislated upon, but for the purpose ad admonishing the public that any bill containing
such words in the title might contain other subjects than that expressed in the definitive part
of the title. But, when congress adopted the Jones Law, the restriction with which we are now
dealing became effective here and the words "for other purposes" could no longer be
appropriately used in the title of legislative bills. Nevertheless, the custom of using these
words has still been followed, although they can no longer serve to cover matter not germane
to the bill in the title of which they are used. But the futility of adding these words to the style
of any act is now obvious (Cooley, Const. Lims., 8th ed., p. 302)

In the brief for the plaintiff it is intimated that the constitutional restriction which we have
been discussing is more or less of a dead letter in this jurisdiction; and it seems to be taken for
granted that no court would ever presume to hold a legislative act or part of a legislative act
invalid for non-compliance with the requirement. This is a mistake; and no utterance of this
court can be cited as giving currency to any such notion. On the contrary the discussion
contained in Central Capiz vs. Ramirez (40 Phil., 883), shows that when a case arises where a
violation of the restriction is apparent, the court has no alternative but to declare the
legislation affected thereby to be invalid.

Second cause of action. — The second cause of action is based upon a charge that the
respondent is owning and holding a business lot, with the structure thereon, in the financial
district of the City of Manila is excess of its reasonable requirements and in contravention of
subsection 5 of section 13 of the corporation Law. The facts on which this charge is based
appear to be these:

On August 28, 1913, the respondent purchased 1,413 square meters of land at the corner of
Juan Luna Street and the Muelle de la Industria, in the City of Manila, immediately adjacent to
the building then occupied by the Hongkong and Shanghai Banking Corporation. At the time
the respondent acquired this lot there stood upon it a building, then nearly fifty years old,
which was occupied in part by the offices of an importing firm and in part by warehouses of
the same firm. The material used in the construction was Guadalupe stone and hewn timber,
and the building contained none of the facilities usually found in a modern office building.

In purchase of a design which had been formed prior to the purchase of the property, the
directors of the El Hogar Filipino caused the old building to be demolished; and they erected
thereon a modern reinforced concrete office building. As at first constructed the new building
was three stories high in the main, but in 1920, in order to obtain greater advantage from the
use of the land, an additional story was added to the building, making a structure of four
stories except in one corner where an additional story was place, making it five stories high
over an area of 117.52 square meters. It is admitted in the plaintiffs brief that this "noble and
imposing structure" — to use the words of the Attorney-General — "has greatly improved the
aspect of the banking and commercial district of Manila and has greatly contributed to the
movement and campaign for the Manila Beautiful." It is also admitted that the competed
building is reasonably proportionate in value and revenue producing capacity to the value of
the land upon which it stands. The total outlay of the respondent for the land and the
improvements thereon was P690,000 and at this valuation the property is carried on the books
of the company, while the assessed valuation of the land and improvements is at P786,478.

Since the new building was completed the respondent has used about 324 square meters of
floor space for its own offices and has rented the remainder of the office space in said building,
consisting of about 3,175 square meters, to other persons and entities. In the second cause of
action of the complaint it is supposed that the acquisition of this lot, the construction of the
new office building thereon, and the subsequent renting of the same in great part to third
persons, are ultra vires acts on the part of the corporation, and that the proper penalty to be
enforced against it in this action is that if dissolution.

With this contention we are unable to agree. Under subsection 5 of section 13 of the
Corporation Law, every corporation has the power to purchase, hold and lease such real
property as the transaction of the lawful business of the corporation may reasonably and
necessarily require. When this property was acquired in 1916, the business of El Hogar Filipino
had developed to such an extent, and its prospects for the future were such as to justify its
directors in acquiring a lot in the financial district of the City of Manila and in constructing
thereon a suitable building as the site of its offices; and it cannot be fairly said that the area of
the lot — 1,413 square meters — was in excess of its reasonable requirements. The law
expressly declares that corporations may acquire such real estate as is reasonably necessary to
enable them to carry out the purposes for which they were created; and we are of the opinion
that the owning of a business lot upon which to construct and maintain its offices is reasonably
necessary to a building and loan association such as the respondent was at the time this
property was acquired. A different ruling on this point would compel important enterprises to
conduct their business exclusively in leased offices — a result which could serve no useful end
but would retard industrial growth and be inimical to the best interests of society.

We are furthermore of the opinion that, inasmuch as the lot referred to was lawfully acquired
by the respondent, it is entitled to the full beneficial use thereof. No legitimate principle can
discovered which would deny to one owner the right to enjoy his (or its) property to the same
extent that is conceded to any other owner; and an intention to discriminate between owners
in this respect is not lightly to be imputed to the Legislature. The point here involved has been
the subject of consideration in many decisions of American courts under statutes even more
restrictive than that which prevails in this jurisdiction; and the conclusion has uniformly been
that a corporations whose business may properly be conducted in a populous center may
acquire an appropriate lot and construct thereon an edifice with facilities in excess of its own
immediate requirements.

Thus in People vs. Pullman's Palace-Car Co. (175 Ill., 125; 64 L. R. A., 366), it appeared that the
respondent corporation owned and controlled a large ten-story business block in the City of
Chicago, worth $2,000,000, and that it occupied only about one-fourth thereof for its own
purposes, leasing the remainder to others at heavy rentals. The corporate charter merely
permitted the holding of such real estate by the respondent as might be necessary for the
successful prosecution of its business. An attempt was made to obtain the dissolution of the
corporation in a quo warranto proceeding similar to that now before us, but the remedy was
denied.

In Rector vs. Hartford Deposit Co., a question was raised as to the power of the Deposit
Company to erect and own a fourteen-story building — containing eight storerooms, one
hundred suites of offices, and one safety deposit vault, under a statute authorizing the
corporation to possess so much real estate "as shall be necessary for the transaction of their
business." The court said:

That the appellee company possessed ample power to acquire real property and
construct a building thereon for the purpose of transacting therein the legitimate
business of the corporation is beyond the range of debate. Nor is the contrary
contended, but the insistence is that, under the guise of erecting a building for corporate
purposes, the appellee company purposely constructed a much larger building than its
business required, containing many rooms intended to be rented to others for offices
and business purposes, — among them, the basement rooms contracted to be leased to
the appellant, — and that in so doing it designedly exceeded its corporate powers. The
position off appellant therefore is that the appellee corporation has flagrantly abused its
general power to acquire real estate and construct a building thereon . . . It was within
the general scope of the express powers of the appellee corporation to own and possess
a building necessary for its proper corporate purposes. In planning and constructing
such a building, as was said in People vs. Pullman's Palace Car Co., supra, the corporation
should not necessarily be restricted to a building containing the precise number of
rooms its then business might require, and no more, but that the future probable
growth and volume of its business might be considered and anticipated, and a larger
building, and one containing more rooms than the present volume of business required
be erected, and the rooms not needed might be rented by the corporation, — provided,
of course, such course should be taken in good faith, and not as a mere evasion of the
public law and the policy of the state relative to the ownership of real estate by
corporations. In such state of case the question is whether the corporation has abused
 or excessively and unjustifiably used the power and authority granted it by the state to
construct buildings and own real estate necessary for its corporate purposes.

In Home savings building Association vs. Driver (129 Ky., 754), one of the questions before the
court was precisely the same as that now before us. Upon this the Supreme Court of Kentucky
said:

The third question is, has the association the right to erect, remodel, or own a building
of more than sufficient capacity to accommodate its own business and to rent out the
excess? There is nothing in the Constitution, charter of the association, or statutes
placing any limitation upon the character of a building which a corporation may erect as
a home in which to conduct its business. A corporation conducting a business of the
character of that in which appellant is engaged naturally expects its business to grow
and expand from time to time, and, in building a home it would be exercising but a
short-sighted judgment if it did not make provision for the future by building a home
large enough to take care of its expanding business, and hence, even if it should build a
house larger and roomier than its present needs or interests require, it would be acting
clearly with the exercise of its corporate right and power. The limitation which the
statute imposes is that proper conduct of its business, but it does not attempt to place
any restriction or limitation upon the right of the corporation or association as to the
character of building it shall erect on said real estate; and, while the Constitution and
the statutes provide that no corporation shall engage in any business other than that
expressly authorized by its charter, we are of opinion that, in renting out the unoccupied
and unused portions of the building so erected, the association could not be said to
engaged in any other business than that authorized by its charter. The renting of the
unused portions of the building is a mere incident in the conduct of its real business. We
would not say that a building association might embark in the business of building
houses and renting or leasing them, but there is quite a difference in building or renting
a house in which to conduct its own business and leasing the unused portion thereof for
the time being, or until such time as they may be needed by the association, and in
building houses for the purpose of renting or leasing them. The one might properly be
said to be the proper exercise of a power incident to the conduct of its legitimate
business, whereas the other would be a clear violation of that provision of the statute
which denies to any corporation the right to conduct any business other than that
authorized by its charter. To hold otherwise would be to charge most of the banking
institutions, trust companies and other corporations, such as title guaranty companies,
etc., doing with violating the law; for it is known that there are few of such institutions
that do not, at times, rent out or lease the unneeded portions of the building occupied
by them as homes. We do not think that in so doing they are violating any provisions of
the law, but that the renting out of the unused or unoccupied portions of their buildings
is but an incident in the conduct of their business.
In Wingert vs. First National Bank of Hagerstown, Md. (175 Fed., 739, 741), a stockholder
sought to enjoin the bank from building a six-story building owned by the bank in the
commercial district of Hagerstown of which only the first story was to be used by the bank, the
remaining stories to be rented out for offices and places of business, on the theory that such
action was ultra vires and in violation of the provisions of the national banking act confining
such corporations to the holding, only, of such real estate "as shall be necessary for its
immediate accommodation in the transaction of its business."

The injunction was denied, the court adopting the opinion of the lower court in which the
following was said:

'The other ground urged by the complainant is that the proposed action is violative of
the restriction which permits a national bank to hold only such real estate as shall be
necessary for its immediate accommodation in the transaction of its business, and that,
therefore, the erection of a building which will contain offices not necessary for the
business of the bank is not permitted by the law, although that method of improving the
lot may be the most beneficial use that can be made of it. It is matter of common
knowledge that the actual practice of national banks is to the contrary. Where ground is
valuable, it may probably be truly said that the majority of national bank buildings are
built with accommodations in excess of the needs of the bank for the purpose of
lessening the bank's expense by renting out the unused portion. If that were not
allowable, many smaller banks in cities would be driven to become tenants as the great
cost of the lot would be prohibitive of using it exclusively for the banking
accommodation of a single bank. As indicative of the interpretation of the law
commonly received and acted upon, reference may be made to the reply of the
Comptroller of the Currency to the injury by the bank in this case asking whether the law
forbids the bank constructing such a building as was contemplated.

'The reply was follows: "Your letter of the 9th instant received, stating that the directors
contemplate making improvements in the bank building and inquiring if there is
anything in the national banking laws prohibiting the construction of a building which
will contain floors for offices to be rented out by the bank as well as the banking room.
Your attention is called to the case of Brown vs. Schleier, 118 Fed., 981 [55 C. C. A, 475],
in which the court held that: 'If the land which a national bank purchases or leases for
the accommodation of its business is very valuable it may exercise the same rights that
belong to other landowners of improving it in a way that will yield the largest income,
lessen its own rent, and render that part of its funds which are invested in realty most
productive.'" This seems to be the common sense interpretation of the act of Congress
and is the one which prevails.'

It would seem to be unnecessary to extend the opinion by lengthy citations upon the point
under consideration, butBrown vs. Schleier (118 Fed., 981), may be cited as being in harmony
with the foregoing authorities. In dealing with the powers of a national bank the court, in this
case, said:

When an occasion arises for an investment in real property for either of the purposes
specified in the statute the national bank act permits banking associations to act as any
prudent person would act in making an investment in real estate, and to exercise the
same measure of judgment and discretion. The act ought not to be construed in such as
way as to compel a national bank, when it acquires real property for a legitimate
purpose, to deal with it otherwise than a prudent land owner would ordinarily deal with
such property.

In the brief of the Attorney-General reliance is place almost entirely upon two Illinois cases,
namely Africani Home Purchase and Loan Association vs. Carroll (267 Ill., 380), and First
Methodist Episcopal Church of Chicago vs. Dixon (178 Ill., 260). In our opinion these cases are
either distinguishable from that now before us, or they reflect a view of the law which is
incorrect. At any rate the weight of judicial opinion is so overwhelmingly in favor of sustaining
the validity of the acts alleged in the second cause of action to have been done by the
respondent in excess of its powers that we refrain from commenting at any length upon said
cases. The ground stated in the second cause of action is in our opinion without merit.

Third cause of action. — Under the third cause of action the respondent is charged with
engaging in activities foreign to the purposes for which the corporation was created and not
reasonable necessary to its legitimate ends. The specifications under this cause of action relate
to three different sorts of activities. The first consist of the administration of the offices in the
El Hogar building not used by the respondent itself and the renting of such offices to the
public. As stated in the discussion connected with the second cause of action, the respondent
uses only about ten per cent of the office space in the El Hogar building for its own purposes,
and it leases the remainder to strangers. In the years 1924 and 1925 the respondent received
as rent for the leased portions of the building the sums of P75,395.06 and P58,259.27,
respectively. The activities here criticized clearly fall within the legitimate powers of the
respondent, as shown in what we have said above relative to the second cause of action. This
matter will therefore no longer detain us. If the respondent had the power to acquire the lot,
construct the edifice and hold it beneficially, as there decided, the beneficial administration by
it of such parts of the building as are let to others must necessarily be lawful.

The second specification under the third cause of action has reference to the administration
and management of properties belonging to delinquent shareholders of the association. In this
connection it appears that in case of delinquency on the part of its shareholders in the
payment of interest, premium, and dues, the association has been accustomed (pursuant to
clause 8 of its standard mortgage) to take over and manage the mortgaged property for the
purpose of applying the income to the obligations of the debtor party. For these services the
respondent charges a commission at the rate of 2½ per centum on sums collected. The case for
the government supposes that the only remedy which the respondent has in case of default on
the part of its shareholders is to proceed to enforce collection of the whole loan in the manner
contemplated in section 185 of the Corporation Law. It will be noted, however, that, according
to said section, the association may treat the whole indebtedness as due, "at the option of the
board of directors," and this remedy is not made exclusive. We see no reason to doubt the
validity of the clause giving the association the right to take over the property which
constitutes the security for the delinquent debt and to manage it with a view to the
satisfaction of the obligations due to the debtor than the immediate enforcement of the entire
obligation, and the validity of the clause allowing this course to be taken appears to us to be
not open to doubt. The second specification under this cause of action is therefore without
merit, as was true of the first.

The third specification under this cause of action relates to certain activities which are
described in the following paragraphs contained in the agreed statements of facts:.

El Hogar Filipino has undertaken the management of some parcels of improved real
estate situated in Manila not under mortgage to it, but owned by shareholders, and has
held itself out by advertisement as prepared to do so. The number of properties so
managed during the years 1921 to 1925, inclusive, was as follows:

1921 eight properties

1922 six properties

1923 ten properties

1924 fourteen properties

1925 fourteen properties.

This service is limited to shareholders; but some of the persons whose properties are so
managed for them became shareholders only to enable them to take advantage thereof.

The services rendered in the management of such improved real estate by El Hogar
Filipino consist in the renting of the same, the payment of real estate taxes and
insurance for the account of the owner, causing the necessary repairs for upkeep to be
made, and collecting rents due from tenants. For the services so rendered in the
management of such properties El Hogar Filipino receives compensation in the form of
commissions upon the gross receipts from such properties at rates varying from two and
one-half per centum to five per centum of the sums so collected, according to the
location of the property and the effort involved in its management.
 The work of managing real estate belonging to non-borrowing shareholders
administered by El Hogar Filipino is carried on by the same members of the staff who
attend to the details of the management of properties administered by the manager of
El Hogar Filipino under the provisions of paragraph 8 of the standard mortgage form,
and of properties bought in on foreclosure of mortgage.

The practice described in the passage above quoted from the agreed facts is in our opinion
unauthorized by law. Such was the view taken by the bank examiner of the Treasury Bureau in
his report to the Insular Treasurer on December 21, 1925, wherein the practice in question was
criticized. The administration of property in the manner described is more befitting to the
business of a real estate agent or trust company than to the business of a building and loan
association. The practice to which this criticism is directed relates of course solely to the
management and administration of properties which are not mortgaged to the association.
The circumstance that the owner of the property may have been required to subscribe to one
or more shares of the association with a view to qualifying him to receive this service is of no
significance. It is a general rule of law that corporations possess only such express powers. The
management and administration of the property of the shareholders of the corporation is not
expressly authorized by law, and we are unable to see that, upon any fair construction of the
law, these activities are necessary to the exercise of any of the granted powers. The
corporation, upon the point now under the criticism, has clearly extended itself beyond the
legitimate range of its powers. But it does not result that the dissolution of the corporation is
in order, and it will merely be enjoined from further activities of this sort.

Fourth cause of action. — It appears that among the by laws of the association there is an
article (No. 10) which reads as follows:

The board of directors of the association, by the vote of an absolute majority of its
members, is empowered to cancel shares and to return to the owner thereof the
balance resulting from the liquidation thereof whenever, by reason of their conduct, or
for any other motive, the continuation as members of the owners of such shares is not
desirable.

This by-law is of course a patent nullity, since it is in direct conflict with the latter part of
section 187 of the Corporation Law, which expressly declares that the board of directors shall
not have the power to force the surrender and withdrawal of unmatured stock except in case
of liquidation of the corporation or of forfeiture of the stock for delinquency. It is agreed that
this provision of the by-laws has never been enforced, and in fact no attempt has ever been
made by the board of directors to make use of the power therein conferred. In November,
1923, the Acting Insular Treasurer addressed a letter to El Hogar Filipino, calling attention to
article 10 of its by-laws and expressing the view that said article was invalid. It was therefore
suggested that the article in question should be eliminated from the by-laws. At the next
meeting of the board of directors the matter was called to their attention and it was resolved
to recommend to the shareholders that in their next annual meeting the article in question be
abrogated. It appears, however, that no annual meeting of the shareholders called since that
date has been attended by a sufficient number of shareholders to constitute a quorum, with
the result that the provision referred to has no been eliminated from the by-laws, and it still
stands among the by-laws of the association, notwithstanding its patent conflict with the law.

It is supposed, in the fourth cause of action, that the existence of this article among the by-
laws of the association is a misdemeanor on the part of the respondent which justifies its
dissolution. In this view we are unable to concur. The obnoxious by-law, as it stands, is a mere
nullity, and could not be enforced even if the directors were to attempt to do so. There is no
provision of law making it a misdemeanor to incorporate an invalid provision in the by-laws of
a corporation; and if there were such, the hazards incident to corporate effort would certainly
be largely increased. There is no merit in this cause of action.

Fifth cause of action. — In section 31 of the Corporation Law it is declared that, "at all elections
of directors there must be present, either in person or by representative authorized to act by
written proxy, the owners of the majority of the subscribed capital stock entitled to vote. . . ."
Conformably with this requirement it is declared in article 61 of the by-laws of El Hogar Filipino
that, "the attendance in person or by proxy of shareholders owning one-half plus one of the
shareholders shall be necessary to constitute a quorum for the election of directors. At the
general annual meetings of the El Hogar Filipino held in the years 1911 and 1912, there was a
quorum of shares present or represented at the meetings and directors were duly elected
accordingly. As the corporation has grown, however, it has been fond increasingly difficult to
get together a quorum of the shareholders, or their proxies, at the annual meetings; and with
the exception of the annual meeting held in 1917, when a new directorate was elected, the
meetings have failed for lack of quorum. It has been foreseen by the officials in charge of the
respondent that this condition of affairs would lead to embarrassment, and a special effort was
made by the management to induce a sufficient number of shareholders to attend the annual
meeting for February, 1923. In addition to the publication of notices in the newspapers, as
required by the by-laws, a letter of notification was sent to every shareholder at his last known
address, together with a blank form of proxy to be used in the event the shareholder could not
personally attend the meeting. Notwithstanding these special efforts the meeting was
attended only by shareholders, in person and by proxy, representing 3,889 shares, out of a
total of 106,491 then outstanding and entitled to vote.

Owing to the failure of a quorum at most of the general meetings since the respondent has
been in existence, it has been the practice of the directors to fill vacancies in the directorate by
choosing suitable persons from among the stockholders. This custom finds its sanction in
article 71 of the by-laws, which reads as follows:
 ART. 71. The directors shall elect from among the shareholders members to fill the
vacancies that may occur in the board of directors until the election at the general
meeting.

The person thus chosen to fill vacancies in the directorate have, it is admitted, uniformly been
experienced and successful business and professional men of means, enjoying earned incomes
of from P12,000 to P50,000 per annum, with an annual average of P30,000 in addition to such
income as they derive from their properties. Moreover, it appears that several of the
individuals constituting the original directorate and persons chosen to supply vacancies therein
belong to prominent Filipino families, and that they are more or less related to each other by
blood or marriage. In addition to this it appears that it has been the policy of the directorate to
keep thereon some member or another of a single prominent American law firm in the city.

It is supposed in the statement of the fifth cause of action in the complaint that the failure of
the corporation to hold annual meetings and the filling of vacancies in the directorate in the
manner described constitute misdemeanors on the part of the respondent which justify the
resumption of the franchise by the Government and dissolution of the corporation; and in this
connection it is charge that the board of directors of the respondent has become a permanent
and self perpetuating body composed of wealthy men instead of wage earners and persons of
moderate means. We are unable to see the slightest merit in the charge. No fault can be
imputed to the corporation on account of the failure of the shareholders to attend the annual
meetings; and their non-attendance at such meetings is doubtless to be interpreted in part as
expressing their satisfaction of the way in which things have been conducted. Upon failure of a
quorum at any annual meeting the directorate naturally holds over and continues to function
until another directorate is chosen and qualified. Unless the law or the charter of a corporation
expressly provides that an office shall become vacant at the expiration of the term of office for
which the officer was elected, the general rule is to allow the officer to holdover until his
successor is duly qualified. Mere failure of a corporation to elect officers does not terminate
the terms of existing officers nor dissolve the corporation (Quitman Oil Company vs. Peacock,
14 Ga. App., 550; Jenkins vs. Baxter, 160 Pa. State, 199; New York B. & E. Ry. Co. vs. Motil, 81
Conn., 466; Hatch vs. Lucky Bill Mining Company, 71 Pac., 865; Youree vs. Home Town Matual
Ins. Company, 180 Missouri, 153; Cassell vs. Lexington, H. and P. Turnpike Road Co., 10 Ky. L. R.,
486). The doctrine above stated finds expressions in article 66 of the by-laws of the respondent
which declares in so many words that directors shall hold office "for the term of one year on
until their successors shall have been elected and taken possession of their offices."

It result that the practice of the directorate of filling vacancies by the action of the directors
themselves is valid. Nor can any exception be taken to then personality of the individuals
chosen by the directors to fill vacancies in the body. Certainly it is no fair criticism to say that
they have chosen competent businessmen of financial responsibility instead of electing poor
persons to so responsible a position. The possession of means does not disqualify a man for
filling positions of responsibility in corporate affairs.
Sixth cause of action. — Under the sixth cause of action it is alleged that the directors of El
Hogar Filipino, instead of serving without pay, or receiving nominal pay or a fixed salary, — as
the complaint supposes would be proper, — have been receiving large compensation, varying
in amount from time to time, out of the profits of the respondent. The facts relating to this
cause of action are in substance these:

Under section 92 of the by-laws of El Hogar Filipino 5 per centum of the net profit shown by
the annual balance sheet is distributed to the directors in proportion to their attendance at
meetings of the board. The compensation paid to the directors from time to time since the
organization was organized in 1910 to the end of the year 1925, together with the number of
meetings of the board held each year, is exhibited in the following table:

Rate per
Compensation Number of
meeting
Year paid directors meetings
as a
as a whole held
whole
1911 .................................. P 4,167.96 25 P 166.71
1912 .................................. 10,511.87 29 362.47
1913 .................................. 15,479.29 27 573.30
1914 .................................. 19,164.72 27 709.80
1915 .................................. 24,032.85 25 961.31
1916 .................................. 27,539.50 28 983.55
1917 .................................. 31,327.00 26 1,204.88
1918 .................................. 32,858.35 20 1,642.91
1919 .................................. 36,318.78 21 1,729.46
1920 .................................. 63,517.01 28 2,268.46
1921 .................................. 36,815.33 25 1,472.61
1922 .................................. 43,133.73 25 1,725.34
1923 .................................. 39,773.61 27 1,473.09
1924 .................................. 38,651.92 26 1,486.61
1925 .................................. 35,719.27 26 1,373.81

It will be note that the compensation above indicated as accruing to the directorate as a whole
has been divided among the members actually present at the different meetings. As a result of
this practice, and the liberal measure of compensation adopted, we find that the attendance of
the membership at the board meetings has been extraordinarily good. Thus, during the years
1920 to 1925, inclusive, when the board was composed of nine members, the attendance has
regularly been eight meeting with the exception of two years when the average attendance
was seven. It is insisted in the brief for the Attorney-General that the payment of the
compensation indicated is excessive and prejudicial to he interests of the shareholders at large.
For the respondent, attention is directed to the fact that the liberal policy adopted by the
association with respect to the compensation of the directors has had highly beneficial results,
not only in securing a constant attendance on the part of the membership, but in obtaining
their intelligent attention to the affairs of the association. Certainly, in this connection, the
following words from the report of the government examiners for 1918 to the Insular Treasurer
contain matter worthy of consideration:

The management of the association is entrusted to men of recognized ability in financial affairs
and it is believed that they have long foreseen all possible future contingencies and that under
such men the interests of the stockholders are duly protected. The steps taken by the
directorate to curtail the influx of unnecessary capital into the association's coffers, as
mentioned above, reveals how the men at grasp the situation and to apply the necessary
remedy as the circumstances were found in the same excellent condition as in the previous
examination.

In so far as this court is concerned the question here before us is not one concerning the
propriety and wisdom of the measure of compensation adopted by the respondent but rather
the question of the validity of the measure. Upon this point there can, it seems to us, be no
difference of intelligent opinion. The Corporation Law does not undertake to prescribe the rate
of compensation for the directors of corporations. The power to fixed the compensation they
shall receive, if any, is left to the corporation, to be determined in its by-laws(Act No. 1459, sec.
21). Pursuant to this authority the compensation for the directors of El Hogar Filipino has been
fixed in section 92 of its by-laws, as already stated. The justice and property of this provision
was a proper matter for the shareholders when the by-laws were framed; and the
circumstance that, with the growth of the corporation, the amount paid as compensation to
the directors has increased beyond what would probably be necessary to secure adequate
service from them is matter that cannot be corrected in this action; nor can it properly be
made a basis for depriving the respondent of its franchise, or even for enjoining it from
compliance with the provisions of its own by-laws. If a mistake has been made, or the rule
adopted in the by-laws meeting to change the rule. The remedy, if any, seems to lie rather in
publicity and competition, rather than in a court proceeding. The sixth cause of action is in our
opinion without merit.

Seventh cause of action. — It appears that the promoter and organizer of El Hogar Filipino was
Mr. Antonio Melian, and in the early stages of the organization of the association the board of
directors authorized the association to make a contract with him with regard to the services
him therefor. Pursuant to this authority the president of the corporation, on January 11, 1911,
entered into a written agreement with Mr. Melian, which is reproduced in the agreed
statement of facts and of which the important clauses are these:

1. The corporation "El Hogar Filipino Sociedad Mutua de Construccion y Prestamos," and
on its behalf its president, Don Antonio R. Roxas, hereby confers on Don Antonio Melian
the office of manager of said association for the period of one year from the date of this
contract.

2. Don Antonio Melian accepts said office and undertakes to render the services thereto
corresponding for the period of one year, as prescribed by the by-laws of the
corporation, without salary.

3. Don Antonio Melian furthermore undertakes to pay for his own account, all the
expenses incurred in the organization of the corporation.

4. Don Antonio Melian further undertakes to lend to the corporation, without interest
the sum of six thousand pesos (P6,000), Philippine Currency, for the purpose of meeting
the expense of rent, office supplies, etcetera, until such time as the association has
sufficient funds of its own with which to return this loan: Provided, nevertheless, That
the maximum period thereof shall not exceed three (3) years.

5. Don Antonio Melian undertakes that the capital of the association shall amount to the
sum of four hundred thousand pesos (P400,000), Philippine currency, par value, during
the first year of its duration.

6. In compensation of the studies made and services rendered by Don Antonio Melian
for its organization, the expenses incurred by him to that end, and in further
consideration of the said loan of six thousand pesos (P6,000), and of the services to be
rendered by him as manager, and of the obligation assumed by him that the nominal
value of the capital of the association shall reach the sum of four hundred thousand
pesos (P400,000) during the first year of its duration, the corporation 'El Hogar Filipino
Sociedad Mutua de Construccion y Prestamos' hereby grants him five per centum (5%)
of the net profits to be earned by it in each year during the period fixed for the duration
of the association by its articles of incorporation; Provided, that this participation in the
profits shall be transmitted to the heirs of Señor Melian in the event of his death; And
provided further, that the performance of all the obligations assumed by Señor Melian in
favor of the association, in accordance with this contract, shall and does constitute a
condition precedent to the acquisition by Señor Melian of the right to the said
participation in the profits of the association, unless the non-performance of such
obligations shall be due to a fortuitous event or force majeure.
In conformity with this agreement there was inserted in section 92 of the by-laws of the
association a provision recognizing the rights of Melian, as founder, to 5 per centum of the net
profits shown by the annual balance sheet, payment of the same to be made to him or his
heirs during the life of the association. It is declared in said article that this portion of the
earnings of the association is conceded to him in compensation for the studies, work and
contributions made by him for the organization of El Hogar Filipino and the performance on his
part of the contract of January 11, 1911, above quoted. During the whole life of the
association, thus far, it has complied with the obligations assumed by it in the contract above-
mentioned; and during the years 1911 to 1925, inclusive, it paid to him as founder's royalty the
sum of P459,011.19, in addition to compensation received from the association by him in to
remuneration of services to the association in various official capacities.

As a seventh cause of action it is alleged in the complaint that this royalty of the founder is
"unconscionable, excessive and out of all proportion to the services rendered, besides being
contrary to and incompatible with the spirit and purpose of building and loan associations." It
is not alleged that the making of this contract was beyond the powers of the association (ultra
vires); nor it alleged that it is vitiated by fraud of any kind in its procurement. Nevertheless, it is
pretended that in making and observing said contract the respondent committed an offense
requiring its dissolution, or, as is otherwise suggested, that the association should be enjoined
from performing the agreement.

It is our opinion that this contention is entirely without merit. Stated in its true simplicity, the
primary question here is whether the making of a (possibly) indiscreet contract is a capital
offense in a corporation, — a question which answers itself. No possible doubt exists as to the
power of a corporation to contract for services rendered and to be rendered by a promoter in
connection with organizing and maintaining the corporation. It is true that contracts with
promoters must be characterized by good faith; but could it be said with certainty, in the light
of facts existing at the time this contract was made, that the compensation therein provided
was excessive? If the amount of the compensation now appears to be a subject of legitimate
criticism, this must be due to the extraordinary development of the association in recent years.

If the Melian contract had been clearly ultra vires — which is not charged and is certainly
untrue — its continued performance might conceivably be enjoined in such a proceeding as
this; but if the defect from which it suffers is mere matter for an action because Melian is not a
party. It is rudimentary in law that an action to annul a contract cannot be maintained without
joining both the contracting parties as defendants. Moreover, the proper party to bring such an
action is either the corporation itself, or some shareholder who has an interest to protect.

The mere fact that the compensation paid under this contract is in excess of what, in the full
light of history, may be considered appropriate is not a proper consideration for this court, and
supplies no ground for interfering with its performance. In the case of El Hogar Filipino vs.
Rafferty (37 Phil., 995), which was before this court nearly ten years ago, this court held that
the El Hogar Filipino is contract with Mr. Melian did not affect the association's legal character.
The inference is that the contract under consideration was then considered binding, and it
occurred to no one that it was invalid. It would be a radical step indeed for a court to attempt
to substitute its judgment for the judgment of the contracting parties and to hold, as we are
invited to hold under this cause of action, that the making of such a contract as this removes
the respondent association from the pale of the law. The majority of the court is of the opinion
that our traditional respect for the sanctity of the contract obligation should prevail over the
radical and innovating tendencies which find acceptance with some and which, if given full
rein, would go far to sink legitimate enterprise in the Islands into the pit of populism and
bolshevism. The seventh count is not sustainable.

Eight cause of action. — Under the fourth cause of action we had case where the alleged
ground for the revocation of the respondent's charter was based upon the presence in the by-
laws of article 10 that was found to be inconsistent with the express provisions of law. Under
the eight cause of action the alleged ground for putting an end to the corporate life of the
respondent is found in the presence of other articles in the by-laws, namely, articles 70 and 76,
which are alleged to be unlawful but which, as will presently be seen, are entirely valid. Article
70 of the by-laws in effect requires that persons elected to the board of directors must be
holders of shares of the paid up value of P5,000 which shall be held as security may be put up
in the behalf of any director by some other holder of shares in the amount stated. Article 76 of
the by-laws declares that the directors waive their right as shareholders to receive loans from
the association.

It is asserted, under the eight cause of action, that article 70 is objectionable in that, under the
requirement for security, a poor member, or wage-earner, cannot serve as director, irrespective
of other qualifications and that as a matter of fact only men of means actually sit on the board.
Article 76 is criticized on the ground that the provision requiring directors to renounce their
right to loans unreasonably limits their rights and privileges as members. There is nothing of
value in either of theses suggestions. Section 21 of the Corporation Law expressly gives the
power to the corporation to provide in its by-laws for the qualifications of directors; and the
requirement of security from them for the proper discharge of the duties of their office, in the
manner prescribed in article 70, is highly prudent and in conformity with good practice. Article
76, prohibiting directors from making loans to themselves, is of course designed to prevent the
possibility of the looting of the corporation by unscrupulous directors. A more discreet
provision to insert in the by-laws of a building and loan association would be hard to imagine.
Clearly, the eighth cause of action cannot be sustained.

Ninth cause of action. — The specification under this head is in effect that the respondent has
abused its franchise in issuing "special" shares. The issuance of these shares is allege to be
illegal and inconsistent with the plan and purposes of building and loan associations; and in
particular, it is alleged and inconsistent with the plan and purposes of building and loan
associations; and in particular, it is alleged that they are, in the main, held by well-to-wage-
earners for accumulating their modest savings for the building of homes.

In the articles of incorporation we find the special shares described as follows:

"Special" shares shall be issued upon the payment of 80 per cent of their par value in
cash, or in monthly dues of P10. The 20 per cent remaining of the par value of such
shares shall be completed by the accumulation thereto of their proportionate part of the
profits of the corporation. At the end of each quarter the holders of special shares shall
be entitled to receive in cash such part of the net profits of the corporation
corresponding to the amount on such date paid in by the holders of special shares, on
account thereof, as shall be determined by the directors, and at the end of each year the
full amount of the net profits available for distribution corresponding to the special
shares. The directors shall apply such part as they deem advisable to the amortization of
the subscription to capital with respect to shares not fully paid up, and the remainder of
the profits, if any, corresponding to such shares, shall be delivered to the holders thereof
in accordance with the provision of the by-laws.

The ground for supposing the issuance of the "special" shares to be unlawful is that special
shares are not mentioned in the Corporation Law as one of the forms of security which may be
issued by the association. In the agreed statement of facts it is said that special shares are
issued upon two plans. By the second, the shareholder, upon subscribing, pays in cash P10 for
each share taken, and undertakes to pay P10 a month, as dues, until the total so paid in
amounts to P160 per share. On December 31, 1925, there were outstanding 20,844 special
shares of a total paid value (including accumulations ) of P3,680,162.51. The practice of El
Hogar Filipino, since 1915, has been to accumulate to each special share, at the end of the
year, one-tenth of the divident declared and to pay the remainder of the divident in cash to the
holders of shares. Since the same year dividend have been declared on the special and
common shares at the rate of 10 per centum per annum. When the amount paid in upon any
special share plus the accumulated dividends accruing to it, amounts to the par value of the
share (P200), such share matures and ceases to participate further in the earning. The amount
of the par value of the share (P200) is then returned to the shareholder and the share
cancelled. Holders of special and ordinary shares participate ratably in the dividends declared
and distributed, the part pertaining to each share being computed on the basis of the capital
paid in, plus the accumulated dividends pertaining to each share at the end of the year. The
total number of shares of El Hogar Filipino outstanding on December 31, 1925, was 125,750,
owned by 5,826 shareholders, and dividend into classes as follows:

Preferred shares .................................. 1,503

Special shares ..................................... 20,884
Ordinary shares .................................. 103,363
The matter of the propriety of the issuance of special shares by El Hogar Filipino has been
before this court in two earlier cases, in both of which the question has received the fullest
consideration from this court. In El Hogar Filipino vs. Rafferty (37 Phil., 995), it was insisted that
the issuance of such shares constituted a departure on the part of the association from the
principle of mutuality; and it was claimed by the Collector of Internal Revenue that this
rendered the association liable for the income tax to which other corporate entities are
subject. It was held that this contention was untenable and that El Hogar Filipino was a
legitimate building and loan association notwithstanding the issuance of said shares.
In Sevireno vs. El Hogar Filipino (G. R. No. 24926),2 and the related cases of Gervasio Miraflores
and Gil Lopes against the same entity, it was asserted by the plaintiffs that the emission of
special shares deprived the herein responded of the privileges and immunities of a building
and loan association and that as a consequence the loans that had been made to the plaintiffs
in those cases were usurious. Upon an elaborate review of the authorities, the court, though
divided, adhered to the principle announced in the earlier case and held that the issuance of
the special shares did not affect the respondent's character as a building and loan association
nor make its loans usurious. In view of the lengthy discussion contained in the decisions above-
mentioned, it would appear to be an act of supererogation on our part to go over the same
ground again. The discussion will therefore not be repeated, and what is now to be said should
be considered supplemental thereto.

Upon examination of the nature of the special shares in the light of American usage, it will be
found that said shares are precisely the same kind of shares that, in some American
jurisdictions, are generally known as advance payment shares; in if close attention be paid to
the language used in the last sentence of section 178 of the Corporation Law, it will be found
that special shares where evidently created for the purpose of meeting the condition cause by
the prepayment of dues that is there permitted. The language of this provision is as follow
"payment of dues or interest may be made in advance, but the corporation shall not allow
interest on such advance payment at a greater rate than six per centum per annum nor for a
longer period than one year." In one sort of special shares the dues are prepaid to the extent
of P160 per share; in the other sort prepayment is made in the amount of P10 per share, and
the subscribers assume the obligation to pay P10 monthly until P160 shall have been paid.

It will escape notice that the provision quoted say that interest shall not be allowed on the
advance payments at a greater rate than six per centum per annum nor for a longer period
than one year. The word "interest " as there used must be taken in its true sense of
compensation for the used of money loaned, and it not must not be confused with the dues
upon which it is contemplated that the interest may be paid. Now, in the absence of any
showing to the contrary, we infer that no interest is ever paid by the association in any amount
for the advance payments made on these shares; and the reason is to be found in the fact that
the participation of the special shares in the earnings of the corporation, in accordance with
section 188 of the Corporation Law, sufficiently compensates the shareholder for the advance
payments made by him; and no other incentive is necessary to induce inventors to purchase
the stock.

It will be observed that the final 20 per centum of the par value of each special share is not
paid for by the shareholder with funds out of the pocket. The amount is satisfied by applying a
portion of the shareholder's participation in the annual earnings. But as the right of every
shareholder to such participation in the earnings is undeniable, the portion thus annually
applied is as much the property of the shareholder as if it were in fact taken out of his pocket.
It follows that the mission of the special shares does not involve any violation of the principle
that the shares must be sold at par.

From what has been said it will be seen that there is express authority, even in the very letter
of the law, for the emission of advance-payment or "special" shares, and the argument that
these shares are invalid is seen to be baseless. In addition to this it is satisfactorily
demonstrated in Severino vs. El Hogar Filipino, supra, that even assuming that the statute has
not expressly authorized such shares, yet the association has implied authority to issue them.
The complaint consequently fails also as regards the stated in the ninth cause of action.

Tenth cause of action. — Under this head of the complaint it is alleged that the defendant is
pursuing a policy of depreciating, at the rate of 10 per centum per annum, the value of the real
properties acquired by it at its sales; and it is alleged that this rate is excessive. From the
agreed statement it appears that since its organization in 1910 El Hogar Filipino, prior to the
end of the year 1925, had made 1,373 loans to its shareholders secured by first mortgages on
real estate as well as by the pledge of the shares of the borrowers. In the same period the
association has purchased at foreclosure sales the real estate constituting the security for 54 of
the aforesaid loans. In making these purchases the association has always bid the full amount
due to it from the debtor, after deducting the withdrawal value of the shares pledged as
collateral, with the result that in no case has the shareholder been called upon to pay a
deficiency judgement on foreclosure.

El Hogar Filipino places real estate so purchased in its inventory at actual cost, as determined
by the amount bid on foreclosure sale; and thereafter until sold the book value of such real
estate is depreciated at the rate fixed by the directors in accordance with their judgment as to
each parcel, the annual average depreciation having varied from nothing to a maximum of
14.138 per cent. The sales thereof, but sales are made for the best prices obtainable, whether
greater or less than the book value.

It is alleged in the complaint that depreciation is charged by the association at the rate of 10
per centum per annum. The agreed statement of facts on this point shows that the annual
average varies from nothing to a maximum of something over 14 per centum. We are thus left
in the dark as to the precise depreciation allowed from year to year. It is not claimed for the
Government that the association is without power to allow some depreciation; and it is quite
clear that the board of directors possesses a discretion in this matter. There is no positive
provision of law prohibiting the association from writing off a reasonable amount for
depreciation on its assets for the purpose of determining its real profits; and article 74 of its
by-laws expressly authorizes the board of directors to determine each year the amount to be
written down upon the expenses of installation and the property of the corporation. There can
be no question that the power to adopt such a by-law is embraced within the power to make
by-laws for the administration of the corporate affairs of the association and for the
management of its business, as well as the care, control and disposition of its property (Act No.
1459, sec. 13 [7]). But the Attorney-General questions the exercise of the direction confided to
the board; and it is insisted that the excessive depreciation of the property of the association is
objectionable in several respects, but mainly because it tends to increase unduly the reserves
of the association, thereby frustrating the right of the shareholders to participate annually and
equally in the earnings of the association.

This count for the complaint proceeds, in our opinion, upon an erroneous notion as to what a
court may do in determining the internal policy of a business corporation. If the criticism
contained in the brief of the Attorney-General upon the practice of the respondent association
with respect to depreciation be well founded, the Legislature should supply the remedy by
defining the extent to which depreciation may be allowed by building and loan associations.
Certainly this court cannot undertake to control the discretion of the board of directors of the
association about an administrative matter as to which they have legitimate power of action.
The tenth cause of action is therefore not well founded.

Eleventh and twelfth causes of action. — The same comment is appropriate with respect to the
eleventh and twelfth causes of action, which are treated together in the briefs, and will be here
combined. The specification in the eleventh cause of action is that the respondent maintains
excessive reserve funds, and in the twelfth cause of action that the board of directors has
settled upon the unlawful policy of paying a straight annual dividend of 10 per centum,
regardless of losses suffered and profits made by the corporation and in contravention of the
requirements of section 188 of the Corporation Law. The facts relating to these two counts in
the complaint, as set forth in the stipulation, are these:

In article 92 of the by-laws of El Hogar Filipino it is provided that 5 per centum of the net
profits earned each year, as shown by the annual balance sheet shall be carried to a reserve
fund. The fund so created is called the General Reserve. Article 93 of the by-laws authorizes
the directors to carry funds to a special reserve, whenever in their judgment it is advisable to
do so, provided that the annual dividend in the year in which funds are carried to special
reserve exceeds 8 per centum. It appears to have been the policy of the board of directors for
several years past to place in the special reserve any balance in the profit and loss account
after the satisfaction of preferential charges and the payment of a dividend of 10 per centum
to all special and ordinary shares (with accumulated dividends). As things stood in 1926 the
general reserve contained an amount equivalent to about 5 per centum of the paid-in value of
shared. This fund has never been drawn upon for the purpose of maintaining the regular
annual dividend; but recourse has been had to the special reserve on three different occasions
to make good the amount necessary to pay dividends. It appears that in the last five years the
reserves have declined from something over 9 per cent to something over 7.

It is insisted in the brief of the Attorney-General that the maintenance of reserve funds is
unnecessary in the case of building and loan associations, and at any rate the keeping of
reserves is inconsistent with section 188 of the Corporation Law. Moreover, it is said that the
practice of the association in declaring regularly a 10 per cent dividend is in effect a guaranty
by the association of a fixed dividend which is contrary to the intention of the statute.

Upon careful consideration of the questions involved we find no reason to doubt the right of
the respondent to maintain these reserves. It is true that the corporation law does not
expressly grant this power, but we think it is to be implied. It is a fact of common observation
that all commercial enterprises encounter periods when earnings fall below the average, and
the prudent manager makes provision for such contingencies. To regard all surplus as profit is
to neglect one of the primary canons of good business practice. Building and loan associations,
though among the most solid of financial institutions, are nevertheless subject to vicissitudes.
Fluctuations in the dividend rate are highly detrimental to any fiscal institutions, while
uniformity in the payments of dividends, continued over long periods, supplies the surest
foundations of public confidence.

The question now under consideration is not new in jurisprudence, for the American courts
have been called upon more than once to consider the legality of the maintenance of reserves
by institutions of this or similar character.

In Greeff vs. Equitable Life Assurance Society, the court had under consideration a charter
provision of a life insurance company, organized on the mutual plan, in its relation to the
power of the company to provide reserves. There the statute provided that "the officers of the
company, within sixty days from the expiration of the first five years, from December 31, 1859,
and within the first sixty days of every subsequent period of five years, shall cause a balance to
be struck of the affairs of the company, which shall exhibit its assets and liabilities, both
present and contingent, and also the net surplus, after deducting a sufficient amount to cover
all outstanding risks and other obligations. Each policy holder shall be credited with an
equitable share of the said surplus."

The court said:

No prudent person would be inclined to take a policy in a company which had so

improvidently conducted its affairs that it only retained a fund barely sufficient to pay its
present liabilities, and, therefore, was in a condition where any change by the reduction
of interest upon, or depreciation in, the value of its securities, or any increase of
mortality, would render it insolvent and subject to be placed in the hands of a receiver.
The evident purpose of the provisions of the defendant's charter and policy relating to
 this subject was to vest in the directors of the corporation a discretion to determine the
proportion of its surplus which should be dividend each year.

In a friendly suit tried in a circuit court of Wisconsin in 1916, entitled Boheman Bldg. and Loan
Association vs. Knolt, the court, in commenting on the nature of these reserves, said:

The apparent function of this fund is to insure the stockholders against losses. Its
purpose is not unlike that of the various forms of insurance now in such common use.
This contribution is as legitimate an item of expense as are the premiums paid on any
insurance policy. (See Clarks and Chase, Building and Loan Association, footnote, page
344.)

In commenting on the necessity of such funds, Sundheim says:

It is optional with the association whether to maintain such a fund or not, but justice
and good business policy seem to require it. The retiring stockholder must be paid the
value of his stock in cash and leave for those remaining a large number of securities and
perhaps some real estate purchased to protect the associations interest. How much will
be realized on these securities, or real estate, no human foresight can tell. Further, the
realizing on these securities may entail considerable litigation and expense. There are
many other contingencies which might cause a shrinkage in the association's assets,
such as defective titles, undisclosed defalcations on the part of an officer, a
miscalculation of assets and liabilities, and many other errors and omissions which must
always be reckoned within the conduct of human affairs.

The contingent fund is merely insurance against possible loss. That losses may occur
from time to time seems almost inevitable and it is, therefore, inequitable that the
remaining stockholders should be compelled to accept all securities at par, so, to say the
least, the maintenance of this fund is justified. The association teaches the duty of
providing for the proverbial rainy day. Why should it not provide for the hour of
adversity? The reserve fund has protected the maturing or withdrawing member during
the period of his membership. In case of loss it has or would have reimbursed him and,
at all times, it has protected him and given strength and standing to the association.
Losses may occur, after his membership ceases, that arose from some mistake or
mismanagement committed during the period of his membership, and in fairness and
equity the remaining members should have some protection against this. (Sundheim,
Law of Building and Loan Association, sec. 53.)

The government insists, we thing, upon an interpretation of section 188 of the Corporation
Law that is altogether too strict and literal. From the fact that the statute provides that profits
and losses shall be annually apportioned among the shareholders it is argued that all earnings
should be distributed without carrying anything to the reserve. But it will be noted that it is
provided in the same section that the profits and losses shall be determined by the board of
directors: and this means that they shall exercise the usual discretion of good businessmen in
allocating a portion of the annual profits to purposes needful to the welfare of the association.
The law contemplates the distribution of earnings and losses after other legitimate obligations
have been met.

Our conclusion is that the respondent has the power to maintain the reserves criticized in the
eleventh and twelfth counts of the complaint; and at any rate, if it be supposed that the
reserves referred to have become excessive, the remedy is in the hands of the Legislature. It is
no proper function of the court to arrogate to itself the control of administrative matters which
have been confided to the discretion of the board of directors. The causes of action under
discussion must be pronounced to be without merit.

Thirteenth cause of action. — The specification under this head is, in effect, that the
respondent association has made loans which, to the knowledge of the associations officers
were intended to be used by the borrowers for other purposes than the building of homes. In
this connection it appears that, though loans have been made by the association exclusively to
its shareholders, no attempt has been made by it to control the borrowers with respect to the
use made of the borrowed funds, the association being content to see that the security given
for the loan in each case is sufficient. On December 31, 1925, the respondent had five hundred
forty-four loans outstanding secured by mortgages upon real estate and by the pledge of the
borrowers' shares in an amount sufficient at maturity to amortize the loans. With respect to
the nature of the real estate upon which these loans were made it appears that three hundred
fifty-one loans were secured by mortgages upon city residences, seven by mortgages upon
commercial building in cities, and three mortgages upon unimproved city lots. At the same
time one hundred eighty-three of the loans were secured by mortgages upon groves, sugar
land, and rice land, with a total area of about 7,558 hectares. From information gathered by
the association from voluntary statements of borrowers given at the time of application with
respect to the use intended to be made of the borrowed funds, it appears that the amount of
P693,200 was borrowed to redeem real property from existing mortgages or pactos de retro,
P280,800 to buy real estate, P449,100 to erect buildings, P24,000 to improve and repair
buildings, P1,480,900 for agricultural purposes, while the amount of P5,763,700 was borrowed
for purposes not disclosed.

Upon these facts an elaborate argument has been constructed in behalf of the plaintiff to the
effect that in making loans for other purposes than the building of residential houses the
association has illegally departed from its character and made itself amenable to the penalty of
dissolution. Aside from being directly opposed to the decision of this court in Lopez and
Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental Negros (47 Phil., 249), this
contention finds no substantial support in the prevailing decisions made in American courts;
and our attention has not been directed to a single case wherein the dissolution of a building
and loan association has been decreed in a quo warranto proceeding because the association
allowed its borrowers to use the loans for other purposes than the acquisition of homes.
The case principally relied upon for the Government appears to be Pfeister vs. Wheeling
Building Association (19 W. Va., 676, 716),which involved the question whether a building and
loan association could recover the full amount of a note given to it by a member and secured
by a mortgage from a stranger. At the time the case arose there was a statute in force in the
State of West Virginia expressly forbidding building and loan associations to use or direct their
funds for or to any other object or purpose than the buying of lots or houses or in building and
repairing houses, and it was declared that in case the funds should be improperly directed to
other objects, the offending association should forfeit all rights and privileges as a corporation.
Under the statute so worded the court held that the plaintiff could only recover the amount
actually advanced by it with lawful interest and fines, without premium; and judgment was
given accordingly. The suggestion in that case that the result would have been the same even
in the absence of statute was mere dictum and is not supported by respectable authority.

Reliance is also placed in the plaintiff's brief upon McCauley vs. Building & Saving Association.
The statute in force in the State of Tennessee at the time this action arose provided that all
loans should be made to the members of the association at open stated meetings and that the
money should be lent to the highest bidder. Inconsistently with this provision, there was
inserted in the by-laws of the association a provision to the effect that no loan should be made
at a greater premium than 30 per cent, nor at a less premium than 29 7/8 per cent. It was held
that this by-law made free and open competition impossible and that it in effect established a
fixed premium. It was accordingly held, in the case cited, that an association could not recover
such part of the loan as had been applied by it to the satisfaction of a premium of 30 per
centum.

We have no criticism to make upon the result reached in either of the two decisions cited, but
it is apparent that much of the discussion contained in the opinions in those cases does not
reflect the doctrine now prevailing in the United States; and much less are those decisions
applicable in this jurisdiction. There is no statute here expressly declaring that loans may be
made by these associations solely for the purpose of building homes. On the contrary, the
building of homes is mentioned in section 171 of the Corporation Law as only one among
several ends which building and loan associations are designed to promote. Furthermore,
section 181 of the Corporation Law expressly authorities the Board of directors of the
association from time to time to fix the premium to be charged.

In the brief of the plaintiff a number of excerpts from textbooks and decisions have been
collated in which the idea is developed that the primary design of building and loan
associations should be to help poor people to procure homes of their own. This beneficent end
is undoubtedly served by these associations, and it is not to be denied that they have been
generally fostered with this end in view. But in this jurisdiction at least the lawmaker has taken
care not to limit the activities of building and loan associations in an exclusive manner, and the
exercise of the broader powers must in the end approve itself to the business community.
Judging from the past history of these institutions it can be truly said that they have done more
to encourage thrift, economy and saving among the people at large than any other institution
of modern times, not excepting even the saving banks. In this connection Mr. Sundheim, in a
late treatise upon the subject of the law of building and loan associations, makes the following
comment:

They have grown to such an extent in recent years that they no longer restrict their
money to the home buyer, but loan their money to the mere investor or dealer in real
estate. They are the holder of large mortgages secured upon farms, factories and other
business properties and rows of stores and dwellings. This is not an abuse of their
powers or departure from their main purposes, but only a natural and proper expansion
along healthy and legitimate lines. (Sundheim, Building and Loan Associations, sec. 7.)

Speaking of the purpose for which loans may be made, the same author adds:

Loans are made for the purpose of purchasing a homestead, or other real estate, or for
any lawful purpose or business, but there is no duty or obligation of the association to
inquire for what purpose the loan is obtained, or to require any stipulation from the
borrower as to what use he will make of the money, or in any manner to supervise or
control its disbursement. (Sundheim, Building and Loan Association, sec. 111.)

In Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental Negros, this
court had before it the question whether a loan made by the respondent association upon the
security of a mortgage upon agricultural land, — where the loan was doubtless used for
agricultural purposes, — was usurious or not; and the case turned upon the point whether, in
making such loans, the association had violated the law and departed from its fundamental
purposes. The conclusion of the court was that the loan was valid and could be lawfully
enforced by a nonjudicial foreclosure in conformity with the terms of the contract between the
association and the borrowing member. We now find no reason to depart from the conclusion
reached in that case, and it is unnecessary to repeat what was then said. The thirteenth cause
of action must therefore be pronounced unfounded.

Fourteenth cause of action. — The specification under this head is that the loans made by the
defendant for purposes other than building or acquiring homes have been extended in
extremely large amounts and to wealthy persons and large companies. In this connection
attention is directed to eight loans made at different times in the last several years to different
persons or entities, ranging in amounts from P120,000 to P390,000 and to two large loans
made to the Roxas Estate and to the Pacific Warehouse Company in the amounts of P1,122,000
and P2,320,000, respectively. In connection with the larger of the two after this loan was made
the available funds of El Hogar Filipino were reduced to the point that the association was
compelled to take advantage of certain provisions of its by-laws authorizing the postponement
of the payment of claims resulting from withdrawals, whereas previously the association had
always settled these claims promptly from current funds. At no time was there apparently any
delay in the payment of matured shares; but in four or five cases there was as much as ten
months delay in the payment of withdrawal applications.

There is little that can be said upon the legal aspects of this cause of action. In so far, as it
relates to the purposes for which these loans were made, the matter is covered by what was
said above with reference to the thirteenth cause of action; and in so far as it relates to the
personality of the borrowers, the question belongs more directly to the discussion under the
sixteenth cause of action, which will be found below. The point, then, which remains for
consideration here is whether it is a suicidal act on the part of a building and loan association
to make loans in large amount. If the loans which are here the subject of criticism had been
made upon inadequate security, especially in case of the largest two, the consequences
certainly would have been disastrous to the association in the extreme; but no such fact is
alleged; and it is to be assumed that none of the ten borrowers have defaulted in their
contracts.

Now, it must be admitted that two of these loans at least are of a very large size, considering
the average range of financial transaction in this country; and the making of the largest loan
was followed, as we have already see, with unpleasant consequences to the association in
dealing with current claims. Nevertheless the agreed statement of facts shoes that all of the
loan referred to are only ten out of a total of five hundred forty-four outstanding on December
31, 1925; and the average of all the loans taken together is modest enough. It appears that the
chief examiner of banks and corporations of the Philippine Treasury, after his examination of El
Hogar Filipino at the end of the year 1925, made a report concerning this association as of
January 31, 1926, in which he criticized the Pacific Warehouse Company loan as being so large
that it temporarily crippled the lending power of the association for some time. This criticism
was apparently justified as proper comment on the activities of the association; but the
question for use here to decide is whether the making of this and the other large loans
constitutes such a misuser of the franchise as would justify us in depriving the association of its
corporate life. This question appears to us to be so simple as almost to answer itself. The law
states no limit with respect to the size of the loans to be made by the association. That matter
is confided to the discretion of the board of directors; and this court cannot arrogate to itself a
control over the discretion of the chosen officials of the company. If it should be thought wise
in the future to put a limit upon the amount of loans to be made to a single person or entity,
resort should be had to the Legislature; it is not a matter amenable to judicial control. The
fourteenth cause of action is therefore obviously without merit.

Fifteenth cause of action. — The criticism here comes back to the supposed misdemeanor of
the respondent in maintaining its reserve funds, — a matter already discussed under the
eleventh and twelfth causes of action. Under the fifteenth cause of action it is claimed that
upon the expiration of the franchise of the association through the effluxion of time, or earlier
liquidation of its business, the accumulated reserves and other properties will accrue to the
founder, or his heirs, and the then directors of the corporation and to those persons who may
at that time to be holders of the ordinary and special shares of the corporation. In this
connection we note that article 95 of the by-laws reads as follows:

ART. 95. The funds obtained by the liquidation of the association shall be applied in the
first place to the repayment of shares and the balance, if any, shall be distribute in
accordance with the system established for the distribution of annual profits.

It will be noted that the cause of action with which we are now concerned is not directed to
any positive misdemeanor supposed to have been committed by the association. It has
exclusive relation to what may happen some thirty-five years hence when the franchise
expires, supposing of course that the corporation should not be reorganized and continued
after that date. There is nothing in article 95 of the by-laws which is, in our opinion, subject to
criticism. The real point of criticism is that upon the final liquidation of the corporation years
hence there may be in existence a reserve fund out of all proportion to the requirements that
may then fall upon it in the liquidation of the company. It seems to us that this is matter that
may be left to the prevision of the directors or to legislative action if it should be deemed
expedient to require the gradual suppression of the reserve funds as the time for dissolution
approaches. It is no matter for judicial interference, and much less could the resumption of the
franchise on this ground be justified. There is no merit in the fifteenth cause of action.

Sixteenth cause of action. — This part of the complaint assigns as cause of action that various
loans now outstanding have been made by the respondent to corporations and partnerships,
and that these entities have in some instances subscribed to shares in the respondent for the
sole purpose of obtaining such loans. In this connection it appears from the stipulation of facts
that of the 5,826 shareholders of El Hogar Filipino, which composed its membership on
December 31, 1925, twenty-eight are juridical entities, comprising sixteen corporations and
fourteen partnerships; while of the five hundred forty-four loans of the association outstanding
on the same date, nine had been made to corporations an five to partnerships. It is also
admitted that some of these juridical entities became shareholders merely for the purpose of
qualifying themselves to take loans from the association, and the same is said with respect to
many natural persons who have taken shares in the association. Nothing is said in the agreed
statement of facts on the point whether the corporations and partnerships that have taken
loans from the respondent are qualified by law governing their own organization to enter into
these contracts with the respondent.

In section 173 of the Corporation Law it is declared that "any person" may become a
stockholder in building and loan associations. The word "person" appears to be here used in its
general sense, and there is nothing in the context to indicate that the expression is used in the
restricted sense of both natural and artificial persons, as indicated in section 2 of the
Administrative Code. We would not say that the word "person" or persons," is to be taken in
this broad sense in every part of the Corporation Law. For instance, it would seem reasonable
to say that the incorporators of a corporation ought to be natural persons, although in section
6 it is said that five or more "persons", although in section 6 it is said that five or more
"persons," not exceeding fifteen, may form a private corporation. But the context there, as well
as the common sense of the situation, suggests that natural persons are meant. When it is
said, however, in section 173, that "any person" may become a stockholder in a building and
loan association, no reason is seen why the phrase may not be taken in its proper broad sense
of either a natural or artificial person. At any rate the question whether these loans and the
attendant subscriptions were properly made involves a consideration of the power of the
subscribing corporations and partnerships to own the stock and take the loans; and it is not
alleged in the complaint that they were without power in the premises. Of course the mere
motive with which subscriptions are made, whether to qualify the stockholders to take a loan
or for some other reason, is of no moment in determining whether the subscribers were
competent to make the contracts. The result is that we find nothing in the allegations of the
sixteenth cause of action, or in the facts developed in connection therewith, that would justify
us in granting the relief.

Seventeenth cause of action. — Under the seventeenth cause of action, it is charged that in
disposing of real estates purchased by it in the collection of its loans, the defendant has no
various occasions sold some of the said real estate on credit, transferring the title thereto to
the purchaser; that the properties sold are then mortgaged to the defendant to secure the
payment of the purchase price, said amount being considered as a loan, and carried as such in
the books of the defendant, and that several such obligations are still outstanding. It is further
charged that the persons and entities to which said properties are sold under the condition
charged are not members or shareholders nor are they made members or shareholders of the
defendant.

This part of the complaint is based upon a mere technicality of bookkeeping. The central idea
involved in the discussion is the provision of the Corporation Law requiring loans to be
stockholders only and on the security of real estate and shares in the corporation, or of shares
alone. It seems to be supposed that, when the respondent sells property acquired at its own
foreclosure sales and takes a mortgage to secure the deferred payments, the obligation of the
purchaser is a true loan, and hence prohibited. But in requiring the respondent to sell real
estate which it acquires in connection with the collection of its loans within five years after
receiving title to the same, the law does not prescribe that the property must be sold for cash
or that the purchaser shall be a shareholder in the corporation. Such sales can of course be
made upon terms and conditions approved by the parties; and when the association takes a
mortgage to secure the deferred payments, the obligation of the purchaser cannot be fairly
described as arising out of a loan. Nor does the fact that it is carried as a loan on the books of
the respondent make it a loan on the books of the respondent make it a loan in law. The
contention of the Government under this head is untenable.

In conclusion, the respondent is enjoined in the future from administering real property not
owned by itself, except as may be permitted to it by contract when a borrowing shareholder
defaults in his obligation. In all other respects the complaint is dismissed, without costs. So
ordered.

G.R. No. L-18216 October 30, 1962

STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants,

vs.
REGISTER OF DEEDS OF MANILA, respondent-appellee.

Ramon C. Fernando for petitioners-appellants.

Office of the Solicitor General for respondent-appellee.

BAUTISTA ANGELO, J.:

On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc. executed a
certificate of liquidation of the assets of the corporation reciting, among other things, that by
virtue of a resolution of the stockholders adopted on September 17, 1960, dissolving the
corporation, they have distributed among themselves in proportion to their shareholdings, as
liquidating dividends, the assets of said corporation, including real properties located in
Manila.

The certificate of liquidation, when presented to the Register of Deeds of Manila, was denied
registration on seven grounds, of which the following were disputed by the stockholders:

3. The number of parcels not certified to in the acknowledgment;

5. P430.50 Reg. fees need be paid;

6. P940.45 documentary stamps need be attached to the document;

7. The judgment of the Court approving the dissolution and directing the disposition of
the assets of the corporation need be presented (Rules of Court, Rule 104, Sec. 3).

Deciding the consulta elevated by the stockholders, the Commissioner of Land Registration
overruled ground No. 7 and sustained requirements Nos. 3, 5 and 6.

The stockholders interposed the present appeal.

As correctly stated by the Commissioner of Land Registration, the propriety or impropriety of

the three grounds on which the denial of the registration of the certificate of liquidation was
predicated hinges on whether or not that certificate merely involves a distribution of the
corporation's assets or should be considered a transfer or conveyance.
Appellants contend that the certificate of liquidation is not a conveyance or transfer but merely
a distribution of the assets of the corporation which has ceased to exist for having been
dissolved. This is apparent in the minutes for dissolution attached to the document. Not being
a conveyance the certificate need not contain a statement of the number of parcel of land
involved in the distribution in the acknowledgment appearing therein. Hence the amount of
documentary stamps to be affixed thereon should only be P0.30 and not P940.45, as required
by the register of deeds. Neither is it correct to require appellants to pay the amount of
P430.50 as registration fee.

The Commissioner of Land Registration, however, entertained a different opinion. He

concurred in the view expressed by the register of deed to the effect that the certificate of
liquidation in question, though it involves a distribution of the corporation's assets, in the last
analysis represents a transfer of said assets from the corporation to the stockholders. Hence, in
substance it is a transfer or conveyance.

We agree with the opinion of these two officials. A corporation is a juridical person distinct
from the members composing it. Properties registered in the name of the corporation are
owned by it as an entity separate and distinct from its members. While shares of stock
constitute personal property they do not represent property of the corporation. The
corporation has property of its own which consists chiefly of real estate (Nelson v. Owen, 113
Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). A share of stock only typifies
an aliquot part of the corporation's property, or the right to share in its proceeds to that extent
when distributed according to law and equity (Hall & Faley v. Alabama Terminal, 173 Ala 398,
56 So., 235), but its holder is not the owner of any part of the capital of the corporation
(Bradley v. Bauder 36 Ohio St., 28). Nor is he entitled to the possession of any definite portion
of its property or assets (Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St., 474). The
stockholder is not a co-owner or tenant in common of the corporate property (Halton v.
Hohnston, 166 Ala 317, 51 So 992).

On the basis of the foregoing authorities, it is clear that the act of liquidation made by the
stockholders of the F. Guanzon and Sons, Inc. of the latter's assets is not and cannot be
considered a partition of community property, but rather a transfer or conveyance of the title
of its assets to the individual stockholders. Indeed, since the purpose of the liquidation, as well
as the distribution of the assets of the corporation, is to transfer their title from the
corporation to the stockholders in proportion to their shareholdings, — and this is in effect the
purpose which they seek to obtain from the Register of Deeds of Manila, — that transfer
cannot be effected without the corresponding deed of conveyance from the corporation to the
stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as one in
the nature of a transfer or conveyance.

WHEREFORE, we affirm the resolution appealed from, with costs against appellants.
G.R. No. L-48627

FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners

vs.
THE HONORABLE COURT OF APPEALS and ALBERTO V. ARELLANO, respondents.

CRUZ, J.:

We gave limited due course to this petition on the question of the solidary liability of the
petitioners with their co-defendants in the lower court 1 because of the challenge to the
following paragraph in the dispositive portion of the decision of the respondent court: *

1. Defendants are hereby ordered to jointly and severally pay the plaintiff the amount of
P50,000.00 for the preparation of the project study and his technical services that led to
the organization of the defendant corporation, plus P10,000.00 attorney's fees; 2

The petitioners claim that this order has no support in fact and law because they had no
contract whatsoever with the private respondent regarding the above-mentioned services.
Their position is that as mere subsequent investors in the corporation that was later created,
they should not be held solidarily liable with the Filipinas Orient Airways, a separate juridical
entity, and with Barretto and Garcia, their co-defendants in the lower court, ** who were the
ones who requested the said services from the private respondent. 3

We are not concerned here with the petitioners' co-defendants, who have not appealed the
decision of the respondent court and may, for this reason, be presumed to have accepted the
same. For purposes of resolving this case before us, it is not necessary to determine whether it
is the promoters of the proposed corporation, or the corporation itself after its organization,
that shall be responsible for the expenses incurred in connection with such organization.

The only question we have to decide now is whether or not the petitioners themselves
are also and personally liable for such expenses and, if so, to what extent.

The reasons for the said order are given by the respondent court in its decision in this wise:

As to the 4th assigned error we hold that as to the remuneration due the plaintiff for the
preparation of the project study and the pre-organizational services in the amount of
P50,000.00, not only the defendant corporation but the other defendants including
defendants Caram should be jointly and severally liable for this amount. As we above
related it was upon the request of defendants Barretto and Garcia that plaintiff handled
 the preparation of the project study which project study was presented to defendant
Caram so the latter was convinced to invest in the proposed airlines. The project study
was revised for purposes of presentation to financiers and the banks. It was on the basis
of this study that defendant corporation was actually organized and rendered
operational. Defendants Garcia and Caram, and Barretto became members of the Board
and/or officers of defendant corporation. Thus, not only the defendant corporation but
all the other defendants who were involved in the preparatory stages of the
incorporation, who caused the preparation and/or benefited from the project study and
the technical services of plaintiff must be liable. 4

It would appear from the above justification that the petitioners were not really involved in the
initial steps that finally led to the incorporation of the Filipinas Orient Airways. Elsewhere in
the decision, Barretto was described as "the moving spirit." The finding of the respondent
court is that the project study was undertaken by the private respondent at the request of
Barretto and Garcia who, upon its completion, presented it to the petitioners to induce them
to invest in the proposed airline. The study could have been presented to other prospective
investors. At any rate, the airline was eventually organized on the basis of the project study
with the petitioners as major stockholders and, together with Barretto and Garcia, as principal
officers.

The following portion of the decision in question is also worth considering:

... Since defendant Barretto was the moving spirit in the pre-organization work of
defendant corporation based on his experience and expertise, hence he was logically
compensated in the amount of P200,000.00 shares of stock not as industrial partner but
more for his technical services that brought to fruition the defendant corporation. By the
same token, We find no reason why the plaintiff should not be similarly compensated
not only for having actively participated in the preparation of the project study for
several months and its subsequent revision but also in his having been involved in the
pre-organization of the defendant corporation, in the preparation of the franchise, in
inviting the interest of the financiers and in the training and screening of personnel. We
agree that for these special services of the plaintiff the amount of P50,000.00 as
compensation is reasonable. 5

The above finding bolsters the conclusion that the petitioners were not involved in the initial
stages of the organization of the airline, which were being directed by Barretto as the main
promoter. It was he who was putting all the pieces together, so to speak. The petitioners were
merely among the financiers whose interest was to be invited and who were in fact persuaded,
on the strength of the project study, to invest in the proposed airline.

Significantly, there was no showing that the Filipinas Orient Airways was a fictitious
corporation and did not have a separate juridical personality, to justify making the petitioners,
as principal stockholders thereof, responsible for its obligations. As a bona fide corporation, the
Filipinas Orient Airways should alone be liable for its corporate acts as duly authorized by its
officers and directors.

In the light of these circumstances, we hold that the petitioners cannot be held personally
liable for the compensation claimed by the private respondent for the services performed by
him in the organization of the corporation. To repeat, the petitioners did not contract such
services. It was only the results of such services that Barretto and Garcia presented to them
and which persuaded them to invest in the proposed airline. The most that can be said is that
they benefited from such services, but that surely is no justification to hold them personally
liable therefor. Otherwise, all the other stockholders of the corporation, including those who
came in later, and regardless of the amount of their share holdings, would be equally and
personally liable also with the petitioners for the claims of the private respondent.

The petition is rather hazy and seems to be flawed by an ambiguous ambivalence. Our
impression is that it is opposed to the imposition of solidary responsibility upon the Carams
but seems to be willing, in a vague, unexpressed offer of compromise, to accept joint liability.
While it is true that it does here and there disclaim total liability, the thrust of the petition
seems to be against the imposition of solidary liability only rather than against any liability at
all, which is what it should have categorically argued.

Categorically, the Court holds that the petitioners are not liable at all, jointly or jointly and
severally, under the first paragraph of the dispositive portion of the challenged decision. So
holding, we find it unnecessary to examine at this time the rules on solidary obligations, which
the parties-needlessly, as it turns out have belabored unto death.

WHEREFORE, the petition is granted. The petitioners are declared not liable under the
challenged decision, which is hereby modified accordingly. It is so ordered.

G.R. No. 97212 June 30, 1993

BENJAMIN YU, petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION and JADE MOUNTAIN PRODUCTS COMPANY
LIMITED, WILLY CO, RHODORA D. BENDAL, LEA BENDAL, CHIU SHIAN JENG and CHEN HO-
FU, respondents.

Jose C. Guico for petitioner.

Wilfredo Cortez for private respondents.

FELICIANO, J.:

Petitioner Benjamin Yu was formerly the Assistant General Manager of the marble quarrying
and export business operated by a registered partnership with the firm name of "Jade
Mountain Products Company Limited" ("Jade Mountain"). The partnership was originally
organized on 28 June 1984 with Lea Bendal and Rhodora Bendal as general partners and Chin
Shian Jeng, Chen Ho-Fu and Yu Chang, all citizens of the Republic of China (Taiwan), as limited
partners. The partnership business consisted of exploiting a marble deposit found on land
owned by the Sps. Ricardo and Guillerma Cruz, situated in Bulacan Province, under a
Memorandum Agreement dated 26 June 1984 with the Cruz spouses. 1 The partnership had its
main office in Makati, Metropolitan Manila.

Benjamin Yu was hired by virtue of a Partnership Resolution dated 14 March 1985, as Assistant
General Manager with a monthly salary of P4,000.00. According to petitioner Yu, however, he
actually received only half of his stipulated monthly salary, since he had accepted the promise
of the partners that the balance would be paid when the firm shall have secured additional
operating funds from abroad. Benjamin Yu actually managed the operations and finances of
the business; he had overall supervision of the workers at the marble quarry in Bulacan and
took charge of the preparation of papers relating to the exportation of the firm's products.

Sometime in 1988, without the knowledge of Benjamin Yu, the general partners Lea Bendal
and Rhodora Bendal sold and transferred their interests in the partnership to private
respondent Willy Co and to one Emmanuel Zapanta. Mr. Yu Chang, a limited partner, also sold
and transferred his interest in the partnership to Willy Co. Between Mr. Emmanuel Zapanta
and himself, private respondent Willy Co acquired the great bulk of the partnership interest.
The partnership now constituted solely by Willy Co and Emmanuel Zapanta continued to use
the old firm name of Jade Mountain, though they moved the firm's main office from Makati to
Mandaluyong, Metropolitan Manila. A Supplement to the Memorandum Agreement relating to
the operation of the marble quarry was entered into with the Cruz spouses in February of
1988.2 The actual operations of the business enterprise continued as before. All the employees
of the partnership continued working in the business, all, save petitioner Benjamin Yu as it
turned out.

On 16 November 1987, having learned of the transfer of the firm's main office from Makati to
Mandaluyong, petitioner Benjamin Yu reported to the Mandaluyong office for work and there
met private respondent Willy Co for the first time. Petitioner was informed by Willy Co that the
latter had bought the business from the original partners and that it was for him to decide
whether or not he was responsible for the obligations of the old partnership, including
petitioner's unpaid salaries. Petitioner was in fact not allowed to work anymore in the Jade
Mountain business enterprise. His unpaid salaries remained unpaid.3
On 21 December 1988. Benjamin Yu filed a complaint for illegal dismissal and recovery of
unpaid salaries accruing from November 1984 to October 1988, moral and exemplary damages
and attorney's fees, against Jade Mountain, Mr. Willy Co and the other private respondents.
The partnership and Willy Co denied petitioner's charges, contending in the main that
Benjamin Yu was never hired as an employee by the present or new partnership. 4

In due time, Labor Arbiter Nieves Vivar-De Castro rendered a decision holding that petitioner
had been illegally dismissed. The Labor Arbiter decreed his reinstatement and awarded him his
claim for unpaid salaries, backwages and attorney's fees.5

On appeal, the National Labor Relations Commission ("NLRC") reversed the decision of the
Labor Arbiter and dismissed petitioner's complaint in a Resolution dated 29 November 1990.
The NLRC held that a new partnership consisting of Mr. Willy Co and Mr. Emmanuel Zapanta
had bought the Jade Mountain business, that the new partnership had not retained petitioner
Yu in his original position as Assistant General Manager, and that there was no law requiring
the new partnership to absorb the employees of the old partnership. Benjamin Yu, therefore,
had not been illegally dismissed by the new partnership which had simply declined to retain
him in his former managerial position or any other position. Finally, the NLRC held that
Benjamin Yu's claim for unpaid wages should be asserted against the original members of the
preceding partnership, but these though impleaded had, apparently, not been served with
summons in the proceedings before the Labor Arbiter.6

Petitioner Benjamin Yu is now before the Court on a Petition for Certiorari, asking us to set
aside and annul the Resolution of the NLRC as a product of grave abuse of discretion
amounting to lack or excess of jurisdiction.

The basic contention of petitioner is that the NLRC has overlooked the principle that a
partnership has a juridical personality separate and distinct from that of each of its members.
Such independent legal personality subsists, petitioner claims, notwithstanding changes in the
identities of the partners. Consequently, the employment contract between Benjamin Yu and
the partnership Jade Mountain could not have been affected by changes in the latter's
membership.7

Two (2) main issues are thus posed for our consideration in the case at bar: (1) whether the
partnership which had hired petitioner Yu as Assistant General Manager had been extinguished
and replaced by a new partnerships composed of Willy Co and Emmanuel Zapanta; and (2) if
indeed a new partnership had come into existence, whether petitioner Yu could nonetheless
assert his rights under his employment contract as against the new partnership.

In respect of the first issue, we agree with the result reached by the NLRC, that is, that the legal
effect of the changes in the membership of the partnership was the dissolution of the old
partnership which had hired petitioner in 1984 and the emergence of a new firm composed of
Willy Co and Emmanuel Zapanta in 1987.
The applicable law in this connection — of which the NLRC seemed quite unaware — is found
in the Civil Code provisions relating to partnerships. Article 1828 of the Civil Code provides as
follows:

Art. 1828. The dissolution of a partnership is the change in the relation of the
partners caused by any partner ceasing to be associated in the carrying on as
distinguished from the winding up of the business. (Emphasis supplied)

Article 1830 of the same Code must also be noted:

Art. 1830. Dissolution is caused:

(1) without violation of the agreement between the partners;

xxx xxx xxx

(b) by the express will of any partner, who must act in

good faith, when no definite term or particular
undertaking is specified;

xxx xxx xxx

(2) in contravention of the agreement between the

partners, where the circumstances do not permit a
dissolution under any other provision of this article, by
the express will of any partner at any time;

xxx xxx xxx

(Emphasis supplied)

In the case at bar, just about all of the partners had sold their partnership interests (amounting
to 82% of the total partnership interest) to Mr. Willy Co and Emmanuel Zapanta. The record
does not show what happened to the remaining 18% of the original partnership interest. The
acquisition of 82% of the partnership interest by new partners, coupled with the retirement or
withdrawal of the partners who had originally owned such 82% interest, was enough to
constitute a new partnership.

The occurrence of events which precipitate the legal consequence of dissolution of a

partnership do not, however, automatically result in the termination of the legal personality of
the old partnership. Article 1829 of the Civil Code states that:

[o]n dissolution the partnership is not terminated, but continues until the winding
up of partnership affairs is completed.
In the ordinary course of events, the legal personality of the expiring partnership persists for
the limited purpose of winding up and closing of the affairs of the partnership. In the case at
bar, it is important to underscore the fact that the business of the old partnership was simply
continued by the new partners, without the old partnership undergoing the procedures
relating to dissolution and winding up of its business affairs. In other words, the new
partnership simply took over the business enterprise owned by the preceeding partnership,
and continued using the old name of Jade Mountain Products Company Limited, without
winding up the business affairs of the old partnership, paying off its debts, liquidating and
distributing its net assets, and then re-assembling the said assets or most of them and opening
a new business enterprise. There were, no doubt, powerful tax considerations which underlay
such an informal approach to business on the part of the retiring and the incoming partners. It
is not, however, necessary to inquire into such matters.

What is important for present purposes is that, under the above described situation, not only
the retiring partners (Rhodora Bendal, et al.) but also the new partnership itself which
continued the business of the old, dissolved, one, are liable for the debts of the preceding
partnership. In Singson, et al. v. Isabela Saw Mill, et al,8 the Court held that under facts very
similar to those in the case at bar, a withdrawing partner remains liable to a third party
creditor of the old partnership.9 The liability of the new partnership, upon the other hand, in
the set of circumstances obtaining in the case at bar, is established in Article 1840 of the Civil
Code which reads as follows:

Art. 1840. In the following cases creditors of the dissolved partnership

are also creditors of the person or partnership continuing the business:

(1) When any new partner is admitted into an existing partnership, or when any
partner retires and assigns (or the representative of the deceased partner assigns)
his rights in partnership property to two or more of the partners, or to one or
more of the partners and one or more third persons, if the business is continued
without liquidation of the partnership affairs;

(2) When all but one partner retire and assign (or the representative of a
deceased partner assigns) their rights in partnership property to the remaining
partner, who continues the business without liquidation of partnership affairs,
either alone or with others;

(3) When any Partner retires or dies and the business of the dissolved partnership
is continued as set forth in Nos. 1 and 2 of this Article, with the consent of the
retired partners or the representative of the deceased partner, but without any
assignment of his right in partnership property;
 (4) When all the partners or their representatives assign their rights in partnership
property to one or more third persons who promise to pay the debts and who
continue the business of the dissolved partnership;

(5) When any partner wrongfully causes a dissolution and remaining partners
continue the business under the provisions of article 1837, second paragraph, No.
2, either alone or with others, and without liquidation of the partnership affairs;

(6) When a partner is expelled and the remaining partners continue the business
either alone or with others without liquidation of the partnership affairs;

The liability of a third person becoming a partner in the partnership continuing

the business, under this article, to the creditors of the dissolved partnership shall
be satisfied out of the partnership property only, unless there is a stipulation to
the contrary.

When the business of a partnership after dissolution is continued under any

conditions set forth in this article the creditors of the retiring or deceased partner
or the representative of the deceased partner, have a prior right to any claim of
the retired partner or the representative of the deceased partner against the
person or partnership continuing the business on account of the retired or
deceased partner's interest in the dissolved partnership or on account of any
consideration promised for such interest or for his right in partnership property.

Nothing in this article shall be held to modify any right of creditors to set
assignment on the ground of fraud.

xxx xxx xxx

(Emphasis supplied)

Under Article 1840 above, creditors of the old Jade Mountain are also creditors of the new
Jade Mountain which continued the business of the old one without liquidation of the
partnership affairs. Indeed, a creditor of the old Jade Mountain, like petitioner Benjamin Yu in
respect of his claim for unpaid wages, is entitled to priority vis-a-vis any claim of any retired or
previous partner insofar as such retired partner's interest in the dissolved partnership is
concerned. It is not necessary for the Court to determine under which one or mare of the
above six (6) paragraphs, the case at bar would fall, if only because the facts on record are not
detailed with sufficient precision to permit such determination. It is, however, clear to the
Court that under Article 1840 above, Benjamin Yu is entitled to enforce his claim for unpaid
salaries, as well as other claims relating to his employment with the previous partnership,
against the new Jade Mountain.
It is at the same time also evident to the Court that the new partnership was entitled to
appoint and hire a new general or assistant general manager to run the affairs of the business
enterprise take over. An assistant general manager belongs to the most senior ranks of
management and a new partnership is entitled to appoint a top manager of its own choice and
confidence. The non-retention of Benjamin Yu as Assistant General Manager did not therefore
constitute unlawful termination, or termination without just or authorized cause. We think
that the precise authorized cause for termination in the case at bar was redundancy. 10 The
new partnership had its own new General Manager, apparently Mr. Willy Co, the principal new
owner himself, who personally ran the business of Jade Mountain. Benjamin Yu's old position
as Assistant General Manager thus became superfluous or redundant. 11It follows that
petitioner Benjamin Yu is entitled to separation pay at the rate of one month's pay for each
year of service that he had rendered to the old partnership, a fraction of at least six (6) months
being considered as a whole year.

While the new Jade Mountain was entitled to decline to retain petitioner Benjamin Yu in its
employ, we consider that Benjamin Yu was very shabbily treated by the new partnership. The
old partnership certainly benefitted from the services of Benjamin Yu who, as noted, previously
ran the whole marble quarrying, processing and exporting enterprise. His work constituted
value-added to the business itself and therefore, the new partnership similarly benefitted from
the labors of Benjamin Yu. It is worthy of note that the new partnership did not try to suggest
that there was any cause consisting of some blameworthy act or omission on the part of Mr. Yu
which compelled the new partnership to terminate his services. Nonetheless, the new Jade
Mountain did not notify him of the change in ownership of the business, the relocation of the
main office of Jade Mountain from Makati to Mandaluyong and the assumption by Mr. Willy Co
of control of operations. The treatment (including the refusal to honor his claim for unpaid
wages) accorded to Assistant General Manager Benjamin Yu was so summary and cavalier as to
amount to arbitrary, bad faith treatment, for which the new Jade Mountain may legitimately
be required to respond by paying moral damages. This Court, exercising its discretion and in
view of all the circumstances of this case, believes that an indemnity for moral damages in the
amount of P20,000.00 is proper and reasonable.

In addition, we consider that petitioner Benjamin Yu is entitled to interest at the legal rate of
six percent (6%) per annum on the amount of unpaid wages, and of his separation pay,
computed from the date of promulgation of the award of the Labor Arbiter. Finally, because
the new Jade Mountain compelled Benjamin Yu to resort to litigation to protect his rights in
the premises, he is entitled to attorney's fees in the amount of ten percent (10%) of the total
amount due from private respondent Jade Mountain.

WHEREFORE, for all the foregoing, the Petition for Certiorari is GRANTED DUE COURSE, the
Comment filed by private respondents is treated as their Answer to the Petition for Certiorari,
and the Decision of the NLRC dated 29 November 1990 is hereby NULLIFIED and SET ASIDE. A
new Decision is hereby ENTERED requiring private respondent Jade Mountain Products
Company Limited to pay to petitioner Benjamin Yu the following amounts:

(a) for unpaid wages which, as found by the Labor Arbiter, shall be
computed at the rate of P2,000.00 per month multiplied by thirty-six
(36) months (November 1984 to December 1987) in the total amount
of P72,000.00;

(b) separation pay computed at the rate of P4,000.00 monthly pay

multiplied by three (3) years of service or a total of P12,000.00;

(c) indemnity for moral damages in the amount of P20,000.00;

(d) six percent (6%) per annum legal interest computed on items (a)
and (b) above, commencing on 26 December 1989 and until fully
paid; and

(e) ten percent (10%) attorney's fees on the total amount due from
private respondent Jade Mountain.

Costs against private respondents.

SO ORDERED.

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

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

GUERRERO, J:

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

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

IT RESULTING: That the antecedents are not difficult to understand; sometime in

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

VIEWED IN THE LIGHT OF ALL THE FOREGOING, judgment is hereby

rendered in favor of plaintiffs and against the defendants declaring
that:

1) The assets or properties of the defunct Tiaong Milling and

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

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

3) That F.L. Cease Plantation Company is removed as 'Trustee for

interest against the estate and essential to the protection of plaintiffs'
rights and is hereby ordered to deliver and convey all the properties
and assets of the defunct Tiaong Milling now under its name, custody
and control to whomsoever be appointed as Receiver - disqualifying
and of the parties herein - the latter to act accordingly upon proper
assumption of office; and

4) Special Proceedings No. 3893 for administration is terminated and

dismissed; the instant case to proceed but on issues of damages only
and for such action inherently essential for partition.

SO ORDERED.

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

upon receipt of that, defendants there filled a notice of appeal p. 129, rollo
together with an appeal bond and a record on appeal but the plaintiffs moved to
dismiss the appeal on the ground that the judgment was in fact interlocutory and
not appealable p. 168 rollo and this position of defendants was sustained by trial
Judge, His Honor ruling that
 IN VIEW OF THE FOREGOING, the appeal interposed by plaintiffs is
hereby dismissed as premature and the Record on Appeal is
necessarily disapproved as improper at this stage of the proceedings.

SO ORDERED.

Lucena City, April 27, 1970.

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

in aid of its appellate jurisdiction,

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

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

THE COURT OF APPEALS ERRED -

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

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

(a) Special Proceedings No. 3893 for the settlement of the Estate of Forrest L.
Cease, simultaneously and concurrently with -
 (b) Civil Case No. 6326, wherein the lower Court ordered Partition under Rule 69,
Rules of Court -

THE ISSUE OF LEGAL OWNERSHIP OF THE PROPERTIES COMMONLY INVOLVED IN BOTH

ACTIONS HAVING BEEN RAISED AT THE OUTSET BY THE TIAONG MILLING AND PLANTATION
COMPANY, AS THE REGISTERED OWNER OF SUCH PROPERTIES UNDER ACT 496.

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

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

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

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

2. Meanwhile, sensing that the appointed receiver was making some attempts to take
possession of the properties, petitioners filed in this present appeal an urgent petition to
restrain proceedings in the lower court. We resolved the petition on January 29, 1975 by
issuing a corresponding temporary restraining order enjoining the court a quo from
implementing its decision of December 27, 1969, more particularly, the taking over by a
receiver of the properties subject of the litigation, and private respondents Benjamin and
Florence Cease from proceeding or taking any action on the matter until further orders from
this Court (pp. 99-100, rollo). Private respondents filed a motion for reconsideration of Our
resolution of January 29, 1975. After weighing the arguments of the parties and taking note of
Our resolution in G.R. No. L-35629 which upheld the appointment of a receiver, We issued
another resolution dated April 11, 1975 lifting effective immediately Our previous temporary
restraining order which enforced the earlier resolution of January 29, 1975 (pp. 140-141, rollo).

3. On February 6, 1976, private respondents filed an urgent petition to restrain proceedings

below in view of the precipitate replacement of the court appointed receiver Mayor Francisco
Escueta (vice Mr. Eleno M. Joyas) and the appointment of Mr. Guillermo Lagrosa on the eve of
respondent Judge Maddela's retirement (p. 166, rollo). The urgent petition was denied in Our
resolution of February 18, 1976 (p. 176, rollo).

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

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

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

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

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

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

Where the estate has no debts, recourse may be had to an administration

proceeding only if the heirs have good reasons for not resorting to an action for
partition. Where partition is possible, either in or out of court, the estate should
not be burdened with an administration proceeding without good and compelling
reasons. (Intestate Estate of Mercado vs. Magtibay, 96 Phil. 383)

In the records of this case, We find no indication of any indebtedness of the estate. No creditor
has come up to charge the estate within the two-year period after the death of Forrest L.
Cease, hence, the presumption under Section 1, Rule 74 that the estate is free from creditors
must apply. Neither has the status of the parties as legal heirs, much less that of respondents,
been raised as an issue. Besides, extant in the records is the stipulation of the parties to submit
the pleadings and contents of the administration proceedings for the cognizance of the trial
judge in adjudicating the civil case for partition (Respondents' Brief, p, 20, rollo). As
respondents observe, the parties in both cases are the same, so are the properties involved;
that actual division is the primary objective in both actions; the theory and defense of the
respective parties are likewise common; and that both cases have been assigned to the same
respondent judge. We feel that the unifying effect of the foregoing circumstances invites the
wholesome exception to the structures of procedural rule, thus allowing, instead, room for
judicial flexibility. Respondent judge's dismissal of the administration proceedings then, is a
judicious move, appreciable in today's need for effective and speedy administration of justice.
There being ample reason to support the dismissal of the special proceedings in this appealed
case, We cannot see in the records any compelling reason why it may not be dismissed just the
same even if considered in a separate action. This is inevitably certain specially when the
subject property has already been found appropriate for partition, thus reducing the petition
for administration to a mere unnecessary solicitation.
The second point raised by petitioners in their first assigned error is equally untenable. In
effect, petitioners argue that the action for partition should not have prospered in view of the
repudiation of the co-ownership by Tiaong Milling and Plantation Company when, as early in
the trial court, it already asserted ownership and corporate title over the properties adverse to
the right of ownership of Forrest L. Cease or his estate. We are not unmindful of the doctrine
relied upon by petitioners in Rodriguez vs. Ravilan, 17 Phil. 63 wherein this Court held that in
an action for partition, it is assumed that the parties by whom it is prosecuted are all co-
owners or co-proprietors of the property to be divided, and that the question of common
ownership is not to be argued, not the fact as to whether the intended parties are or are not
the owners of the property in question, but only as to how and in what manner and proportion
the said property of common ownership shall be distributed among the interested parties by
order of the Court. Consistent with this dictum, it has been field that if any party to a suit for
partition denies the pro-indivisocharacter of the estate whose partition is sought, and claims
instead, exclusive title thereto the action becomes one for recovery of property cognizable in
the courts of ordinary jurisdiction. 2

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

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

a) As to the dismissal of Special Proceedings No. 3893, of course, at first glance,

this was wrong, for the reason that the case trial had been heard was Civil Case
No. 6326; but what should not be overlooked either is Chat respondent Judge was
the same Judge that had before him in his own sala, said Special Proceedings No.
3893, p. 43 rollo, and the parties to the present Civil Case No. 6326 had
themselves asked respondent Judge to take judicial notice of the same and its
contents page 34, rollo; it is not difficult to see that when respondent Judge in par.
4 of the dispositive part of his decision complained of, ordered that,
 4) Special Proceedings No. 3893 for administration is terminated and
dismissed; the instant case to proceed but on issues of damages only
and for such action inherently essential or partition. p. 123, rollo,

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

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

We do not agree. In reposing ownership to the estate of Forrest L. Cease, the trial court indeed
found strong support, one that is based on a well-entrenched principle of law. In sustaining
respondents' theory of "merger of Forrest L. Cease and The Tiaong Milling as one personality",
or that "the company is only the business conduit and alter ego of the deceased Forrest L.
Cease and the registered properties of Tiaong Milling are actually properties of Forrest L. Cease
and should be divided equally, share and share alike among his six children, ... ", the trial court
did aptly apply the familiar exception to the general rule by disregarding the legal fiction of
distinct and separate corporate personality and regarding the corporation and the individual
member one and the same. In shredding the fictitious corporate veil, the trial judge narrated
the undisputed factual premise, thus:
 While the records showed that originally its incorporators were aliens, friends or
third-parties in relation of one to another, in the course of its existence, it
developed into a close family corporation. The Board of Directors and
stockholders belong to one family the head of which Forrest L. Cease always
retained the majority stocks and hence the control and management of its affairs.
In fact, during the reconstruction of its records in 1947 before the Security and
Exchange Commission only 9 nominal shares out of 300 appears in the name of
his 3 eldest children then and another person close to them. It is likewise
noteworthy to observe that as his children increase or perhaps become of age, he
continued distributing his shares among them adding Florence, Teresa and Marion
until at the time of his death only 190 were left to his name. Definitely, only the
members of his family benefited from the Corporation.

The accounts of the corporation and therefore its operation, as well as that of the
family appears to be indistinguishable and apparently joined together. As
admitted by the defendants (Manifestation of Compliance with Order of March 7,
1963 [Exhibit "21"] the corporation 'never' had any account with any banking
institution or if any account was carried in a bank on its behalf, it was in the name
of Mr. Forrest L. Cease. In brief, the operation of the Corporation is merged with
those of the majority stockholders, the latter using the former as his
instrumentality and for the exclusive benefits of all his family. From the foregoing
indication, therefore, there is truth in plaintiff's allegation that the corporation is
only a business conduit of his father and an extension of his personality, they are
one and the same thing. Thus, the assets of the corporation are also the estate of
Forrest L. Cease, the father of the parties herein who are all legitimate children of
full blood.

A rich store of jurisprudence has established the rule known as the doctrine of disregarding or
piercing the veil of corporate fiction. Generally, a corporation is invested by law with a
personality separate and distinct from that of the persons composing it as well as from that of
any other legal entity to which it may be related. By virtue of this attribute, a corporation may
not, generally, be made to answer for acts or liabilities of its stockholders or those of the legal
entities to which it may be connected, and vice versa. This separate and distinct personality is,
however, merely a fiction created by law for convenience and to promote the ends of justice
(Laguna Transportation Company vs. Social Security System, L-14606, April 28, 1960; La
Campana Coffee Factory, Inc. vs. Kaisahan ng mga Manggagawa sa La Campana, L-5677, May
25, 1953). For this reason, it may not be used or invoked for ends subversive of the policy and
purpose behind its creation (Emiliano Cano Enterprises, Inc. vs. CIR, L-20502, Feb. 26, 1965) or
which could not have been intended by law to which it owes its being McConnel vs. Court of
Appeals, L- 10510, March 17, 1961, 1 SCRA 722). This is particularly true where the fiction is
used to defeat public convenience, justify wrong, protect fraud, defend crime (Yutivo Sons
Hardware Company vs. Court of Tax Appeals, L-13203, Jan. 28, 1961, 1 SCRA 160), confuse
legitimate legal or judicial issues (R. F. Sugay & Co. vs. Reyes, L-20451, Dec. 28, 1964),
perpetrate deception or otherwise circumvent the law (Gregorio Araneta, Inc. vs. reason de
Paterno, L-2886, Aug. 22, 1952, 49 O.G. 721). This is likewise true where the corporate entity is
being used as an alter ego, adjunct, or business conduit for the sole benefit of the stockholders
or of another corporate entity (McConnel vs. Court of Appeals, supra; Commissioner of
Internal Revenue vs. Norton Harrison Co., L-7618, Aug. 31, 1964).

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

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

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

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

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

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

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

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

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

- that accordingly, the contrary ruling in Fuentebella vs. Carrascoso which

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

Fuentebella adopted instead the opposite line of conflicting decisions mostly in

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

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

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

The miranda ruling has since then been applied as the new rule by a unanimous Court
in Valdez vs. Bagasao, 82 SCRA 22 (March 8, 1978).

If there were a valid genuine claim of Exclusive ownership of the inherited properties on the
part of petitioners to respondents' action for partition, then under the Miranda ruling,
petitioners would be sustained, for as expressly held therein " the general rule of partition that
an appeal will not lie until the partition or distribution proceedings are terminated will not
apply where appellant claims exclusive ownership of the whole property and denies the
adverse party's right to any partition."

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

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

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

SO ORDERED.

G.R. No. L-69259 January 26, 1988

DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,

vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.

GUTIERREZ, JR., J.:

The petitioners question the decision of the Intermediate Appellate Court which sustained the
private respondent's contention that the deed of exchange whereby Delfin Pacheco and
Pelagia Pacheco conveyed a parcel of land to Delpher Trades Corporation in exchange for 2,500
shares of stock was actually a deed of sale which violated a right of first refusal under a lease
contract.

Briefly, the facts of the case are summarized as follows:

In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169
square meters of real estate Identified as Lot. No. 1095, Malinta Estate, in the
Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro Manila)
which is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land
registry.

On April 3, 1974, the said co-owners leased to Construction Components

International Inc. the same property and providing that during the existence or
after the term of this lease the lessor should he decide to sell the property leased
shall first offer the same to the lessee and the letter has the priority to buy under
similar conditions (Exhibits A to A-5)

On August 3, 1974, lessee Construction Components International, Inc. assigned

its rights and obligations under the contract of lease in favor of Hydro Pipes
 Philippines, Inc. with the signed conformity and consent of lessors Delfin Pacheco
and Pelagia Pacheco (Exhs. B to B-6 inclusive)

The contract of lease, as well as the assignment of lease were annotated at he

back of the title, as per stipulation of the parties (Exhs. A to D-3 inclusive)

On January 3, 1976, a deed of exchange was executed between lessors Delfin and
Pelagia Pacheco and defendant Delpher Trades Corporation whereby the former
conveyed to the latter the leased property (TCT No.T-4240) together with another
parcel of land also located in Malinta Estate, Valenzuela, Metro Manila (TCT No.
4273) for 2,500 shares of stock of defendant corporation with a total value of
P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)

On the ground that it was not given the first option to buy the leased property pursuant to the
proviso in the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended
complaint for reconveyance of Lot. No. 1095 in its favor under conditions similar to those
whereby Delpher Trades Corporation acquired the property from Pelagia Pacheco and Delphin
Pacheco.

After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive
portion of the decision reads:

ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of

the plaintiffs preferential right to acquire the subject property (right of first
refusal) and ordering the defendants and all persons deriving rights therefrom to
convey the said property to plaintiff who may offer to acquire the same at the rate
of P14.00 per square meter, more or less, for Lot 1095 whose area is 27,169
square meters only. Without pronouncement as to attorney's fees and costs.
(Appendix I; Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)

The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.

The defendants-appellants, now the petitioners, filed a petition for certiorari to review the
appellate court's decision.

We initially denied the petition but upon motion for reconsideration, we set aside the
resolution denying the petition and gave it due course.

The petitioners allege that:

The denial of the petition will work great injustice to the petitioners, in that:

1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire

from petitioners a parcel of industrial land consisting of 27,169 square meters or
 2.7 hectares (located right after the Valenzuela, Bulacan exit of the toll
expressway) for only P14/sq. meter, or a total of P380,366, although the prevailing
value thereof is approximately P300/sq. meter or P8.1 Million;

2. Private respondent is allowed to exercise its right of first refusal even if there is
no "sale" or transfer of actual ownership interests by petitioners to third parties;
and

3. Assuming arguendo that there has been a transfer of actual ownership

interests, private respondent will acquire the land not under "similar conditions"
by which it was transferred to petitioner Delpher Trades Corporation, as provided
in the same contractual provision invoked by private respondent. (pp. 251-252,
Rollo)

The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties
executed by the Pachecos on the one hand and the Delpher Trades Corporation on the other
was meant to be a contract of sale which, in effect, prejudiced the private respondent's right of
first refusal over the leased property included in the "deed of exchange."

Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco
testified that Delpher Trades Corporation is a family corporation; that the corporation was
organized by the children of the two spouses (spouses Pelagia Pacheco and Benjamin
Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned in common the parcel of
land leased to Hydro Pipes Philippines in order to perpetuate their control over the property
through the corporation and to avoid taxes; that in order to accomplish this end, two pieces of
real estate, including Lot No. 1095 which had been leased to Hydro Pipes Philippines, were
transferred to the corporation; that the leased property was transferred to the corporation by
virtue of a deed of exchange of property; that in exchange for these properties, Pelagia and
Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55%
majority in the corporation because the other owners only owned 2,000 shares; and that at
the time of incorporation, he knew all about the contract of lease of Lot. No. 1095 to Hydro
Pipes Philippines. In the petitioners' motion for reconsideration, they refer to this scheme as
"estate planning." (p. 252, Rollo)

Under this factual backdrop, the petitioners contend that there was actually no transfer of
ownership of the subject parcel of land since the Pachecos remained in control of the property.
Thus, the petitioners allege: "Considering that the beneficial ownership and control of
petitioner corporation remained in the hands of the original co-owners, there was no transfer
of actual ownership interests over the land when the same was transferred to petitioner
corporation in exchange for the latter's shares of stock. The transfer of ownership, if anything,
was merely in form but not in substance. In reality, petitioner corporation is a mere alter ego or
conduit of the Pacheco co-owners; hence the corporation and the co-owners should be
deemed to be the same, there being in substance and in effect an Identity of interest." (p. 254,
Rollo)

The petitioners maintain that the Pachecos did not sell the property. They argue that there was
no sale and that they exchanged the land for shares of stocks in their own corporation. "Hence,
such transfer is not within the letter, or even spirit of the contract. There is a sale when
ownership is transferred for a price certain in money or its equivalent (Art. 1468, Civil Code)
while there is a barter or exchange when one thing is given in consideration of another thing
(Art. 1638, Civil Code)." (pp. 254-255, Rollo)

On the other hand, the private respondent argues that Delpher Trades Corporation is a
corporate entity separate and distinct from the Pachecos. Thus, it contends that it cannot be
said that Delpher Trades Corporation is the Pacheco's same alter ego or conduit; that
petitioner Delfin Pacheco, having treated Delpher Trades Corporation as such a separate and
distinct corporate entity, is not a party who may allege that this separate corporate existence
should be disregarded. It maintains that there was actual transfer of ownership interests over
the leased property when the same was transferred to Delpher Trades Corporation in exchange
for the latter's shares of stock.

We rule for the petitioners.

After incorporation, one becomes a stockholder of a corporation by subscription or by

purchasing stock directly from the corporation or from individual owners thereof (Salmon,
Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at
bar, in exchange for their properties, the Pachecos acquired 2,500 original unissued no par
value shares of stocks of the Delpher Trades Corporation. Consequently, the Pachecos became
stockholders of the corporation by subscription "The essence of the stock subscription is an
agreement to take and pay for original unissued shares of a corporation, formed or to be
formed." (Rohrlich 243, cited in Agbayani, Commentaries and Jurisprudence on the
Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 430) It is significant that the
Pachecos took no par value shares in exchange for their properties.

A no-par value share does not purport to represent any stated proportionate
interest in the capital stock measured by value, but only an aliquot part of the
whole number of such shares of the issuing corporation. The holder of no-par
shares may see from the certificate itself that he is only an aliquot sharer in the
assets of the corporation. But this character of proportionate interest is not
hidden beneath a false appearance of a given sum in money, as in the case of par
value shares. The capital stock of a corporation issuing only no-par value shares is
not set forth by a stated amount of money, but instead is expressed to be divided
into a stated number of shares, such as, 1,000 shares. This indicates that a
shareholder of 100 such shares is an aliquot sharer in the assets of the
corporation, no matter what value they may have, to the extent of 100/1,000 or
 1/10. Thus, by removing the par value of shares, the attention of persons
interested in the financial condition of a corporation is focused upon the value of
assets and the amount of its debts. (Agbayani, Commentaries and Jurisprudence
on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 107).

Moreover, there was no attempt to state the true or current market value of the real estate.
Land valued at P300.00 a square meter was turned over to the family's corporation for only
P14.00 a square meter.

It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos
have control of the corporation. Their equity capital is 55% as against 45% of the other
stockholders, who also belong to the same family group.

In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they
really did was to invest their properties and change the nature of their ownership from
unincorporated to incorporated form by organizing Delpher Trades Corporation to take control
of their properties and at the same time save on inheritance taxes.

As explained by Eduardo Neria:

xxx xxx xxx

ATTY. LINSANGAN:

Q Mr. Neria, from the point of view of taxation, is there any benefit to
the spouses Hernandez and Pacheco in connection with their
execution of a deed of exchange on the properties for no par value
shares of the defendant corporation?

A Yes, sir.

COURT:

Q What do you mean by "point of view"?

A To take advantage for both spouses and corporation in entering in

the deed of exchange.

ATTY. LINSANGAN:

Q (What do you mean by "point of view"?) What are these benefits

to the spouses of this deed of exchange?
A Continuous control of the property, tax exemption benefits, and
other inherent benefits in a corporation.

Q What are these advantages to the said spouses from the point of
view of taxation in entering in the deed of exchange?

A Having fulfilled the conditions in the income tax law, providing for
tax free exchange of property, they were able to execute the deed of
exchange free from income tax and acquire a corporation.

Q What provision in the income tax law are you referring to?

A I refer to Section 35 of the National Internal Revenue Code under

par. C-sub-par. (2) Exceptions regarding the provision which I quote:
"No gain or loss shall also be recognized if a person exchanges his
property for stock in a corporation of which as a result of such
exchange said person alone or together with others not exceeding
four persons gains control of said corporation."

Q Did you explain to the spouses this benefit at the time you
executed the deed of exchange?

A Yes, sir

Q You also, testified during the last hearing that the decision to have
no par value share in the defendant corporation was for the purpose
of flexibility. Can you explain flexibility in connection with the
ownership of the property in question?

A There is flexibility in using no par value shares as the value is

determined by the board of directors in increasing capitalization. The
board can fix the value of the shares equivalent to the capital
requirements of the corporation.

Q Now also from the point of taxation, is there any flexibility in the
holding by the corporation of the property in question?

A Yes, since a corporation does not die it can continue to hold on to

the property indefinitely for a period of at least 50 years. On the
other hand, if the property is held by the spouse the property will be
tied up in succession proceedings and the consequential payments of
estate and inheritance taxes when an owner dies.
 Q Now what advantage is this continuity in relation to ownership by a
particular person of certain properties in respect to taxation?

A The property is not subjected to taxes on succession as the

corporation does not die.

Q So the benefit you are talking about are inheritance taxes?

A Yes, sir. (pp. 3-5, tsn., December 15, 1981)

The records do not point to anything wrong or objectionable about this "estate planning"
scheme resorted to by the Pachecos. "The legal right of a taxpayer to decrease the amount of
what otherwise could be his taxes or altogether avoid them, by means which the law permits,
cannot be doubted." (Liddell & Co., Inc. v. The collector of Internal Revenue, 2 SCRA 632 citing
Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596).

The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation
cannot be considered a contract of sale. There was no transfer of actual ownership interests by
the Pachecos to a third party. The Pacheco family merely changed their ownership from one
form to another. The ownership remained in the same hands. Hence, the private respondent
has no basis for its claim of a light of first refusal under the lease contract.

WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution
of the then Intermediate Appellate Court are REVERSED and SET ASIDE. The amended
complaint in Civil Case No. 885-V-79 of the then Court of First Instance of Bulacan is
DISMISSED. No costs.

SO ORDERED.

173 F. Supp. 915 (1959)

W. H. GARRETT
v.
SOUTHERN RAILWAY COMPANY.
Civ. A. No. 3465.

United States District Court E. D. Tennessee, N. D.

May 8, 1959.

*916 Hodges & Doughty, Knoxville, Tenn., for plaintiff.

Key & Lee, Knoxville, Tenn., for defendant.

ROBERT L. TAYLOR, District Judge.

The plaintiff in this case was employed as a wheel moulder by Lenoir Car Works, a Tennessee
corporation. He claims injuries from silicosis contracted from silica dust permeating the
foundry. But the questions whether he had silicosis, and the amount of injury, are not reached
in this phase of the case.

The sole question here is whether defendant, Southern Railway Company (hereinafter referred
to as Southern), which acquired the entire capital stock of Lenoir Car Works (referred to
hereinafter as Lenoir) in 1904, the year of the latter's organization, so completely dominated
Lenoir that the latter was but an adjunct, or instrumentality, of Southern. If it did, then the
complainant would, for the purpose of this case, be an employee of Southern and would be
entitled to recover under the Federal Employers' Liability Act, 45 U.S.C.A. § 51 et seq. Because
there is a real question that Lenoir is but an instrumentality of Southern, the plaintiff in order
to protect his rights, has also brought suit in the State courts against Lenoir for Workmen's
Compensation.

The general rule is that stock ownership alone by one corporation of the stock of another does
not thereby render the dominant corporation liable for the torts of the subsidiary unless the
separate corporate existence of the subsidiary is a mere sham, or unless the control of the
subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation.
Sheridan v. Pan-American Refining Co., D.C.N.Y. 123 F. Supp. 81. The general rule is also stated
in an Annotation appearing in 50 A.L.R. 611. See also Kentucky Electric Power Co. v. Norton
Coal Mining Co., 6 Cir., 93 F.2d 923, 926. Whether the subsidiary is an instrumentality of the
owner corporation is a question to be determined from all the surrounding circumstances.
Fletcher Cyclopedia Corporations, Sec. 43 (p. 157), Sec. 6222; Berkey v. Third Ave. R. Co., 244
N.Y. 84, 155 N.E. 58, 50 A.L.R. 599 (opinion by Cardozo); Costan v. Manila Electric Co., 2 Cir., 24
F.2d 383, 384. Items to be considered in reaching such a determination are common
directorships, common officers, common fiscal set up, etc.

The plaintiff relies upon the following circumstances:

That all directors and officers of Lenoir are employees of Southern and live in Washington; that
Southern owns all the *917 stock of Lenoir except five qualifying shares; that between 1942-
1957 Lenoir sold to Southern, or its affiliates, over 30 million dollars worth of its products while
selling approximately four and a half million to outside purchasers; that all profits of Lenoir
went to Southern; that all claims of Lenoir employees for accidents are handled by the claim's
office of Southern; that all litigation against Lenoir is handled by Southern's attorneys; that
general accounting of Lenoir is handled in Washington by personnel of Southern; that the
Railroad Retirement Board decided that employees of Lenoir were entitled to benefits under
the Railroad Retirement Act, 45 U.S.C.A. § 215 et seq., because of the relationship between
Lenoir and Southern; that Lenoir has the power of eminent domain; and that on May 13, 1904,
the Board of Directors of Southern authorized the purchase of the entire capital stock of
Lenoir.

Our question is whether these factors would establish Lenoir as the mere creature of Southern.
The defendant railroad says that these matters are not controlling and to sustain its position
emphasizes the following facts:

That although Lenoir sells the majority of its products to Southern or its affiliates, it does not
sell to them exclusively and in the fifteen-year period prior to the suit sold twelve percent to
other customers; that Lenoir maintains its offices and business in Lenoir City, Tennessee,
although it concedes that the corporate and accounting offices are in Washington in a building
owned by Southern; that the management of Lenoir is vested in a manager, Henry Marius, who
has held the position continuously since July 1, 1945, is paid by Lenoir, and although he holds
and votes the proxy of Southern at the annual stockholders meeting, he has no other
connection with Southern; that never has any individual served at the same time as a Director
of Lenoir and Southern; that the work of Lenoir is a specialty and in the last 20 years no official
or supervising employee of Southern has by training, or experience, been in a position to direct
or supervise the operation of such a business; that Southern has not purchased all its wheels,
steel and brass castings from Lenoir, but has bought substantial amounts from others; that
Southern has followed the custom in the trade as to price quotations and supplying scrap
material in its dealings with Lenoir, and all sales to Southern have been upon the basis of a bid
price or negotiated price; that in every case Southern obtains bids from several manufacturers
and purchases from the lowest bidder; that the manager of Lenoir establishes the prices of all
prospective purchases, including that of Southern; that the manager expects to make a profit
and is not informed by Southern of bids of its competitors even when the prices are
negotiated; that bids are revised sometimes, but never with knowledge of the bids of
competitors; that all sales are the result of the business judgment of the Manager and not the
result of threats, persuasion or intimidation by Southern; that at no time has any individual
occupied the same official position in both companies with the exception of corporate and
financial officials; that Lenior has since 1919 been a duly qualified employer under the
Tennessee Workmen's Compensation Law, T.C.A. § 50-901 et seq., and with the exception of
this and several similar suits has settled all claims made under and covered by the Tennessee
Workmen's Compensation Law; that Lenoir maintains a separate bank account and has never
intermingled its funds with those of Southern; that the companies keep separate books and
Lenoir pays its own taxes; that Southern issues no passes to the manager or any other
employee of Lenoir; that Lenoir owns no track or rolling stock, publishes no tariffs, files no
reports with the Interstate Commerce Commission and uses no facilities or property jointly
with Southern; that claims of employees are investigated and settled by the Claim Department
of the Southern Railway System, which likewise defends claims litigation; that the general
accounting of Lenoir is handled *918by the Accounting Department of the Southern Railway
System, but local accounting is handled by Lenoir employees at Lenoir City; that salaries of
employees of the System doing this general work are paid by Southern, but reimbursement of
its fair proportionate part thereof is made by Lenoir and other members of the System at
monthly intervals, and that the share of Lenoir is $2,000 monthly; that Lenoir makes separate
collective bargaining agreements with its employees and there is no interchange of seniority
between operations of Lenoir and the railroad, or vice versa; that Lenoir has its own legal
counsel in Lenoir City, selected by its manager in addition to the use it makes of the Legal
Department of the System.

Counsel have been commendably frank and candid in the pre-trial conference, and in
answering interrogatories and filing exhibits. The factual data before the Court is not in
conflict. The Court's responsibility is to determine whether Lenoir is operated as a sham for
Southern, or as the instrumentality, or as an adjunct of its operation.

The facts set forth above outline with singular sharpness the relation between the two
companies. The Court finds the existence of two distinct operations. There is no evidence that
Southern dictated the management of Lenoir. In fact, the evidence indicates that Henry Marius
was in full control of the operation. He established prices. He handled all negotiations in
collective bargaining agreements. Lenoir paid local taxes, had local counsel, maintained
Workmen's Compensation. There is no evidence that Lenoir was run solely for the benefit of
Southern. In fact a substantial part of its requirements in the field of operation of Lenior were
bought elsewhere. Lenoir sold substantial quantities to other companies. It operated no rolling
stock and had nothing to do with the transportation business.

The situation here is not like that in Southern Pacific Co. v. Gileo, 351 U.S. 493, 76 S. Ct. 952,
100 L. Ed. 1357, where the railroad itself operated a wheel foundry. The only question there as
to employee Aranda was whether his duties as a wheel moulder served to further interstate
commerce. The Supreme Court decided he was entitled to the benefit of the Federal
Employers' Liability Act.

But before the Gileo decision applies here we must first determine whether Lenoir was
operated so tightly by Southern that it was an agency or instrumentality of Southern. In our
opinion it was not. Policy decisions and pricings remained in the hands of Marius. Certain
accounting and claims work was done in Washington to eliminate duplication. But there is no
evidence that policy decisions of Lenoir were made or dictated by Southern. Marius operated
the business as a going concern in the fields it was equipped to handle. Where Southern, or
the Southern Railway System, did work for Lenoir there was careful accounting and adjustment
of costs at the end of each month. The facts do not reveal the intimacy and inseparability of
control which would lead the Court to hold that Southern and Lenoir were one and the same.
There is no such control here as in Costan v. Manila Electric Co., supra.

Lenoir was not in the words of the Act a "common carrier by railroad." It was not performing
what have been called non-delegable duties of the railroad. It was not an operator of a
terminal, performed no switching or transportation functions at all. It was a manufacturer and
plaintiff was one of its employees. It was hence not an "agent" of Southern in the sense used in
some of the cases cited by the plaintiff, since it performed no common carrier operations.
Chicago, M. & St. P. Ry. Co. v. Minnesota Civic & Commerce Ass'n, 247 U.S. 490, 38 S. Ct. 553,
62 L. Ed. 1229; Davis v. Alexander, 269 U.S. 114, 46 S. Ct. 34, 70 L. Ed. 186; Sinkler v. Missouri
Pacific R. Co., 356 U.S. 326, 78 S. Ct. 758, 2 L. Ed. 2d 799.

Defendant manufactured car wheels, bearings of various kinds and items of a related nature.
Southern could produce such items for its own use and if it did *919 so would be liable in tort
under the F.E. L.A. for accidents occurring in the activity. But Southern did not manufacture
these things in its own plants. Although necessary to keep its rolling stock in good repair, the
items could be purchased anywhere. In fact the evidence indicates that substantial purchases
of these products were made elsewhere. If purchased of a completely independent company,
no claim could be made that such company was an instrumentality of Southern.

The question only arises because of the ownership of Lenoir by Southern and because of the
other relationships listed above. We come back to the question whether the control was such
as to make Lenoir a mere adjunct of Southern. We repeat again that it was not. Friedman v.
Vandalia R. Co., 8 Cir., 254 F. 292, 294; Atlantic Coast Line R. Co. v. Shields, 5 Cir., 220 F.2d 242,
246.

In a case not involving a tort the Court of Appeals for the Sixth Circuit has set down the
following guide lines. Kentucky Electric Power Co. v. Norton Coal Mining Co., supra:

"On the other hand, it is likewise well settled that a corporation is ordinarily an entity, separate
and apart from its stockholders, and mere ownership of all the stock of one corporation by
another, and the identity of officers of one with officers of another, are not alone sufficient to
create identity of corporate interest between the two companies or to create the relation of
principal and agent or to create a representative or fiduciary relationship between the two. If
such stock ownership and potential control be resorted to only for the purpose of normally
participating in the affairs of the subsidiary corporation in a manner usual to stockholders and
not for the purpose of taking some unfair advantage of the subsidiary or using it as a mere
adjunct to the main corporation or as a subterfuge to justify wrongdoing, their identity as
separate corporations will not be disregarded but their respective rights when dealing with
each other in respect to their separate property will be recognized and maintained. The extent
of stock ownership and mere potential control of one company over another has never been
regarded as the determining factor in the consideration of such cases. Something must be
disclosed to indicate the exercise of undue domination or influence resulting in an
infringement upon the rights of the subservient corporation for the benefit of the dominant
one. Otherwise, the rights of the separate corporations in respect to their corporate property
must be governed by the rules applicable in ordinary cases." [93 F.2d 926.]

This excerpt from the Kentucky Electric Power case was quoted with approval in a footnote to
the case of Taylor v. Standard Gas & Electric Co., 10 Cir., 96 F.2d 693, 704. In that case the Court
in considering the indicia of control quoted at length from Powell on Parent and Subsidiary
Corporations:

"There is respectable authority for the proposition that to justify the application of the
instrumentality rule between parent and subsidiary corporation, there must be present in
addition to the elements of control through stock ownership and common directorates and
officers, elements of fraud or wrongdoing on the part of the parent corporation to the
detriment of the susbidiary and third persons in their relations with the subsidiary.

"Sections 5 and 6 of Powell on Parent and Subsidiary Corporations, in part, read:

"`The Instrumentality Rule, in its shortest form, may now be stated:

"`So far as the question of control alone is concerned, the parent corporation will be
responsible for the obligations of its subsidiary when its control has been exercised to
such *920 a degree that the subsidiary has become its mere instrumentality.

"`The Instrumentality Rule is recognized in all jurisdictions in this country and our problem
therefore is to determine the circumstances which render the subsidiary an "instrumentality"
within the meaning of the decisions. This is primarily a question of fact and of degree.'

"`The circumstances rendering the subsidiary an instrumentality. It is manifestly impossible to

catalogue the infinite variations of fact that can arise but there are certain common
circumstances which are important and which, if present in the proper combination, are
controlling.
"These are as follows:

"`(a) The parent corporation owns all or most of the capital stock of the subsidiary.

"`(b) The parent and subsidiary corporations have common directors or officers.

"`(c) The parent corporation finances the subsidiary.

"`(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation.

"`(e) The subsidiary has grossly inadequate capital.

"`(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.

"`(g) The subsidiary has substantially no business except with the parent corporation or no
assets except those conveyed to it by the parent corporation.

"`(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary
is described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation's own.

"`(i) The parent corporation uses the property of the subsidiary as its own.
"`(j) The directors or executives of the subsidiary do not act independently in the interest of
the subsidiary but take their orders from the parent corporation in the latter's interest.

"`(k) The formal legal requirements of the subsidiary are not observed.'"

In the case at bar only two of the eleven listed indicia occur, namely, the ownership of most of
the capital stock of Lenoir by Southern, and possibly subscription by Southern to the capital
stock of Lenoir. In our opinion the principles of the Kentucky Electric Power case apply here,
and when applied we conclude that the control of Southern over Lenoir was not such as to
constitute the latter an adjunct of Southern. The complaint must be dismissed.

JARDINE DAVIES, INC., G.R. No. 151438

Petitioner,
Present:

PUNO, J., Chairman,

AUSTRIA-MARTINEZ,
versus CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.
JRB REALTY, INC.,
Respondent. Promulgated:
July 15, 2005
x----------------------------------------------x

DECISION

CALLEJO, SR., J.:

Before us is a petition for review of the Decision [1] of the Court of Appeals (CA) in CA-G.R.

CV No. 54201 affirming in toto that of the Regional Trial Court (RTC) in Civil Case No. 90-237 for
specific performance; and the Resolution dated January 11, 2002 denying the motion for

reconsideration thereof.

The facts are as follows:

In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building, named Blanco

Center, on its parcel of land located at 119 Alfaro St., Salcedo Village, Makati City. An air

conditioning system was needed for the Blanco Law Firm housed at the second floor of the

building. On March 13, 1980, the respondents Executive Vice-President, Jose R. Blanco,
accepted the contract quotation of Mr. A.G. Morrison, President of Aircon and Refrigeration

Industries, Inc. (Aircon), for two (2) sets of Fedders Adaptomatic 30,000 kcal (Code: 10-TR) air

conditioning equipment with a net total selling price of P99,586.00.[2] Thereafter, two (2) brand

new packaged air conditioners of 10 tons capacity each to deliver 30,000 kcal or 120,000

BTUH[3] were installed by Aircon. When the units with rotary compressors were installed, they

could not deliver the desired cooling temperature. Despite several adjustments and corrective

measures, the respondent conceded that Fedders Air Conditioning USAs technology for rotary

compressors for big capacity conditioners like those installed at the Blanco Center had not yet

been perfected. The parties thereby agreed to replace the units with reciprocating/semi-

hermetic compressors instead. In a Letter dated March 26, 1981, [4] Aircon stated that it would

be replacing the units currently installed with new ones using rotary compressors, at the

earliest possible time. Regrettably, however, it could not specify a date when delivery could be

effected.

TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the

maintenance of the units, inclusive of parts and services. In October 1987, the respondent

learned, through newspaper ads,[5] that Maxim Industrial and Merchandising Corporation

(Maxim, for short) was the new and exclusive licensee of Fedders Air Conditioning USA in the
Philippines for the manufacture, distribution, sale, installation and maintenance of Fedders air

conditioners. The respondent requested that Maxim honor the obligation of Aircon, but the

latter refused. Considering that the ten-year period of prescription was fast approaching, to

expire on March 13, 1990, the respondent then instituted, on January 29, 1990, an action for

specific performance with damages against Aircon & Refrigeration Industries, Inc., Fedders Air

Conditioning USA, Inc., Maxim Industrial & Merchandising Corporation and petitioner Jardine

Davies, Inc.[6] The latter was impleaded as defendant, considering that Aircon was a subsidiary

of the petitioner. The respondent prayed that judgment be rendered, as follows:

1. Ordering the defendants to jointly and severally at their account and

expense deliver, install and place in operation two
brand new units of each 10-tons capacity Fedders unitary packaged air
conditioners with Fedders USAs technology perfected rotary compressors to
always deliver 30,000 kcal or 120,000 BTUH to the second floor of the Blanco
Center building at 119 Alfaro St., Salcedo Village, Makati, Metro Manila;

2. Ordering defendants to jointly and severally reimburse plaintiff not only

the sums of P415,118.95 for unsaved electricity from 21 st October 1981 to
7th January 1990 and P99,287.77 for repair costs of the two service units from
7th March 1987 to 11th January 1990, with legal interest thereon from the filing of
this Complaint until fully reimbursed, but also like unsaved electricity costs and
like repair costs therefrom until Prayer No. 1 above shall have been complied
with;

3. Ordering defendants to jointly and severally pay plaintiffs P150,000.00

attorneys fees and other costs of litigation, as well as exemplary damages in an
amount not less than or equal to Prayer 2 above; and

4. Granting plaintiff such other and further relief as shall be just and
equitable in the premises.[7]

Of the four defendants, only the petitioner filed its Answer. The court did not acquire

jurisdiction over Aircon because the latter ceased operations, as its corporate life ended on
December 31, 1986.[8] Upon motion, defendants Fedders Air Conditioning USA and Maxim

were declared in default.[9]

On May 17, 1996, the RTC rendered its Decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered ordering defendants Jardine Davies,

Inc., Fedders Air Conditioning USA, Inc. and Maxim Industrial and Merchandising
Corporation, jointly and severally:

1. To deliver, install and place into operation the two (2) brand
new units of Fedders unitary packaged airconditioning units each of
10 tons capacity with rotary compressors to deliver 30,000 kcal or
120,000 BTUH to the second floor of the Blanco Center building, or
to pay plaintiff the current price for two such units;

2. To reimburse plaintiff the amount of P556,551.55 as and for

the unsaved electricity bills from October 21, 1981 up to April 30,
1995; and another amount of P185,951.67 as and for repair costs;

3. To pay plaintiff P50,000.00 as and for attorneys fees; and

4. Cost of suit.[10]

The petitioner filed its notice of appeal with the CA, alleging that the trial court erred in

holding it liable because it was not a party to the contract between JRB Realty, Inc. and Aircon,

and that it had a personality separate and distinct from that of Aircon.

On March 23, 2000, the CA affirmed the trial courts ruling in toto; hence, this petition.

The petitioner raises the following assignment of errors:

I.
THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE FOR THE ALLEGED
CONTRACTUAL BREACH OF AIRCON SOLELY BECAUSE THE LATTER WAS
FORMERLY JARDINES SUBSIDIARY.

II.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE
ALTER EGO, THE COURT OF APPEALS ERRED IN NOT DECLARING AIRCONS
 OBLIGATION TO DELIVER THE TWO (2) AIRCONDITIONING UNITS TO JRB AS
HAVING BEEN SUBSTANTIALLY COMPLIED WITH IN GOOD FAITH.

III.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE
ALTER EGO, THE COURT OF APPEALS ERRED IN NOT DECLARING JRBS CAUSES OF
ACTION AS HAVING BEEN BARRED BY LACHES.
IV.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE
ALTER EGO, THE COURT OF APPEALS ERRED IN FINDING JRB ENTITLED TO
RECOVER ALLEGED UNSAVED ELECTRICITY EXPENSES.

V.
THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE TO PAY ATTORNEYS
FEES.
VI.
THE COURT OF APPEALS ERRED IN NOT HOLDING JRB LIABLE TO JARDINE FOR
DAMAGES.[11]

It is the well-settled rule that factual findings of the trial court, as affirmed by the CA, are

accorded high respect, even finality at times. However, considering that the factual findings of

the CA and the RTC were based on speculation and conjectures, unsupported by substantial

evidence, the Court finds that the instant case falls under one of the excepted instances. There

is, thus, a need to correct the error.

The trial court ruled that Aircon was a subsidiary of the petitioner, and concluded, thus:

Plaintiffs documentary evidence shows that at the time it contracted with

Aircon on March 13, 1980 (Exhibit D) and on the date the revised agreement was
reached on March 26, 1981, Aircon was a subsidiary of Jardine. The phrase A
subsidiary of Jardine Davies, Inc. was printed on Aircons letterhead of its March
13, 1980 contract with plaintiff (Exhibit D-1), as well as the Aircons letterhead of
Jardines Director and Senior Vice-President A.G. Morrison and Aircons President
in his March 26, 1981 letter to plaintiff (Exhibit J-2) confirming the revised
agreement. Aircons newspaper ads of April 12 and 26, 1981 and a press release
 on August 30, 1982 (Exhibits E, F and L) also show that defendant Jardine
publicly represented Aircon to be its subsidiary.

Records from the Securities and Exchange Commission (SEC) also reveal
that as per Jardines December 31, 1986 and 1985 Financial Statements that The
company acts as general manager of its subsidiaries (Exhibit P). Jardines
Consolidated Balance Sheet as of December 31, 1979 filed with the SEC listed
Aircon as its subsidiary by owning 94.35% of Aircon (Exhibit P-1). Also, Aircons
reportorial General Information Sheet as of April 1980 and April 1981 filed with
the SEC show that Jardine was 94.34% owner of Aircon (Exhibits Q and R) and
that out of seven members of the Board of Directors of Aircon, four (4) are also
of Jardine.

Defendant Jardines witness, Atty. Fe delos Santos-Quiaoit admitted that

defendant Aircon, renamed Aircon & Refrigeration Industries, Inc. is one of the
subsidiaries of Jardine Davies (TSN, September 22, 1995, p. 12). She also testified
that Jardine nominated, elected, and appointed the controlling majority of the
Board of Directors and the highest officers of Aircon (Ibid, pp. 10,13-14).

The foregoing circumstances provide justifiable basis for this Court to

disregard the fiction of corporate entity and treat defendant Aircon as part of
the instrumentality of co-defendant Jardine.[12]

The respondent court arrived at the same conclusion basing its ruling on the following

documents, to wit:

(a) Contract/Quotation #78-No. 80-1639 dated March 03, 1980 (Exh. D-1);

(b) Newspaper Advertisements (Exhs. E-1 and F-1);

(c) Letter dated March 26, 1981 of A.G. Morrison, President of Aircon, to
Atty. J.R. Blanco (Exh. J);

(d) News items of Bulletin Today dated August 30, 1982 (Exh. L);

(e) Balance Sheet of Jardine Davies, Inc. as of December 31, 1979 listing
Aircon as one of its subsidiaries (Exh. P);

(f) Financial Statement of Aircon as of December 31, 1982 and 1981 (Exh.
S);
 (g) Financial Statement of Aircon as of December 31, 1981 (Exh. S-1). [13]

Applying the doctrine of piercing the veil of corporate fiction, both the respondent and

trial courts conveniently held the petitioner liable for the alleged omissions of Aircon,

considering that the latter was its instrumentality or corporate alter ego. The petitioner is now

before us, reiterating its defense of separateness, and the fact that it is not a party to the

contract.

We find merit in the petition.

It is an elementary and fundamental principle of corporation law that a corporation is an

artificial being invested by law with a personality separate and distinct from its stockholders

and from other corporations to which it may be connected. While a corporation is allowed to

exist solely for a lawful purpose, the law will regard it as an association of persons or in case of

two corporations, merge them into one, when this corporate legal entity is used as a cloak for

fraud or illegality.[14] This is the doctrine of piercing the veil of corporate

fiction which applies only when such corporate fiction is used to defeat public convenience,

justify wrong, protect fraud or defend crime.[15] The rationale behind piercing a corporations

identity is to remove the barrier between the corporation from the persons comprising it to

thwart the fraudulent and illegal schemes of those who use the corporate personality as a

shield for undertaking certain proscribed activities.[16]

While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow

that Aircons corporate legal existence can just be disregarded. In Velarde v. Lopez, Inc.,[17] the

Court categorically held that a subsidiary has an independent and separate juridical
personality, distinct from that of its parent company; hence, any claim or suit against the latter

does not bind the former, and vice versa. In applying the doctrine, the following requisites

must be established: (1) control, not merely majority or complete stock control; (2) such

control must have been used by the defendant to commit fraud or wrong, to perpetuate the

violation of a statutory or other positive legal duty, or dishonest acts in contravention of

plaintiffs legal rights; and (3) the aforesaid control and breach of duty must proximately cause

the injury or unjust loss complained of.[18]

The records bear out that Aircon is a subsidiary of the petitioner only because the latter

acquired Aircons majority of capital stock. It, however, does not exercise complete control over

Aircon; nowhere can it be gathered that the petitioner manages the business affairs of Aircon.

Indeed, no management agreement exists between the petitioner and Aircon, and the latter is

an entirely different entity from the petitioner.[19]

Jardine Davies, Inc., incorporated as early as June 28, 1946, [20] is primarily a financial and

trading company. Its Articles of Incorporation states among many others that the purposes for
which the said corporation was formed, are as follows:

(a) To carry on the business of merchants, commission merchants, brokers,

factors, manufacturers, and agents;

(b) Upon complying with the requirements of law applicable thereto, to act
as agents of companies and underwriters doing and engaging in any and all kinds
of insurance business.[21]

On the other hand, Aircon, incorporated on December 27, 1952, [22] is a manufacturing

firm. Its Articles of Incorporation states that its purpose is mainly -

 To carry on the business of manufacturers of commercial and household
appliances and accessories of any form, particularly to manufacture, purchase,
sell or deal in air conditioning and refrigeration products of every class and
description as well as accessories and parts thereof, or other kindred
articles; and to erect, or buy, lease, manage, or otherwise acquire
manufactories, warehouses, and depots for manufacturing, assemblage, repair
and storing, buying, selling, and dealing in the aforesaid appliances, accessories
and products. [23]

The existence of interlocking directors, corporate officers and shareholders, which the

respondent court considered, is not enough justification to pierce the veil of corporate fiction,

in the absence of fraud or other public policy considerations. [24] But even when there is

dominance over the affairs of the subsidiary, the doctrine of piercing the veil of corporate

fiction applies only when such fiction is used to defeat public convenience, justify wrong,

protect fraud or defend crime.[25] To warrant resort to this extraordinary remedy, there must be

proof that the corporation is being used as a cloak or cover for fraud or illegality, or to work

injustice.[26] Any piercing of the corporate veil has to be done with caution. [27] The wrongdoing

must be clearly and convincingly established. It cannot just be presumed.[28]

In the instant case, there is no evidence that Aircon was formed or utilized with the

intention of defrauding its creditors or evading its contracts and obligations. There was nothing

fraudulent in the acts of Aircon in this case. Aircon, as a manufacturing firm of air

conditioners, complied with its obligation of providing two air conditioning units for the second

floor of the Blanco Center in good faith, pursuant to its contract with the respondent.

Unfortunately, the performance of the air conditioning units did not satisfy the respondent

despite several adjustments and corrective measures. In a Letter [29] dated October 22, 1980,

the respondent even conceded that Fedders Air Conditioning USA has not yet perhaps

perfected its technology of rotary compressors, and agreed to change the compressors with
the semi-hermetic type. Thus, Aircon substituted the units with serviceable ones which

delivered the cooling temperature needed for the law office. After enjoying ten (10) years of its

cooling power, respondent cannot now complain about the performance of these units, nor

can it demand a replacement thereof.

Moreover, it was reversible error to award the respondent the amount of P556,551.55

representing the alleged 30% unsaved electricity costs and P185,951.67 as maintenance cost

without showing any basis for such award. To justify a grant of actual or compensatory

damages, it is necessary to prove with a reasonable degree of certainty, premised upon

competent proof and on the best evidence obtainable by the injured party, the actual amount

of loss.[30] The respondent merely based its cause of action on Aircons alleged representation

that Fedders air conditioners with rotary compressors can save as much as 30% on electricity

compared to other brands. Offered in evidence were newspaper advertisements published on

April 12 and 26, 1981. The respondent then recorded its electricity consumption from October

21, 1981 up to April 3, 1995 and computed 30% thereof, which amounted to P556,551.55. The

Court rules that this amount is highly speculative and merely hypothetical, and for which the

petitioner can not be held accountable.

First. The respondent merely relied on the newspaper advertisements showing the

Fedders window-type air conditioners, which are far different from the big capacity air

conditioning units installed at Blanco Center.

Second. After such print advertisements, the respondent informed Aircon that it was

going to install an electric meter to register its electric consumption so as to determine the

electric costs not saved by the presently installed units with semi-hermetic compressors.

Contrary to the allegations of the respondent that this was in pursuance to their Revised
Agreement, no proof was adduced that Aircon agreed to the respondents proposition. It was a

unilateral act on the part of the respondent, which Aircon did not oblige or commit itself to

pay.

Third. Needless to state, the amounts computed are mere estimates representing the

respondents self-serving claim of unsaved electricity cost, which is too speculative and

conjectural to merit consideration. No other proofs, reports or bases of comparison showing

that Fedders Air Conditioning USA could indeed cut down electricity cost by 30% were

adduced.

Likewise, there is no basis for the award of P185,951.67 representing maintenance cost.

The respondent merely submitted a schedule[31] prepared by the respondents accountant,

listing the alleged repair costs from March 1987 up to June 1994. Such evidence is self-serving

and can not also be given probative weight, considering that there are no proofs of receipts,

vouchers, etc., which would substantiate the amounts paid for such services. Absent any more

convincing proof, the Court finds that the respondents claims are without basis, and cannot,

therefore, be awarded.

We sustain the petitioners separateness from that of Aircon in this case. It bears

stressing that the petitioner was never a party to the contract. Privity of contracts take effect

only between parties, their successors-in-interest, heirs and assigns. [32] The petitioner, which

has a

separate and distinct legal personality from that of Aircon, cannot, therefore, be held liable.

IN VIEW OF THE FOREGOING, the petition is GRANTED. The assailed decision of the

Court of Appeals, affirming the decision of the Regional Trial Court is REVERSED and SET

ASIDE. The complaint of the respondent is DISMISSED. Costs against the respondent.
SO ORDERED.

G.R. No. L-47673 October 10, 1946

KOPPEL (PHILIPPINES), INC., plaintiff-appellant,

vs.
ALFREDO L. YATCO, Collector of Internal Revenue, defendant-appellee.

Padilla, Carlos and Fernando for appellant.

Office of the Solicitor General Ozaeta, First Assistant Solicitor General Reyes and.
Office of the Solicitor General Reyes and Solicitor Cañizanes for appellee.

HILADO, J.:

This is an appeal by Koppel (Philippines), Inc., from the judgment of the Court of First Instance
of Manila in civil case No. 51218 of said court dismissing said corporation's complaint for the
recovery of the sum of P64,122.51 which it had paid under protest to the Collector of Internal
Revenue on October 30, 1936, as merchant sales tax. The main facts of the case were
stipulated in the court below as follows:

AGREED STATEMENT OF FACTS

Now come the plaintiff by attorney Eulogio P. Revilla and the defendant by the Solicitor
General and undersigned Assistant Attorney of the Bureau of Justice and, with leave of
this Honorable Court, hereby respectfully stipulated and agree to the following facts, to
wit:

I. That plaintiff is a corporation duly organized and existing under and by virtue of the
laws of the Philippines, with principal office therein at the City of Manila, the capital
stock of which is divided into thousand (1,000) shares of P100 each. The Koppel
Industrial Car and Equipment company, a corporation organized and existing under the
laws of the State of Pennsylvania, United States of America, and not licensed to do
business in the Philippines, owned nine hundred and ninety-five (995) shares out of the
total capital stock of the plaintiff from the year 1928 up to and including the year 1936,
and the remaining five (5) shares only were and are owned one each by officers of the
plaintiff corporation.
II. That plaintiff, at all times material to this case, was and now is duly licensed to engage
in business as a merchant and commercial broker in the Philippines; and was and is the
holder of the corresponding merchant's and commercial broker's privilege tax receipts.

III. That the defendant Collector of Internal revenue is now Mr. Bibiano L. Meer in lieu of
Mr. Alfredo L. Yatco.

IV. That during the period from January 1, 1929, up to and including December 31, 1932,
plaintiff transacted business in the Philippines in the following manner, with the
exception of the transactions which are described in paragraphs V and VI of this
stipulation:

When a local buyer was interested in the purchase of railway materials, machinery, and
supplies, it asked for price quotations from plaintiff. Atypical form of such request is
attached hereto and made a part hereof as Exhibit A. (Exhibit A represents typical
transactions arising from written requests for quotations, while Exhibits B to G, inclusive,
are typical transactions arising from verbal requests for quotation.) Plaintiff then cabled
for the quotation desired for Koppel Industrial Car and Equipment Company. A sample of
the pertinent cable is hereto attached and made a part hereof as Exhibit B. Koppel
Industrial Car and Equipment Company answered by cable quoting its cost price, usually
A. C. I. F. Manila cost price, which was later followed by a letter of confirmation. A
sample of the said cable quotation and of the letter of confirmation are hereto attached
and made a part hereof as Exhibits C and C-1. Plaintiff, however, quoted by Koppel
Industrial Car and Equipment Company. Copy of the plaintiff's letter to purchaser is
hereto attached and made a part hereof as Exhibit D. On the basis of these quotations,
orders were placed by the local purchasers, copies of which orders are hereto attached
as Exhibits E and E-1.

A cable was then sent to Koppel Industrial Car and Equipment company giving
instructions to ship the merchandise to Manila forwarding the customer's order. Sample
of said cable is hereto attached as Exhibit F. The bills of lading were usually made to
"order" and indorsed in blank with notation to the effect that the buyer be notified of
the shipment of the goods covered in the bills of lading; commercial invoices were
issued by Koppel Industrial Car and Equipment Company in the names of the purchasers
and certificates of insurance were likewise issued in their names, or in the name of
Koppel Industrial Car and Equipment Company but indorsed in blank and attached to
drafts drawn by Koppel Industrial Car and Equipment Company on the purchasers, which
were forwarded through foreign banks to local banks. Samples of the bills of lading are
hereto attached as Exhibits F-1, I-1, I-2 and I-3. Bills of ladings, Exhibits I-1, I-2 and I-3,
may equally have been employed, but said Exhibits I-1, I-2 and I-3 have no connection
with the transaction covered by Exhibits B to G, inclusive. The purchasers secured the
shipping papers by arrangement with the banks, and thereupon received and cleared
the shipments. If the merchandise were of European origin, and if there was not
sufficient time to forward the documents necessary for clearance, through foreign banks
to local banks, to the purchasers, the Koppel Industrial Car and Equipment company did,
in many cases, send the documents directly from Europe to plaintiff with instructions to
turn these documents over to the purchasers. In many cases, where sales was effected
on the basis of C. I. F. Manila, duty paid, plaintiff advanced the sums required for the
payment of the duty, and these sums, so advanced, were in every case reimbursed to
plaintiff by Koppel Industrial Car and Equipment Company. The price were payable by
drafts agreed upon in each case and drawn by Koppel Industrial Car and Equipment
Company on respective purchasers through local banks, and payments were made to the
banks by the purchasers on presentation and delivery to them of the above-mentioned
shipping documents or copies thereof. A sample of said drafts is hereto attached as
Exhibit G. Plaintiff received by way of compensation a percentage of the profits realized
on the above transactions as fixed in paragraph 6 of the plaintiff's contract with Koppel
Industrial Car and Equipment Company, which contract is hereto attached as Exhibit H,
and suffered its corresponding share in the losses resulting from some of the
transactions.

That the total gross sales from January 1, 1929, up to and including December 31, 1932,
effected in the foregoing manner and under the above specified conditions, amount to
P3, 596,438.84.

V. That when a local sugar central was interested in the purchase of railway materials,
machinery and supplies, it secured quotations from, and placed the corresponding
orders with, the plaintiff in substantially the same manner as outlined in paragraph IV of
this stipulation, with the only difference that the purchase orders which were agreed to
by the central and the plaintiff are similar to the sample hereto attached and made a
part hereof as Exhibit I. Typical samples of the bills of lading covering the herein
transaction are hereto attached and made a part hereto as Exhibits I-1, I-2 and I-3. The
value of the sales carried out in the manner mentioned in this paragraph is P133,964.98.

VI. That sometime in February, 1929, Miguel J. Ossorio, of Manila, Philippines, placed an
option with Koppel Industrial Car and Equipment Company, through plaintiff, to
purchase within three months a pair of Atlas-Diesel Marine Engines. Koppel Industrial
Car and Equipment Company purchased said Diesel Engines in Stockholm, Sweden, for
$16,508.32. The suppliers drew a draft for the amount of $16,508.32 on the Koppel
Industrial Car and Equipment Company, which paid the amount covered by the draft.
Later, Miguel J. Ossorio definitely called the deal off, and as Koppel Industrial Car and
Equipment Company could not ship to or draw on said Mr. Miguel J. Ossorio, it in turn
drew another draft on plaintiff for the same amount at six months sight, with the
understanding that Koppel Industrial Car and Equipment Company would reimburse
plaintiff when said engines were disposed of. Plaintiff honored the draft and debited the
said sum of $16,508.32 to merchandise account. The engines were left stored at
Stockholm, Sweden. On April 1, 1930, a new local buyer, Mr. Cesar Barrios, of Iloilo,
Philippines, was found and the same engines were sold to him for $21,000 (P42,000) C. I.
F. Hongkong. The engines were shipped to Hongkong and a draft for $21,000 was drawn
by Koppel Industrial Car and Equipment Company on Mr. Cesar Barrios. After the draft
was fully paid by Mr. Barrios, Koppel Industrial Car and Equipment Company reimbursed
plaintiff with cost price of $16,508.32 and credited it with $1,152.95 as its share of the
profit on the transaction. Exhibits J and J-1 are herewith attached and made integral
parts of this stipulation with particular reference to paragraph VI hereof.

VII. That plaintiff's share in the profits realized out of these transactions described in
paragraphs IV, V and VI hereof totaling P3,772,403.82, amounts to P132,201.30; and that
plaintiff within the time provided by law returned the aforesaid amount P132,201.30 for
the purpose of the commercial broker's 4 per cent tax and paid thereon the sum
P5,288.05 as such tax.

VIII. That defendant demanded of the plaintiff the sum of P64,122.51 as the merchants'
sales tax of 1% per cent on the amount of P3,772,403.82, representing the total gross
value of the sales mentioned in paragraphs IV, V and VI hereof, including the 25 per cent
surcharge for the late payment of the said tax, which tax and surcharge were
determined after the amount of P5,288.05 mentioned in paragraph VI hereof was
deducted.

IX. That plaintiff, on October 30, 1936, paid under protest said sum of P64,122.51 in
order to avoid further penalties, levy and distraint proceedings.

X. That defendant, on November 10, 1936, overruled plaintiff's protest, and defendant
has failed and refused and still fails and refuses, notwithstanding demands by plaintiff, to
return to the plaintiff said sum of P64,122.51 or any part thereof.

xxx xxx xxx

That the parties hereby reserve the right to present additional evidence in
support of their respective contentions.

Manila, Philippines, December 26, 1939

(Sgd.) ROMAN OZAETA

Solicitor General

(Sgd.) ANTONIO CAÑIZARES

Assistant Attorney
 (Sgd.) E. P. REVILLA
Attorney for the Plaintiff
3rd Floor, Perez Samanillo Bldg., Manila

Both parties adduced some oral evidence in clarification of or addition to their agreed
statement of facts. A preponderance of evidence has established, besides the facts thus
stipulated, the following:

(a) The shares of stock of plaintiff corporation were and are all owned by Koppel
Industries Car and Equipment Company of Pennsylvania, U. S. A., exceptive which
were necessary to qualify the Board of Directors of said plaintiff corporation;

(b) In the transactions involved herein the plaintiff corporation acted as the
representative of Koppel Industrial Car and Equipment Company only, and not as
the agent of both the latter company and the respective local purchasers —
plaintiff's principal witness, A.H. Bishop, its resident Vice-President, in his
testimony invariably referred to Koppel Industrial Car and Equipment Co. as "our
principal" 9 t. s. n., pp. 10, 11, 12, 19, 75), except that at the bottom of page 10 to
the top of page 11, the witness stated that they had "several principal" abroad but
that "our principal abroad was, for the years in question, Koppel Industrial Car and
Equipment Company," and on page 68, he testified that what he actually said was
". . . but our principal abroad" and not "our principal abroad" — as to which it is
very significant that neither this witness nor any other gave the name of even a
single other principal abroad of the plaintiff corporation;

(c) The plaintiff corporation bore alone incidental expenses — as, for instance,
cable expenses-not only those of its own cables but also those of its "principal"
(t.s.n., pp. 52, 53);

(d) the plaintiff's "share in the profits" realized from the transactions in which it
intervened was left virtually in the hands of Koppel Industrial Car and Equipment
Company (t.s.n., p. 51);

(e) Where drafts were not paid by the purchasers, the local banks were instructed
not to protest them but to refer them to plaintiff which was fully empowered by
Koppel Industrial Car and Equipment company to instruct the banks with regards
to disposition of the drafts and documents (t.s.n., p. 50; Exhibit G);lawphil.net

(f) Where the goods were European origin, consular invoices, bill of lading, and, in
general, the documents necessary for clearance were sent directly to plaintiff
(t.s.n., p. 14);
 (g) If the plaintiff had in stock the merchandise desired by local buyers, it
immediately filled the orders of such local buyers and made delivery in the
Philippines without the necessity of cabling its principal in America either for price
quotations or confirmation or rejection of that agreed upon between it and the
buyer (t.s.n., pp. 39-43);

(h) Whenever the deliveries made by Koppel Industrial Car and Equipment
Company were incomplete or insufficient to fill the local buyer's orders, plaintiff
used to make good the deficiencies by deliveries from its own local stock, but in
such cases it charged its principal only the actual cost of the merchandise thus
delivered by it from its stock and in such transactions plaintiff did not realize any
profit (t.s.n., pp. 53-54);

(i) The contract of sale involved herein were all perfected in the Philippines.

Those described in paragraph IV of the agreed statement of facts went through the
following process: (1) "When a local buyer was interested in the purchase of railway
materials, machinery, and supplies, it asked for price quotations from plaintiff"; (2)
"Plaintiff then cabled for the quotation desired from Koppel Industrial Car and
Equipment Company"; (3) "Plaintiff, however, quoted to the purchaser a selling price
above the figures quoted by Koppel Industrial Car and Equipment Company"; (4) "On the
basis of these quotations, orders were placed by the local purchasers . . ."

Those described in paragraph V of said agreed statement of facts were transacted "in
substantially the same manner as outlined in paragraph IV."

As to the single transaction described in paragraph VI of the same agreed statement of

facts, discarding the Ossorio option which anyway was called off, "On April 1, 1930, a
new local buyer, Mr. Cesar Barrios, of Iloilo, Philippines, was found and the same engines
were sold to him for $21,000(P42,000) C.I.F. Hongkong." (Emphasis supplied.).

(j) Exhibit H contains the following paragraph:

It is clearly understood that the intent of this contract is that the broker shall perform
only the functions of a broker as set forth above, and shall not take possession of any of
the materials or equipment applying to said orders or perform any acts or duties outside
the scope of a broker; and in no sense shall this contract be construed as granting to the
broker the power to represent the principal as its agent or to make commitments on its
behalf.

The Court of First Instance held for the defendant and dismissed plaintiff's complaint with costs
to it.
Upon this appeal, seven errors are assigned to said judgment as follows:.

1. That the court a quo erred in not holding that appellant is a domestic corporation
distinct and separate from, and not a mere branch of Koppel Industrial Car and
Equipment Co.;

2. the court a quo erred in ignoring the ruling of the Secretary of Finance, dated January
31, 1931, Exhibit M;

3. the court a quo erred in not holding that a character of a broker is determined by the
nature of the transaction and not by the basis or measure of his compensation;

4. The court a quo erred in not holding that appellant acted as a commercial broker in
the transactions covered under paragraph VI of the agreed statement of facts;

5. The court a quo erred in not holding that appellant acted as a commercial broker in
the transactions covered under paragraph v of the agreed statement of facts;

6. The court a quo erred in not holding that appellant acted as a commercial broker in
the sole transaction covered under paragraph VI of the agreed statement of facts;

7. the court a quo erred in dismissing appellant's complaint.

The lower court found and held that Koppel (Philippines), Inc. is a mere dummy or brach
("hechura") of Koppel industrial Car and Equipment Company. The lower court did not deny
legal personality to Koppel (Philippines), Inc. for any and all purposes, but in effect its
conclusion was that, in the transactions involved herein, the public interest and convenience
would be defeated and what would amount to a tax evasion perpetrated, unless resort is had
to the doctrine of "disregard of the corporate fiction."

I. In its first assignment of error appellant submits that the trial court erred in not holding that
it is a domestic corporation distinct and separate from and not a mere branch of Koppel
Industrial Car and Equipment Company. It contends that its corporate existence as Philippine
corporation can not be collaterally attacked and that the Government is estopped from so
doing. As stated above, the lower court did not deny legal personality to appellant for any and
all purposes, but held in effect that in the transaction involved in this case the public interest
and convenience would be defeated and what would amount to a tax evasion perpetrated,
unless resort is had to the doctrine of "disregard of the corporate fiction." In other words, in
looking through the corporate form to the ultimate person or corporation behind that form, in
the particular transactions which were involved in the case submitted to its determination and
judgment, the court did so in order to prevent the contravention of the local internal revenue
laws, and the perpetration of what would amount to a tax evasion, inasmuch as it considered
— and in our opinion, correctly — that appellant Koppel (Philippines), Inc. was a mere branch
or agency or dummy ("hechura") of Koppel Industrial Car and Equipment Co. The court did not
hold that the corporate personality of Koppel (Philippines), Inc., would also be disregarded in
other cases or for other purposes. It would have had no power to so hold. The courts' action in
this regard must be confined to the transactions involved in the case at bar "for the purpose of
adjudging the rights and liabilities of the parties in the case. They have no jurisdiction to do
more." (1 Flethcer, Cyclopedia of Corporation, Permanent ed., p. 124, section 41.)

A leading and much cited case puts it as follows:

If any general rule can be laid down, in the present state of authority, it is that a
corporation will be looked upon as a legal entity as a general rule, and until sufficient
reason to the contrary appears; but, when the notion of legal entity is used to defeat
public convinience, justify wrong, protect fraud, or defend crime, the law will regard the
corporation as an association of persons. (1 Fletcher Cyclopedia of Corporation
[Permanent Edition], pp. 135, 136; United States vs. Milwaukee Refrigeration Transit Co.,
142 Fed., 247, 255, per Sanborn, J.)

In his second special defense appellee alleges "that the plaintiff was and is in fact a branch or
subsidiary of Koppel Industrial Car and Equipment Co., a Pennsylvania corporation not licensed
to do business in the Philippines but actually doing business here through the plaintiff; that the
said foreign corporation holds 995 of the 1,000 shares of the plaintiff's capital stock, the
remaining five shares being held by the officers of the plaintiff herein in order to permit the
incorporation thereof and to enable its aforesaid officers to act as directors of the plaintiff
corporation; and that plaintiff was organized as a Philippine corporation for the purpose of
evading the payment by its parent foreign corporation of merchants' sales tax on the
transactions involved in this case and others of similar nature."

By most courts the entity is normally regarded but is disregarded to prevent injustice, or
the distortion or hiding of the truth, or to let in a just defense. (1 Fletcher, Cyclopedia of
Corporation, Permanent Edition, pp. 139,140; emphasis supplied.)

Another rule is that, when the corporation is the mere alter ego, or business conduit of a
person, it may de disregarded." (1 Fletcher, Cyclopedia of Corporation, Permanent
Edition, p. 136.)

Manifestly, the principle is the same whether the "person" be natural or artificial.

A very numerous and growing class of cases wherein the corporate entity is disregarded
is that (it is so organized and controlled, and its affairs are so conducted, as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation)." (1
Fletcher, Cyclopedia of Corporation, Permanent ed., pp. 154, 155.)
 While we recognize the legal principle that a corporation does not lose its entity by the
ownership of the bulk or even the whole of its stock, by another corporation
(Monongahela Co. vs. Pittsburg Co., 196 Pa., 25; 46 Atl., 99; 79 Am. St. Rep., 685) yet it is
equally well settled and ignore corporate forms." (Colonial Trust Co. vs. Montello Brick
Works, 172 Fed., 310.)

Where it appears that two business enterprises are owned, conducted and controlled by
the same parties, both law and equity will, when necessary to protect the rights of third
persons, disregard the legal fiction that two corporations are distinct entities, and treat
them as identical. (Abney vs. Belmont Country Club Properties, Inc., 279 Pac., 829.)

. . . the legal fiction of distinct corporate existence will be disregarded in a case where a
corporation is so organized and controlled and its affairs are so conducted, as to make it
merely an instrumentality or adjunct of another corporation. (Hanter vs. Baker Motor
Vehicle Co., 190 Fed., 665.)

In United States vs. Lehigh Valley R. Co. 9220 U.S., 257; 55 Law. ed., 458, 464), the Supreme
Court of the United States disregarded the artificial personality of the subsidiary coal company
in order to avoid that the parent corporation, the Lehigh Valley R. Co., should be able, through
the fiction of that personality, to evade the prohibition of the Hepburn Act against the
transportation by railroad companies of the articles and commodities described therein.

Chief Justice White, speaking for the court, said:

. . . Coming to discharge this duty it follows, in view of the express prohibitions of the
commodities clause, it must be held that while the right of a railroad company as a
stockholder to use its stock ownership for the purpose of a bona fide separate
administration of the affairs of a corporation in which it has a stock interest may not be
denied, the use of such stock ownership in substance for the purpose of destroying the
entity of a producing, etc., corporation, and commingling its affairs in administration
with the affairs of the railroad company, so as to make the two corporations virtually
one, brings the railroad company so voluntarily acting as to such producing, etc.,
corporation within the prohibitions of the commodities clause. In other words, that by
operation and effect of the commodities clause there is duty cast upon a railroad
company proposing to carry in interstate commerce the product of a producing, etc.,
corporation in which it has a stock interest, not to abuse such power so as virtually to
do by indirection that which the commodities clause prohibits, — a duty which plainly
would be violated by the unnecessary commingling of the affairs of the producing
company with its own, so as to cause them to be one and inseparable.

Corrobarative authorities can be cited in support of the same proposition, which we deem
unnecessary to mention here.
From the facts hereinabove stated, as established by a preponderance of the evidence ,
particularly those narrated in paragraph (a), (b), (c), (d), (e),(f), (h), (i), and (j) after the agreed
statement of facts, we find that, in so far as the sales involved herein are concerned, Koppel
(Philippines), Inc., and Koppel Industrial Car and Equipment company are to all intents and
purposes one and the same; or, to use another mode of expression, that, as regards those
transactions, the former corporation is a mere branch, subsidiary or agency of the latter. To our
mind, this is conclusively borne out by the fact, among others, that the amount of he so-called
"share in the profits" of Koppel (Philippines), Inc., was ultimately left to the sole, unbridled
control of Koppel Industrial Car and Equipment Company. If, in their relations with each other,
Koppel (Philippines), Inc., was considered and intended to function as a bona fide separate
corporation, we can not conceive how this arrangement could have been adopted, for if there
was any factor in its business as to which it would in that case naturally have been opposed to
being thus controlled, it must have been precisely the amount of profit which it could
endeavor and hope to earn. No group of businessmen could be expected to organize a
mercantile corporation — the ultimate end of which could only be profit — if the amount of
that profit were to be subjected to such a unilateral control of another corporation, unless
indeed the former has previously been designed by the incorporators to serve as a mere
subsidiary, branch or agency of the latter. Evidently, Koppel Industrial Car and Equipment
Company made us of its ownership of the overwhelming majority — 99.5% — of the capital
stock of the local corporation to control the operations of the latter to such an extent that it
had the final say even as to how much should be allotted to said local entity in the so-called
sharing in the profits. We can not overlook the fact that in the practical working of corporate
organizations of the class to which these two entities belong, the holder or holders of the
controlling part of the capital stock of the corporation, particularly where the control is
determined by the virtual ownership of the totality of the shares, dominate not only the
selection of the Board of Directors but, more often than not, also the action of that Board.
Applying this to the instant case, we can not conceive how the Philippine corporation could
effectively go against the policies, decisions, and desires of the American corporation with
regards to the scheme which was devised through the instrumentality of the contract Exhibit
H, as well as all the other details of the system which was adopted in order to avoid paying the
1½ per cent merchants sales tax. Neither can we conceive how the Philippine corporation
could avoid following the directions of the American corporation held 99.5 per cent of the
capital stock of the Philippine corporation. In the present instance, we note that Koppel
(Philippines), Inc., was represented in the Philippines by its "resident Vice-President." This fact
necessarily leads to the inference that the corporation had at least a Vice-President, and
presumably also a President, who were not resident in the Philippines but in America, where
the parent corporation is domiciled. If Koppel (Philippines), Inc., had been intended to operate
as a regular domestic corporation in the Philippines, where it was formed, the record and the
evidence do not disclose any reason why all its officers should not reside and perform their
functions in the Philippines.
Other facts appearing from the evidence, and presently to be stated, strengthen our
conclusion, because they can only be explained if the local entity is considered as a mere
subsidiary, branch or agency of the parent organization. Plaintiff charged the parent
corporation no more than actual cost — without profit whatsoever — for merchandise
allegedly of its own to complete deficiencies of shipments made by said parent corporation
(t.s.n., pp. 53, 54) — a fact which could not conceivably have been the case if plaintiff had
acted in such transactions as an entirely independent entity doing business — for profit, of
course — with the American concern. There has been no attempt even to explain, if the latter
situation really obtained, why these two corporations should have thus departed from the
ordinary course of business. Plaintiff was charged by the American corporation with the cost
even of the latter's cable quotations — from ought that appears from the evidence, this can
only be comprehended by considering plaintiff as such a subsidiary, branch or agency of the
parent entity, in which case it would be perfectly understandable that for convenient
accounting purposes and the easy determination of the profits or losses of the parent
corporation's Philippines should be charged against the Philippine office and set off against its
receipts, thus separating the accounts of said branch from those which the central organization
might have in other countries. The reference to plaintiff by local banks, under a standing
instruction of the parent corporation, of unpaid drafts drawn on Philippine customers by said
parent corporation, whenever said customers dishonored the drafts, and the fact that the
American corporation had previously advised said banks that plaintiff in those cases was "fully
empowered to instruct (the banks) with regard to the disposition of the drafts and documents"
(t.s.n., p. 50), in the absence of any other satisfactory explanation naturally give rise to the
inference that plaintiff was a subsidiary, branch or agency of the American concern, rather than
an independent corporation acting as a broker. For, without such positive explanation, this
delegation of power is indicative of the relations between central and branch offices of the
same business enterprise, with the latter acting under instructions already given by the former.
Far from disclosing a real separation between the two entities, particularly in regard to the
transactions in question, the evidence reveals such commongling and interlacing of their
activities as to render even incomprehensible certain accounting operations between them,
except upon the basis that the Philippine corporation was to all intents and purposes a mere
subsidiary, branch, or agency of the American parent entity. Only upon this basis can it be
comprehended why it seems not to matter at all how much profit would be allocated to
plaintiff, or even that no profit at all be so allocated to it, at any given time or after any given
period.

As already stated above, under the evidence the sales in the Philippines of the railway
materials, machinery and supplies imported here by Koppel Industrial Car and Equipment
Company could have been as conviniently and efficiently transacted and handled — if not
more so — had said corporation merely established a branch or agency in the Philippines and
obtained license to do business locally; and if it had done so and said sales had been effected
by such branch or agency, there seems to be no dispute that the 1½ per cent merchants' sales
tax then in force would have been collectible. So far as we can discover, there would be only
one, but very important, difference between the two schemes — a difference in tax liability on
the ground that the sales were made through another and distinct corporation, as alleged
broker, when we have seen that this latter corporation is virtually owned by the former, or that
they practically one and the same, is to sanction a circumvention of our tax laws, and permit a
tax evasion of no mean proportions and the consequent commission of a grave injustice to the
Government. Not only this; it would allow the taxpayer to do by indirection what the tax laws
prohibited to be done directly (non-payment of legitimate taxes), paraphrasing the United
States Supreme Court in United States vs. Lehigh Valley R. Co., supra.

The act of one corporation crediting or debiting the other for certain items, expenses or even
merchandise sold or disposed of, is perfectly compatible with the idea of the domestic entity
being or acting as a mere branch, agency or subsidiary of the parent organization. Such
operations were called for any way by the exigencies or convenience of the entire business.
Indeed, accounting operation such as these are invitable, and have to be effected in the
ordinary course of business enterprise extends its trade to another land through a branch
office, or through another scheme amounting to the same thing.

If plaintiff were to act as broker in the Philippines for any other corporation, entity or person,
distinct from Koppel Industrial Car and Equipment company, an entirely different question will
arise, which, however, we are not called upon, nor in a position, to decide.

As stated above, Exhibit H contains to the following paragraph:

It is clearly understood that the intent of this contract is that the broker shall perform
only the functions of a broker as set forth above, and shall not take possession of any of
the materials or equipment applying to said orders or perform any acts or duties outside
the scope of a broker; and in no sense shall this contract be construed as granting to the
broker the power to represent the principal as its agent or to make commitments on its
behalf.

The foregoing paragraph, construed in the light of other facts noted elsewhere in this decision,
betrays, we think a deliberate intent, through the medium of a scheme devised with great
care, to avoid the payment of precisely the 1½ per cent merchants' sales tax in force in the
Philippines before, at the time of, and after, the making of the said contract Exhibit H. If this
were to be allowed, the payment of a tax, which directly could not have been avoided, could
be evaded by indirection, consideration being had of the aforementioned peculiar relations
between the said American and local corporations. Such evasion, involving as it would, a
violation of the former Internal Revenue Law, would even fall within the penal sanction of
section 2741 of the Revised Administrative Code. Which only goes to show the illegality of the
whole scheme. We are not here concerned with the impossibility of collecting the merchants'
sales tax, as a mere incidental consequence of transactions legal in themselves and innocent in
their purpose. We are dealing with a scheme the primary, not to say the sole, object of which
the evasion of the payment of such tax. It is this aim of the scheme that makes it illegal.
We have said above that the contracts of sale involved herein were all perfected in the
Philippines. From the facts stipulated in paragraph IV of the agreed statement of facts, it clearly
appears that the Philippine purchasers had to wait for Koppel Industrial Car and Equipment
Company to communicate its cost prices to Koppel (Philippines), Inc., were perfected in the
Philippines. In those cases where no such price quotations from the American corporation
were needed, of course, the sales effected in those cases described in paragraph V of the
agreed statement of facts were, as expressed therein, transacted "in substantially the same
manner as outlined in paragraph VI." Even the single transaction described in paragraph VI of
the agreed statement of facts was also perfected in the Philippines, because the contracting
parties were here and the consent of each was given here. While it is true that when the
contract was thus perfected in the Philippines the pair of Atlas-Diesel Marine Engines were in
Sweden and the agreement was to deliver them C.I.F. Hongkong, the contract of sale being
consensual — perfected by mere consent — (Civil Code, article 1445; 10 Manresa, 4th ed., p.
11), the location of the property and the place of delivery did not matter in the question of
where the agreement was perfected.

In said paragraph VI, we read the following, as indicating where the contract was perfected,
considering beforehand that one party, Koppel (Philippines),Inc., which in contemplation of
law, as to that transaction, was the same Koppel Industrial Car Equipment Co., was in the
Philippines:

. . . on April 1, 1930, a new local buyer Mr. Cesar Barrios, of Iloilo, Philippines, was found
and the same engines were sold to him for $21,000 (P42,000) C.I.F. Hongkong . . .
(Emphasis supplied.)

Under the revenue law in force when the sales in question took place, the merchants' sales tax
attached upon the happening of the respective sales of the "commodities, goods, wares, and
merchandise" involved, and we are clearly of opinion that such "sales" took place upon the
perfection of the corresponding contracts. If such perfection took place in the Philippines, the
merchants' sales tax then in force here attached to the transactions.

Even if we should consider that the Philippine buyers in the cases covered by paragraph IV and
V of the agreed statement of facts, contracted with Koppel Industrial Car and Equipment
company, we will arrive at the same final result. It can not be denied in that case that said
American corporation contracted through Koppel (Philippines), Inc., which was in the
Philippines. The real transaction in each case of sale, in final effect, began with an offer of sale
from the seller, said American corporation, through its agent, the local corporation, of the
railway materials, machinery, and supplies at the prices quoted, and perfected or completed by
the acceptance of that offer by the local buyers when the latter, accepting those prices, placed
their orders. The offer could not correctly be said to have been made by the local buyers when
they asked for price quotations, for they could not rationally be taken to have bound
themselves to buy before knowing the prices. And even if we should take into consideration
the fact that the american corporation contracted, at least partly, through correspondence,
according to article 54 of the Code of Commerce, the respective contracts were completed
from the time of the acceptance by the local buyers, which happened in the Philippines.

Contracts executed through correspondence shall be completed from the time an

answer is made accepting the proposition or the conditions by which the latter may be
modified." (Code of Commerce, article 54; emphasis supplied.)

A contract is as a rule considered as entered into at the place where the place it is
performed. So where delivery is regarded as made at the place of delivery." (13 C. J.,
580-81, section 581.)

(In the consensual contract of sale delivery is not needed for its perfection.)

II. Appellant's second assignment of error can be summarily disposed of. It is clear that the
ruling of the Secretary of Finance, Exhibit M, was not binding upon the trial court, much less
upon this tribunal, since the duty and power of interpreting the laws is primarily a function of
the judiciary. (Ortua vs. Singson Encarnacion, 59 Phil., 440, 444.) Plaintiff cannot be excused
from abiding by this legal principle, nor can it properly be heard to say that it relied on the
Secretary's ruling and that, therefore, the courts should not now apply an interpretation at
variance therewith. The rule of stare decisis is undoubtedly entitled to more respect in the
construction of statutes than the interpretations given by officers of the administrative
branches of the government, even those entrusted with the administration of particular laws.
But this court, in Philippine Trust Company and Smith, Bell and Co. vs. Mitchell(59 Phil., 30, 36),
said:

. . . The rule of stare decisis is entitled to respect. Stability in the law, particularly in the
business field, is desirable. But idolatrous reverence for precedent, simply as precedent,
no longer rules. More important than anything else is that court should be right. . . .

III. In the view we take of the case, and after the disposition made above of the first
assignment of error, it becomes unnecessary to make any specific ruling on the third, fourth,
fifth, sixth, and seventh assignments of error, all of which are necessarily disposed of adversely
to appellant's contention.

Wherefore, he judgment appealed from is affirmed, with costs of both instances against
appellant. So ordered.

G.R. No. L-9687 June 30, 1961

LIDDELL & CO., INC., petitioner-appellant,
vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent-appellee.

Ozaeta, Lichauco and Picazo for petitioner-appellant.

Office of the Solicitor General for respondent-appellee.

BENGZON, C.J.:

Statement. This is an appeal from the decision of the Court of Tax Appeals imposing a tax
deficiency liability of P1,317,629.61 on Liddell & Co., Inc.

Said Company lists down several issues which may be boiled to the following:

(a) Whether or not Judge Umali of the Tax Court below could validly participate in the
making of the decision;

(b) Whether or not Liddell & Co. Inc., and the Liddell Motors, Inc. are (practically)
identical corporations, the latter being merely .the alter ego of the former;

(c) Whether or not, granting the identical nature of the corporations, the assessment of
tax liability, including the surcharge thereon by the Court of Tax Appeals, is correct.

Undisputed Facts. The parties submitted a partial stipulation of facts, each reserving the right
to present additional evidence.

Said undisputed facts are substantially as follows:

The petitioner, Liddell & Co. Inc., (Liddell & Co. for short) is a domestic corporation
establish in the Philippines on February 1, 1946, with an authorized capital of P100,000
divided into 1000 share at P100 each. Of this authorized capital, 196 shares valued at
P19,600 were subscribed and paid by Frank Liddell while the other four shares were in
the name of Charles Kurz, E.J. Darras, Angel Manzano and Julian Serrano at one shares
each. Its purpose was to engage in the business of importing and retailing Oldsmobile
and Chevrolet passenger cars and GMC and Chevrolet trucks..

On January 31, 1947, with the limited paid-in capital of P20,000, Liddell & Co. was able
to declare a 90% stock dividend after which declaration on, Frank Liddells holding in the
Company increased to 1,960 shares and the employees, Charles Kurz E.J. Darras, Angel
Manzano and Julian Serrano at 10 share each. The declaration of stock dividend was
followed by a resolution increasing the authorized capital of the company to P1,000.000
which the Securities & Exchange Commission approved on March 3, 1947. Upon such
approval, Frank Liddell subscribed to 3,000 additional shares, for which he paid into the
corporation P300,000 so that he had in his own name 4,960 shares.
On May 24, 1957, Frank Liddell, on one hand and Messrs. Kurz, Darras, Manzano and
Serrano on the other, executed an agreement (Exhibit A) which was further
supplemented by two other agreements (Exhibits B and C) dated May 24, 1947 and June
3, 1948, wherein Frank Liddell transferred (On June 7, 1948) to various employees of
Liddell & Co. shares of stock.

At the annual meeting of stockholders of Liddell & Co. held on March 9, 1948, a 100%
stock dividend was declared, thereby increasing the issued capital stock of aid
corporation from P1,000.000 to P 3,000,000 which increase was duly approved by the
Securities and Exchange Commission on June 7, 1948. Frank Liddell subscribed to and
paid 20% of the increase of P400,000. He paid 25% thereof in the amount of P100,000
and the balance of P3,000,000 was merely debited to Frank Liddell-Drawing Account and
credited to Subscribed Capital Stock on December 11, 1948.

On March 8, 1949, stock dividends were again issued by Liddell & Co. and in accordance
with the agreements, Exhibits A, B, and C, the stocks of said company stood as follows:

No. of
Name Amount Per Cent
Shares

Frank Liddell 13,688 P1,368,800 72.00%

Irene Liddell 1 100 .01%

Mercedes
Vecin 1 100 .01%

Charles Kurz 1,225 122,500 6.45%

E.J. Darras 1,225 122,500 6.45%

Angel
Manzano 1,150 115,000 6.06%

Julian Serrano 710 71,000 3.74%

 E. Hasim 500 50,000 2.64%

G. W. Kernot 500 50,000 2.64%

19,000 P1,900,000 100.00%

On November 15, 1948, in accordance with a resolution of a special meeting of the Board of
Directors of Liddell & Co., stock dividends were again declared. As a result of said declaration
and in accordance with the agreements, Exhibits, A, B, and C, the stockholdings in the
company appeared to be:

No. of
Name Amount Per Cent
Shares

Frank
Liddell 19,738 P1,973,800 65.791%

Irene Liddell 1 100 .003%

Mercedes
Vecin 1 100 .003%

Charles Kurz 2,215 221,500 7.381%

E.J. Darras 2,215 221,500 7.381%

Angel
Manzano 1,810 181,000 6.031%
 Julian
Serrano 1,700 170,000 5.670%

E. Hasim 830 83,000 2.770%

G. W.
Kernot 1,490 149,000 4.970%

30,000 P3,000,000 100.000%

On the basis of the agreement Exhibit A, (May, 1947) "40%" of the earnings available for
dividends accrued to Frank Liddell although at the time of the execution of aid instrument,
Frank Liddell owned all of the shares in said corporation. 45% accrued to the employees,
parties thereto; Kurz 12-1/2%; Darras 12-1/2%; A. Manzano 12-1/2% and Julian Serrano 7-
1/2%. The agreement Exhibit A was also made retroactive to 1946. Frank Liddell reserved the
right to reapportion the 45% dividends pertaining to the employees in the future for the
purpose of including such other faithful and efficient employees as he may subsequently
designate. (As a matter of fact, Frank Liddell did so designate two additional employees
namely: E. Hasim and G. W. Kernot). It was for such inclusion of future faithful employees that
Exhibits B-1 and C were executed. As per Exhibit C, dated May 13, 1948, the 45% given by
Frank Liddell to his employees was reapportioned as follows: C. Kurz — 12,%; E. J. Darras —
12%; A. Manzano — l2%; J. Serrano — 3-1/2%; G. W. Kernot — 2%.

Exhibit B contains the employees' definition in detail of the manner by which they sought to
prevent their share-holdings from being transferred to others who may be complete strangers
to the business on Liddell & Co.

From 1946 until November 22, 1948 when the purpose clause of the Articles of Incorporation
of Liddell & Co. Inc., was amended so as to limit its business activities to importations of
automobiles and trucks, Liddell & Co. was engaged in business as an importer and at the same
time retailer of Oldsmobile and Chevrolet passenger cars and GMC and Chevrolet trucks.

On December 20, 1948, the Liddell Motors, Inc. was organized and registered with the
Securities and Exchange Commission with an authorized capital stock of P100,000 of which
P20,000 was subscribed and paid for as follows: Irene Liddell wife of Frank Liddell 19,996
shares and Messrs. Marcial P. Lichauco, E. K. Bromwell, V. E. del Rosario and Esmenia Silva, 1
share each.
At about the end of the year 1948, Messrs. Manzano, Kurz and Kernot resigned from their
respective positions in the Retail Dept. of Liddell & Co. and they were taken in and employed
by Liddell Motors, Inc.: Kurz as Manager-Treasurer, Manzano as General Sales Manager for cars
and Kernot as General Sales Manager for trucks.

Beginning January, 1949, Liddell & Co. stopped retailing cars and trucks; it conveyed them
instead to Liddell Motors, Inc. which in turn sold the vehicles to the public with a steep mark-
up. Since then, Liddell & Co. paid sales taxes on the basis of its sales to Liddell Motors Inc.
considering said sales as its original sales.

Upon review of the transactions between Liddell & Co. and Liddell Motors, Inc. the Collector of
Internal Revenue determined that the latter was but an alter ego of Liddell & Co. Wherefore,
he concluded, that for sales tax purposes, those sales made by Liddell Motors, Inc. to the
public were considered as the original sales of Liddell & Co. Accordingly, the Collector of
Internal Revenue assessed against Liddell & Co. a sales tax deficiency, including surcharges, in
the amount of P1,317,629.61. In the computation, the gross selling price of Liddell Motors, Inc.
to the general public from January 1, 1949 to September 15, 1950, was made the basis without
deducting from the selling price, the taxes already paid by Liddell & Co. in its sales to the
Liddell Motors Inc.

The Court of Tax Appeals upheld the position taken by the Collector of Internal Revenue.

A. Judge Umali: Appellant urges the disqualification on of Judge Roman M. Umali to participate
in the decision of the instant case because he was Chief of the Law Division, then Acting
Deputy Collector and later Chief Counsel of the Bureau of Internal Revenue during the time
when the assessment in question was made.1 In refusing to disqualify himself despite
admission that had held the aforementioned offices, Judge Umali stated that he had not in any
way participated, nor expressed any definite opinion, on any question raised by the parties
when this case was presented for resolution before the said bureau. Furthermore, after careful
inspection of the records of the Bureau, he (Judge Umali as well as the other members of the
court below), had not found any indication that he had expressed any opinion or made any
decision that would tend to disqualify him from participating in the consideration of the case in
the Tax Court.

At this juncture, it is well to consider that petitioner did not question the truth of Judge Umali's
statements. In view thereof, this Tribunal is not inclined to disqualify said judge. Moreover, in
furtherance of the presumption of the judge's moral sense of responsibility this Court has
adopted, and now here repeats, the ruling that the mere participation of a judge in prior
proceedings relating to the subject in the capacity of an administrative official does not
necessarily disqualify him from acting as judge.2

Appellant also contends that Judge Umali signed the said decision contrary to the provision of
Section 13, Republic Act No. 1125;3 that whereas the case was submitted for decision of the
Court of Tax Appeals on July 12, 1955, and the decision of Associate Judge Luciano and Judge
Nable were both signed on August 11, 1955 (that is, on the last day of the 30-day period
provided for in Section 13, Republic Act No. 1125), Judge Umali signed the decision August 31,
1955 or 20 days after the lapse of the 30-day period allotted by law.

By analogy it may be said that inasmuch as in Republic Act No. 1125 (law creating the Court of
Tax Appeals) like the law governing the procedure in the court of Industrial Relations, there is
no provision invalidating decisions rendered after the lapse of 30 days, the requirement of
Section 13, Republic Act No. 1125 should be construed as directory.4

Besides as pointed out by appellee, the third paragraph of Section 13 of Republic Act No. 1125
(quoted in the margin)5 confirms this view; because in providing for two thirty-day periods, the
law means that decision may still be rendered within the second period of thirty days (Judge
Umali signed his decision within that period).

B. Identity of the two corporations: On the question whether or not Liddell Motors, Inc. is
the alter ego of Liddell & Co. Inc., we are fully convinced that Liddell & Co. is wholly owned by
Frank Liddell. As of the time of its organization, 98% of the capital stock belonged to Frank
Liddell. The 20% paid-up subscription with which the company began its business was paid by
him. The subsequent subscriptions to the capital stock were made by him and paid with his
own money.

These stipulations and conditions appear in Exhibit A: (1) that Frank Liddell had the authority
to designate in the future the employee who could receive earnings of the corporation; to
apportion among the stock holders the share in the profits; (2) that all certificates of stock in
the names of the employees should be deposited with Frank Liddell duly indorsed in blank by
the employees concerned; (3) that each employee was required to sign an agreement with the
corporation to the effect that, upon his death or upon his retirement or separation for any
cause whatsoever from the corporation, the said corporation should, within a period of sixty
days therefor, have the absolute and exclusive option to purchase and acquire the whole of the
stock interest of the employees so dying, resigning, retiring or separating.

These stipulations in our opinion attest to the fact that Frank Liddell also owned it. He supplied
the original his complete control over the corporation.

As to Liddell Motors, Inc. we are fully persuaded that Frank Liddell also owned it. He supplied
the original capital funds.6 It is not proven that his wife Irene, ostensibly the sole incorporator
of Liddell Motors, Inc. had money of her own to pay for her P20,000 initial subscription. 7 Her
income in the United States in the years 1943 and 1944 and the savings therefrom could not
be enough to cover the amount of subscription, much less to operate an expensive trade like
the retail of motor vehicles. The alleged sale of her property in Oregon might have been true,
but the money received therefrom was never shown to have been saved or deposited so as to
be still available at the time of the organization of the Liddell Motors, Inc.
The evidence at hand also shows that Irene Liddell had scant participation in the affairs of
Liddell Motors, Inc. She could hardly be said to possess business experience. The income tax
forms record no independent income of her own. As a matter of fact, the checks that
represented her salary and bonus from Liddell Motors, Inc. found their way into the personal
account of Frank Liddell. Her frequent absences from the country negate any active
participation in the affairs of the Motors company.

There are quite a series of conspicuous circumstances that militate against the separate and
distinct personality of Liddell Motors, Inc. from Liddell & Co.8 We notice that the bulk of the
business of Liddell & Co. was channeled through Liddell Motors, Inc. On the other hand, Liddell
Motors, Inc. pursued no activities except to secure cars, trucks, and spare parts from Liddell &
Co. Inc. and then sell them to the general public. These sales of vehicles by Liddell & Co. to
Liddell Motors, Inc. for the most part were shown to have taken place on the same day that
Liddell Motors, Inc. sold such vehicles to the public. We may even say that the cars and trucks
merely touched the hands of Liddell Motors, Inc. as a matter of formality.

During the first six months of 1949, Liddell & Co. issued ten (10) checks payable to Frank Liddell
which were deposited by Frank Liddell in his personal account with the Philippine National
Bank. During this time also, he issued in favor of Liddell Motors, Inc. six (6) checks drawn
against his personal account with the same bank. The checks issued by Frank Liddell to the
Liddell Motors, Inc. were significantly for the most part issued on the same day when Liddell &
Co. Inc. issued the checks for Frank Liddell9 and for the same amounts.

It is of course accepted that the mere fact that one or more corporations are owned and
controlled by a single stockholder is not of itself sufficient ground for disregarding separate
corporate entities. Authorities10 support the rule that it is lawful to obtain a corporation
charter, even with a single substantial stockholder, to engage in a specific activity, and such
activity may co-exist with other private activities of the stockholder. If the corporation is a
substantial one, conducted lawfully and without fraud on another, its separate identity is to be
respected.

Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. are corporations owned
and controlled by Frank Liddell directly or indirectly is not by itself sufficient to justify the
disregard of the separate corporate identity of one from the other. There is, however, in this
instant case, a peculiar consequence of the organization and activities of Liddell Motors, Inc.

Under the law in force at the time of its incorporation the sales tax on original sales of cars
(sections 184, 185 and 186 of the National Internal Revenue Code), was progressive, i.e. 10% of
the selling price of the car if it did not exceed P5000, and 15% of the price if more than P5000
but not more than P7000, etc. This progressive rate of the sales tax naturally would tempt the
taxpayer to employ a way of reducing the price of the first sale. And Liddell Motors, Inc. was
the medium created by Liddell & Co. to reduce the price and the tax liability.
Let us illustrate: a car with engine motor No. 212381 was sold by Liddell & Co. Inc. to Liddell
Motors, Inc. on January 17, 1948 for P4,546,000.00 including tax; the price of the car was
P4,133,000.23, the tax paid being P413.22, at 10%. And when this car was later sold (on the
same day) by Liddell Motors, Inc. to P.V. Luistro for P5500, no more sales tax was paid. 11 In this
price of P5500 was included the P413.32 representing taxes paid by Liddell & Co. Inc. in the
sale to Liddell Motors, Inc. Deducting P413.32 representing taxes paid by Liddell & Co., Inc. the
price of P5500, the balance of P5,087.68 would have been the net selling price of Liddell & Co.,
Inc. to the general public (had Liddell Motors, Inc. not participated and intervened in the sale),
and 15% sales tax would have been due. In this transaction, P349.68 in the form of taxes was
evaded. All the other transactions (numerous) examined in this light will inevitably reveal that
the Government coffers had been deprived of a sizeable amount of taxes.

As opined in the case of Gregory v. Helvering,12 "the legal right of a taxpayer to decrease the
amount of what otherwise would be his taxes, or altogether avoid them by means which the
law permits, cannot be doubted." But, as held in another case, 13 "where a corporation is a
dummy, is unreal or a sham and serves no business purpose and is intended only as a blind,
the corporate form may be ignored for the law cannot countenance a form that is bald and a
mischievous fiction."

Consistently with this view, the United States Supreme Court14 held that "a taxpayer may gain
advantage of doing business thru a corporation if he pleases, but the revenue officers in proper
cases, may disregard the separate corporate entity where it serves but as a shield for tax
evasion and treat the person who actually may take the benefits of the transactions as the
person accordingly taxable."

Thus, we repeat: to allow a taxpayer to deny tax liability on the ground that the sales were
made through an other and distinct corporation when it is proved that the latter is virtually
owned by the former or that they are practically one and the same is to sanction a
circumvention of our tax laws.15

C. Tax liability computation: In the Yutivo case16 the same question involving the computation
of the alleged deficiency sales tax has been raised. In accordance with our ruling in said case
we hold as correctly stated by Judge Nable in his concurring and dissenting opinion on this
case, that the deficiency sales tax should be based on the selling price obtained by Liddell
Motors, Inc. to the public AFTER DEDUCTING THE TAX ALREADY PAID BY LIDDELL & CO., INC. in
its sales to Liddell Motors, Inc.

On the imposition of the 50% surcharge by reason of fraud, we see that the transactions
between Liddell Motors Inc. and Liddell & Co., Inc. have always been embodied in proper
documents, constantly subject to inspection by the tax authorities. Liddell & Co., Inc. have
always made a full report of its income and receipts in its income tax returns.
Paraphrasing our decision in the Yutivo case, we may now say, in filing its return on the basis of
its sales to Liddell Motors, Inc. and not on those by the latter to the public, it cannot be held
that the Liddell & Co., Inc. deliberately made a false return for the purpose of defrauding the
government of its revenue, and should suffer a 50% surcharge. But penalty for late payment
(25%) should be imposed.

In view of the foregoing, the decision appealed from is hereby modified: Liddell & Co., Inc. is
declared liable only for the amount of P426,811.67 with 25% surcharge for late payment and
6% interest thereon from the time the judgment becomes final.

As it appears that, during the pendency of this litigation appellant paid under protest to the
Government the total amount assessed by the Collector, the latter is hereby required to return
the excess to the petitioner. No costs.

G.R. No. L-5677 May 25, 1953

LA CAMPANA FACTORY, INC., and TAN TONG doing business under the trial name "LA
CAMPANA GAUGAU PACKING", petitioners,
vs.
KAISAHAN NG MGA MANGGAGAWA SA LA CAMPANA (KKM) and THE COURT OF INDUSTRIAL
RELATIONS, respondents.

Ceferino de los Santos, R., Ceferino de los Santos, Jr. and Manuel V. Roxas for petitioners.
Carlos E. Santiago for respondent union.

REYES, J.:

Tan Tong, one of the herein petitioners, has since 1932 been engaged in the business of buying
and selling gaugau under the trade name La Campana Gaugau Packing with an establishment
in Binondo, Manila, which was later transferred to España Extension, Quezon City. But on July
6, 1950, Tan Tong, with himself and members of his family corporation known as La Campana
Factory Co., Inc., with its principal office located in the same place as that of La Campana
Gaugau Packing.

About a year before the formation of the corporation, or on July 11, 1949, Tan Tong had
entered into a collective bargaining agreement with the Philippine Legion of Organized
Workers, known as PLOW for short, to which the union of Tan Tong's employees headed by
Manuel E. Sadde was then affiliated. Seceding, however, from the PLOW, Tan Tong's employees
later formed their own organization known as Kaisahan Ng Mga Manggagawa Sa La Campana,
one of the herein respondents, and applied for registration in the Department of Labor as an
independent entity. Pending consideration of this application, the Department gave the new
organization legal standing by issuing it a permit as an affiliate to the Kalipunan Ng Mga
Manggagawa.

On July 19, 1951, the Kaisahan Ng Mga Manggagawa Sa La Campana, hereinafter to be

referred to as the respondent Kaisahan, which, as of that date, counted with 66 members —
workers all of them of both La Campana Gaugau Packing and La Campana Coffee Factory Co.,
Inc. — presented a demand for higher wages and more privileges, the demand being
addressed to La Campana Starch and Coffee Factory, by which name they sought to designate,
so it appears, the La Campana Gaugau Packing and the La Campana Coffee Factory Co., Inc. As
the demand was not granted and an attempt at settlement through the mediation of the
Conciliation Service of the Department of Labor had given no result, the said Department
certified the dispute to the Court of Industrial Relations on July 17, 1951, the case being there
docketed as Case No. 584-V.

With the case already pending in the industrial court, the Secretary of Labor, on September 5,
1951, revoked the Kalipunan Ng Mga Kaisahang Manggagawa's permit as a labor union on the
strength of information received that it was dominated by subversive elements, and, in
consequence, on the 20th of the same month, also suspended the permit of its affiliate, the
respondent Kaisahan.

We have it from the court's order of January 15, 1952, which forms one of the annexes to the
present petition, that following the revocation of the Kaisahan's permit, "La Campana Gaugau
and Coffee Factory" (obviously the combined name of La Campana Gaugau Packing and La
Campana Coffee Factory Co., Inc,) and the PLOW, which had been allowed to intervene as a
party having an interest in the dispute, filed separate motions for the dismissal of the case on
the following grounds:

1. That the action is directed against two different entities with distinct personalities,
with "La Campana Starch Factory" and the "La Campana Coffee Factory, Inc.";

2. That the workers of the "La Campana Coffee Factory, Inc." are less than thirty-one;

3. That the petitioning union has no legal capacity to sue, because its registration as an
organized union has been revoked by the Department of Labor on September 5, 1951;
and

4. That there is an existing valid contract between the respondent "La Campana Gaugau
Packing" and the intervenor PLOW, where-in the petitioner's members are contracting
parties bound by said contract.
Several hearings were held on the above motions, in the course of which ocular inspections
were also made, and on the basis of the evidence received and the facts observed in the ocular
inspections, the Court of Industrial Relations denied the said motions in its order of January 14,
1952, because if found as a fact that:

A. While the coffee corporation is a family corporation with Mr. Tan Tong, his wife, and
children as the incorporations and stockhelders (Exhibit 1), the La Campana Gaugau
Packing is merely a business name (Exhibit 4).

B. According to the contract of lease (Exhibit 23), Mr. Tan Tong., propriety and manager
of the Ka Campana Gaugau Factory, leased a space of 200 square meters in the bodega
housing the gaugau factory to his son Tan Keng Lim, manager of the La Campana Coffee
Factory. But the lease was executed only on September 1, 1951, while the dispute
between the parties was pending before the Court.

C. There is only one entity La Campana Starch and Coffee Factory, as shown by the
signboard (Exhibit 1), the advertisement in the delivery trucks (Exhibit I-1), the packages
of gaugau(Exhibit K), and delivery forms (Exhibits J, J-1, and J-2).

D. All the laborers working in the gaugau or in the coffee factory receive their pay from
the same person, the cashier, Miss Natividad Garcia, secretary of Mr. Tan Tong; and they
are transferred from the gaugau to the coffee and vice-versa as the management so
requires.

E. There has been only one payroll for the entire La Campana personnel and only one
person preparing the same — Miss Natividad Garcia, secretary of Mr. Tan Tong. But after
the case at bar was certified to this Court on July 17, 1951, the company began making
separate payrolls for the coffee factory (Exhibits M-2 and M-3, and for the gaugau
factory (Exhibits O-2, O-3 and O-4). It is to be noted that before July 21, 1951, the coffee
payrolls all began with number "41-Maria Villanueva" with 24 or more laborers (Exhibits
M and M-1), whereas beginning July 21, 1951, the payrolls for the coffee factory began
with No. 1-Loreta Bernabe with only 14 laborers (Exhibits M-2 and M-3).

F. During the ocular inspection made in the factory on August 26, 1951 the Court has
found the following:

In the ground floor and second floor of the gaugau factory there were hundreds of bags
of raw coffee behind the pile of gaugau sacks. There were also women employees
working paper wrappers for gaugau, and, in the same place there were about 3,000 cans
to be used as containers for coffee.

The Court found out also that there were 16 trucks used both for the delivery of coffee
and gaugau. To show that those trucks carried both coffee and gaugau, the union
 president invited the Court to examine the contents of delivery truck No. T-582 parked in
a garage between the gaugau building and the coffee factory, and upon examination,
there were found inside the said truck boxes of gaugau and cans of coffee,

and held that:

. . . there is only one management for the business of gaugau and coffee with whom the
laborers are dealing regarding their work. Hence, the filing of action against the Ka
Campana Starch and Coffee Factory is proper and justified.

With regards to the alleged lack of personality, it is to be noted that before the
certification of the case to this Court on July 17, 1951, the petitioner Kaisahan Ng Mga
Manggagawa Sa La Campana, had a separate permit from the Department of Labor.
This permit was suspended on September 30, 1951. (Exhibit M-Intervenor, page 55, of
the record). It is not true that, on July 17, 1951, when this case forwarded to this Court,
the petitioner's permit, as an independent union, had not yet been issued, for the very
Exhibit MM-Intervenor regarding the permit, conclusively shows the preexistence of said
permit. (Annex G.)

Their motion for reconsideration of the above order having been denied, Tan Tong and La
Campana Coffee Factory, Inc. (same as La Campana Coffee Factory Co., Inc.), later joined by the
PLOW, filed the present petition for certiorari on the grounds that the Court of Industrial
Relations had no jurisdiction to take cognizance of the case, for the reason, according to them,
"(1) that the petitioner La Campana Coffee Factory, Inc. has only 14 employees, only 5 of
whom are members of the respondent union and therefore the absence of the jurisdictional
number (30) as provided by sections 1 and 4 of Commonwealth Act No. 103; and, (2) that the
suspension of respondent union's permit by the Secretary of Labor has the effect of taking
away the union's right to collective bargaining under section 2 of Commonwealth Act No. 213
and consequently, its personality to sue for ad in behalf of its members."

As to the first ground, petitioners obviously do not question the fact that the number of
employees of the La Campana Gaugau Packing involved in the case is more than the
jurisdictional number (31) required bylaw, but they do contend that the industrial court has no
jurisdiction to try the case as against La Campana Coffee Factory, Inc. because the latter has
allegedly only 14 laborers and only of these are members of the respondent Kaisahan. This
contention loses force when it is noted that, as found by the industrial court — and this finding
is conclusive upon us — La Campana Gaugau Packing and La Campana Coffee Factory Co. Inc.,
are operating under one single management, that is, as one business though with two trade
names. True, the coffee factory is a corporation and, by legal fiction, an entity existing separate
and apart fro the persons composing it, that is, Tan Tong and his family. But it is settled that
this fiction of law, which has been introduced as a matter of convenience and to subserve the
ends of justice cannot be invoked to further an end subversive of that purpose.
 Disregarding Corporate Entity. — The doctrine that a corporation is a legal entity existing
separate and apart from the person composing it is a legal theory introduced for
purposes of convenience and to subserve the ends of justice. The concept cannot,
therefore, be extended to a point beyond its reason and policy, and when invoked in
support of an end subversive of this policy, will be disregarded by the courts. Thus, in an
appropriate case and in furtherance of the ends of justice, a corporation and the
individual or individuals owning all its stocks and assets will be treated as identical, the
corporate entity being disregarded where used as a cloak or cover for fraud or illegality.
(13 Am. Jur., 160-161.)

. . . A subsidiary or auxiliary corporation which is created by a parent corporation merely

as an agency for the latter may sometimes be regarded as identical with the parent
corporation, especially if the stockholders or officers of the two corporations are
substantially the same or their system of operation unified. (Ibid. 162; see Annotation 1
A. L. R. 612, s. 34 A. L. R. 599.)

In the present case Tan Tong appears to be the owner of the gaugau factory. And the coffee
factory, though an incorporated business, is in reality owned exclusively by Tan Tong and his
family. As found by the Court of industrial Relations, the two factories have but one office, one
management and one payroll, except after July 17, the day the case was certified to the Court
of Industrial Relations, when the person who was discharging the office of cashier for both
branches of the business began preparing separate payrolls for the two. And above all, it
should not be overlooked that, as also found by the industrial court, the laborers of
the gaugau factory and the coffee factory were interchangeable, that is, the laborers from the
gaugau factory were sometimes transferred to the coffee factory and vice-versa. In view of all
these, the attempt to make the two factories appears as two separate businesses, when in
reality they are but one, is but a device to defeat the ends of the law (the Act governing capital
and labor relations) and should not be permitted to prevail.

The second point raised by petitioners is likewise with-out merit. In the first place, there being
more than 30 laborers involved and the Secretary of Labor having certified the dispute to the
Court of Industrial Relations, that court duly acquired jurisdiction over the case (International
Oil Factory vs. NLU, Inc. 73 Phil., 401; section 4, C. A. 103). This jurisdiction was not when the
Department of Labor suspended the permit of the respondent Kaisahan as a labor
organization. For once jurisdiction is acquired by the Court of Industrial Relations it is retained
until the case is completely decided. (Manila Hotel Employees Association vs. Manila Hotel Co.
et al., 73 Phil., 374.)

In view of the foregoing, the petition is denied, with costs against the petitioner.
G.R. No. 182770 September 17, 2014

WPM INTERNATIONAL TRADING, INC. and WARLITO P. MANLAPAZ, Petitioners,

vs.
FE CORAZON LABAYEN, Respondent.

DECISION

BRION, J.:

We review in this petition for review on certiorari1 the decision2 dated September 28, 2007 and
the resolution3 dated April 28, 2008 of the Court of Appeals (CA) in CA-G.R. CV No. 68289 that
affirmed with modification the decision4 of the Regional Trial Court (RTC), Branch 77, Quezon
City.

The Factual Background

The respondent, Fe Corazon Labayen, is the owner of H.B.O. Systems Consultants, a

management and consultant firm. The petitioner, WPM International Trading, Inc. (WPM), is a
domestic corporation engaged in the restaurant business, while Warlito P. Manlapaz
(Manlapaz) is its president.

Sometime in 1990, WPM entered into a management agreement with the respondent, by
virtue of which the respondent was authorized to operate, manage and rehabilitate Quickbite,
a restaurant owned and operated by WPM. As part of her tasks, the respondent looked for a
contractor who would renovate the two existing Quickbite outlets in Divisoria, Manila and
Lepanto St., University Belt, Manila. Pursuant to the agreement, the respondent engaged the
services of CLN Engineering Services (CLN) to renovate Quickbite-Divisoria at the cost of
₱432,876.02.

On June 13, 1990, Quickbite-Divisoria’s renovation was finally completed, and its possession
was delivered to the respondent. However, out of the ₱432,876.02 renovation cost, only the
amount of ₱320,000.00 was paid to CLN, leaving a balance of ₱112,876.02.

Complaint for Sum of Money (Civil Case No. Q-90-7013)

On October 19, 1990, CLN filed a complaint for sum of money and damages before the RTC
against the respondent and Manlapaz, which was docketed as Civil Case No. Q-90-7013. CLN
later amended the complaint to exclude Manlapaz as defendant. The respondent was declared
in default for her failure to file a responsive pleading.

The RTC, in its January 28, 1991 decision, found the respondent liable to pay CLN actual
damages inthe amount of ₱112,876.02 with 12% interest per annum from June 18,1990 (the
date of first demand) and 20% of the amount recoverable as attorney’s fees.
Complaint for Damages (Civil Case No. Q-92-13446)

Thereafter, the respondent instituted a complaint for damages against the petitioners, WPM
and Manlapaz. The respondent alleged that in Civil Case No. Q-90-7013, she was adjudged
liable for a contract that she entered into for and in behalf of the petitioners, to which she
should be entitled to reimbursement; that her participation in the management agreement
was limited only to introducing Manlapaz to Engineer Carmelo Neri (Neri), CLN’s general
manager; that it was actually Manlapaz and Neri who agreed on the terms and conditions of
the agreement; that when the complaint for damages was filed against her, she was abroad;
and that she did not know of the case until she returned to the Philippines and received a copy
of the decision of the RTC.

In her prayer, the respondent sought indemnification in the amount of ₱112,876.60 plus
interest at 12%per annum from June 18, 1990 until fully paid; and 20% of the award as
attorney’s fees. She likewise prayed that an award of ₱100,000.00 as moral damages and
₱20,000.00 as attorney’s fees be paid to her.

In his defense, Manlapaz claims that it was his fellow incorporator/director Edgar
Alcansajewho was in-charge with the daily operations of the Quickbite outlets; that when
Alcansaje left WPM, the remaining directors were compelled to hire the respondent as
manager; that the respondent had entered intothe renovation agreement with CLN in her own
personal capacity; that when he found the amount quoted by CLN too high, he instructed the
respondent to either renegotiate for a lower price or to look for another contractor; that since
the respondent had exceeded her authority as agent of WPM, the renovation agreement
should only bind her; and that since WPM has a separate and distinct personality, Manlapaz
cannot be made liable for the respondent’s claim.

Manlapaz prayed for the dismissal of the complaint for lack of cause of action, and by way of
counterclaim, for the award of ₱350,000.00 as moral and exemplary damages and ₱50,000.00
attorney’s fees.

The RTC, through an order dated March 2, 1993 declared WPM in default for its failure to file a
responsive pleading.

The Decision of the RTC

In its decision, the RTC held that the respondent is entitled to indemnity from Manlapaz. The
RTC found that based on the records, there is a clear indication that WPM is a mere
instrumentality or business conduit of Manlapaz and as such, WPM and Manlapaz are
considered one and the same. The RTC also found that Manlapaz had complete control over
WPM considering that he is its chairman, president and treasurer at the same time. The RTC
thus concluded that Manlapaz is liable in his personal capacity to reimburse the respondent
the amount she paid to CLN inconnection with the renovation agreement.
The petitioners appealed the RTC decision with the CA. There, they argued that in view of the
respondent’s act of entering into a renovation agreement with CLN in excess of her authority
as WPM’s agent, she is not entitled to indemnity for the amount she paid. Manlapaz also
contended that by virtue ofWPM’s separate and distinct personality, he cannot be
madesolidarily liable with WPM.

The Ruling of the Court of Appeals

On September 28, 2007, the CA affirmed, with modification on the award of attorney’s fees,
the decision of the RTC.The CA held that the petitioners are barred from raising as a defense
the respondent’s alleged lack of authority to enter into the renovation agreement in view of
their tacit ratification of the contract.

The CA likewise affirmed the RTC ruling that WPM and Manlapaz are one and the same based
on the following: (1) Manlapaz is the principal stockholder of WPM; (2) Manlapaz had
complete control over WPM because he concurrently held the positions of president, chairman
of the board and treasurer, in violation of the Corporation Code; (3) two of the four other
stockholders of WPM are employed by Manlapaz either directly or indirectly; (4) Manlapaz’s
residence is the registered principal office of WPM; and (5) the acronym "WPM" was derived
from Manlapaz’s initials. The CA applied the principle of piercing the veil of corporate fiction
and agreed with the RTC that Manlapaz cannot evade his liability by simply invoking WPM’s
separate and distinct personality.

After the CA's denial of their motion for reconsideration, the petitioners filed the present
petition for review on certiorari under Rule 45 of the Rules of Court.

The Petition

The petitioners submit that the CA gravely erred in sustaining the RTC’s application of the
principle of piercing the veil of corporate fiction. They argue that the legal fiction of corporate
personality could only be discarded upon clear and convincing proof that the corporation is
being used as a shield to avoid liability or to commit a fraud. Since the respondent failed to
establish that any of the circumstances that would warrant the piercing is present, Manlapaz
claims that he cannot be made solidarily liable with WPM to answerfor damages allegedly
incurred by the respondent.

The petitioners further argue that, assuming they may be held liable to reimburse to the
respondentthe amount she paid in Civil Case No. Q-90-7013, such liability is only limited to the
amount of ₱112,876.02, representing the balance of the obligation to CLN, and should not
include the twelve 12% percent interest, damages and attorney’s fees.

The Issues
The core issues are: (1) whether WPM is a mere instrumentality, alter-ego, and business
conduit of Manlapaz; and (2) whether Manlapaz is jointly and severally liable with WPM to the
respondent for reimbursement, damages and interest.

Our Ruling

We find merit in the petition.

We note, at the outset, that the question of whether a corporation is a mere instrumentality or
alter-ego of another is purely one of fact.5 This is also true with respect to the question of
whether the totality of the evidence adduced by the respondentwarrants the application of
the piercing the veil of corporate fiction doctrine.6

Generally, factual findings of the lower courts are accorded the highest degree of respect, if
not finality. When adopted and confirmed by the CA, these findings are final and conclusive
and may not be reviewed on appeal,7save in some recognized exceptions8 among others, when
the judgment is based on misapprehension of facts.

We have reviewed the records and found that the application of the principle of piercing the
veil of corporate fiction is unwarranted in the present case.

On the Application ofthe Principle of Piercing the Veil of Corporate Fiction

The rule is settled that a corporation has a personality separate and distinct from the persons
acting for and in its behalf and, in general, from the people comprising it. 9 Following this
principle, the obligations incurred by the corporate officers, orother persons acting as
corporate agents, are the direct accountabilities ofthe corporation they represent, and not
theirs. Thus, a director, officer or employee of a corporation is generally not held personally
liable for obligations incurred by the corporation;10 it is only in exceptional circumstances that
solidary liability will attach to them.

Incidentally, the doctrine of piercing the corporate veil applies only in three (3) basic instances,
namely: a) when the separate and distinct corporate personality defeats public convenience, as
when the corporate fiction is used as a vehicle for the evasion of an existing obligation; b) in
fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend
a crime; or c) is used in alter ego cases, i.e., where a corporation is essentially a farce, since it is
a mere alter ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs so conducted as to make it merely aninstrumentality, agency, conduit
or adjunct of another corporation.11

Piercing the corporate veil based on the alter ego theory requires the concurrence of three
elements, namely:
 (1) Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at the time no separate mind, will
or existence of its own;

(2) Such control must have beenused by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal right; and

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

The absence of any ofthese elements prevents piercing the corporate veil. 12

In the present case, the attendantcircumstances do not establish that WPM is a mere alter ego
of Manlapaz.

Aside from the fact that Manlapaz was the principal stockholder of WPM, records do not show
that WPM was organized and controlled, and its affairs conducted in a manner that made it
merely an instrumentality, agency, conduit or adjunct ofManlapaz. As held in Martinez v. Court
of Appeals,13 the mere ownership by a singlestockholder of even all or nearly all of the capital
stocks ofa corporation is not by itself a sufficient ground to disregard the separate corporate
personality. To disregard the separate juridical personality of a corporation, the wrongdoing
must be clearly and convincingly established.14

Likewise, the records of the case do not support the lower courts’ finding that Manlapaz had
control or domination over WPM or its finances. That Manlapaz concurrentlyheld the positions
of president, chairman and treasurer, or that the Manlapaz’s residence is the registered
principal office of WPM, are insufficient considerations to prove that he had exercised
absolutecontrol over WPM.

In this connection, we stress thatthe control necessary to invoke the instrumentality or alter
ego rule is not majority or even complete stock control but such domination of finances,
policies and practices that the controlled corporation has, so tospeak, no separate mind, will or
existence of its own, and is but a conduit for its principal. The control must be shown to have
been exercised at the time the acts complained of took place. Moreover, the control and
breach of duty must proximately cause the injury or unjust loss for which the complaint is
made.

Here, the respondent failed to prove that Manlapaz, acting as president, had absolute control
over WPM.1âwphi1 Even granting that he exercised a certain degree of control over the
finances, policies and practices of WPM, in view of his position as president, chairman and
treasurer of the corporation, such control does not necessarily warrant piercing the veil of
corporate fiction since there was not a single proof that WPM was formed to defraud CLN or
the respondent, or that Manlapaz was guilty of bad faith or fraud.

On the contrary, the evidence establishes that CLN and the respondent knew and acted on the
knowledgethat they were dealing with WPM for the renovation of the latter’s restaurant, and
not with Manlapaz. That WPM later reneged on its monetary obligation to CLN, resulting to the
filing of a civil case for sum of money against the respondent, does not automatically indicate
fraud, in the absence of any proof to support it.

This Court also observed that the CA failed to demonstrate how the separate and distinct
personalityof WPM was used by Manlapaz to defeat the respondent’s right for reimbursement.
Neither was there any showing that WPM attempted to avoid liability or had no property
against which to proceed.

Since no harm could be said to have been proximately caused by Manlapaz for which the latter
could be held solidarily liable with WPM, and considering that there was no proof that WPM
had insufficient funds, there was no sufficient justification for the RTC and the CA to have ruled
that Manlapaz should be held jointly and severally liable to the respondent for the amount she
paid to CLN. Hence, only WPM is liable to indemnify the respondent.

Finally, we emphasize that the piercing of the veil of corporate fiction is frowned upon and
thus, must be done with caution.15 It can only be done if it has been clearly established that
the separate and distinct personality of the corporation is used to justify a wrong, protect
fraud, or perpetrate a deception. The court must be certain that the corporate fiction was
misused to such an extent that injustice, fraud, or crime was committed against another, in
disregard of its rights; it cannot be presumed.

On the Award of Moral Damages

On the award of moral damages, we find the same in order in view of WPM's unjustified
refusal to pay a just debt. Under Article 2220 of the New Civil Code, 16 moral damages may be
awarded in cases of a breach of contract where the defendant acted fraudulently or in bad
faith or was guilty of gross negligence amounting to bad faith.

In the present case, when payment for the balance of the renovation cost was demanded,
WPM, instead of complying with its obligation, denied having authorized the respondent to
contract in its behalf and accordingly refused to pay. Such cold refusal to pay a just debt
amounts to a breach of contract in bad faith, as contemplated by Article 2220. Hence, the CA's
order to pay moral damages was in order.

WHEREFORE, in light of the foregoing, the decision dated September 28, 2007 of the Court of
Appeals in CA-G.R. CV No. 68289 is MODIFIED and that petitioner Warlito P. Manlapaz is
ABSOLVED from any liability under the renovation agreement.
SO ORDERED.