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 certiorari 1 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)
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.

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 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 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.
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,7 save 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.
G.R. No. 186433 November 27, 2013
NUCCIO SAVERIO and NS INTERNATIONAL INC., Petitioners,
vs.
ALFONSO G. PUYAT, Respondent.
DECISION
BRION, J.:
We resolve the petition for review on certiorari, 1 filed by petitioners
Nuccio Saverio and NS International, Inc. (NS) against respondent
Alfonso G. Puyat, challenging the October 27, 2008 decision 2 and
the February 10, 2009 resolution3 of the Court of Appeals (CA) in
CA-G.R. CV. No. 87879. The CA decision affirmed the December
15, 2004 decision4 of the Regional Trial Court RTC) of Makati City,
Branch 136, in Civil Case No. 00-594. The CA subsequently denied
the petitioners motion for reconsideration.
The Factual Antecedents
On July 22, 1996, the respondent granted a loan to NSI. The loan
was made pursuant to the Memorandum of Agreement and
Promissory Note (MOA)5 between the respondent and NSI,
represented by Nuccio. It was agreed that the respondent would
extend a credit line with a limit of ₱500,000.00 to NSI, to be paid
within thirty (30) days from the time of the signing of the document.
The loan carried an interest rate of 17% per annum, or at an
adjusted rate of 25% per annum if payment is beyond the stipulated
period. The petitioners received a total amount of ₱300,000.00 and
certain machineries intended for their fertilizer processing plant
business (business). The proposed business, however, failed to
materialize.
On several occasions, Nuccio made personal payments amounting
to ₱600,000.00. However, as of December 16, 1999, the petitioners
allegedly had an outstanding balance of ₱460,505.86. When the
petitioners defaulted in the payment of the loan, the respondent filed
a collection suit with the RTC, alleging mainly that the petitioners still
owe him the value of the machineries as shown by the Breakdown
of Account6 he presented.
The petitioners refuted the respondent’s allegation and insisted that
they have already paid the loan, evidenced by the respondent’s
receipt for the amount of ₱600,000.00. They submitted that their
remaining obligation to pay the machineries’ value, if any, had long
been extinguished by their business’ failure to materialize. They
posited that, even assuming without conceding that they are liable,
the amount being claimed is inaccurate, the penalty and the interest
imposed are unconscionable, and an independent accounting is
needed to determine the exact amount of their liability.
The RTC Ruling
In its decision dated December 15, 2004, the RTC found that aside
from the cash loan, the petitioners’ obligation to the respondent also
covered the payment of the machineries’ value. The RTC also
brushed aside the petitioners’ claim of partnership. The RTC thus
ruled that the payment of ₱600,000.00 did not completely extinguish
the petitioners’ obligation.
The RTC also found merit in the respondent’s contention that the
petitioners are one and the same. Based on Nuccio’s act of entering
a loan with the respondent for purposes of financing NSI’s proposed
business and his own admission during cross-examination that the
word "NS" in NSI’s name stands for "Nuccio Saverio," the RTC
found that the application of the doctrine of piercing the veil of
corporate fiction was proper.
The RTC, moreover, concluded that the interest rates stipulated in
the MOA were not usurious and that the respondent is entitled to
attorney’s fees on account of the petitioners’ willful breach of the
loan obligation. Thus, principally relying on the submitted
Breakdown of Account, the RTC ordered the petitioners, jointly and
severally, to pay the balance of ₱460,505.86, at 12% interest, and
attorney’s fees equivalent to 25% of the total amount due.
The CA Ruling
The petitioners appealed the RTC ruling to the CA. There, they
argued that in view of the lack of proper accounting and the
respondent’s failure to substantiate his claims, the exact amount of
their indebtedness had not been proven. Nuccio also argued that by
virtue of NSI’s separate and distinct personality, he cannot be made
solidarily liable with NSI.
On October 27, 2008, the CA rendered a decision7 declaring the
petitioners jointly and severally liable for the amount that the
respondent sought. The appellate court likewise held that since the
petitioners neither questioned the delivery of the machineries nor
their valuation, their obligation to pay the amount of ₱460,505.86
under the Breakdown of Account remained unrefuted.
The CA also affirmed the RTC ruling that petitioners are one and the
same for the following reasons: (1) Nuccio owned forty percent
(40%) of NSI; (2) Nuccio personally entered into the loan contract
with the respondent because there was no board resolution from
NSI; (3) the petitioners were represented by the same counsel; (4)
the failure of NSI to object to Nuccio’s acts shows the latter’s control
over the corporation; and (5) Nuccio’s control over NSI was used to
commit a wrong or fraud. It further adopted the RTC’s findings of
bad faith and willful breach of obligation on the petitioners’ part, and
affirmed its award of attorney’s fees.
The Petition
The petitioners submit that the CA gravely erred in ruling that a
proper accounting was not necessary. They argue that the
Breakdown of Account - which the RTC used as a basis in awarding
the claim, as affirmed by the CA - is hearsay since the person who
prepared it, Ramoncito P. Puyat, was not presented in court to
authenticate it. They also point to the absence of the award’s
computation in the RTC ruling, arguing that assuming they are still
indebted to the respondent, the specific amount of their
indebtedness remains undetermined, thus the need for an
accounting to determine their exact liability.
They further question the CA’s findings of solidary liability. They
submit that in the absence of any showing that corporate fiction was
used to defeat public convenience, justify a wrong, protect fraud or
defend a crime, or where the corporation is a mere alter ego or
business conduit of a person, Nuccio’s mere ownership of forty
percent (40%) does not justify the piercing of the separate and
distinct personality of NSI.
The Case for the Respondent
The respondent counters that the issues raised by the petitioners in
the present petition – pertaining to the correctness of the calibration
of the documentary and testimonial evidence by the RTC, as
affirmed by the CA, in awarding the money claims – are essentially
factual, not legal. These issues, therefore, cannot, as a general rule,
be reviewed by the Supreme Court in an appeal by certiorari. In
other words, the resolution of the assigned errors is beyond the
ambit of a Rule 45 petition.
 The Issue
The case presents to us the issue of whether the CA committed a
reversible error in affirming the RTC’s decision holding the
petitioners jointly and severally liable for the amount claimed.
Our Ruling
After a review of the parties’ contentions, we hold that a remand of
the case to the court of origin for a complete accounting and
determination of the actual amount of the petitioners’ indebtedness
is called for.
The determination of questions of fact is improper in a Rule 45
proceeding; Exceptions.
The respondent questions the present petition’s propriety, and
contends that in a petition for review on certiorari under Rule 45 of
the Rules of Court, only questions of law may be raised. He argues
that the petitioners are raising factual issues that are not permissible
under the present petition and these issues have already been
extensively passed upon by the RTC and the CA. The petitioners,
on the other hand, assert that the exact amount of their
indebtedness has not been determined with certainty. They insist
that the amount of ₱460,505.86 awarded in favor of the respondent
has no basis because the latter failed to substantiate his claim. They
also maintain that the Breakdown of Account used by the lower
courts in arriving at the collectible amount is unreliable for the
respondent’s failure to adduce supporting documents for the alleged
additional expenses charged against them. With no independent
determination of the actual amount of their indebtedness, the
petitioners submit that an order for a proper accounting is
imperative.
We agree with the petitioners. While we find the fact of indebtedness
to be undisputed, the determination of the extent of the adjudged
money award is not, because of the lack of any supporting
documentary and testimonial evidence. These evidentiary issues, of
course, are necessarily factual, but as we held in The Insular Life
Assurance Company, Ltd. v. Court of Appeals, 8 this Court may take
cognizance even of factual issues under exceptional circumstances.
In this cited case, we held:
It is a settled rule that in the exercise of the Supreme Court's power
of review, the Court is not a trier of facts and does not normally
undertake the re-examination of the evidence presented by the
contending parties during the trial of the case considering that the
findings of facts of the CA are conclusive and binding on the Court.
However, the Court had recognized several exceptions to this rule,
to wit: (1) when the findings are grounded entirely on speculation,
surmises or conjectures; (2) when the inference made is manifestly
mistaken, absurd or impossible; (3) when there is grave abuse of
discretion; (4) when the judgment is based on a misapprehension of
facts; (5) when the findings of facts are conflicting; (6) when in
making its findings the Court of Appeals went beyond the issues of
the case, or its findings are contrary to the admissions of both the
appellant and the appellee; (7) when the findings are contrary to the
trial court; (8) when the findings are conclusions without citation of
specific evidence on which they are based; (9) when the facts set
forth in the petition as well as in the petitioner's main and reply briefs
are not disputed by the respondent; (10) when the findings of fact
are premised on the supposed absence of evidence and
contradicted by the evidence on record; and (11) when the Court of
Appeals manifestly overlooked certain relevant facts not disputed by
the parties, which, if properly considered, would justify a different
conclusion.
We note in this regard that the RTC, in awarding the amount of
₱460,505.86 in favor of the respondent, principally relied on the
Breakdown of Account. Under this document, numerous entries,
including the cash loan, were enumerated and identified with their
corresponding amounts. It included the items of expenses allegedly
chargeable to the petitioners, the value of the machineries, the
amount credited as paid, and the interest and penalty allegedly
incurred.
A careful perusal of the records, however, reveals that the entries in
the Breakdown of Account and their corresponding amounts are not
supported by the respondent’s presented evidence. The itemized
expenses, as repeatedly pointed out by the petitioners, were not
proven, and the remaining indebtedness, after the partial payment of
₱600,000.00, was merely derived by the RTC from the Breakdown
of Account.
Significantly, the RTC ruling neither showed how the award was
computed nor how the interest and penalty were calculated. In fact,
it merely declared the petitioners liable for the amount claimed by
the respondent and adopted the breakdown of liability in the
Breakdown of Account. This irregularity is even aggravated by the
RTC’s explicit refusal to explain why the payment of ₱600,000.00
did not extinguish the debt. While it may be true that the petitioners’
indebtedness, aside from the cash loan of ₱300,000.00,
undoubtedly covered the value of the machineries, the RTC decision
was far from clear and instructive on the actual remaining
indebtedness (inclusive of the machineries’ value, penalties and
interests) after the partial payment was made and how these were
all computed.
We, thus, find it unacceptable for the RTC to simply come up with a
conclusion that the payment of ₱600,000.00 did not extinguish the
debt, or, assuming it really did not, that the remaining amount of
indebtedness amounts exactly to ₱460,505.86, without any showing
of how this balance was arrived at. To our mind, the RTC’s ruling, in
so far as the determination of the actual indebtedness is concerned,
is incomplete.
What happened at the RTC likewise transpired at the CA when the
latter affirmed the appealed decision; the CA merely glossed over
the contention of the petitioners, and adopted the RTC’s findings
without giving any enlightenment. To reiterate, nowhere in the
decisions of the RTC and the CA did they specify how the award,
including the penalty and interest, was determined. The petitioners
were left in the dark as to how their indebtedness of ₱300,000.00,
after making a payment of ₱600,000.00, ballooned to ₱460,505.86.
Worse, unsubstantiated expenses, appearing in the Breakdown of
Account, were charged to them.
We, therefore, hold it inescapable that the prayer for proper
accounting to determine the petitioners’ actual remaining
indebtedness should be granted. As this requires presentation of
additional evidence, a remand of the case is only proper and in
order.
Piercing the veil of corporate fiction is not justified. The petitioners
are not one and the same.
At the outset, we note that the question of whether NSI is an alter
ego of Nuccio is a factual one. This is also true with respect to the
question of whether the totality of the evidence adduced by the
respondent warrants the application of the piercing the veil of
corporate fiction doctrine. As we did in the issue of accounting, we
hold that the Court may properly wade into the piercing the veil issue
although purely factual questions are involved.
After a careful study of the records and the findings of both the RTC corporation’s finances. Neither the absence of a board resolution
and the CA, we hold that their conclusions, based on the given authorizing him to contract the loan nor NSI’s failure to object
findings, are not supported by the evidence on record. thereto supports this conclusion. These may be indicators that,
among others, may point the proof required to justify the piercing the
The rule is settled that a corporation is vested by law with a
veil of corporate fiction, but by themselves, they do not rise to the
personality separate and distinct from the persons composing it.
level of proof required to support the desired conclusion. It should be
Following this principle, a stockholder, generally, is not answerable
noted in this regard that while Nuccio was the signatory of the loan
for the acts or liabilities of the corporation, and vice versa. The
and the money was delivered to him, the proceeds of the loan were
obligations incurred by the corporate officers, or other persons
unquestionably intended for NSI’s proposed business plan. That the
acting as corporate agents, are the direct accountabilities of the
business did not materialize is not also sufficient proof to justify a
corporation they represent, and not theirs. A director, officer or
piercing, in the absence of proof that the business plan was a
employee of a corporation is generally not held personally liable for
fraudulent scheme geared to secure funds from the respondent for
obligations incurred by the corporation 9 and while there may be
the petitioners’ undisclosed goals.
instances where solidary liabilities may arise, these circumstances
are exceptional.10 Considering that the basis for holding Nuccio liable for the payment
of the loan has been proven to be insufficient, we find no justification
Incidentally, we have ruled that mere ownership by a single
for the RTC to hold him jointly and solidarily liable for NSI’s unpaid
stockholder or by another corporation of all or nearly all of the capital
loan. Similarly, we find that the CA ruling is wanting in sufficient
stocks of the corporation is not, by itself, a sufficient ground for
explanation to justify the doctrine’s application and affirmation of the
disregarding the separate corporate personality. Other than mere
RTC’s ruling. With these points firmly in mind, we hold that NSI’s
ownership of capital stocks, circumstances showing that the
liability should not attach to Nuccio.
corporation is being used to commit fraud or proof of existence of
absolute control over the corporation have to be proven. In short, On the final issue of the award of attorney’s fees, Article 1229 of the
before the corporate fiction can be disregarded, alter-ego elements New Civil Code provides:
must first be sufficiently established.
Article 1229. The judge shall equitably reduce the penalty when the
In Hi-Cement Corporation v. Insular Bank of Asia and America (later principal obligation has been partly or irregularly complied with by
PCI-Bank, now Equitable PCI-Bank),11 we refused to apply the the debtor. Even if there has been no performance, the penalty may
piercing the veil doctrine on the ground that the corporation was a also be reduced by the courts if it is iniquitous or unconscionable.
mere alter ego because mere ownership by a stockholder of all or
Under the circumstances of the case, we find the respondent’s
nearly all of the capital stocks of a corporation does not, by itself,
entitlement to attorney’s fees to be justified. There is no doubt that
justify the disregard of the separate corporate personality. In this
he was forced to litigate to protect his interest, i.e., to recover his
cited case, we ruled that in order for the ground of corporate
money. We find, however, that in view of the partial payment of
ownership to stand, the following circumstances should also be
₱600,000.00, the award of attorney’s fees equivalent to 25% should
established: (1) that the stockholders had control or complete
be reduced to 10% of the total amount due. The award of
domination of the corporation’s finances and that the latter had no
appearance fee of ₱3,000.00 and litigation cost of ₱10,000.00
separate existence with respect to the act complained of; (2) that
should, however, stand as these are costs necessarily attendant to
they used such control to commit a wrong or fraud; and (3) the
litigation.
control was the proximate cause of the loss or injury.
WHEREFORE, the petition is GRANTED. The October 27, 2008
Applying these principles to the present case, we opine and so hold
decision and the February 10, 2009 resolution of the Court of
that the attendant circumstances do not warrant the piercing of the
Appeals in CA-G.R. CV. No. 87879 are REVERSED AND SET
veil of NSI’s corporate fiction.
ASIDE. The case is REMANDED to the Regional Trial Court of
Aside from the undisputed fact of Nuccio’s 40% shareholdings with Makati City, Branch 136, for proper accounting and reception of
NSI, the RTC applied the piercing the veil doctrine based on the such evidence as may be needed to determine the actual amount of
following reasons. First, there was no board resolution authorizing petitioner NS International, Inc.’s indebtedness, and to adjudicate
Nuccio to enter into a contract of loan. Second, the petitioners were respondent Alfonso G. Puyat’s claims as such evidence may
represented by one and the same counsel. Third, NSI did not object warrant.
to Nuccio’s act of contracting the loan.
SO ORDERED.
Fourth, the control over NSI was used to commit a wrong or fraud.
Fifth, Nuccio’s admission that "NS" in the corporate name "NSI"
means "Nuccio Saverio."

We are not convinced of the sufficiency of these cited reasons. In

our view, the RTC failed to provide a clear and convincing
explanation why the doctrine was applied. It merely declared that its
application of the doctrine of piercing the veil of corporate fiction has
a basis, specifying for this purpose the act of Nuccio’s entering into
a contract of loan with the respondent and the reasons stated
above.
The records of the case, however, do not show that Nuccio had
control or domination over NSI’s finances.1âwphi1 The mere fact
that it was Nuccio who, in behalf of the corporation, signed the MOA
is not sufficient to prove that he exercised control over the
G.R. No. 152347 June 21, 2006
UNION BANK OF THE PHILIPPINES, Petitioner,
vs.
SPS. ALFREDO ONG AND SUSANA ONG and JACKSON LEE,
Respondents.
DECISION
GARCIA, J.:
By this petition for review under Rule 45 of the Rules of Court,
petitioner Union Bank of the Philippines (Union Bank) seeks to set
aside the decision1 dated December 5, 2001 of the Court of Appeals
(CA) in CA-G.R. No. 66030 reversing an earlier decision of the
Regional Trial Court (RTC) of Pasig City in Civil Case No. 61601, a
suit thereat commenced by the petitioner against the herein
respondents for annulment or rescission of sale in fraud of creditors.
The facts:
Herein respondents, the spouses Alfredo Ong and Susana Ong,
own the majority capital stock of Baliwag Mahogany Corporation
(BMC). On October 10, 1990, the spouses executed a Continuing
Surety Agreement in favor of Union Bank to secure a
P40,000,000.00-credit line facility made available to BMC. The
agreement expressly stipulated a solidary liability undertaking.
On October 22, 1991, or about a year after the execution of the
surety agreement, the spouses Ong, for P12,500,000.00, sold their
974-square meter lot located in Greenhills, San Juan, Metro Manila,
together with the house and other improvements standing thereon,
to their co-respondent, Jackson Lee (Lee, for short). The following
day, Lee registered the sale and was then issued Transfer
Certificate of Title (TCT) No. 4746-R. At about this time, BMC had
already availed itself of the credit facilities, and had in fact executed
a total of twenty-two (22) promissory notes in favor of Union Bank.
On November 22, 1991, BMC filed a Petition for Rehabilitation and
for Declaration of Suspension of Payments with the Securities and
Exchange Commission (SEC). To protect its interest, Union Bank
lost no time in filing with the RTC of Pasig City an action for
rescission of the sale between the spouses Ong and Jackson Lee
for purportedly being in fraud of creditors.
In its complaint, docketed as Civil Case No. 61601 and eventually
raffled to Branch 157 of the court, Union Bank assailed the validity of
the sale, alleging that the spouses Ong and Lee entered into the
transaction in question for the lone purpose of fraudulently removing
the property from the reach of Union Bank and other creditors. The
fraudulent design, according to Union Bank, is evidenced by the
following circumstances: (1) insufficiency of consideration, the
purchase price of P12,500,000.00 being below the fair market value
of the subject property at that time; (2) lack of financial capacity on
the part of Lee to buy the property at that time since his gross
income for the year 1990, per the credit investigation conducted by
the bank, amounted to only P346,571.73; and (3) Lee did not assert
absolute ownership over the property as he allowed the spouses
Ong to retain possession thereof under a purported Contract of
Lease dated October 29, 1991.
Answering, herein respondents, as defendants a quo, maintained, in
the main, that both contracts of sale and lease over the Greenhills
property were founded on good and valid consideration and
executed in good faith. They also scored Union Bank for forum
shopping, alleging that the latter is one of the participating creditors
in BMC’s petition for rehabilitation.
Issues having been joined, trial followed. On September 27, 1999,
the trial court, applying Article 1381 of the Civil Code and noting that
the evidence on record "present[s] a holistic combination of
circumstances distinctly characterized by badges of fraud," rendered
judgment for Union Bank, the Deed of Sale executed on October 22,
1991 by the spouses Ong in favor of Lee being declared null and
void.
Foremost of the circumstances adverted to relates to the execution
of the sale against the backdrop of the spouses Ong, as owners of
70% of BMC's stocks, knowing of the company’s insolvency. This
knowledge was the reason why, according to the court, the spouses
Ong disposed of the subject property leaving the bank without
recourse to recover BMC's indebtedness. The trial court also made
reference to the circumstances which Union Bank mentioned in its
complaint as indicia of conveyance in fraud of creditors.
Therefrom, herein respondents interposed an appeal to the CA
which docketed their recourse as CA-G.R. No. 66030.
In its Decision dated December 5, 2001, the CA reversed and set
aside the trial court's ruling, observing that the contract of sale
executed by the spouses Ong and Lee, being complete and regular
on its face, is clothed with the prima facie presumption of regularity
and legality. Plodding on, the appellate court said:
In order that rescission of a contract made in fraud of creditors may
be decreed, it is necessary that the complaining creditors must
prove that they cannot recover in any other manner what is due
them. xxx.
There is no gainsaying that the basis of liability of the appellant
spouses in their personal capacity to Union Bank is the Continuing
Surety Agreement they have signed … on October 10, 1990.
However, the real debtor of Union Bank is BMC, which has a
separate juridical personality from appellants Ong. Granting that
BMC was already insolvent at the time of the sale, still, there was no
showing that at the time BMC filed a petition for suspension of
payment that appellants Ong were themselves bankrupt. In the case
at bench, no attempt was made by Union Bank, not even a feeble or
half-hearted one, to establish that appellants spouses have no other
property from which Union Bank, as creditor of BMC, could obtain
payment. While appellants Ong may be independently liable directly
to Union Bank under the Continuing Surety Agreement, all that
Union Bank tried to prove was that BMC was insolvent at the time of
the questioned sale. No competent evidence was adduced showing
that appellants Ong had no leviable assets other than the subject
property that would justify challenge to the transaction.2
Petitioner moved for a reconsideration of the above decision but its
motion was denied by the appellate court in its resolution of
February 21, 2002.3
Hence, petitioner’s present recourse on its submission that the
appellate court erred:
I. xxx WHEN IT CONSIDERED THAT THE SALE
TRANSACTION BETWEEN [ RESPONDENTS SPOUSES
ONG AND LEE] ENJOYS THE PRESUMPTION OF
REGULARITY AND LEGALITY AS THERE EXISTS ALSO A
PRESUMPTION THAT THE SAID SALE WAS ENTERED IN
FRAUD OF CREDITORS. PETITIONER THEREFORE NEED
NOT PROVE THAT RESPONDENTS SPOUSES ONG DID
NOT LEAVE SUFFICIENT ASSETS TO PAY THEIR
CREDITORS. BUT EVEN THEN, PETITIONER HAS PROVEN
THAT THE SPOUSES HAVE NO OTHER ASSETS.
 II. IN CONCLUDING, ASSUMING EX-GRATIA ARGUMENTI
THAT THE SALE BETWEEN DEFENDANT-APPELLANTS
ENJOY THE PRESUMPTION OF REGULARITY AND
LEGALITY, THAT THE EVIDENCE ADDUCED BY THE
PETITIONER … WAS NOT SUFFICIENT TO OVERCOME
THE PRESUMPTION.
III. xxx IN FINDING THAT IT WAS [RESPONDENT] LEE WHO
HAS SUFFICIENTLY PROVEN THAT THERE WAS A VALID
AND SUFFICIENT CONSIDERATION FOR THE SALE.
IV. xxx IN NOT FINDING THAT JACKSON LEE WAS IN BAD
FAITH WHEN HE PURCHASED THE PROPERTY.4
Petitioner maintains, citing China Banking Corporation vs. Court of
Appeals,5 that the sale in question, having been entered in fraud of
creditor, is rescissible. In the same breath, however, petitioner would
fault the CA for failing to consider that the sale between the Ongs
and Lee is presumed fraudulent under Section 70 of Act No. 1956,
as amended, or the Insolvency Law. Elaborating on this point,
petitioner states that the subject sale occurred thirty (30) days prior
to the filing by BMC of a petition for suspension of payment before
the SEC, thus rendering the sale not merely rescissible but
absolutely void.
We resolve to deny the petition.
In effect, the determinative issue tendered in this case resolves itself
into the question of whether or not the Ong-Lee contract of sale
partakes of a conveyance to defraud Union Bank. Obviously, this
necessitates an inquiry into the facts and this Court eschews factual
examination in a petition for review under Rule 45 of the Rules of
Court, save when, as in the instant case, a clash between the
factual findings of the trial court and that of the appellate court
exists,6 among other exceptions.
As between the contrasting positions of the trial court and the CA,
that of the latter commends itself for adoption, being more in accord
with the evidence on hand and the laws applicable thereto.
Essentially, petitioner anchors its case on Article 1381 of the Civil
Code which lists as among the rescissible contracts "[T]hose
undertaken in fraud of creditors when the latter cannot in any other
manner collect the claim due them."
Contracts in fraud of creditors are those executed with the intention
to prejudice the rights of creditors. They should not be confused with
those entered into without such mal-intent, even if, as a direct
consequence thereof, the creditor may suffer some damage. In
determining whether or not a certain conveying contract is
fraudulent, what comes to mind first is the question of whether the
conveyance was a bona fide transaction or a trick and contrivance to
defeat creditors.7 To creditors seeking contract rescission on the
ground of fraudulent conveyance rest the onus of proving by
competent evidence the existence of such fraudulent intent on the
part of the debtor, albeit they may fall back on the disputable
presumptions, if proper, established under Article 1387 of the Code.8
In the present case, respondent spouses Ong, as the CA had
determined, had sufficiently established the validity and legitimacy of
the sale in question. The conveying deed, a duly notarized
document, carries with it the presumption of validity and regularity.
Too, the sale was duly recorded and annotated on the title of the
property owners, the spouses Ong. As the transferee of said
property, respondent Lee caused the transfer of title to his name.
There can be no quibbling about the transaction being supported by
a valid and sufficient consideration. Respondent Lee’s account,
while on the witness box, about this angle of the sale was
categorical and straightforward. An excerpt of his testimony:
Atty. De Jesus :
Before you prepared the consideration of this formal offer, as
standard operating procedure of buy and sell, what documents were
prepared?
xxx xxx xxx
Jackson Lee:
A. There is a downpayment.
Q. And how much was the downpayment?
A. P2,500,000.00.
Q. Was that downpayment covered by a receipt signed by the
seller?
A. Yes, Sir, P500,000.00 and P2,000,000.00
xxx xxx xxx
Q. Are you referring to the receipt dated October 19, 1991, how
about the other receipt dated October 21, 1991?
A. Yes, Sir, this is the same receipt.
xxx xxx xxx
Q. Considering that the consideration of this document is for
P12,000,000.00 and you made mention only of P2,500,000.00,
covered by the receipts, do you have evidence to show that, finally,
Susana Ong received the balance of P10,000,000.00?
A. Yes, Sir.
Q. Showing to you a receipt denominated as Acknowledgement
Receipt, dated October 25, 1991, are you referring to this receipt to
cover the balance of P10,000,000.00?
A. Yes, sir.9
The foregoing testimony readily proves that money indeed changed
hands in connection with the sale of the subject property.
Respondent Lee, as purchaser, paid the stipulated contract price to
the spouses Ong, as vendors. Receipts presented in evidence
covered and proved such payment. Accordingly, any suggestion
negating payment and receipt of valuable consideration for the
subject conveyance, or worse, that the sale was fictitious must
simply be rejected.
In a bid to attach a badge of fraud on the transaction, petitioner
raises the issue of inadequate consideration, alleging in this regard
that only P12,500,000.00 was paid for property having, during the
period material, a fair market value of P14,500,000.00.
We do not agree.
The existence of fraud or the intent to defraud creditors cannot
plausibly be presumed from the fact that the price paid for a piece of
real estate is perceived to be slightly lower, if that really be the case,
than its market value. To be sure, it is logical, even expected, for
contracting minds, each having an interest to protect, to negotiate on
the price and other conditions before closing a sale of a valuable
piece of land. The negotiating areas could cover various items. The
purchase price, while undeniably an important consideration, is
doubtless only one of them. Thus, a scenario where the price
actually stipulated may, as a matter of fact, be lower than the
original asking price of the vendor or the fair market value of the
property, as what perhaps happened in the instant case, is not out of
the ordinary, let alone indicative of fraudulent intention. That the
spouses Ong acquiesced to the price of P12,500,000.00, which may
be lower than the market value of the house and lot at the time of
alienation, is certainly not an unusual business phenomenon.
Lest it be overlooked, the disparity between the price appearing in
the conveying deed and what the petitioner regarded as the real
value of the property is not as gross to support a conclusion of fraud.
What is more, one Oliver Morales, a licensed real estate appraiser
and broker, virtually made short shrift of petitioner’s claim of gross
inadequacy of the purchase price. Mr. Morales declared that there
exists no gross disparity between the market value of the subject
property and the price mentioned in the deed as consideration. He
explained why:
ATTY. EUFEMIO:
Q. I am showing to you the said two (2) exhibits Mr. Morales and I
would like you to go over the terms and conditions stated therein
and as an expert in real estate appraiser (sic) and also as a real
estate broker, can you give this Honorable Court your considered
opinion whether the consideration stated therein P12,500,000.00 in
the light of all terms and conditions of the said Deed of Absolute
Sale and Offer to Purchase could be deemed fair and reasonable?
xxx xxx xxx
MR. MORALES:
A. My opinion generally a Deed of Absolute Sale indicated
prescribed not only the amount of the consideration. There are also
other expenses involved in the sales. I do not see here other
payment of who takes care of capital gains stocks (sic) in this Deed
of Sale neither who shouldered the documentary stamps or even
transfer tax. That is my comment regarding this.
Q. Precisely Mr. Witness we have also shown to you the Offer to
Purchase which has been marked as Exhibit "9" as to the terms
which we are asking?
xxx xxx xxx
A. Well, it says here in item C of the conditions the Capital Gains
Stocks (sic), documentary stamps, transfer tax registration and
broker’s fee for the buyer’s account. I do not know how much is this
worth. If at all in condition (sic) to the 12.5 million which is the selling
price, may I, therefore aside (sic) how much is the total cost
pertaining to this. The capital gains tax on (sic), documentary
stamps, transfer tax are all computed on the basis of the
consideration which is P12.5 M, the capital gain stocks (sic) is 5%,
5% of 12.5 M.
xxx xxx xxx
Yes sir if the 5% capital gains tax and documentary stamps
respectively shall be added to the 12.5 Million before the inclusion of
the transfer tax, the amount will be already in the vicinity of
P13,250.000.
Q. With such consideration Mr. Witness and in the light of the terms
and conditions in the said Offer to Purchase and Deed of Absolute
Sale could you give your opinion as to whether the consideration is
fair and reasonable.
xxx xxx xxxe
A. With our proposal of P14.5 M as compared now to
P13,250,000.00 may I give my opinion that generally there will be
two appraisers. In fairness to the situation, they should not vary by
as much as 7% down so we are playing at a variance actually of
about 15%. In my experience in this profession for the last 27 years
as I have said in fairness if there is another appraisal done by
another person, that kind of difference is very marginal should at
least indicate the fairness of the property and so therefore the only
way to find out is to determine the difference between the P14.5 M
and the P13,250,000.00. My computation indicates that it is close to
10% something like that difference. What is the question again?
Q. Whether it is fair and reasonable under the circumstances.
A. I have answered already the question and I said maximum of
15%.
Q. So based on your computation this is about 10% which is fair and
reasonable.
A That is right sir.10
Withal, the consideration of the sale is fair and reasonable as would
justify the conclusion that the sale is undoubtedly a true and genuine
conveyance to which the parties thereto are irrevocably and
undeniably bound.
It may be stressed that, when the validity of sales contract is in
issue, two veritable presumptions are relevant: first, that there was
sufficient consideration of the contract11 ; and, second, that it was
the result of a fair and regular private transaction.12 If shown to hold,
these presumptions infer prima facie the transaction's validity,
except that it must yield to the evidence adduced 13 which the party
disputing such presumptive validity has the burden of overcoming.
Unfortunately for the petitioner, it failed to discharge this burden. Its
bare allegation respecting the sale having been executed in fraud of
creditors and without adequate consideration cannot, without more,
prevail over the respondents' evidence which more than sufficiently
supports a conclusion as to the legitimacy of the transaction and the
bona fides of the parties.
Parenthetically, the rescissory action to set aside contracts in fraud
of creditors is accion pauliana, essentially a subsidiary remedy
accorded under Article 1383 of the Civil Code which the party
suffering damage can avail of only when he has no other legal
means to obtain reparation for the same. 14 In net effect, the
provision applies only when the creditor cannot recover in any other
manner what is due him.
It is true that respondent spouses, as surety for BMC, bound
themselves to answer for the latter’s debt. Nonetheless, for
purposes of recovering what the eventually insolvent BMC owed the
bank, it behooved the petitioner to show that it had exhausted all the
properties of the spouses Ong. It does not appear in this case that
the petitioner sought other properties of the spouses other than the
subject Greenhills property. The CA categorically said so. Absent
proof, therefore, that the spouses Ong had no other property except
their Greenhills home, the sale thereof to respondent Lee cannot
simplistically be considered as one in fraud of creditors.
Neither was evidence adduced to show that the sale in question
peremptorily deprived the petitioner of means to collect its claim
against the Ongs. Where a creditor fails to show that he has no
other legal recourse to obtain satisfaction for his claim, then he is
not entitled to the rescission asked.15
For a contract to be rescinded for being in fraud of creditors, both
contracting parties must be shown to have acted maliciously so as
to prejudice the creditors who were prevented from collecting their
claims.16 Again, in this case, there is no evidence tending to prove
that the spouses Ong and Lee were conniving cheats. In fact, the
petitioner did not even attempt to prove the existence of personal
closeness or business and professional interdependence between
the spouses Ong and Lee as to cast doubt on their true intent in
executing the contract of sale. With the view we take of the evidence
on record, their relationship vis-à-vis the subject Greenhills property
was no more than one between vendor and vendee dealing with
each other for the first time. Any insinuation that the two colluded to
gyp petitioner bank is to read in a relationship something which,
from all indications, appears to be purely business.
It cannot be overemphasized that rescission is generally unavailing
should a third person, acting in good faith, is in lawful possession of
the property,17 that is to say, he is protected by law against a suit for
rescission by the registration of the transfer to him in the registry.
As recited earlier, Lee was - and may still be - in lawful possession
of the subject property as the transfer to him was by virtue of a
presumptively valid onerous contract of sale. His possession is
evidenced by no less than a certificate of title issued him by the
Registry of Deeds of San Juan, Metro Manila, after the usual
registration of the corresponding conveying deed of sale. On the
other hand, the bona fides of his acquisition can be deduced from
his conduct and outward acts previous to the sale. As testified to by
him and duly noted by the CA, respondent Lee undertook what
amounts to due diligence on the possible defects in the title of the
Ongs before proceeding with the sale. As it were, Lee decided to
buy the property only after being satisfied of the absence of such
defects.18
Time and again, the Court has held that one dealing with a
registered parcel of land need not go beyond the certificate of title as
he is charged with notice only of burdens which are noted on the
face of the register or on the certificate of title.19 The Continuing
Surety Agreement, it ought to be particularly pointed out, was never
recorded nor annotated on the title of spouses Ong. There is no
evidence extant in the records to show that Lee had knowledge,
prior to the subject sale, of the surety agreement adverted to. In fine,
there is nothing to remotely suggest that the purchase of the subject
property was characterized by anything other than good faith.
Petitioner has made much of respondent Lee not taking immediate
possession of the property after the sale, stating that such failure is
an indication of his participation in the fraudulent scheme to
prejudice petitioner bank.
We are not persuaded.
Lee, it is true, allowed the respondent spouses to continue
occupying the premises even after the sale. This development,
however, is not without basis or practical reason. The spouses'
continuous possession of the property was by virtue of a one-year
lease20 they executed with respondent Lee six days after the sale.
As explained by the respondent spouses, they insisted on the lease
arrangement as a condition for the sale in question. And pursuant to
the lease contract aforementioned, the respondent Ongs paid and
Lee collected rentals at the rate of P25,000.00 a month. Contrary
thus to the petitioner’s asseveration, respondent Lee, after the sale,
exercised acts of dominion over the said property and asserted his
rights as the new owner. So, when the respondent spouses
continued to occupy the property after its sale, they did so as mere
tenants. While the failure of the vendee to take exclusive possession
of the property is generally recognized as a badge of fraud, the
same cannot be said here in the light of the existence of what
appears to be a genuine lessor-lessee relationship between the
spouses Ong and Lee. To borrow from Reyes vs. Court of
Appeals,21 possession may be exercised in one’s own name or in
the name of another; an owner of a piece of land has possession,
either when he himself physically occupies the same or when
another person who recognizes his right as owner is in such
occupancy.
Petitioner’s assertion regarding respondent Lee’s lack of financial
capacity to acquire the property in question since his income in 1990
was only P346,571.73 is clearly untenable. Assuming for argument
that petitioner got its figure right, it is clearly incorrect to measure
one’s purchasing capacity with one’s income at a given period. But
the more important consideration in this regard is the uncontroverted
fact that respondent Lee paid the purchase price of said property.
Where he sourced the needed cash is, for the nonce, really of no
moment.
The cited case of China Banking22 cannot plausibly provide
petitioner with a winning card. In that case, the Court, applying
Article 1381 (3) of the Civil Code, rescinded an Assignment of
Rights to Redeem owing to the failure of the assignee to overthrow
the presumption that the said conveyance/assignment is fraudulent.
In turn, the presumption was culled from Article 1387, par. 2, of the
Code pertinently providing that "[A]lienation by onerous title are also
presumed fraudulent when made by persons against whom some
judgment has been rendered in any instance or some writ of
attachment has been issued."
Indeed, when the deed of assignment was executed in China
Banking, the assignor therein already faced at that time an adverse
judgment. In the same case, moreover, the Court took stock of other
signs of fraud which tainted the transaction therein and which are,
significantly, not obtaining in the instant case. We refer, firstly, to the
element of kinship, the assignor, Alfonso Roxas Chua, being the
father of the assignee, Paulino. Secondly, Paulino admitted knowing
his father to be insolvent. Hence, the Court, rationalizing the
rescission of the assignment of rights, made the following remarks:
The mere fact that the conveyance was founded on valuable
consideration does not necessarily negate the presumption of fraud
under Article 1387 of the Civil Code. There has to be valuable
consideration and the transaction must have been made bona fide. 23
There lies the glaring difference with the instant case.
Here, the existence of fraud cannot be presumed, or, at the very
least, what were perceived to be badges of fraud have been proven
to be otherwise. And, unlike Alfonso Roxas Chua in China Banking,
a judgment has not been rendered against respondent spouses Ong
or that a writ of attachment has been issued against them at the time
of the disputed sale.
In a last-ditch attempt to resuscitate a feeble cause, petitioner cites
Section 70 of the Insolvency Law which, unlike the invoked Article
1381 of the Civil Code that deals with a valid but rescissible
contract, treats of a contractual infirmity resulting in nullity no less of
the transaction in question. Insofar as pertinent, Section 70 of the
Insolvency Law provides:
Sec. 70. If any debtor, being insolvent, or in contemplation of
insolvency, within thirty days before the filing of a petition by or
against him, with a view to giving a preference to any creditor or
person having a claim against him xxx makes any xxx sale or
conveyance of any part of his property, xxx such xxx sale,
assignment or conveyance is void, and the assignee, or the
receiver, may recover the property or the value thereof, as assets of
such insolvent debtor. xxx. Any payment, pledge, mortgage,
conveyance, sale, assignment, or transfer of property of whatever
character made by the insolvent within one (1) month before the
filing of a petition in insolvency by or against him, except for a
valuable pecuniary consideration made in good faith shall be
void. xxx. (Emphasis added)
Petitioner avers that the Ong-Lee sales contract partakes of a
fraudulent transfer and is null and void in contemplation of the
aforequoted provision, the sale having occurred on October 22,
1991 or within thirty (30) days before BMC filed a petition for
suspension of payments on November 22, 1991.

Petitioner's reliance on the afore-quoted provision is misplaced for

the following reasons:
First, Section 70, supra, of the Insolvency Law specifically
makes reference to conveyance of properties made by a
"debtor" or by an "insolvent" who filed a petition, or against
whom a petition for insolvency has been filed. Respondent
spouses Ong have doubtlessly not filed a petition for a
declaration of their own insolvency. Neither has one been filed
against them. And as the CA aptly observed, it was never
proven that respondent spouses are likewise insolvent,
petitioner having failed to show that they were down to their
Greenhills property as their only asset.
It may be that BMC had filed a petition for rehabilitation and
suspension of payments with the SEC. The nagging fact,
however is that BMC is a different juridical person from the
respondent spouses. Their seventy percent (70%) ownership
of BMC’s capital stock does not change the legal situation.
Accordingly, the alleged insolvency of BMC cannot, as
petitioner postulates, extend to the respondent spouses such
that transaction of the latter comes within the purview of
Section 70 of the Insolvency Law.
Second, the real debtor of petitioner bank in this case is BMC.
The fact that the respondent spouses bound themselves to
answer for BMC’s indebtedness under the surety agreement
referred to at the outset is not reason enough to conclude that
the spouses are themselves debtors of petitioner bank. We
have already passed upon the simple reason for this
proposition. We refer to the basic precept in this jurisdiction
that a corporation, upon coming into existence, is invested by
law with a personality separate and distinct from those of the
persons composing it.24 Mere ownership by a single or small
group of stockholders of nearly all of the capital stock of the
corporation is not, without more, sufficient to disregard the
fiction of separate corporate personality.25
Third, Section 70 of the Insolvency Law considers transfers
made within a month after the date of cleavage void, except
those made in good faith and for valuable pecuniary
consideration. The twin elements of good faith and valuable
and sufficient consideration have been duly established. Given
the validity and the basic legitimacy of the sale in question,
there is simply no occasion to apply Section 70 of the
Insolvency Law to nullify the transaction subject of the instant
case.
All told, we are far from convinced by petitioner’s argumentation that
the circumstances surrounding the sale of the subject property may
be considered badges of fraud. Consequently, its failure to show
actual fraudulent intent on the part of the spouses Ong defeats its
own cause.
WHEREFORE, the instant petition is DENIED and the assailed
decision of the Court of Appeals is AFFIRMED.
G.R. No. 144805 June 8, 2006
EDUARDO V. LINTONJUA, JR. and ANTONIO K. LITONJUA,
Petitioners,
vs.
ETERNIT CORPORATION (now ETERTON MULTI-RESOURCES
CORPORATION), ETEROUTREMER, S.A. and FAR EAST BANK
& TRUST COMPANY, Respondents.
DECISION
CALLEJO, SR., J.:
On appeal via a Petition for Review on Certiorari is the Decision1 of
the Court of Appeals (CA) in CA-G.R. CV No. 51022, which affirmed
the Decision of the Regional Trial Court (RTC), Pasig City, Branch
165, in Civil Case No. 54887, as well as the Resolution2 of the CA
denying the motion for reconsideration thereof.
The Eternit Corporation (EC) is a corporation duly organized and
registered under Philippine laws. Since 1950, it had been engaged
in the manufacture of roofing materials and pipe products. Its
manufacturing operations were conducted on eight parcels of land
with a total area of 47,233 square meters. The properties, located in
Mandaluyong City, Metro Manila, were covered by Transfer
Certificates of Title Nos. 451117, 451118, 451119, 451120, 451121,
451122, 451124 and 451125 under the name of Far East Bank &
Trust Company, as trustee. Ninety (90%) percent of the shares of
stocks of EC were owned by Eteroutremer S.A. Corporation (ESAC),
a corporation organized and registered under the laws of Belgium. 3
Jack Glanville, an Australian citizen, was the General Manager and
President of EC, while Claude Frederick Delsaux was the Regional
Director for Asia of ESAC. Both had their offices in Belgium.
In 1986, the management of ESAC grew concerned about the
political situation in the Philippines and wanted to stop its operations
in the country. The Committee for Asia of ESAC instructed Michael
Adams, a member of EC’s Board of Directors, to dispose of the eight
parcels of land. Adams engaged the services of realtor/broker Lauro
G. Marquez so that the properties could be offered for sale to
prospective buyers. Glanville later showed the properties to
Marquez.
Marquez thereafter offered the parcels of land and the
improvements thereon to Eduardo B. Litonjua, Jr. of the Litonjua &
Company, Inc. In a Letter dated September 12, 1986, Marquez
declared that he was authorized to sell the properties for
P27,000,000.00 and that the terms of the sale were subject to
negotiation.4
Eduardo Litonjua, Jr. responded to the offer. Marquez showed the
property to Eduardo Litonjua, Jr., and his brother Antonio K.
Litonjua. The Litonjua siblings offered to buy the property for
P20,000,000.00 cash. Marquez apprised Glanville of the Litonjua
siblings’ offer and relayed the same to Delsaux in Belgium, but the
latter did not respond. On October 28, 1986, Glanville telexed
Delsaux in Belgium, inquiring on his position/ counterproposal to the
offer of the Litonjua siblings. It was only on February 12, 1987 that
Delsaux sent a telex to Glanville stating that, based on the
"Belgian/Swiss decision," the final offer was "US$1,000,000.00 and
P2,500,000.00 to cover all existing obligations prior to final
liquidation."5
Marquez furnished Eduardo Litonjua, Jr. with a copy of the telex
sent by Delsaux. Litonjua, Jr. accepted the counterproposal of
Delsaux. Marquez conferred with Glanville, and in a Letter dated
February 26, 1987, confirmed that the Litonjua siblings had
accepted the counter-proposal of Delsaux. He also stated that the
Litonjua siblings would confirm full payment within 90 days after
execution and preparation of all documents of sale, together with the
necessary governmental clearances.6
The Litonjua brothers deposited the amount of US$1,000,000.00
with the Security Bank & Trust Company, Ermita Branch, and
drafted an Escrow Agreement to expedite the sale. 7
Sometime later, Marquez and the Litonjua brothers inquired from
Glanville when the sale would be implemented. In a telex dated April
22, 1987, Glanville informed Delsaux that he had met with the buyer,
which had given him the impression that "he is prepared to press for
a satisfactory conclusion to the sale."8 He also emphasized to
Delsaux that the buyers were concerned because they would incur
expenses in bank commitment fees as a consequence of prolonged
period of inaction.9
Meanwhile, with the assumption of Corazon C. Aquino as President
of the Republic of the Philippines, the political situation in the
Philippines had improved. Marquez received a telephone call from
Glanville, advising that the sale would no longer proceed. Glanville
followed it up with a Letter dated May 7, 1987, confirming that he
had been instructed by his principal to inform Marquez that "the
decision has been taken at a Board Meeting not to sell the
properties on which Eternit Corporation is situated." 10
Delsaux himself later sent a letter dated May 22, 1987, confirming
that the ESAC Regional Office had decided not to proceed with the
sale of the subject land, to wit:
May 22, 1987
Mr. L.G. Marquez
L.G. Marquez, Inc.
334 Makati Stock Exchange Bldg.
6767 Ayala Avenue
Makati, Metro Manila
Philippines
Dear Sir:
Re: Land of Eternit Corporation
I would like to confirm officially that our Group has decided not to
proceed with the sale of the land which was proposed to you.
The Committee for Asia of our Group met recently (meeting every
six months) and examined the position as far as the Philippines are
(sic) concerned. Considering [the] new political situation since the
departure of MR. MARCOS and a certain stabilization in the
Philippines, the Committee has decided not to stop our operations in
Manila. In fact, production has started again last week, and (sic) to
recognize the participation in the Corporation.
We regret that we could not make a deal with you this time, but in
case the policy would change at a later state, we would consult you
again.
xxx
Yours sincerely,
(Sgd.)
C.F. DELSAUX
cc. To: J. GLANVILLE (Eternit Corp.)11
When apprised of this development, the Litonjuas, through counsel,
wrote EC, demanding payment for damages they had suffered on
account of the aborted sale. EC, however, rejected their demand.
The Litonjuas then filed a complaint for specific performance and
damages against EC (now the Eterton Multi-Resources Corporation)
and the Far East Bank & Trust Company, and ESAC in the RTC of
Pasig City. An amended complaint was filed, in which defendant EC
was substituted by Eterton Multi-Resources Corporation; Benito C.
Tan, Ruperto V. Tan, Stock Ha T. Tan and Deogracias G. Eufemio
were impleaded as additional defendants on account of their
purchase of ESAC shares of stocks and were the controlling
stockholders of EC.
In their answer to the complaint, EC and ESAC alleged that since
Eteroutremer was not doing business in the Philippines, it cannot be
subject to the jurisdiction of Philippine courts; the Board and
stockholders of EC never approved any resolution to sell subject
properties nor authorized Marquez to sell the same; and the telex
dated October 28, 1986 of Jack Glanville was his own personal
making which did not bind EC.
On July 3, 1995, the trial court rendered judgment in favor of
defendants and dismissed the amended complaint.12 The fallo of the
decision reads:
WHEREFORE, the complaint against Eternit Corporation now
Eterton Multi-Resources Corporation and Eteroutremer, S.A. is
dismissed on the ground that there is no valid and binding sale
between the plaintiffs and said defendants.
The complaint as against Far East Bank and Trust Company is
likewise dismissed for lack of cause of action.
The counterclaim of Eternit Corporation now Eterton Multi-
Resources Corporation and Eteroutremer, S.A. is also dismissed for
lack of merit.13
The trial court declared that since the authority of the agents/realtors
was not in writing, the sale is void and not merely unenforceable,
and as such, could not have been ratified by the principal. In any
event, such ratification cannot be given any retroactive effect.
Plaintiffs could not assume that defendants had agreed to sell the
property without a clear authorization from the corporation
concerned, that is, through resolutions of the Board of Directors and
stockholders. The trial court also pointed out that the supposed sale
involves substantially all the assets of defendant EC which would
result in the eventual total cessation of its operation. 14
The Litonjuas appealed the decision to the CA, alleging that "(1) the
lower court erred in concluding that the real estate broker in the
instant case needed a written authority from appellee corporation
and/or that said broker had no such written authority; and (2) the
lower court committed grave error of law in holding that appellee
corporation is not legally bound for specific performance and/or
damages in the absence of an enabling resolution of the board of
directors."15 They averred that Marquez acted merely as a broker or
go-between and not as agent of the corporation; hence, it was not
necessary for him to be empowered as such by any written
authority. They further claimed that an agency by estoppel was
created when the corporation clothed Marquez with apparent
authority to negotiate for the sale of the properties. However, since it
was a bilateral contract to buy and sell, it was equivalent to a
perfected contract of sale, which the corporation was obliged to
consummate.
In reply, EC alleged that Marquez had no written authority from the
Board of Directors to bind it; neither were Glanville and Delsaux
authorized by its board of directors to offer the property for sale.
Since the sale involved substantially all of the corporation’s assets, it
would necessarily need the authority from the stockholders.
On June 16, 2000, the CA rendered judgment affirming the decision
of the RTC. 16 The Litonjuas filed a motion for reconsideration, which
was also denied by the appellate court.
The CA ruled that Marquez, who was a real estate broker, was a
special agent within the purview of Article 1874 of the New Civil
Code. Under Section 23 of the Corporation Code, he needed a
special authority from EC’s board of directors to bind such
corporation to the sale of its properties. Delsaux, who was merely
the representative of ESAC (the majority stockholder of EC) had no
authority to bind the latter. The CA pointed out that Delsaux was not
even a member of the board of directors of EC. Moreover, the
Litonjuas failed to prove that an agency by estoppel had been
created between the parties.
In the instant petition for review, petitioners aver that
I
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE
WAS NO PERFECTED CONTRACT OF SALE.
II
THE APPELLATE COURT COMMITTED GRAVE ERROR OF LAW
IN HOLDING THAT MARQUEZ NEEDED A WRITTEN AUTHORITY
FROM RESPONDENT ETERNIT BEFORE THE SALE CAN BE
PERFECTED.
III
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
GLANVILLE AND DELSAUX HAVE THE NECESSARY
AUTHORITY TO SELL THE SUBJECT PROPERTIES, OR AT THE
VERY LEAST, WERE KNOWINGLY PERMITTED BY
RESPONDENT ETERNIT TO DO ACTS WITHIN THE SCOPE OF
AN APPARENT AUTHORITY, AND THUS HELD THEM OUT TO
THE PUBLIC AS POSSESSING POWER TO SELL THE SAID
PROPERTIES.17
Petitioners maintain that, based on the facts of the case, there was a
perfected contract of sale of the parcels of land and the
improvements thereon for "US$1,000,000.00 plus P2,500,000.00 to
cover obligations prior to final liquidation." Petitioners insist that they
had accepted the counter-offer of respondent EC and that before the
counter-offer was withdrawn by respondents, the acceptance was
made known to them through real estate broker Marquez.
Petitioners assert that there was no need for a written authority from
the Board of Directors of EC for Marquez to validly act as
broker/middleman/intermediary. As broker, Marquez was not an
ordinary agent because his authority was of a special and limited
character in most respects. His only job as a broker was to look for a
buyer and to bring together the parties to the transaction. He was
not authorized to sell the properties or to make a binding contract to
respondent EC; hence, petitioners argue, Article 1874 of the New
Civil Code does not apply.
In any event, petitioners aver, what is important and decisive was
that Marquez was able to communicate both the offer and counter-
offer and their acceptance of respondent EC’s counter-offer,
resulting in a perfected contract of sale.
Petitioners posit that the testimonial and documentary evidence on
record amply shows that Glanville, who was the President and
General Manager of respondent EC, and Delsaux, who was the
Managing Director for ESAC Asia, had the necessary authority to
sell the subject property or, at least, had been allowed by
respondent EC to hold themselves out in the public as having the
power to sell the subject properties. Petitioners identified such
evidence, thus:
1. The testimony of Marquez that he was chosen by Glanville
as the then President and General Manager of Eternit, to sell
the properties of said corporation to any interested party, which
authority, as hereinabove discussed, need not be in writing.
2. The fact that the NEGOTIATIONS for the sale of the subject
properties spanned SEVERAL MONTHS, from 1986 to 1987;
3. The COUNTER-OFFER made by Eternit through
GLANVILLE to sell its properties to the Petitioners;
4. The GOOD FAITH of Petitioners in believing Eternit’s offer
to sell the properties as evidenced by the Petitioners’
ACCEPTANCE of the counter-offer;
5. The fact that Petitioners DEPOSITED the price of
[US]$1,000,000.00 with the Security Bank and that an
ESCROW agreement was drafted over the subject properties;
6. Glanville’s telex to Delsaux inquiring "WHEN WE
(Respondents) WILL IMPLEMENT ACTION TO BUY AND
SELL";
7. More importantly, Exhibits "G" and "H" of the Respondents,
which evidenced the fact that Petitioners’ offer was allegedly
REJECTED by both Glanville and Delsaux.18
Petitioners insist that it is incongruous for Glanville and Delsaux to
make a counter-offer to petitioners’ offer and thereafter reject such
offer unless they were authorized to do so by respondent EC.
Petitioners insist that Delsaux confirmed his authority to sell the
properties in his letter to Marquez, to wit:
Dear Sir,
Re: Land of Eternit Corporation
I would like to confirm officially that our Group has decided not
to proceed with the sale of the land which was proposed to
you.
The Committee for Asia of our Group met recently (meeting
every six months) and examined the position as far as the
Philippines are (sic) concerned. Considering the new political
situation since the departure of MR. MARCOS and a certain
stabilization in the Philippines, the Committee has decided not
to stop our operations in Manila[.] [I]n fact production started
again last week, and (sic) to reorganize the participation in the
Corporation.
We regret that we could not make a deal with you this time, but
in case the policy would change at a later stage we would
consult you again.
In the meantime, I remain
Yours sincerely,
C.F. DELSAUX19
Petitioners further emphasize that they acted in good faith when
Glanville and Delsaux were knowingly permitted by respondent EC
to sell the properties within the scope of an apparent authority.
Petitioners insist that respondents held themselves to the public as
possessing power to sell the subject properties.
By way of comment, respondents aver that the issues raised by the
petitioners are factual, hence, are proscribed by Rule 45 of the
Rules of Court. On the merits of the petition, respondents EC (now
EMC) and ESAC reiterate their submissions in the CA. They
maintain that Glanville, Delsaux and Marquez had no authority from
the stockholders of respondent EC and its Board of Directors to offer
the properties for sale to the petitioners, or to any other person or
entity for that matter. They assert that the decision and resolution of
the CA are in accord with law and the evidence on record, and
should be affirmed in toto.
Petitioners aver in their subsequent pleadings that respondent EC,
through Glanville and Delsaux, conformed to the written authority of
Marquez to sell the properties. The authority of Glanville and
Delsaux to bind respondent EC is evidenced by the fact that
Glanville and Delsaux negotiated for the sale of 90% of stocks of
respondent EC to Ruperto Tan on June 1, 1997. Given the
significance of their positions and their duties in respondent EC at
the time of the transaction, and the fact that respondent ESAC owns
90% of the shares of stock of respondent EC, a formal resolution of
the Board of Directors would be a mere ceremonial formality. What
is important, petitioners maintain, is that Marquez was able to
communicate the offer of respondent EC and the petitioners’
acceptance thereof. There was no time that they acted without the
knowledge of respondents. In fact, respondent EC never repudiated
the acts of Glanville, Marquez and Delsaux.
The petition has no merit.
Anent the first issue, we agree with the contention of respondents
that the issues raised by petitioner in this case are factual. Whether
or not Marquez, Glanville, and Delsaux were authorized by
respondent EC to act as its agents relative to the sale of the
properties of respondent EC, and if so, the boundaries of their
authority as agents, is a question of fact. In the absence of express
written terms creating the relationship of an agency, the existence of
an agency is a fact question.20 Whether an agency by estoppel was
created or whether a person acted within the bounds of his apparent
authority, and whether the principal is estopped to deny the
apparent authority of its agent are, likewise, questions of fact to be
resolved on the basis of the evidence on record.21 The findings of
the trial court on such issues, as affirmed by the CA, are conclusive
on the Court, absent evidence that the trial and appellate courts
ignored, misconstrued, or misapplied facts and circumstances of
substance which, if considered, would warrant a modification or
reversal of the outcome of the case.22
It must be stressed that issues of facts may not be raised in the
Court under Rule 45 of the Rules of Court because the Court is not
a trier of facts. It is not to re-examine and assess the evidence on
record, whether testimonial and documentary. There are, however,
recognized exceptions where the Court may delve into and resolve
factual issues, namely:
(1) When the conclusion is a finding grounded entirely on
speculations, surmises, or conjectures; (2) when the inference made
is manifestly mistaken, absurd, or impossible; (3) when there is
grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of fact are
conflicting; (6) when the Court of Appeals, in making its findings,
went beyond the issues of the case and the same is contrary to the
admissions of both appellant and appellee; (7) when the findings of
the Court of Appeals are contrary to those of the trial court; (8) when
the findings of fact are conclusions without citation of specific
evidence on which they are based; (9) when the Court of Appeals
manifestly overlooked certain relevant facts not disputed by the
parties, which, if properly considered, would justify a different
conclusion; and (10) when the findings of fact of the Court of
Appeals are premised on the absence of evidence and are
contradicted by the evidence on record.23
We have reviewed the records thoroughly and find that the
petitioners failed to establish that the instant case falls under any of
the foregoing exceptions. Indeed, the assailed decision of the Court
of Appeals is supported by the evidence on record and the law.
It was the duty of the petitioners to prove that respondent EC had
decided to sell its properties and that it had empowered Adams,
Glanville and Delsaux or Marquez to offer the properties for sale to
prospective buyers and to accept any counter-offer. Petitioners
likewise failed to prove that their counter-offer had been accepted by
respondent EC, through Glanville and Delsaux. It must be stressed
that when specific performance is sought of a contract made with an
agent, the agency must be established by clear, certain and specific
proof.24
Section 23 of Batas Pambansa Bilang 68, otherwise known as the
Corporation Code of the Philippines, provides:
SEC. 23. The Board of Directors or Trustees. – Unless otherwise
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted
and all property of such corporations controlled and held by the
board of directors or trustees to be elected from among the holders
of stocks, or where there is no stock, from among the members of
the corporation, who shall hold office for one (1) year and until their
successors are elected and qualified.
Indeed, a corporation is a juridical person separate and distinct from
its members or stockholders and is not affected by the personal
rights,
obligations and transactions of the latter.25 It may act only through its
board of directors or, when authorized either by its by-laws or by its
board resolution, through its officers or agents in the normal course
of business. The general principles of agency govern the relation
between the corporation and its officers or agents, subject to the
articles of incorporation, by-laws, or relevant provisions of law.26
Under Section 36 of the Corporation Code, a corporation may sell or
convey its real properties, subject to the limitations prescribed by
law and the Constitution, as follows:
SEC. 36. Corporate powers and capacity. – Every corporation
incorporated under this Code has the power and capacity:
xxxx
7. To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with such real and personal
property, including securities and bonds of other corporations, as the
transaction of a lawful business of the corporation may reasonably
and necessarily require, subject to the limitations prescribed by the
law and the Constitution.
The property of a corporation, however, is not the property of the
stockholders or members, and as such, may not be sold without
express authority from the board of directors.27 Physical acts, like
the offering of the properties of the corporation for sale, or the
acceptance of a counter-offer of prospective buyers of such
properties and the execution of the deed of sale covering such
property, can be performed by the corporation only by officers or
agents duly authorized for the purpose by corporate by-laws or by
specific acts of the board of directors.28 Absent such valid
delegation/authorization, the rule is that the declarations of an
individual director relating to the affairs of the corporation, but not in
the course of, or connected with, the performance of authorized
duties of such director, are not binding on the corporation. 29
While a corporation may appoint agents to negotiate for the sale of
its real properties, the final say will have to be with the board of
directors through its officers and agents as authorized by a board
resolution or by its by-laws.30 An unauthorized act of an officer of the
corporation is not binding on it unless the latter ratifies the same
expressly or impliedly by its board of directors. Any sale of real
property of a corporation by a person purporting to be an agent
thereof but without written authority from the corporation is null and
void. The declarations of the agent alone are generally insufficient to
establish the fact or extent of his/her authority.31
By the contract of agency, a person binds himself to render some
service or to do something in representation on behalf of another,
with the consent or authority of the latter.32 Consent of both principal
and agent is necessary to create an agency. The principal must
intend that the agent shall act for him; the agent must intend to
accept the authority and act on it, and the intention of the parties
must find expression either in words or conduct between them. 33
An agency may be expressed or implied from the act of the
principal, from his silence or lack of action, or his failure to repudiate
the agency knowing that another person is acting on his behalf
without authority. Acceptance by the agent may be expressed, or
implied from his acts which carry out the agency, or from his silence
or inaction according to the circumstances.34 Agency may be oral
unless the law requires a specific form. 35 However, to create or
convey real rights over immovable property, a special power of
attorney is necessary.36 Thus, when a sale of a piece of land or any
portion thereof is through an agent, the authority of the latter shall be
in writing, otherwise, the sale shall be void.37
In this case, the petitioners as plaintiffs below, failed to adduce in
evidence any resolution of the Board of Directors of respondent EC
empowering Marquez, Glanville or Delsaux as its agents, to sell, let
alone offer for sale, for and in its behalf, the eight parcels of land
owned by respondent EC including the improvements thereon. The
bare fact that Delsaux may have been authorized to sell to Ruperto
Tan the shares of stock of respondent ESAC, on June 1, 1997,
cannot be used as basis for petitioners’ claim that he had likewise
been authorized by respondent EC to sell the parcels of land.
Moreover, the evidence of petitioners shows that Adams and
Glanville acted on the authority of Delsaux, who, in turn, acted on
the authority of respondent ESAC, through its Committee for Asia, 38
the Board of Directors of respondent ESAC, 39 and the Belgian/Swiss
component of the management of respondent ESAC. 40 As such,
Adams and Glanville engaged the services of Marquez to offer to
sell the properties to prospective buyers. Thus, on September 12,
1986, Marquez wrote the petitioner that he was authorized to offer
for sale the property for P27,000,000.00 and the other terms of the
sale subject to negotiations. When petitioners offered to purchase
the property for P20,000,000.00, through Marquez, the latter relayed
petitioners’ offer to Glanville; Glanville had to send a telex to
Delsaux to inquire the position of respondent ESAC to petitioners’
offer. However, as admitted by petitioners in their Memorandum,
Delsaux was unable to reply immediately to the telex of Glanville
because Delsaux had to wait for confirmation from respondent between it and Glanville or Delsaux. For an agency by estoppel to
ESAC.41 When Delsaux finally responded to Glanville on February exist, the following must be established: (1) the principal manifested
12, 1987, he made it clear that, based on the "Belgian/Swiss a representation of the agent’s authority or knowlingly allowed the
decision" the final offer of respondent ESAC was US$1,000,000.00 agent to assume such authority; (2) the third person, in good faith,
plus P2,500,000.00 to cover all existing obligations prior to final relied upon such representation; (3) relying upon such
liquidation.42 The offer of Delsaux emanated only from the representation, such third person has changed his position to his
"Belgian/Swiss decision," and not the entire management or Board detriment.48 An agency by estoppel, which is similar to the doctrine
of Directors of respondent ESAC. While it is true that petitioners of apparent authority, requires proof of reliance upon the
accepted the counter-offer of respondent ESAC, respondent EC was representations, and that, in turn, needs proof that the
not a party to the transaction between them; hence, EC was not representations predated the action taken in reliance. 49 Such proof
bound by such acceptance. is lacking in this case. In their communications to the petitioners,
Glanville and Delsaux positively and unequivocally declared that
While Glanville was the President and General Manager of
they were acting for and in behalf of respondent ESAC.
respondent EC, and Adams and Delsaux were members of its Board
of Directors, the three acted for and in behalf of respondent ESAC, Neither may respondent EC be deemed to have ratified the
and not as duly authorized agents of respondent EC; a board transactions between the petitioners and respondent ESAC, through
resolution evincing the grant of such authority is needed to bind EC Glanville, Delsaux and Marquez. The transactions and the various
to any agreement regarding the sale of the subject properties. Such communications inter se were never submitted to the Board of
board resolution is not a mere formality but is a condition sine qua Directors of respondent EC for ratification.
non to bind respondent EC. Admittedly, respondent ESAC owned
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for
90% of the shares of stocks of respondent EC; however, the mere
lack of merit. Costs against the petitioners.
fact that a corporation owns a majority of the shares of stocks of
another, or even all of such shares of stocks, taken alone, will not SO ORDERED.
justify their being treated as one corporation.43
It bears stressing that in an agent-principal relationship, the
personality of the principal is extended through the facility of the
agent. In so doing, the agent, by legal fiction, becomes the principal,
authorized to perform all acts which the latter would have him do.
Such a relationship can only be effected with the consent of the
principal, which must not, in any way, be compelled by law or by any
court.44
The petitioners cannot feign ignorance of the absence of any regular
and valid authority of respondent EC empowering Adams, Glanville
or Delsaux to offer the properties for sale and to sell the said
properties to the petitioners. A person dealing with a known agent is
not authorized, under any circumstances, blindly to trust the agents;
statements as to the extent of his powers; such person must not act
negligently but must use reasonable diligence and prudence to
ascertain whether the agent acts within the scope of his authority. 45
The settled rule is that, persons dealing with an assumed agent are
bound at their peril, and if they would hold the principal liable, to
ascertain not only the fact of agency but also the nature and extent
of authority, and in case either is controverted, the burden of proof is
upon them to prove it.46 In this case, the petitioners failed to
discharge their burden; hence, petitioners are not entitled to
damages from respondent EC.
It appears that Marquez acted not only as real estate broker for the
petitioners but also as their agent. As gleaned from the letter of
Marquez to Glanville, on February 26, 1987, he confirmed, for and in
behalf of the petitioners, that the latter had accepted such offer to
sell the land and the improvements thereon. However, we agree
with the ruling of the appellate court that Marquez had no authority
to bind respondent EC to sell the subject properties. A real estate
broker is one who negotiates the sale of real properties. His
business, generally speaking, is only to find a purchaser who is
willing to buy the land upon terms fixed by the owner. He has no
authority to bind the principal by signing a contract of sale. Indeed,
an authority to find a purchaser of real property does not include an
authority to sell.47
Equally barren of merit is petitioners’ contention that respondent EC
is estopped to deny the existence of a principal-agency relationship
G.R. No. 174462
PHILIPPINE OVERSEAS TELECOMMUNICATIONS
CORPORATION (POTC), PHILIPPINE COMMUNICATIONS
SATELLITE CORPORATION (PHILCOMSAT), Petitioners,
vs.
SANDIGANBAYAN (3rd Division), REPUBLIC OF THE
PHILIPPINES represented by PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT (PCGG), Respondents.
DECISION
PEREZ, J.:
Before this Court is a Petition for Certiorari filed under Rule 65 of the
Rules of Court, seeking to nullify the Resolution 1 of public
respondent Sandiganbayan dated 20 October 2005 in Civil Case
No. 0009, entitled "Republic of the Philippines v. Jose L. Africa,
Manuel H Nieto, Jr., Ferdinand E. Marcos, Imelda R. Marcos,
Ferdinand R. Marcos, Jr., Roberto S. Benedicto, Juan Ponce Enrile,
Potenciano Ilusorio." The assailed Resolution denied petitioners'
Omnibus Motion, which sought the lifting of the sequestration order
issued by the Presidential Commission on Good Government
(PCGG) on Philippine Overseas Telecommunications Corporation
(POTC) and Philippine Communications Satellite Corporation
(PHILCOMSAT).
The antecedent facts are as follows:
However whoever reads recent Philippine history, the EDSA People
Power Revolution in February 1986 is a singular political
phenomenon. Unprecedented, unique, unnatural even, the
revolution was unarmed. But it succeeded. The unnatural means
yielded results natural to a revolution. The vanquished and its acts
had to yield to the victors and its reactions. The new President
Corazon Cojuangco Aquino, exercising revolutionary government
powers issued Executive Order Nos. 1 and 2, creating the PCGG to
recover properties amassed by the unseated President Ferdinand
Edralin Marcos, Sr., his immediate family, relatives, and cronies, "by
taking undue advantage of their public office and/or using their
powers, authority, influence, connections or relationship,"2 and to
sequester and take over such properties. The present litigation is
one of the many offsprings of the revolutionary orders.
Pursuant to Executive Order Nos. 1 and 2, on 14 March 1986, then
PCGG Commissioner Ramon A. Diaz issued a letter3 directing
Officer-In-Charge Carlos M. Ferrales to:
a. Sequester and immediately take over POTC and PHILCO
MS AT among others, and
b. To freeze all 'withdrawals, transfers and/or remittances
under any type of deposit accounts, trust accounts or
placements.
POTC is a private corporation, which is a main stockholder of
PHILCOMSAT, a government-owned and controlled corporation,
which was established in 1966 and was granted a legislative
telecommunications franchise by virtue of Republic Act No. 5514, as
amended by Republic Act No. 7949, to establish and operate
international satellite communication in the Philippines.
On 22 July 1987, the Office of the Solicitor General (OSG), on
behalf of the Republic of the Philippines, filed a Complaint for
Reconveyance, Reversion, Accounting and Restitution, and
Damages, docketed as Civil Case No. 0009, against Jose L. Africa,
Manuel H. Nieto, Jr., Ferdinand E. Marcos, Imelda R. Marcos,
Ferdinand R. Marcos, Jr., Roberto S. Benedicto, Juan Ponce Enrile,
and Potenciano Ilusorio (collectively hereinafter referred to as
"defendants"). The Complaint averred the following:
(a) xxx through manipulations and dubious arrangements with
officers and members of the Board of the National
Development Corporation (NDC), xxx purchased NDC's
shareholdings in the Philippine Communications Satellite
Corporation (PHILCOMSA T), xxx under highly unconscionable
terms and conditions manifestly disadvantageous to Plaintiff
and the Filipino people[;]
(b) xxx
(c) illegally manipulated, under the guise of expanding the
operations of PHILCOMSAT, the purchase of major
shareholdings of Cable and Wireless Limited, a London-based
telecommunication company, in Eastern Telecommunications
Philippines, Incorporated (ETPI), which shareholdings
Defendants Roberto S. Benedicto, Jose L. Africa and Manuel
H. Nieto, Jr., by themselves and through corporations namely
Polygon Investors and Managers, Inc., Aeroco[m] Investors
and Managers Inc. and Universal Molasses Corporation
organized by them, were beneficially held for themselves and
for Defendants Ferdinand E. Marcos and Imelda R. Marcos;
(d) illegally effected, xxx contracts involving corporations which
they owned and/or controlled, such as: The contract between
ETPI and Polygon Investors and Managers, Inc., thereby
ensuring effective control of ETPI and advancing Defendants'
scheme to monopolize the telecommunications industry;
(e) acted in collaboration with each other as dummies,
nominees and/or agents of Defendants Ferdinand E. Marcos,
Imelda R. Marcos and Ferdinand R. Marcos, Jr. in several
corporations, such as, the Mid-Pasig Land Development
Corporation and Independent Realty Corporation which,
through manipulations by said Defendants, appropriated a
substantial portion of the shareholdings in POTC-PHILCOMSA
T held by the late Honorio Poblador, Jr., Jose Valdez and
Francisco Reyes, thereby further advancing Defendants'
scheme to monopolize the telecommunications industry;
(f) received improper payments such as bribes, kickbacks or
commissions from an overprice in the purchase of equipment
for DOMSAT[:]4
As alleged in the Complaint, through clever schemes, the wealth
that should go to the coffers of the government, which should be
deemed acquired for the benefit of the Republic, went to the
defendants in their own individual accounts-some, however, through
conduits or corporations. The property supposedly acquired illegally
was specifically set out in a list appended to the Complaint as Annex
A. For instance, Jose L. Africa, one of the defendants, allegedly
channelled the ill-gotten wealth in shares of stock in twenty (20)
corporations, to wit:
1. Security Bank and Trust Company
2. SBTC Trust, Class A, Account No. 2016
3. SBTC Trust, Class A, Account No. 2017
4. SBTC Trust, Class A, Account No. 2018
5. Oceanic Wireless Network, Inc.
6. Bukidnon Sugar [Milling] Co., Inc.
7. Domestic Satellite Phils., Inc.
8. Northern Lines, Inc.
 9. Philippine Communications Satellite Corp.
10. Far East Managers and Investors, Inc.
11. Traders Royal Bank
12. Philippine Overseas Telecommunications Corp.
13. Eastern Telecommunications Philippines, Inc.
14. Polygon Investors & Managers, Inc.
15. Universal Molasses Corp.
controlled the disbursement of funds of POTC and PHILCOMSAT.
At the same time, in a Memorandum11 by the PCGG dated 24
October 2000 to the Bangko Sentral ng Pilipinas (BSP), the PCGG
informed the BSP that in all cash withdrawals, transfer of funds,
money market placements and disbursements of POTC and
PHILCOMSAT, the approval of the PCGG appointed comptroller is
required. The Memorandum was to be disseminated to all
commercial banks and other non-bank financial institutions
performing quasi-banking functions.

16. Silangan Investors and Managers, Inc.
17. Masters Assets Corp., Class B
18. Gainful Assets Corp., Class B
19. Aerocom Investors and Managers, Inc.
20. Luzon Stevedoring Corp.
21. Amalgamated Motors (Philippines), Inc.
22. Philippine National Construction Corp.
23. Consolidated Tobacco Industries of the Philippines. 5
Another defendant, Manuel H. Nieto, Jr., allegedly channelled ill-
gotten wealth into shares of stock in fifteen (15) corporations,
namely:
1. Ozamis Agricultural Development, Inc.
2. Eastern Telecommunications Philippines, Inc.
From Civil Case No. 0009 sprung other cases: (1) Injunction; (2)
Mandamus; and (3) Approval of the Compromise Agreement.
On 1 March 1991, POTC and PHILCOMSAT filed separate
complaints for Injunction with the Sandiganbayan against the
Republic to nullify and lift the sequestration order issued against
them for failure to file the necessary judicial action against them
within the period prescribed by the Constitution and to enjoin the
PCGG from interfering with their management and operation, which
the Sandiganbayan granted on 4 December 1991 through a
Resolution.12
On 23 January 1995, however, this Court, in Republic v.
Sandiganbayan (First Division), G.R. No. 96073, 240 SCRA 376,
January 23, 1995, reversed the Sandiganbayan Resolution and
ruled that the filing of Complaint for Reconveyance, Reversion,
Accounting and Restitution, and Damages, docketed as Civil Case
No. 0009, was filed within the required 6-month period.

3. Rang'ay Farms Besides the complaint for Injunction, POTC also filed a complaint for
Mandamus against the Republic before the Sandiganbayan to
4. Hacienda San Martin, Inc.
compel the PCGG to return POTC's Stock and Transfer Book and
5. Domestic Satellite Stock Certificate Booklets. The case was docketed as Civil Case
6. Bukidnon Sugar Milling Co., Inc. No. 0148.

7. Sum1yday Farms Company Inc.
8. Silangan Investors & Managers, Inc.
9. Phil. Communications Satellite Corp.
10. Oceanic Wireless Network, Inc.
11. Integral Factors Corp.
12. Phil. Overseas Telecommunication[s] Corp.
13. Aerocom Investors and Managers, Inc.
14. Del Carmen Investments, Inc.
On 13 May 1993, the Sandiganbayan granted the Mandamus, and
the Decision became final and executory.
On 28 June 1996, Atty. Potenciano Ilusorio (Ilusorio), one of the
defendants in the Civil Case No. 0009, entered into a Compromise
Agreement with the Republic. Out of 5,400 or 40o/o of the shares of
stock of POTC in the names of Mid-Pasig Land Development
Corporation (MLDC) and Independent Realty Corporation (IRC), the
government recovered 4, 727 shares or 34.9% of the shares of
stock. Ilusorio, on the other hand, retained 673 shares or 5% of the
shares of stock.

15. Polygon Ventures & Land Development Corp.6 The Compromise Agreement was approved by the Sandiganbayan
in an Order13 dated 8 June 1998.
As borne by the records,7 the following are the stockholdings in
POTC of the defendants in Civil Case No. 0009: In opposition to the Compromise Agreement, MLDC and IRC filed a
Motion to Vacate the Compromise Agreement on 16 August and 2
1. (Estate of) Jose L. Africa 1 October 1998, respectively, which was denied by the
Sandiganbayan in a Resolution14 dated 20 December 1999. In the
2. Manuel·H. Nieto, Jr. 107
same Resolution, the Sandiganbayan directed the Corporate
3. Ferdinand and Imelda Marcos 08 Secretary of POTC to issue within ten (10) days from receipt thereof,
the corresponding Stock Certificate of the government. Pursuant to
4. Ferdinand Marcos, Jr. 09 the Order, 4,727 or 34.9% shares of stock of POTC were transferred
5. (Estate of) Roberto Benedicto 464 (reverted to the Republic) in the name of the Republic of the Philippines.

6. Juan Ponce Enrile 010 Aggrieved, the PCGG, MLDC, and IRC filed separate petitions
before this Court to nullify the Order of the Sandiganbayan
7. (Estate of) Potenciano Ilusorio 16 (reverted to the Republic) approving the Compromise Agreement, which this Court, on 15 June
2005, declared valid in Republic of the Phils. v. Sandiganbayan,
G.R. No. 141796 and 141804.
Pursuant to its power to sequester and to avoid further dissipation of
the sequestered properties, the PCGG appointed a comptroller, who The Decision of the Court has long become final and executory. The
dispositive portion of the Decision reads:
 Having been sealed with court approval, the Compromise
Agreement has the force of res judicata between the parties
and should be complied with in accordance with its terms.
Pursuant thereto, Victoria C. de los Reyes, Corporate
Secretary of the POTC, transmitted to Mr. Magdangal B. Elma,
then Chief Presidential Legal Counsel and Chairman of PCGG,
Stock Certificate No. 131 dated January 10, 2000, issued in
the name of the Republic of the Philippines, for 4, 727 POTC
shares. Thus, the Compromise Agreement was partly
implemented.
WHEREFORE, the instant petitions are hereby DISMISSED.
SO ORDERED.15(Citations omitted)
By virtue of the aforesaid Decision in Republic of the Phils. v.
Sandiganbayan, POTC and PHILCOMSAT filed an Omnibus
Motion16 dated 28 February 2005, which sought to nullify and/or
discharge the continued sequestration of POTC and PHILCOMSAT
and to declare null and void the PCGG Memorandum to the BSP
dated 24 October 2000.
On 20 October 2005, the Sandiganbayan denied POTC and
PHILCOMSAT' s Omnibus Motion in the assailed Resolution.17 The
Motion for Reconsideration was likewise denied in a Resolution 18
dated 2 August 2006.
Hence, the present Petition, which raises the following assignment
of errors.
ASSIGNMENT OF ERRORS
(A)
The public respondent Sandiganbayan erred, and in fact,
gravely abused its discretion amounting to lack or excess of
jurisdiction, when it ruled that the sequestration of POTC and
PHILCOMSAT is still necessary under the present
circumstances.
(B)
The public respondent Sandiganbayan erred, and in fact,
gravely abused its discretion amounting to lack or excess of
jurisdiction, when it ruled that the appointment of a PCGG
fiscal agent in POTC and PHILCOMSAT is justified under the
present circumstances.
(C)
The public respondent Sandiganbayan erred, and in fact,
[gravely] abused its discretion amounting to lack or excess of
jurisdiction, when it ruled that the sequestration order against
the petitioners is valid despite clear fatal legal infirmities
thereto.19
Arguments of POTC and PHILCOMSAT
POTC and PHILCOMSAT aver that the Sandiganbayan committed
grave abuse of discretion amounting to lack or in excess of
jurisdiction by affirming the continued sequestration of the shares,
disregarding the final and executory Decision and Resolution of the
Sandiganbayan dated 15 June 2005 and 7 September 2005 in
Republic of the Phils. v. Sandiganbayan, which already ruled on the
ownership of the subject shares. In the aforesaid case, the Court
upheld the Compromise Agreement between the government and
Ilusorio. As a consequence, the government is now the undisputed
owner of 34.9% of the shares of stock of the sequestered
corporations. Pursuant to the final and executory Decision of the
Court, there is no longer need for the continued sequestration of
POTC and PHILCOMSAT. POTC and PHILCO MS AT cited the
pronouncement of this Court in Bataan Shipyard and Engineering
Co., Inc. (BASECO) v. PCGG, which held that, as the writ of
sequestration is merely a conservatory measure, thus, provisional
and temporary in character, the final adjudication of the Court, which
finally disposed the sequestered shares, rendered the writ
unnecessary.
The POTC and PHILCOMSAT aver that while the PCGG has the
power to sequester, such power is merely provisional. The POTC
and PHILCOMSAT cite Executive Order No. 1, Section 3, which
grants the PCGG the power to take over sequestered properties
provisionally, such that, after the sequestered properties have been
finally disposed of by the proper authorities, the writ shall be lifted.
Ruling of the Sandiganbayan
On the other hand, as it held, the Sandiganbayan posits that the
sequestration of POTC and PHILCOMSAT should not be lifted. The
Sandiganbayan ruled in this wise:
Executive Order No. 1 declares that the sequestration of
property the acquisition if which is suspect shall last until the
transactions leading to such acquisition can be disposed
of by the appropriate authorities.
xxx.
Also, this Court had already ruled in the Resolution dated April
1 2003 that there was prima facie evidence that the herein
defendants have ill-gotten wealth consisting of funds and
properties and that POTC and PHILCOMSAT, among others,
were used in acquiring and concealing their ill-gotten wealth.20
(Emphasis supplied)
Hence, the main issue of whether or not the continued sequestration
is necessary.
Our Ruling
We rule in favor of POTC and PHILCOMSAT.
I
First, the threshold issue of whether or not the failure to properly
implead POTC and PHILCOMSAT as defendants in Civil Case No.
0009 is a fatal jurisdictional error.
Section 26, Article XVIII of the Constitution mandates that if no
judicial action has been filed within six (6) months after the
ratification of the 1987 Constitution,21 the writ of sequestration shall
automatically be lifted. In the case at bar, there was no judicial
action filed against POTC and PHILCOMSAT. There has never
been any appropriate judicial action for reconveyance or recovery
ever instituted by the Republic against POTC and PHILCOMSAT.
A perusal of the instant Complaint, docketed as Civil Case No. 0009
dated 22 July 1987, reveals that it was filed against private
individuals, namely, Jose L. Africa, Manuel H. Nieto, Jr., Ferdinand
E. Marcos, Imelda R. Marcos, Ferdinand R. Marcos, Jr., Roberto S.
Benedicto, Juan Ponce Enrile, Potenciano Ilusorio. 22 Nowhere was
POTC and PHILCOMSAT impleaded in the Complaint.
The facts surrounding the present case square with those in PCGG
v. Sandiganbayan (PCGG).23In PCGG, the complaint was filed
against private individuals, Nieto and Africa, who are shareholders in
Aerocom. The Court ruled that the failure to implead Aerocom, the
corporation, violated the fundamental principle that a corporation's
legal personality is distinct and separate from its stockholders, and
that mere annexation to the list of corporations does not suffice. In
the same manner as PCGG, in the case at bar, the Complaint was
filed only against POTC and PHILCOMSAT' s stockholders, who are
private individuals. Similarly, POTC and PHILCOMSAT were also
merely annexed to the list of corporations and were not properly
impleaded in the case. The suit was against its individual
shareholders, herein respondents, Jose L. Africa, Manuel H. Nieto,
Jr., Ferdinand E. Marcos, Imelda R. Marcos, Ferdinand R. Marcos,
Jr., Roberto S. Benedicto, Juan Ponce Enrile, and Potenciano
Ilusorio.
Failure to implead POTC and PHILCOMSAT is a violation of the
fundamental principle that a corporation has a legal personality
distinct and separate from its stockholders; 24 that, the filing of a
complaint against a stockholder is not ipso facto a complaint against
the corporation. Our pronouncement in Aerocom is apt:
There is no existing sequestration to talk about in this case, as
the writ issued against Aerocom, to repeat, is invalid for
reasons hereinbefore stated. Ergo, the suit in Civil Case No.
0009 against Mr. Nieto and Mr. Africa as shareholders in
Aerocom is not and cannot ipso facto be a suit against the
unimpleaded Aerocom itself without violating the fundamental
principle that a corporation has a legal personality distinct and
separate from its stockholders. Such is the ruling laid down in
PCGG v. Jnterco reiterated anew in a case of more recent
vintage - Republic v. Sandiganbayan, Sipalay Trading Corp.
and Allied Banking Corp. where this. Court, speaking through
Mr. Justice Ricardo J. Francisco, hewed to the lone dissent of
Mr. Justice Teodoro R. Padilla in the very same Republic v.
Sandiganbayan case herein invoked by the PCGG, to wit:
xxxx. (Emphasis supplied, citations omitted)
The basic tenets of fair play and principles of justice dictate that a
corporation, as a legal entity distinct and separate from its
stockholders, must be impleaded as defendants, giving it the
opportunity to be heard. The failure to properly implead POTC and
PHILCOMSAT not only violates the latters' legal personality, but is
repugnant on POTC's and PHILCOMSAT's right to due process.
"[F]ailure to implead these corporations as defendants and merely
annexing a list of such corporations to the complaints is a violation
of their right to due process for it would in effect be disregarding
their distinct and separate personality without a hearing." 25 As
already settled, a suit against individual stockholders is not a suit
against the corporation.
Proceeding from the foregoing, as POTC and PHILCOMSAT were
not impleaded, there is no longer any existing sequestration on
POTC and PHILCOMSAT.26 The sequestration order over POTC
and PHILCOMSAT was automatically lifted six (6) months after the
ratification of the 1987 Constitution on 2 February 1987 for failure to
implead POTC and PHILCOMSAT in Civil Case No. 0009 before the
Sandiganbayan or before any court for that matter. 27 To recite
Section 26, Article XVIII of the Constitution, if no judicial action has
been filed within six (6) months after the ratification of the 1987
Constitution, the writ of sequestration shall automatically be lifted.
Note must be made of the fact that we do not here touch our
previous holding that Civil Case No. 0009 was filed within the 6-
month period. We now say that such notwithstanding, and as shown
by the facts on record, the POTC and PHILCOMSA T were not
impleaded in the Civil Case.
II
For one more reason should this Petition be granted. This concerns
the shares in petitioner corporations of Potenciano Ilusorio covered
by the Compromise Agreement entered into between Ilusorio and
PCGG, which was upheld by the Court in Republic of the Phils. v.
Sandiganbayan, the decision in which is now final and executory.
a. Sequestration is merely provisional
To effectively recover all ill-gotten wealth amassed by former
President Marcos and his cronies, the President granted the PCGG,
among others, power and authority to sequester, provisionally take
over or freeze suspected ill-gotten wealth. The subject of the present
case is the extent of PCGG's power to sequester.
Sequestration is the means to place or cause to be placed under the
PCGG's possession or control properties, building or office,
including business enterprises and entities, for the purpose of
preventing the destruction, concealment or dissipation of, and
otherwise conserving and preserving the same until it can be
determined through appropriate judicial proceedings, whether the
property was in truth "ill-gotten. "28
However, the power of the PCGG to sequester is merely
provisional.29 None other than Executive Order No. 1, Section 3(c)
expressly provides for the provisional nature of sequestration, to wit:
c) To provisionally take over in the public interest or to
prevent its disposal or dissipation, business enterprises and
properties taken over by the government of the Marcos
Administration or by entities or persons close to former
President Marcos, until the transactions leading to such
acquisition by the latter can be disposed of by the appropriate
authorities.30 (Emphasis supplied).
In the notable case of Bataan Shipyard & Engineering Co., Inc.
(BASECO) v. PCGG,31 the Court clearly pronounced that
sequestration is provisional, that such sequestration shall last "until
the transactions leading to such acquisition xxx can be disposed of
by the appropriate authorities."32
Sequestration is akin to the provisional remedy of preliminary
attachment, or receivership.33 Similarly, in attachment, the property
of the defendant is seized as a security for the satisfaction of any
judgment that may be obtained, and not disposed of, or dissipated,
or lost intentionally or otherwise, pending litigation.34 In a
receivership, the property is placed in the possession and control of
a receiver appointed by the court, who shall conserve the property
pending final determination of ownership or right of possession of
the parties.35 In sequestration, the same principle holds true. The
sequestered properties are placed under the control of the PCGG,
subject to the final determination of whether the property was in truth
ill-gotten. We reiterate the disquisition of this Court in BASECO:
By the clear terms of the law, the power of the PCGG to
sequester property claimed to be "ill-gotten" means to place or
cause to be placed under its possession or control said
property, or any building or office wherein any such property
and any records pertaining thereto may be found, including
"business enterprises and entities," - for the purpose of
preventing the destruction, concealment or dissipation of, and
otherwise conserving and preserving, the same - until it can
be determined, through appropriate judicial proceedings,
whether the property was in truth "ill- gotten," i.e., acquired
through or as a result of improper or illegal use of or the
conversion of funds belonging to the Government or any of its
branches, instrumentalities, enterprises, banks or financial
institutions, or by taking undue advantage of official position,
 authority relationship, connection or influence, resulting in
unjust enrichment of the ostensible owner and grave damage
and prejudice to the State. xxx.36 (Emphasis supplied, citations
omitted)
Sequestration is. a conservatory writ,37 which purpose is to preserve
properties in custodia legis, lest the dissipation and concealment of
the "ill-gotten" wealth the former President Marcos and his allies
may resort to, pending the final disposition of the properties. 38 It is to
prevent the disappearance or dissipation pending adjudgment of
whether the acquisition thereof by the apparent owner was attended
by some vitiating anomaly or attended by some illegal means. 39
Thus by no means is it permanent in character. Upon the final
disposition of the sequestered properties, the sequestration is
renderedfunctus officio.
b. Ownership of the sequestered properties
have already been finally adjudged
As sequestration is a provisional remedy, a transitional state of
affairs, in order to prevent the disappearance or dissipation of the
property pending the final disposition of the property, the ultimate
purpose of sequestration is to bring an intended permanent effect
while the PCGG investigates in pursuit of a judicial proceeding - to
dispose of the sequestered properties. Tersely put, the ultimate
purpose of sequestration is to recover the sequestered properties in
favor of the government in case they tum out to be ill-gotten. This
function to dispose of the property is reserved to the
Sandiganbayan. Until the Sandiganbayan determines whether the
property was in truth and in fact "ill- gotten", the sequestration shall
subsist. In case of a finding that the sequestered properties are ill-
gotten, the property shall be returned to the lawful owner, to the
people, through the government; otherwise, the sequestered
property shall be returned to the previous owner.
Clearly, the purpose of sequestration is to take control until the
property is finally disposed of by the proper authorities.1âwphi1
However, when such property has already been disposed of, such
that the owner has already been adjudged by the Court, must the
sequestration still subsist?
In the case at bar, the 34.9% ownership of the sequestered property
has been finally adjudged; the ultimate purpose of sequestration
was already accomplished when the ownership thereof was
adjudged to the government by this Court in Republic of the Phils. v.
Sandiganbayan. Moreover, the said shares in the ownership of the
sequestered properties have reverted to the Government. The
government now owns 4,727 shares or 34.9% of the sequestered
corporations.
As the sequestered property has already been disposed, the
ultimate purpose of sequestration has already been attained; the evil
sought to be prevented is no longer present. Evidently, the
sequestered property which was already returned to the government
cannot anymore be dissipated or concealed. Otherwise stated, the
sequestered properties need no longer be subject of reversion
proceedings because they have already reverted back to the
government. Thus, as the sequestration is rendered functus officio, it
is merely ministerial upon the Sandiganbayan to lift the same.
In fact, on 4 November 2010, the Department of Justice (DOJ),
which has supervision over the PCGG, acknowledged the need to
lift the writ of sequestration in the DOJ Memorandum LML-M-4K10-
368.40 The pertinent portion of the DOJ Memorandum reads:
It bears stressing that the PCGG, which is now under the
administrative supervision of this Department pursuant to
Executive Order No. 643 s. 2007, has lost "authority" over the
shares of the Republic in POTC. This is due to the fact that in
PCGG Resolution No. 2007-024 dated 4 September 2007, it
was resolved that the 4,727 shares of stock of POTC, which is
under the name of the Republic of the Philippines, be now
transferred to the Department of Finance (DOF) for disposition.
xxx. (Boldface omitted)
xxxx
In view of the foregoing, you are hereby directed to
immediately implement PCGG Resolution No. 2007-024 by
immediately transferring to the DOF, for its proper disposition,
POTC Stock Certificate No. 131. Corollary to this is the
lifting of the sequestration orders, if any, that covers the
4,727 shares of stock of the Republic in POTC. xxx.41
(Emphasis supplied)
Quite telling is this Court's unequivocal pronouncement in a rather
recent case of Palm Avenue Holding Co., Inc. v.
Sandiganbayan,42which involved very similar factual antecedents to
those pertaining to petitioners POTC and PHILCOMSAT.
"Section 26, Article XVIII of the 1987 Constitution provides:
xxxx
A sequestration or freeze order shall be issued only upon
showing of a prima facie case. The order and the list of
the sequestered of frozen properties shall forthwith be
registered with the proper court. For orders issued before
the ratification of this Constitution, the corresponding
judicial action or proceeding shall be filed within six
months from its ratification. For those issued after such
ratification, the judicial action or proceeding shall be
commenced within six months from the issuance thereof.
The sequestration or freeze order is deemed
automatically lifted if no judicial action or proceeding is
commenced as herein provided.1âwphi1
The aforesaid provision mandates the Republic to file the
corresponding judicial action or proceedings within a six-month
period (from its ratification on February 2, 1987) in order to
maintain sequestration, non-compliance with which would
result in the automatic lifting of the sequestration order. The
Court's ruling in Presidential Commission on Good
Government v. Sandiganbayan, which remains good law,
reiterates the necessity of the Republic to actually implead
corporations as defendants in the complaint, out of recognition
for their distinct and separate personalities, failure to do so
would necessarily be denying such entities their right to due
process. Here, the writ of sequestration issued against the
assets of the Palm Companies is not valid because the suit in
Civil Case No. 0035 against Benjamin Romualdez as
shareholder in the Palm Companies is not a suit against the
latter. The Court has held, contrary to the assailed
Sandiganbayan Resolution in G .R. No. 173082, that failure to
implead these corporations as defendants and merely
annexing a list of such corporations to the complaints is a
violation of their right to due process for it would be, in effect,
disregarding their distinct and separate personality without a
hearing. Here, the Palm Companies were merely mentioned as
Item Nos. 47 and 48, Annex A of the Complaint, as among the
corporations where defendant Romualdez owns shares of
stocks. Furthermore, while the writ of sequestration was issued
on October 27, 1986, the Palm Companies were impleaded in
 the case only in 1997, or already a decade from the ratification
of the Constitution in 1987, way beyond the prescribed period.
The argument that the beneficial owner of these corporations
was, anyway, impleaded as party-defendant can only be
interpreted as a tacit admission of the failure to file the
corresponding judicial action against said corporations
pursuant to the constitutional mandate. Whether or not the
impleaded defendant in Civil Case No. 0035 is indeed the
beneficial owner of the Palm Companies is a matter which the
PCGG merely assumes and still has to prove in said case.
The sequestration order issued against the Palm
Companies is therefore deemed automatically lifted due to
the failure of the Republic to commence the proper judicial
action or to implead them therein within the period under
the Constitution. However, the lifting of the writ of
sequestration will not necessarily be fatal to the main case
since the same does not ipso facto mean that the sequestered
properties are, in fact, not illgotten. The effect of the lifting of
the sequestration will merely be the termination of the
government's role as conservator. In other words, the PCGG
may no longer exercise administrative or housekeeping
powers, and its nominees may no longer vote the sequestered
shares to enable them to sit in the corporate board of the
subject company.43 (Emphasis supplied, citations omitted)
The glaring similarity in the circumstances attendant in the case
involving Palm Companies with the situation of petitioners POTC
and PHILCOMSAT compels us to rule in this case as we did in Palm
case.
On a final note, while sequestration is the means to revert the
amassed ill-gotten wealth back to the coffers of our government, we
must still safeguard the protection of property rights from
overzealousness. Sequestration as statutorily and constitutionally
recognized is not permanent. It must be lifted when the law and
proven facts warrant, or when the purpose has been accomplished.
WHEREFORE, the Petition is GRANTED. The assailed Resolution
issued by the Sandiganbayan dated 20 October 2005 and 2 August
2006 are REVERSED. The writ of sequestration issued against
petitioner POTC and PHILCOMSA T is hereby declared LIFTED six
(6) months after the ratification of the 1987 Constitution on 2
February 1987.
G.R. No. 154975 January 29, 2007
GENERAL CREDIT CORPORATION (now PENTA CAPITAL
FINANCE CORPORATION), Petitioner,
vs.
ALSONS DEVELOPMENT and INVESTMENT CORPORATION
and CCC EQUITY CORPORATION, Respondents.
DECISION
GARCIA, J.:
In this petition for review on certiorari under Rule 45 of the Rules of
Court, petitioner General Credit Corporation, now known as Penta
Capital Finance Corporation, seeks to annul and set aside the
Decision1 and Resolution2 dated April 11, 2002 and August 20,
2002, respectively, of the Court of Appeals (CA) in CA-G.R. CV No.
31801, affirming the November 8, 1990 decision of the Regional
Trial Court (RTC) of Makati City in its Civil Case No. 12707, an
action for a sum of money thereat instituted by the herein
respondent Alsons Development and Investment Corporation
against the petitioner and respondent CCC Equity Corporation.
The facts:
Shortly after its incorporation in 1957 as a finance and investment
company, petitioner General Credit Corporation (GCC, for short),
then known as Commercial Credit Corporation (CCC), established
CCC franchise companies in different urban centers of the country. 3
In furtherance of its business, GCC had, as early as 1974, applied
for and was able to secure license from the then Central Bank (CB)
of the Philippines and the Securities and Exchange Commission
(SEC) to engage also in quasi-banking activities.4 On the other
hand, respondent CCC Equity Corporation (EQUITY, for brevity)
was organized in November 1994 by GCC for the purpose of,
among other things, taking over the operations and management of
the various franchise companies. At a time material hereto,
respondent Alsons Development and Investment Corporation
(ALSONS, hereinafter) and Conrado, Nicasio, Editha and Ladislawa,
all surnamed Alcantara, and Alfredo de Borja (hereinafter the
Alcantara family, for convenience), each owned, just like GCC,
shares in the aforesaid GCC franchise companies, e.g., CCC Davao
and CCC Cebu.
In December 1980, ALSONS and the Alcantara family, for a
consideration of Two Million (P2,000,000.00) Pesos, sold their
shareholdings – a total of 101,953 shares, more or less – in the
CCC franchise companies to EQUITY.[5] On January 2, 1981,
EQUITY issued ALSONS et al., a "bearer" promissory note for
P2,000,000.00 with a one-year maturity date, at 18% interest per
annum, with provisions for damages and litigation costs in case of
default.6
Some four years later, the Alcantara family assigned its rights and
interests over the bearer note to ALSONS which thenceforth
became the holder thereof.7 But even before the execution of the
assignment deal aforestated, letters of demand for interest payment
were already sent to EQUITY, through its President, Wilfredo
Labayen, who pleaded inability to pay the stipulated interest,
EQUITY no longer then having assets or property to settle its
obligation nor being extended financial support by GCC.
What happened next, as narrated in the assailed Decision of the CA,
may be summarized, as follows:
1. On January 14, 1986, before the RTC of Makati, ALSONS,
having failed to collect on the bearer note aforementioned, filed
a complaint for a sum of money8 against EQUITY and GCC.
The case, docketed as Civil Case No. 12707, was eventually
raffled to Branch 58 of the court. As stated in par. 4 of the
complaint, GCC is being impleaded as party-defendant for any
judgment ALSONS might secure against EQUITY and, under
the doctrine of piercing the veil of corporate fiction, against
GCC, EQUITY having been organized as a tool and mere
conduit of GCC.
2. Answering with a cross-claim against GCC, EQUITY stated
by way of special and affirmative defenses that it (EQUITY):
a) was purposely organized by GCC for the latter to avoid
CB Rules and Regulations on DOSRI (Directors, Officers,
Stockholders and Related Interest) limitations, and that it
acted merely as intermediary or bridge for loan
transactions and other dealings of GCC to its franchises
and the investing public; and
b) is solely dependent upon GCC for its funding
requirements, to settle, among others, equity purchases
made by investors on the franchises; hence, GCC is
solely and directly liable to ALSONS, the former having
failed to provide …EQUITY the necessary funds to meet
its obligations to ALSONS.
3. GCC filed its ANSWER to Cross-claim, stressing that it is a
distinct and separate entity from EQUITY and alleging, in
essence that the business relationships with each other were
always at arm’s length. And following the denial of its motion to
dismiss ALSONS’ complaint, on the ground of lack of
jurisdiction and want of cause of action, GCC filed its Answer
thereto and set up affirmative defenses with counterclaim for
exemplary damages and attorney’s fees.
Issues having been joined, trial ensued. Presented by ALSONS, but
testifying as adverse witnesses, were CB and GCC officers. Among
other things, ALSONS’ evidence, which included the EQUITY-issued
"bearer" promissory note marked as Exhibit "K" and over sixty (60)
other marked and subsequently admitted documents, 9 were to the
effect that five (5) incorporators, each contributing P100,000.00 as
the initial paid up capital of the company, organized EQUITY to
manage, as it did manage, various GCC franchises through
management contracts. Before EQUITY’s incorporation, however,
GCC was already into the financing business as it was in fact
managing and operating various CCC franchises. Presented in
evidence, too, was the September 29, 1982 letter-reply of one G.
Villanueva, then GCC President, to EQUITY President Wilfredo
Labayen, bearing on the sale of EQUITY shares to third parties, part
of the proceeds of which the Alcantaras wanted applied to liquidate
the promissory note in question. In said letter, Mr. Villanueva
explained that the GCC Board denied the Alcantaras’ request to be
paid out of such proceeds, but nonetheless authorized EQUITY to
pay them interest out of EQUITY’s operation income, in preference
over what was due GCC.10
Albeit EQUITY presented its president, it opted to adopt the
testimony of some of ALSONS’ witnesses, inclusive of the
documentary exhibits testified to by each of them, as its evidence.
For its part, GCC called only Wilfredo Labayen to testify. It stuck to
its underlying defense of separateness and presented documentary
evidence detailing the organizational structures of both GCC and
EQUITY. And in a bid to negate the notion that it was conducting its
business illegally, GCC presented CB and SEC-issued licenses
authoring it to engage in financing and quasi-banking activities. It
also adduced evidence to prove that it was never a party to any of
the actionable documents ALSONS and its predecessors-in-interest
had in their possession and that the November 27, 1985 deed of
assignment of rights over the promissory note was unenforceable.
Eventually, the trial court, on its finding that EQUITY was but an
instrumentality or adjunct of GCC and considering the legal
consequences and implications of such relationship, came out with
its decision on November 8, 1990, rendering judgment for ALSONS,
to wit:
WHEREFORE, the foregoing premises considered, judgment is
hereby rendered in favor of plaintiff [ALSONS] and against the
defendants [EQUITY and GCC] who are hereby ordered, jointly and
severally, to pay plaintiff:
1. the principal sum of Two Million Pesos (P2,000,000.00)
together with the interest due thereon at the rate of eighteen
percent (18%) annually computed from Jan. 2, 1981 until the
obligation is fully paid;
2. liquidated damages due thereon equivalent to three percent
(3%) monthly computed from January 2, 1982 until the
obligation is fully paid;
3. attorney’s fees in an amount equivalent to twenty four
percent (24%) of the total obligation due; and
4. the costs of suit.
IT IS SO ORDERED. (Words in brackets added.)
Therefrom, GCC went on appeal to the CA where its appellate
recourse was docketed as CA-G.R. CV No. 31801, ascribing to the
trial court the commission of the following errors:
1. In holding that there is a "Parent-Subsidiary" corporate
relationship between EQUITY and GCC;
2. In not holding that EQUITY and GCC are distinct and
separate corporate entities;
3. In applying the doctrine of "Piercing the Veil of Corporate
Fiction" in the case at bar; and
4. In not holding ALSONS in estoppel to question the corporate
personality of EQUITY.
On April 11, 2002, the appellate court rendered the herein assailed
Decision,11 affirming that of the trial court, thus:
WHEREFORE, premises considered, the Decision of the Regional
Trial Court, Branch 58, Makati in Civil Case No. 12707 is hereby
AFFIRMED.
SO ORDERED.
In time, GCC moved for reconsideration followed by a motion for
oral argument, but both motions were denied by the CA in its equally
assailed Resolution of August 20, 2002.12
Hence, GCC’s present recourse anchored on the following
arguments, issues and/or submissions:
1. The motion for oral argument with motion for reconsideration
and its supplement were perfunctorily denied by the CA without
justifiable basis;
2. There is absolutely no basis for piercing the veil of corporate
fiction;
3. Respondent Alsons is not a real party-in-interest as the
promissory note payable to bearer subject of the collection suit
is but a simulated document and/or refers to another party.
Moreover, the subject promissory note is not admissible in
evidence because it has not been duly authenticated and it is
an altered document;
4. The fact of full payment stated in the ten (10) deeds of sale
of the shares of stock is conclusive on the sellers, and by the
patrol evidence rule, the alleged fact of its non-payment cannot
be introduced in evidenced; and
5. The counter-claim filed by GCC against Alsons should be
granted in the interest of justice.
The petition and the arguments and/or issues holding it together are
without merit. The desired reversal of the assailed decision and
resolution of the appellate court is accordingly DENIED.
Instead of raising distinctly formulated questions of law, as is
expected of one seeking a review under Rule 45 of the Rules of
Court of a final CA judgment,13 petitioner GCC starts off by voicing
disappointment over the "perfunctory" denial by the CA of its twin
motions for reconsideration and oral argument. Petitioner, to be
sure, cannot plausibly expect a reversal action premised on the
cursory way its motions were denied, if such indeed were the case.
Such manner of denial, while perhaps far from ideal, is not even a
recognized ground for appeal by certiorari, unless a denial of due
process ensues, which is not the case here. And lest it be
overlooked, the CA prefaced its assailed denial resolution with the
clause: "[F]inding no reversible error committed to warrant the
modification and/or reversal of the April 11, 2002 Decision,"
suggesting that the appellate court gave the petitioner’s motion for
reconsideration the attention it deserved. At the very least, the
petitioner was duly apprised of the reasons why reconsideration
could not be favorably considered. An extended resolution was not
really necessary to dispose of the motion for reconsideration in
question.
Petitioner’s lament about being deprived of procedural due process
owing to the denial of its motion for oral argument is simply
specious. Under the CA Internal Rules, the appellate court may tap
any of the three (3) alternatives therein provided to aid the court in
resolving appealed cases before it. It may rely on available records
alone, require the submission of memoranda or set the case for oral
argument. The option the Internal Rules thus gives the CA
necessarily suggests that the appellate court may, at its sound
discretion, dispense with a tedious oral argument exercise. Rule VI,
Section 6 of the 2002 Internal Rules of the CA, provides:
SEC. 6 Judicial Action on Certain Petitions.- (a) In petitions for
review, after the receipt of the respondent’s comment on the
petition, … the Court [of Appeals] may dismiss the petition if it finds
the same to be patently without merit …, otherwise, it shall give due
course to it.
xxx xxx xxx
If the petition is given due course, the Court may consider the case
submitted for decision or require the parties to submit their
memorandum or set the case for oral argument. xxx. After the oral
argument or upon submission of the memoranda … the case shall
be deemed submitted for decision.
In the case at bench, records reveal that the appellate court, in line
with the prescription of its own rules, required the parties to just
submit, as they did, their respective memoranda to properly ventilate
their separate causes. Under this scenario, the petitioner cannot be
validly heard, having been deprived of due process.
Just like the first, the last three (3) arguments set forth in the petition
will not carry the day for the petitioner. In relation therewith, the
Court notes that these arguments and the issues behind them were
not raised before the trial court. This appellate maneuver cannot be
allowed. For, well-settled is the rule that issues or grounds not
raised below cannot be resolved on review in higher courts. 14
Springing surprises on the opposing party is antithetical to the
sporting idea of fair play, justice and due process; hence, the
proscription against a party shifting from one theory at the trial court
to a new and different theory in the appellate level. On the same
rationale, points of law, theories, issues not brought to the attention
of the lower court or, in fine, not interposed during the trial cannot be
raised for the first time on appeal.15
There are, to be sure, exceptions to the rule respecting what may be
raised for the first time on appeal. Lack of jurisdiction over when the
issues raised present a matter of public policy16 comes immediately
to mind. None of the well-recognized exceptions obtain in this case,
however.
Lest it be overlooked vis-à-vis the same last three arguments thus
pressed, both the trial court and the CA, based on the evidence
adduced, adjudged the petitioner and respondent EQUITY jointly
and severally liable to pay what respondent ALSONS is entitled to
under the "bearer" promissory note. The judgment argues against
the notion of the note being simulated or altered or that respondent
ALSONS has no standing to sue on the note, not being the payee of
the "bearer" note. For, the declaration of liability not only
presupposes the duly established authenticity and due execution of
the promissory note over which ALSONS, as the holder in due
course thereof, has interest, but also the untenability of the
petitioner’s counterclaim for attorney’s fees and exemplary damages
against ALSONS. At bottom, the petitioner predicated such counter-
claim on the postulate that respondent ALSONS had no cause of
action, the supposed promissory note being, according to the
petitioner, either a simulated or an altered document.
In net effect, the definitive conclusion of the appellate court –
affirmatory of that of the trial court – was that the bearer promissory
note (Exh. "K") was a genuine and authentic instrument payable to
the holder thereof. This factual determination, as a matter of long
and sound appellate practice, deserves great weight and shall not
be disturbed on appeal, save for the most compelling reasons, 17
such as when that determination is clearly without evidentiary
support or when grave abuse of discretion has been committed. 18
This is as it should be since the Court, in petitions for review of CA
decisions under Rule 45 of the Rules of Court, usually limits its
inquiry only to questions of law. Stated otherwise, it is not the
function of the Court to analyze and weigh all over again the
evidence or premises supportive of the factual holdings of lower
courts.19
As nothing in the record indicates any of the exceptions adverted to
above, the factual conclusion of the CA that the P2 Million
promissory note in question was authentic and was issued at the
first instance to respondent ALSONS and the Alcantara family for
the amount stated on its face, must be affirmed. It should be
stressed in this regard that even the issuing entity, i.e., respondent
EQUITY, never challenged the genuineness and due execution of
the note.
This brings us to the remaining but core issue tendered in this case
and aptly raised by the petitioner, to wit: whether there is absolutely
no basis for piercing GCC’s veil of corporate identity.
A corporation is an artificial being vested by law with a personality
distinct and separate from those of the persons composing it 20 as
well as from that of any other entity to which it may be related.21 The
first consequence of the doctrine of legal entity of the separate
personality of the corporation is that a corporation may not be made
to answer for acts and liabilities of its stockholders or those of legal
entities to which it may be connected or vice versa. 22
The notion of separate personality, however, may be disregarded
under the doctrine – "piercing the veil of corporate fiction" – as in
fact the court will often look at the corporation as a mere collection
of individuals or an aggregation of persons undertaking business as
a group, disregarding the separate juridical personality of the
corporation unifying the group. Another formulation of this doctrine is
that when two (2) business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when
necessary to protect the rights of third parties, disregard the legal
fiction that two corporations are distinct entities and treat them as
identical or one and the same.23
Whether the separate personality of the corporation should be
pierced hinges on obtaining facts, appropriately pleaded or proved.
However, any piercing of the corporate veil has to be done with
caution, albeit the Court will not hesitate to disregard the corporate
veil when it is misused or when necessary in the interest of justice. 24
After all, the concept of corporate entity was not meant to promote
unfair objectives.
Authorities are agreed on at least three (3) basic areas where
piercing the veil, with which the law covers and isolates the
corporation from any other legal entity to which it may be related, is
allowed.25 These are: 1) defeat of public convenience,26 as when the
corporate fiction is used as vehicle for the evasion of an existing
obligation;27 2) fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime;28 or 3) alter ego
cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make
it merely an instrumentality, agency, conduit or adjunct of another
corporation.29
The CA found valid grounds to pierce the corporate veil of petitioner
GCC, there being justifiable basis for such action. When the
appellate court spoke of a justifying factor, the reference was to
what the trial court said in its decision, namely: the existence of
"certain circumstances [which], taken together, gave rise to the
ineluctable conclusion that … [respondent] EQUITY is but an
instrumentality or adjunct of [petitioner] GCC."
The Court agrees with the disposition of the appellate court on the
application of the piercing doctrine to the transaction subject of this
case. Per the Court’s count, the trial court enumerated no less than
20 documented circumstances and transactions, which, taken as a
package, indeed strongly supported the conclusion that respondent
EQUITY was but an adjunct, an instrumentality or business conduit
of petitioner GCC. This relation, in turn, provides a justifying ground
to pierce petitioner’s corporate existence as to ALSONS’ claim in
question. Foremost of what the trial court referred to as "certain
circumstances" are the commonality of directors, officers and
stockholders and even sharing of office between petitioner GCC and
respondent EQUITY; certain financing and management
arrangements between the two, allowing the petitioner to handle the
funds of the latter; the virtual domination if not control wielded by the
petitioner over the finances, business policies and practices of
respondent EQUITY; and the establishment of respondent EQUITY
by the petitioner to circumvent CB rules. For a perspective, the the justifying occasion to pierce the veil of corporate fiction between
following are some relevant excerpts from the trial court’s decision GCC and EQUITY. We quote the trial court:
setting forth in some detail the tipping circumstances adverted to
Verily, indeed, as the relationships binding herein [respondent
therein:
EQUITY and petitioner GCC] have been that of "parent-subsidiary
It must be noted that as characterized by their business relationship, corporations" the foregoing principles and doctrines find suitable
[respondent] EQUITY and [petitioner] GCC had common directors applicability in the case at bar; and, it having been satisfactorily and
and/or officers as well as stockholders. This is revealed by the indubitably shown that the said relationships had been used to
proceedings recorded in SEC Case No. 25-81 entitled "Avelina perform certain functions not characterized with legitimacy, this
Ramoso, et al., vs. GCC, et al., where it was established, thru the Court … feels amply justified to "pierce the veil of corporate entity"
testimony of EQUITY’s own President … that more than 90% of the and disregard the separate existence of the percent (sic) and
stockholders of … EQUITY were also stockholders of … GCC ….. subsidiary the latter having been so controlled by the parent that its
Disclosed likewise is the fact that when [EQUITY’s President] separate identity is hardly discernible thus becoming a mere
Labayen sold the shareholdings of EQUITY in said franchise instrumentality or alter ego of the former. Consequently, as the
companies, practically the entire proceeds thereof were surrendered parent corporation, [petitioner] GCC maybe (sic) held responsible for
to GCC, and not received by EQUITY (EXHIBIT "RR") xxx. the acts and contracts of its subsidiary – [respondent] EQUITY -
most especially if the latter (who had anyhow acknowledged its
It was likewise shown by a preponderance of evidence that not only
liability to ALSONS) maybe (sic) without sufficient property with
had …GCC financed … EQUITY and that the latter was heavily
which to settle its obligations. For, after all, GCC was the entity
indebted to the former but EQUITY was, in fact, a wholly owned
which initiated and benefited immensely from the fraudulent scheme
subsidiary of …GCC. Thus, as affirmed by EQUITY’s President, …
perpetrated in violation of the law. (Words in parenthesis in the
the funds invested by EQUITY in the CCC franchise companies
original; emphasis and bracketed words added).
actually came from CCC Phils. or GCC (Exhibit "Y-5")…. that, as
disclosed by the Auditor’s report for 1982, past due receivables Given the foregoing considerations, it behooves the petitioner, as a
alone of GCC exceeded P101,000,000.00 mostly to GCC affiliates matter of law and equity, to assume the legitimate financial
especially CCC EQUITY. …; that [CB’s] Report of Examination obligation of a cash-strapped subsidiary corporation which it virtually
dated July 14, 1977 shows that … EQUITY which has a paid-up controlled to such a degree that the latter became its instrument or
capital of only P500,000.00 was the biggest borrower of GCC with a agent. The facts, as found by the courts a quo, and the applicable
total loan of P6.70 Million …. law call for this kind of disposition. Or else, the Court would be
allowing the wrong use of the fiction of corporate veil.
xxx xxx xxx
WHEREFORE, the instant petition is DENIED and the appealed
It has likewise been amply substantiated by [respondent ALSONS’]
Decision and Resolution of the Court of Appeals are accordingly
evidence that not only did … GCC cause the incorporation of …
AFFIRMED.
EQUITY, but, the latter had grossly inadequate capital for the pursuit
of its line of business to the extent that its business affairs were Costs against the petitioner.
considered as GCC’s own business endeavors. xxx.
SO ORDERED.
xxx xxx xxx
ALSONS has likewise shown …that the bonuses of the officers and
directors of … EQUITY was based on its total financial performance
together with all its affiliates… both firms were sharing one and the
same office when both were still operational … and that the directors
and executives of … EQUITY never acted independently … but took
their orders from … GCC….
The evidence has also indubitably established that … EQUITY was
organized by … GCC for the purpose of circumventing [CB] rules
and regulations and the Anti-Usury Law. Thus, as disclosed by the
Advance Report … on the result of Central Bank’s Operations
Examination conducted on … GCC as of March 31, 1977
(EXHIBITS "FFF" etc.), the latter violated [CB] rules and regulations
by : (a) using as a conduit its non-quasi bank affiliates …. (b) issuing
without recourse facilities to enable GCC to extend credit to affiliates
like … EQUITY which go beyond the single borrower’s limit without
the need of showing outstanding balance in the book of accounts.
(Emphasis over words in brackets added.)
It bears to stress at this point that the facts and the inferences drawn
therefrom, upon which the two (2) courts below applied the piercing
doctrine, stand, for the most part, undisputed. Among these is, to
reiterate, the matter of EQUITY having been incorporated to serve,
as it did serve, as an instrumentality or adjunct of GCC. With the
view we take of this case, GCC did not adduce any evidence, let
alone rebut the testimonies and documents presented by ALSONS,
to establish the prevailing circumstances adverted to that provided
G.R. No. L-9687 June 30, 1961 P1,000.000 to P 3,000,000 which increase was duly approved
by the Securities and Exchange Commission on June 7, 1948.
LIDDELL & CO., INC., petitioner-appellant,
Frank Liddell subscribed to and paid 20% of the increase of
vs.
P400,000. He paid 25% thereof in the amount of P100,000 and
THE COLLECTOR OF INTERNAL REVENUE, respondent-
the balance of P3,000,000 was merely debited to Frank
appellee.
Liddell-Drawing Account and credited to Subscribed Capital
Ozaeta, Lichauco and Picazo for petitioner-appellant. Stock on December 11, 1948.
Office of the Solicitor General for respondent-appellee.
On March 8, 1949, stock dividends were again issued by
BENGZON, C.J.: Liddell & Co. and in accordance with the agreements, Exhibits
A, B, and C, the stocks of said company stood as follows:
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 Name No. of Shares Amount Per Cent
Liddell & Co., Inc. Frank Liddell 13,688 P1,368,800 72.00%
Said Company lists down several issues which may be boiled to the Irene Liddell 1 100 .01%
following: Mercedes Vecin 1 100 .01%

(a) Whether or not Judge Umali of the Tax Court below could Charles Kurz 1,225 122,500 6.45%
validly participate in the making of the decision; E.J. Darras 1,225 122,500 6.45%
Angel Manzano 1,150 115,000 6.06%
(b) Whether or not Liddell & Co. Inc., and the Liddell Motors,
Julian Serrano 710 71,000 3.74%
Inc. are (practically) identical corporations, the latter being
merely .the alter ego of the former; E. Hasim 500 50,000 2.64%
G. W. Kernot 500 50,000 2.64%
(c) Whether or not, granting the identical nature of the
19,000 P1,900,000 100.00%
corporations, the assessment of tax liability, including the
surcharge thereon by the Court of Tax Appeals, is correct. On November 15, 1948, in accordance with a resolution of a special
meeting of the Board of Directors of Liddell & Co., stock dividends
Undisputed Facts. The parties submitted a partial stipulation of facts, were again declared. As a result of said declaration and in
each reserving the right to present additional evidence. accordance with the agreements, Exhibits, A, B, and C, the
Said undisputed facts are substantially as follows: stockholdings in the company appeared to be:

The petitioner, Liddell & Co. Inc., (Liddell & Co. for short) is a Name No. of Shares Amount Per Cent
domestic corporation establish in the Philippines on February Frank Liddell 19,738 P1,973,800 65.791%
1, 1946, with an authorized capital of P100,000 divided into Irene Liddell 1 100 .003%
1000 share at P100 each. Of this authorized capital, 196 Mercedes Vecin 1 100 .003%
shares valued at P19,600 were subscribed and paid by Frank Charles Kurz 2,215 221,500 7.381%
Liddell while the other four shares were in the name of Charles
E.J. Darras 2,215 221,500 7.381%
Kurz, E.J. Darras, Angel Manzano and Julian Serrano at one
Angel Manzano 1,810 181,000 6.031%
shares each. Its purpose was to engage in the business of
importing and retailing Oldsmobile and Chevrolet passenger Julian Serrano 1,700 170,000 5.670%
cars and GMC and Chevrolet trucks.. E. Hasim 830 83,000 2.770%
G. W. Kernot 1,490 149,000 4.970%
On January 31, 1947, with the limited paid-in capital of
P20,000, Liddell & Co. was able to declare a 90% stock 30,000 P3,000,000 100.000%
dividend after which declaration on, Frank Liddells holding in On the basis of the agreement Exhibit A, (May, 1947) "40%" of the
the Company increased to 1,960 shares and the employees, earnings available for dividends accrued to Frank Liddell although at
Charles Kurz E.J. Darras, Angel Manzano and Julian Serrano the time of the execution of aid instrument, Frank Liddell owned all
at 10 share each. The declaration of stock dividend was of the shares in said corporation. 45% accrued to the employees,
followed by a resolution increasing the authorized capital of the parties thereto; Kurz 12-1/2%; Darras 12-1/2%; A. Manzano 12-
company to P1,000.000 which the Securities & Exchange 1/2% and Julian Serrano 7-1/2%. The agreement Exhibit A was also
Commission approved on March 3, 1947. Upon such approval, made retroactive to 1946. Frank Liddell reserved the right to
Frank Liddell subscribed to 3,000 additional shares, for which reapportion the 45% dividends pertaining to the employees in the
he paid into the corporation P300,000 so that he had in his future for the purpose of including such other faithful and efficient
own name 4,960 shares. employees as he may subsequently designate. (As a matter of fact,
Frank Liddell did so designate two additional employees namely: E.
On May 24, 1957, Frank Liddell, on one hand and Messrs. Hasim and G. W. Kernot). It was for such inclusion of future faithful
Kurz, Darras, Manzano and Serrano on the other, executed an employees that Exhibits B-1 and C were executed. As per Exhibit C,
agreement (Exhibit A) which was further supplemented by two dated May 13, 1948, the 45% given by Frank Liddell to his
other agreements (Exhibits B and C) dated May 24, 1947 and employees was reapportioned as follows: C. Kurz — 12,%; E. J.
June 3, 1948, wherein Frank Liddell transferred (On June 7, Darras — 12%; A. Manzano — l2%; J. Serrano — 3-1/2%; G. W.
1948) to various employees of Liddell & Co. shares of stock. Kernot — 2%.
At the annual meeting of stockholders of Liddell & Co. held on Exhibit B contains the employees' definition in detail of the manner
March 9, 1948, a 100% stock dividend was declared, thereby by which they sought to prevent their share-holdings from being
increasing the issued capital stock of aid corporation from
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 Liddell 9 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 Court 14 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. 100812 June 25, 1999
FRANCISCO MOTORS CORPORATION, petitioner,
vs.
COURT OF APPEALS and SPOUSES GREGORIO and LIBRADA
MANUEL, respondents.
QUISUMBING, J.:
This petition for review on certiorari, under Rule 45 of the Rules of
Court, seeks to annul the decision 1 of the Court of Appeals in C.A.
G.R. CV No. 10014 affirming the decision rendered by Branch 135,
Regional Trial Court of Makati, Metro Manila. The procedural
antecedents of this petition are as follows:
On January 23, 1985, petitioner filed a complaint 2 against private
respondents to recover three thousand four hundred twelve and six
centavos (P3,412.06), representing the balance of the jeep body
purchased by the Manuels from petitioner; an additional sum of
twenty thousand four hundred fifty-four and eighty centavos
(P20,454.80) representing the unpaid balance on the cost of repair
of the vehicle; and six thousand pesos (P6,000.00) for cost of suit
and attorney's fees. 3 To the original balance on the price of jeep
body were added the costs of repair. 4 In their answer, private
respondents interposed a counterclaim for unpaid legal services by
Gregorio Manuel in the amount of fifty thousand pesos (P50,000)
which was not paid by the incorporators, directors and officers of the
petitioner. The trial court decided the case on June 26, 1985, in
favor of petitioner in regard to the petitioner's claim for money, but
also allowed the counter-claim of private respondents. Both parties
appealed. On April 15, 1991, the Court of Appeals sustained the trial
court's decision. 5 Hence, the present petition.
For our review in particular is the propriety of the permissive
counterclaim which private respondents filed together with their
answer to petitioner's complaint for a sum of money. Private
respondent Gregorio Manuel alleged as an affirmative defense that,
while he was petitioner's Assistant Legal Officer, he represented
members of the Francisco family in the intestate estate proceedings
of the late Benita Trinidad. However, even after the termination of
the proceedings, his services were not paid. Said family members,
he said, were also incorporators, directors and officers of petitioner.
Hence to petitioner's collection suit, he filed a counter permissive
counterclaim for the unpaid attorney's fees. 6
For failure of petitioner to answer the counterclaim, the trial court
declared petitioner in default on this score, and evidence ex-parte
was presented on the counterclaim. The trial court ruled in favor of
private respondents and found that Gregorio Manuel indeed
rendered legal services to the Francisco family in Special
Proceedings Number 7803 — "In the Matter of Intestate Estate of
Benita Trinidad". Said court also found that his legal services were
not compensated despite repeated demands, and thus ordered
petitioner to pay him the amount of fifty thousand (P50,000.00)
pesos. 7
Dissatisfied with the trial court's order, petitioner elevated the matter
to the Court of Appeals, posing the following issues:
I.
WHETHER OR NOT THE DECISION RENDERED BY THE LOWER
COURT IS NULL AND VOID AS IT NEVER ACQUIRED
JURISDICTION OVER THE PERSON OF THE DEFENDANT.
II.
WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL
PARTY IN THE ALLEGED PERMISSIVE COUNTERCLAIM
SHOULD BE HELD LIABLE TO THE CLAIM OF DEFENDANT-
APPELLEES.
III.
WHETHER OR NOT THERE IS FAILURE ON THE PART OF
PLAINTIFF-APPELLANT TO ANSWER THE ALLEGED
PERMISSIVE COUNTERCLAIM. 8
Petitioner contended that the trial court did not acquire jurisdiction
over it because no summons was validly served on it together with
the copy of the answer containing the permissive counterclaim.
Further, petitioner questions the propriety of its being made party to
the case because it was not the real party in interest but the
individual members of the Francisco family concerned with the
intestate case.
In its assailed decision now before us for review, respondent Court
of Appeals held that a counterclaim must be answered in ten (10)
days, pursuant to Section 4, Rule 11, of the Rules of Court; and
nowhere does it state in the Rules that a party still needed to be
summoned anew if a counterclaim was set up against him. Failure to
serve summons, said respondent court, did not effectively negate
trial court's jurisdiction over petitioner in the matter of the
counterclaim. It likewise pointed out that there was no reason for
petitioner to be excused from answering the counterclaim. Court
records showed that its former counsel, Nicanor G. Alvarez,
received the copy of the answer with counterclaim two (2) days prior
to his withdrawal as counsel for petitioner. Moreover when
petitioner's new counsel, Jose N. Aquino, entered his appearance,
three (3) days still remained within the period to file an answer to the
counterclaim. Having failed to answer, petitioner was correctly
considered in default by the trial
court. 9 Even assuming that the trial court acquired no jurisdiction
over petitioner, respondent court also said, but having filed a motion
for reconsideration seeking relief from the said order of default,
petitioner was estopped from further questioning the trial court's
jurisdiction. 10
On the question of its liability for attorney's fees owing to private
respondent Gregorio Manuel, petitioner argued that being a
corporation, it should not be held liable therefor because these fees
were owed by the incorporators, directors and officers of the
corporation in their personal capacity as heirs of Benita Trinidad.
Petitioner stressed that the personality of the corporation, vis-a-vis
the individual persons who hired the services of private respondent,
is separate and distinct, 11 hence, the liability of said individuals did
not become an obligation chargeable against petitioner.
Nevertheless, on the foregoing issue, the Court of Appeals ruled as
follows:
However, this distinct and separate personality is merely a
fiction created by law for convenience and to promote justice.
Accordingly, this separate personality of the corporation may
be disregarded, or the veil of corporate fiction pierced, in cases
where it is used as a cloak or cover for found (sic) illegality, or
to work an injustice, or where necessary to achieve equity or
when necessary for the protection of creditors. (Sulo ng Bayan,
Inc. vs. Araneta, Inc., 72 SCRA 347) Corporations are
composed of natural persons and the legal fiction of a separate
corporate personality is not a shield for the commission of
injustice and inequity. (Chemplex Philippines, Inc. vs.
Pamatian, 57 SCRA 408).
 In the instant case, evidence shows that the plaintiff-appellant
Francisco Motors Corporation is composed of the heirs of the
late Benita Trinidad as directors and incorporators for whom
defendant Gregorio Manuel rendered legal services in the
intestate estate case of their deceased mother. Considering
the aforestated principles and circumstances established in
this case, equity and justice demands plaintiff-appellant's veil
of corporate identity should be pierced and the defendant be
compensated for legal services rendered to the heirs, who are
directors of the plaintiff-appellant corporation. 12
Now before us, petitioner assigns the following errors:
I.
THE COURT OF APPEALS ERRED IN APPLYING THE
DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY.
II.
THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE
WAS JURISDICTION OVER PETITIONER WITH RESPECT TO
THE COUNTERCLAIM. 13
Petitioner submits that respondent court should not have resorted to
piercing the veil of corporate fiction because the transaction
concerned only respondent Gregorio Manuel and the heirs of the
late Benita Trinidad. According to petitioner, there was no cause of
action by said respondent against petitioner; personal concerns of
the heirs should be distinguished from those involving corporate
affairs. Petitioner further contends that the present case does not fall
among the instances wherein the courts may look beyond the
distinct personality of a corporation. According to petitioner, the
services for which respondent Gregorio Manuel seeks to collect fees
from petitioner are personal in nature. Hence, it avers the heirs
should have been sued in their personal capacity, and not involve
the corporation. 14
With regard to the permissive counterclaim, petitioner also insists
that there was no proper service of the answer containing the
permissive counterclaim. It claims that the counterclaim is a
separate case which can only be properly served upon the opposing
party through summons. Further petitioner states that by nature, a
permissive counterclaim is one which does not arise out of nor is
necessarily connected with the subject of the opposing party's claim.
Petitioner avers that since there was no service of summons upon it
with regard to the counterclaim, then the court did not acquire
jurisdiction over petitioner. Since a counterclaim is considered an
action independent from the answer, according to petitioner, then in
effect there should be two simultaneous actions between the same
parties: each party is at the same time both plaintiff and defendant
with respect to the other, 15 requiring in each case separate
summonses.
In their Comment, private respondents focus on the two questions
raised by petitioner. They defend the propriety of piercing the veil of
corporate fiction, but deny the necessity of serving separate
summonses on petitioner in regard to their permissive counterclaim
contained in the answer.
Private respondents maintain both trial and appellate courts found
that respondent Gregorio Manuel was employed as assistant legal
officer of petitioner corporation, and that his services were solicited
by the incorporators, directors and members to handle and
represent them in Special Proceedings No. 7803, concerning the
Intestate Estate of the late Benita Trinidad. They assert that the
members of petitioner corporation took advantage of their positions
by not compensating respondent Gregorio Manuel after the
termination of the estate proceedings despite his repeated demands
for payment of his services. They cite findings of the appellate court
that support piercing the veil of corporate identity in this particular
case. They assert that the corporate veil may be disregarded when it
is used to defeat public convenience, justify wrong, protect fraud,
and defend crime. It may also be pierced, according to them, 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. In these instances, they aver, the
corporation should be treated merely as an association of individual
persons. 16
Private respondents dispute petitioner's claim that its right to due
process was violated when respondents' counterclaim was granted
due course, although no summons was served upon it. They claim
that no provision in the Rules of Court requires service of summons
upon a defendant in a counterclaim. Private respondents argue that
when the petitioner filed its complaint before the trial court it
voluntarily submitted itself to the jurisdiction of the court. As a
consequence, the issuance of summons on it was no longer
necessary. Private respondents say they served a copy of their
answer with affirmative defenses and counterclaim on petitioner's
former counsel, Nicanor G. Alvarez. While petitioner would have the
Court believe that respondents served said copy upon Alvarez after
he had withdrawn his appearance as counsel for the petitioner,
private respondents assert that this contention is utterly baseless.
Records disclose that the answer was received two (2) days before
the former counsel for petitioner withdrew his appearance, according
to private respondents. They maintain that the present petition is but
a form of dilatory appeal, to set off petitioner's obligations to the
respondents by running up more interest it could recover from them.
Private respondents therefore claim damages against petitioner. 17
To resolve the issues in this case, we must first determine the
propriety of piercing the veil of corporate fiction.
Basic in corporation law is the principle that a corporation has a
separate personality distinct from its stockholders and from other
corporations to which it may be connected. 18 However, under the
doctrine of piercing the veil of corporate entity, the corporation's
separate juridical personality may be disregarded, for example,
when the corporate identity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime. Also, where the
corporation is a mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its affairs
are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation, then its distinct personality
may be ignored. 19 In these circumstances, the courts will treat the
corporation as a mere aggrupation of persons and the liability will
directly attach to them. The legal fiction of a separate corporate
personality in those cited instances, for reasons of public policy and
in the interest of justice, will be justifiably set aside.
In our view, however, given the facts and circumstances of this
case, the doctrine of piercing the corporate veil has no relevant
application here. Respondent court erred in permitting the trial
court's resort to this doctrine. The rationale behind piercing a
corporation's identity in a given case 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.
However, in the case at bar, instead of holding certain individuals or
persons responsible for an alleged corporate act, the situation has
been reversed. It is the petitioner as a corporation which is being
ordered to answer for the personal liability of certain individual of the appellate court on this particular issue. Moreover, as noted by
directors, officers and incorporators concerned. Hence, it appears to the respondent court, when petitioner filed its motion seeking to set
us that the doctrine has been turned upside down because of its aside the order of default, in effect it submitted itself to the
erroneous invocation. Note that according to private respondent jurisdiction of the court. As well said by respondent court:
Gregorio Manuel his services were solicited as counsel for members
Further on the lack of jurisdiction as raised by plaintiff-
of the Francisco family to represent them in the intestate
appellant[,] [t]he records show that upon its request, plaintiff-
proceedings over Benita Trinidad's estate. These estate
appellant was granted time to file a motion for reconsideration
proceedings did not involve any business of petitioner.
of the disputed decision. Plaintiff-appellant did file its motion for
Note also that he sought to collect legal fees not just from certain reconsideration to set aside the order of default and the
Francisco family members but also from petitioner corporation on judgment rendered on the counterclaim.
the claims that its management had requested his services and he
Thus, even if the court acquired no jurisdiction over plaintiff-
acceded thereto as an employee of petitioner from whom it could be
appellant on the counterclaim, as it vigorously insists, plaintiff-
deduced he was also receiving a salary. His move to recover unpaid
appellant is considered to have submitted to the court's
legal fees through a counterclaim against Francisco Motors
jurisdiction when it filed the motion for reconsideration seeking
Corporation, to offset the unpaid balance of the purchase and repair
relief from the court. (Soriano vs. Palacio, 12 SCRA 447). A
of a jeep body could only result from an obvious misapprehension
party is estopped from assailing the jurisdiction of a court after
that petitioner's corporate assets could be used to answer for the
voluntarily submitting himself to its jurisdiction. (Tejones vs.
liabilities of its individual directors, officers, and incorporators. Such
Gironella, 159 SCRA 100). Estoppel is a bar against any
result if permitted could easily prejudice the corporation, its own
claims of lack of jurisdiction. (Balais vs. Balais, 159 SCRA 37).
creditors, and even other stockholders; hence, clearly inequitous to 22
petitioner.
WHEREFORE, the petition is hereby GRANTED and the assailed
Furthermore, considering the nature of the legal services involved,
decision is hereby REVERSED insofar only as it held Francisco
whatever obligation said incorporators, directors and officers of the
Motors Corporation liable for the legal obligation owing to private
corporation had incurred, it was incurred in their personal capacity.
respondent Gregorio Manuel; but this decision is without prejudice to
When directors and officers of a corporation are unable to
his filing the proper suit against the concerned members of the
compensate a party for a personal obligation, it is far-fetched to
Francisco family in their personal capacity. No pronouncement as to
allege that the corporation is perpetuating fraud or promoting
costs.1âwphi1.nêt
injustice, and be thereby held liable therefor by piercing its corporate
veil. While there are no hard and fast rules on disregarding separate SO ORDERED.
corporate identity, we must always be mindful of its function and
purpose. A court should be careful in assessing the milieu where the
doctrine of piercing the corporate veil may be applied. Otherwise an
injustice, although unintended, may result from its erroneous
application.
The personality of the corporation and those of its incorporators,
directors and officers in their personal capacities ought to be kept
separate in this case. The claim for legal fees against the concerned
individual incorporators, officers and directors could not be properly
directed against the corporation without violating basic principles
governing corporations. Moreover, every action — including a
counterclaim — must be prosecuted or defended in the name of the
real party in interest. 20 It is plainly an error to lay the claim for legal
fees of private respondent Gregorio Manuel at the door of petitioner
(FMC) rather than individual members of the Francisco family.
However, with regard to the procedural issue raised by petitioner's
allegation, that it needed to be summoned anew in order for the
court to acquire jurisdiction over it, we agree with respondent court's
view to the contrary. Section 4, Rule 11 of the Rules of Court
provides that a counterclaim or cross-claim must be answered within
ten (10) days from service. Nothing in the Rules of Court says that
summons should first be served on the defendant before an answer
to counterclaim must be made. The purpose of a summons is to
enable the court to acquire jurisdiction over the person of the
defendant. Although a counterclaim is treated as an entirely distinct
and independent action, the defendant in the counterclaim, being
the plaintiff in the original complaint, has already submitted to the
jurisdiction of the court. Following Rule 9, Section 3 of the 1997
Rules of Civil Procedure, 21 if a defendant (herein petitioner) fails to
answer the counterclaim, then upon motion of plaintiff, the defendant
may be declared in default. This is what happened to petitioner in
this case, and this Court finds no procedural error in the disposition
G.R. No. 191525
INTERNATIONAL ACADEMY OF MANAGEMENT AND
ECONOMICS (I/AME), Petitioner
vs.
LITTON AND COMPANY, INC., Respondent
DECISION
SERENO, CJ.:
Before us is a Petition for Review on Certiorari under Rule 45 of the
Rules of Court assailing the Court of Appeals (CA) Decision 1 and
Resolution2 in CA-G.R. SP No. 107727.
The CA affirmed the Judgment3 and Order4 of the Regional Trial
Court (RTC) of Manila in Special Civil Action No. 06-115547
reinstating the Order5 of the Metropolitan Trial Court (Me TC) of
Manila in favor of Litton and Company, Inc. (Litton).
THE FACTS
The facts, as culled from the records, are as follows:
Atty. Emmanuel T. Santos (Santos), a lessee to two (2) buildings
owned by Litton, owed the latter rental arrears as well as his share
of the payment of realty taxes.6
Consequently, Litton filed a complaint for unlawful detainer against
Santos before the MeTC of Manila. The MeTC ruled in Litton’s favor
and ordered Santos to vacate A.I.D. Building and Litton Apartments
and to pay various sums of money representing unpaid arrears,
realty taxes, penalty, andattorney’s fees.7
It appears however that the judgment was not executed. Litton
subsequently filed an action for revival of judgment, which was
granted by the RTC.8 Santos then appealed the RTC decision to the
CA, which nevertheless affirmed the RTC.9 The said CA decision
became final and executory on 22 March 1994.10
On l 1 November 1996, the sheriff of the MeTC of Manila levied on a
piece of real property covered by Transfer Certificate of Title (TCT)
No. 187565 and registered in the name of International Academy of
Management and Economics Incorporated (I/AME), in order to
execute the judgment against Santos.11 The annotations on TCT No.
187565 indicated that such was "only up to the extent of the share of
Emmanuel T. Santos."12
I/AME filed with Me TC a "Motion to Lift or Remove Annotations
Inscribed in TCT No. 187565 of the Register of Deeds of Makati
City."13 I/AME claimed that it has a separate and distinct personality
from Santos; hence, its properties should not be made to answer for
the latter's liabilities. The motion was denied in an Order dated 29
October 2004.
Upon motion for reconsideration of I/AME, the Me TC reversed its
earlier ruling and ordered the cancellation of the annotations of levy
as well as the writ of execution. Litton then elevated the case to the
RTC, which in turn reversed the Order granting I/AME’s motion for
reconsideration and reinstated the original Order dated 29 October
2004.
I/AME then filed a petition with the CA to contest the judgment of the
RTC, which was eventually denied by the appellate court.
THE CA RULING
The CA upheld the Judgment and Order of the RTC and held that no
grave abuse of discretion was committed when the trial court
pierced the corporate veil of I/AME.14
It took note of how Santos had utilized I/ AME to insulate the Makati
real property covered by TCT No. 187565 from the execution of the
judgment rendered against him, for the following reasons:
First, the Deed of Absolute Sale dated 31 August 1979 indicated
that Santos, being the .President, was representing I/AME as the
vendee.15 However, records show that it was only in 1985 that
I/AME was organized as a juridical entity.16 Obviously, Santos could
not have been President of a non-existent corporation at that time.17
Second, the CA noted that the subject real property was transferred
to I/AME during the pendency of the appeal for the revival of the
judgment in the ejectment case in the CA.18
Finally, the CA observed that the Register of Deeds of Makati City
issued TCT No. 187565 only on 17 November 1993, fourteen (14)
years after the execution of the Deed of Absolute Sale and more
than eight (8) years after I/AME was incorporated.19
Thus, the CA concluded that Santos merely used I/ AME as a shield
to protect his property from the coverage of the writ of execution;
therefore, piercing the veil of corporate fiction is proper.20
THE ISSUES
The issues boil down to the alleged denial of due process when the
court pierced the corporate veil of I/ AME and its property was made
to answer for the liability of Santos.
OUR RULING
We deny the petition.
There was no violation of due
process against I/AME
Petitioner avers that its right to due process was violated when it
was dragged into the case and its real property made an object of a
writ of execution in a judgment against Santos. It argues that since it
was not impleaded in the main case, the court a quo never acquired
jurisdiction over it. Indeed, compliance with the recognized modes of
acquisition ofjurisdiction cannot be dispensed with even in piercing
the veil of corporation.21
In a petition for review on certiorari under Rule 45, only questions of
law shall be entertained. This Court considers the determination of
the existence of any of the circumstances that would warrant the
piercing of the veil of corporate fiction as a question of fact which
ordinarily cannot be the subject of a petition for review on certiorari
under Rule 45. We will only take cognizance of factual issues if the
findings of the lower court are not supported by the evidence on
record or are based on a misapprehension of facts. 22 Once the CA
affirms the factual findings of the trial court, such findings are
deemed final and conclusive and thus, may not be reviewed on
appeal, unless the judgment of the CA depends on a
misapprehension of facts, which if properly considered, would justify
a different conclusion.23 Such exception however, is not applicable
in this case.
The 29 October 2004 MeTC judgment, the RTC judgment, and the
CA decision are one in accord on the matters presented before this
Court.
In general, corporations, whether stock or non-stock, are treated as
separate and distinct legal entities from the natural persons
composing them. The privilege of being considered a distinct and
separate entity is confined to legitimate uses, and is subject to
equitable limitations to prevent its being exercised for fraudulent,
unfair or illegal purposes.24 However, once equitable limitations are
breached using the coverture of the corporate veil, courts may step
in to pierce the same.
As we held in Lanuza, Jr. v. BF Corporation:25
Piercing the corporate veil is warranted when "[the separate
personality of a corporation] is used as a means to perpetrate
fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse
legitimate issues." It is also warranted in alter ego cases
"where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation
is so organized and controlled and its affairs are so conducted
as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation."
When [the] corporate veil is pierced, the corporation and
persons who are normally treated as distinct from the
corporation are treated as one person, such that when the
corporation is adjudged liable, these persons, too, become
liable as if they were the corporation.
The piercing of the corporate veil is premised on the fact that the
corporation concerned must have been properly served with
summons or properly subjected to the jurisdiction of the court a quo.
Corollary thereto, it cannot be subjected to a writ of execution meant
for another in violation of its right to due process.26
There exists, however, an exception to this rule: if it is shown "by
clear and convincing proof that the separate and distinct personality
of the corporation was purposefully employed to evade a legitimate
and binding commitment and perpetuate a fraud or like
wrongdoings. "27
The resistance of the Court to offend the right to due process of a
corporation that is a nonparty in a main case, may disintegrate not
only when its director, officer, shareholder, trustee or member is a
party to the main case, but when it finds facts which show that
piercing of the corporate veil is merited.28
Thus, as the Court has already ruled, a party whose corporation is
vulnerable to piercing of its corporate veil cannot argue violation of
due process.29
In this case, the Court confirms the lower courts' findings that Santos
had an existing obligation based on a court judgment that he owed
monthly rentals and unpaid realty taxes under a lease contract he
entered into as lessee with the Littons as lessor. He was not able to
comply with this particular obligation, and in fact, refused to comply
therewith.
This Court agrees with the CA that Santos used I/AME as a means
to defeat judicial processes and to evade his obligation to Litton. 30
Thus, even while I/AME was not imp leaded in the main case and
yet was so named in a writ of execution to satisfy a court judgment
against Santos, it is vulnerable to the piercing of its corporate veil.
We will further expound on this matter.
Piercing the Corporate Veil may
Apply to Non-stock Corporations
Petitioner I/AME argues that the doctrine of piercing the corporate
veil applies only to stock corporations, and not to non-stock,
nonprofit corporations such as I/AME since there are no
stockholders to hold liable in such a situation but instead only
members. Hence, they do not have investments or shares of stock
or assets to answer for possible liabilities.
Thus, no one in a non-stock corporation can be held liable in case
the corporate veil is disregarded or pierced.31
The CA disagreed. It ruled that since the law does not make a
distinction between a stock and non-stock corporation, neither
should there be a distinction in case the doctrine of piercing the veil
of corporate fiction has to be applied. While I/AME is an educational
institution, the CA further ruled, it still is a registered corporation
conducting its affairs as such.32
This Court agrees with the CA.
In determining the propriety of applicability of piercing the veil of
corporate fiction, this Court, in a number of cases, did not put in
issue whether a corporation is a stock or non-stock corporation. In
Sula ng Bayan, Inc. v. Gregorio Araneta, Inc. ,33 we considered but
ultimately refused to pierce the corporate veil of a non-stock non-
profit corporation which sought to institute an action for
reconveyance of real property on behalf of its members. This Court
held that the non-stock corporation had no personality to institute a
class suit on behalf of its members, considering that the non-stock
corporation was not an assignee or transferee of the real property in
question, and did not have an identity that was one and the same as
its members.
In another case, this Court did not put in issue whether the
corporation is a non-stock, non-profit, non-governmental corporation
in considering the application of the doctrine of piercing of corporate
veil. In Republic of the Philippines v. Institute for Social Concern, 34
while we did not allow the piercing of the corporate veil, this Court
affirmed the finding of the CA that the Chairman of the Institute for
Social Concern cannot be held jointly and severally liable with the
aforesaid non-governmental organization (NGO) at the time the
Memorandum of Agreement was entered into with the Philippine
Government. We found no fraud in that case committed by the
Chairman that would have justified the piercing of the corporate veil
of the NG0.35
In the United States, from which we have adopted our law on
corporations, non-profit corporations are not immune from the
doctrine of piercing the corporate veil.1âwphi1 Their courts view
piercing of the corporation asan equitable remedy, which justifies
said courts to scrutm1ze any organization however organized and in
whatever manner it operates. Moreover, control of ownership does
not hinge on stock ownership.
As held in Barineau v. Barineau:36
[t]he mere fact that the corporation involved is a nonprofit
corporation does not by itself preclude a court from applying
the equitable remedy of piercing the corporate veil. The
equitable character of the remedy permits a court to look to the
substance of the organization, and its decision is not controlled
by the statutory framework under which the corporation was
formed and operated. While it may appear to be impossible for
a person to exercise ownership control over a non-stock, not-
for-profit corporation, a person can be held personally liable
under the alter ego theory if the evidence shows that the
person controlling the corporation did in fact exercise control,
even though there was no stock ownership.
In another U.S. case, Public Interest Bounty Hunters v. Board of
Governors of Federal Reserve System,37 the U.S. Court allowed the
piercing of the corporate veil of the Foundation headed by the
plaintiff, in order to avoid inequitable results. Plaintiff was found to
be the sole trustee, the sole member of the board, and the sole
financial contributor to the Foundation. In the end, the Court found
that the plaintiff used the Foundation to avoid paying attorneys’ fees.
The concept of equitable ownership, for stock or non-stock
corporations, in piercing of the corporate veil scenarios, may also be
considered. An equitable owner is an individual who is a non-
shareholder defendant, who exercises sufficient control or
considerable authority over the corporation to the point of completely
disregarding the corporate form and acting as though its assets are
his or her alone to manage and distribute.38
Given the foregoing, this Court sees no reason why a non-stock
corporation such as I/AME, may not be scrutinized for purposes of
piercing the corporate veil or fiction.
Piercing the Corporate Veil may
Apply to Natural Persons
The petitioner also insists that the piercing of the corporate veil
cannot be applied to a natural person - in this case, Santos - simply
because as a human being, he has no corporate veil shrouding or
covering his person.39
a) When the Corporation is the Alter Ego of a Natural Person
As cited in Sula ng Bayan, Inc. v. Araneta, Inc. ,40 "[t]he doctrine of
alter ego is based upon the misuse of a corporation by an
individual for wrongful or inequitable purposes, and in such case
the court merely disregards the corporate entity and holds the
individual responsible for acts knowingly and intentionally done in
the name of the corporation." This, Santos has done in this case.
Santos formed I/AME, using the non-stock corporation, to evade
paying his judgment creditor, Litton.
The piercing of the corporate veil may apply to corporations as well
as natural persons involved with corporations. This Court has held
that the "corporate mask may be lifted and the corporate veil may be
pierced when a corporation is just but the alter ego of a person or of
another corporation."41
We have considered a deceased natural person as one and the
same with his corporaticc to protect the succession rights of his legal
heirs to his estate. In Cease v. Court of Appeals, 42 the predecessor-
in-interest organized a close corporation which acquired properties
during its existence. When he died intestate, trouble ensued
amongst his children on whether or not to consider his company one
and the same with his person. The Court agreed with the trial court
when it pierced the corporate veil of the decedent's corporation. It
found that said corporation was his business conduit and alter ego.
Thus, the acquired properties were actually properties of the
decedent and as such, should be divided among the decedent's
legitimate children in the partition of his estate.43
In another instance, this Court allowed the piercing of the corporate
veil against another natural person, in Arcilla v. Court of Appeals. 44
The case stemmed from a complaint for sum of money against
Arcilla for his failure to pay his loan from the private respondent.
Arcilla, in his defense, alleged that the loan was in the name of his
family corporation, CSAR Marine Resources, Inc. He further argued
that the CA erred in holding CSAR Marine Resources liable to the
private respondent since the latter was not impleaded as a party in
the case. This Court allowed the piercing of the corporate veil and
held that Arcilla used "his capacity as President, x x x [as] a
sanctuary for a defense x x x to avoid complying with the liability
adjudged against him x x x. "45 We held that his liability remained
attached even if he was impleaded as a party, and not the
corporation, to thecollection case and even if he ceased to be
corporate president.46 Indeed, even if Arcilla had ceased to be
corporate president, he remained personally liable for the judgment
debt to pay his personal loan, for we treated him and the corporation
as one and the same. CSAR Marine was deemed his alter ego.
We find similarities with Arcilla and the instant case. Like Arcilla,
Santos: (1) was adjudged liable to pay on a judgment against him;
(2) he became President of a corporation; (3) he formed a
corporation to conceal assets which were supposed to pay for the
judgment against his favor; (4) the corporation which has Santos as
its President, is being asked by the court to pay on the judgment;
and (5) he may not use as a defense that he is no longer President
of I/AME (although a visit to the website of the school shows he is
the current President).47
This Court agrees with the CA that I/AME is the alter ego of Santos
and Santos - the natural person - is the alter ego of I/AME. Santos
falsely represented himself as President of I/AME in the Deed of
Absolute Sale when he bought the Makati real property, at a time
when I/ AME had not yet existed. Uncontroverted facts in this case
also reveal the findings of Me TC showing Santos and I/ AME as
being one and the same person:
(1) Santos is the conceptualizer and implementor of I/AME;
(2) Santos’ contribution is ₱1,200,000.00 (One Million Two
Hundred Thousand Pesos) out of the ₱1,500,000.00 (One
Million Five Hundred Thousand Pesos), making him the
majority contributor of I/AME; and,
(3) The building being occupied by I/AME is named after
Santos using his known nickname (to date it is called, the "Noli
Santos Inte1national Tower").48
This Court deems I/AME and Santos as alter egos of each other
based on the former’s own admission in its pleadings before the trial
court. In its Answer (to Amended Petition) with the RTC entitled
Litton and Company, Inc. v. Hon. Hernandez-Calledo, Civil Case No.
06-115547, I/AME admitted the allegations found in paragraphs 2, 4
and 5 of the amended petition of Litton, particularly paragraph
number 4 which states:
4. Respondent, International Academy of Management and
Economics Inc. (hereinafter referred to as Respondent I/
AME), is a corporation organized and existing under Philippine
laws with address at 1061 Metropolitan Avenue, San Antonie
Village, Makati City, where it may be served with summons
and other judicial processes. It is the corporate entity used
by Respondent Santos as his alter ego for the purpose of
shielding his assets from the reach of his creditors, one of
which is herein Petitioner.49 (Emphases ours)
Hence, I/AME is the alter ego of the natural person, Santos, which
the latter used to evade the execution on the Makati property, thus
frustrating the satisfaction of the judgment won by Litton.
b) Reverse Piercing of the Corporate Veil
This Court in Arcilla pierced the corporate veil of CSAR Marine
Resources to satisfy a money judgment against its erstwhile
President, Arcilla.
We borrow from American parlance what is called reverse piercing
or reverse corporate piercing or piercing the corporate veil "in
reverse."
As held in the U.S. Case, C.F. Trust, Inc., v. First Flight Limited
Partnership, 50 "in a traditional veil-piercing action, a court disregards
the existence of the corporate entity so a claimant can reach the Under the current Rules of Court on Civil Procedure, when it comes
assets of a corporate insider. In a reverse piercing action, however, to satisfaction by levy, a judgment obligor is given the option to
the plaintiff seeks to reach the assets of a corporation to satisfy immediately choose which property or part thereof may be levied
claims against a corporate insider." upon to satisfy the judgment. If the judgmentobligor does not
exercise the option, personal properties, if any, shall be first levied
"Reverse-piercing flows in the opposite direction (of traditional
and then on real properties if the personal properties are deemed
corporate veil-piercing) and makes the corporation liable for the debt
insufficient to answer for the judgment.58
of the shareholders."51
In the instant case, it may be possible for this Court to recommend
It has two (2) types: outsider reverse piercing and insider reverse
that Litton run after the other properties of Santos that could satisfy
piercing. Outsider reverse piercing occurs when a party with a claim
the money judgment - first personal, then other real properties other
against an individual or corporation attempts to be repaid with
than that of the school. However, if we allow this, we frustrate the
assets of a corporation owned or substantially controlled by the
decades-old yet valid MeTC judgment which levied on the real
defendant.52 In contrast, in insider reverse piercing, the controlling
property now titled under the name of the school. Moreover, this
members will attempt to ignore the corporate fiction in order to take
Court will unwittingly condone the action of Santos in hiding all these
advantage of a benefit available to the corporation, such as an
years behind the corporate form to evade paying his obligation
interest in a lawsuit or protection of personal assets.53
under the judgment in the court a quo. This we cannot countenance
Outsider reverse veil-piercing is applicable in the instant case. without being a party to the injustice.
Litton, as judgment creditor, seeks the Court's intervention to pierce
Thus, the reverse piercing of the corporate veil of I/AME to enforce
the corporate veil of I/AME in order to make its Makati real property
the levy on execution of the Makati real property where the school
answer for a judgment against Santos, who formerly owned and still
now stands is applied.
substantially controls I/AME.
WHEREFORE, in view of the foregoing, the instant petition is
In the U.S. case Acree v. McMahan, 54 the American court held that
DENIED. The CA Decision in CA-G.R. SP No. 107727 dated 30
"[ o ]utsider reverse veil-piercing extends the traditional veil-piercing
October 2009 and its Resolution on 12 March 2010 are hereby
doctrine to permit a third-party creditor to pierce the veil to satisfy
AFFIRMED. The MeTC Order dated 29 October 2004 is hereby
the debts of an individual out of the corporation's assets."
REINSTATED.
The Court has pierced the corporate veil in a reverse manner in the
Accordingly, the MeTC of Manila, Branch 2, is hereby DIRECTED to
instances when the scheme was to avoid corporate assets to be
execute with dispatch the MeTC Order dated 29 October 2004
included in the estate of a decedent as in the Cease case and when
against Santos.
the corporation was used to escape a judgment to pay a debt as in
the Arcilla case. SO ORDERED.

In a 1962 Philippine case, this Court also employed what we now

call reverse-piercing of the corporate veil. In Palacio v. Fely
Transportation Co., 55 we found that the president and general
manager of the private respondent company formed the corporation
to evade his subsidiary civil liability resulting from the conviction of
his driver who ran over the child of the petitioner, causing injuries
and medical expenses. The Court agreed with the plaintiffs that the
president and general manager, and Fely Transportation, may be
regarded as one and the same person. Thus, even if the president
and general manager was not a party to the case, we reversed the
lower court and declared both him and the private respondent
company, jointly and severally liable to the plaintiffs. Thus, this Court
allowed the outsider-plaintiffs to pierce the corporate veil of Fely
Transportation to run after its corporate assets and pay the
subsidiary civil liability of the company's president and general
manager.
This notwithstanding, the equitable remedy of reverse corporate
piercing or reverse piercing was not meant to encourage a creditor’s
failure to undertake such remedies that could have otherwise been
available, to the detriment of other creditors.56
Reverse corporate piercing is an equitable remedy which if utilized
cavalierly, may lead to disastrous consequences for both stock and
non-stock corporations. We are aware that ordinary judgment
collection procedures or other legal remedies are preferred over that
which would risk damage to third parties (for instance, innocent
stockholders or voluntary creditors) with unprotected interests in the
assets of the beleaguered corporation.57
Thus, this Court would recommend the application of the current
1997 Rules on Civil Procedure on Enforcement of Judgments.
G.R. No. L-41337 June 30, 1988
TAN BOON BEE & CO., INC., petitioner,
vs.
THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE
OF BRANCH XVIII of the Court of First Instance of Manila,
GRAPHIC PUBLISHING, INC., and PHILIPPINE AMERICAN CAN
DRUG COMPANY, respondents.
De Santos, Balgos & Perez Law Office for petitioner.
Araneta Mendoza & Papa Law Office for respondent Phil. American
Drug Company.
PARAS, J.:
This is a petition for certiorari, with prayer for preliminary injunction,
to annul and set aside the March 26, 1975 Order of the then Court of
First Instance of Manila, Branch XXIII, setting aside the sale of
"Heidelberg" cylinder press executed by the sheriff in favor of the
herein petitioner, as well as the levy on the said property, and
ordering the sheriff to return the said machinery to its owner, herein
private respondent Philippine American Drug Company.
Petitioner herein, doing business under the name and style of
Anchor Supply Co., sold on credit to herein private respondent
Graphic Publishing, Inc. (GRAPHIC for short) paper products
amounting to P55,214.73. On December 20, 1972, GRAPHIC made
partial payment by check to petitioner in the total amount of
P24,848.74; and on December 21, 1972, a promissory note was
executed to cover the balance of P30,365.99. In the said promissory
note, it was stipulated that the amount will be paid on monthly
installments and that failure to pay any installment would make the
amount immediately demandable with an interest of 12% per
annum. On September 6, 1973, for failure of GRAPHIC to pay any
installment, petitioner filed with the then Court of First Instance of
Manila, Branch XXIII, presided over by herein respondent judge,
Civil Case No. 91857 for a Sum of Money (Rollo, pp. 36-38).
Respondent judge declared GRAPHIC in default for failure to file its
answer within the reglementary period and plaintiff (petitioner
herein) was allowed to present its evidence ex parte. In a Decision
dated January 18, 1974 (Ibid., pp. 39-40), the trial court ordered
GRAPHIC to pay the petitioner the sum of P30,365.99 with 12%
interest from March 30, 1973 until fully paid, plus the costs of suit.
On motion of petitioner, a writ of execution was issued by
respondent judge; but the aforestated writ having expired without the
sheriff finding any property of GRAPHIC, an alias writ of execution
was issued on July 2, 1974.
Pursuant to the said issued alias writ of execution, the executing
sheriff levied upon one (1) unit printing machine Identified as
"Original Heidelberg Cylinder Press" Type H 222, NR 78048, found
in the premises of GRAPHIC. In a Notice of Sale of Execution of
Personal Property dated July 29, 1974, said printing machine was
scheduled for auction sale on July 26, 1974 at 10:00 o'clock at 14th
St., Cor. Atlanta St., Port Area, Manila (lbid., p. 45); but in a letter
dated July 19, 1974, herein private respondent, Philippine American
Drug Company (PADCO for short) had informed the sheriff that the
printing machine is its property and not that of GRAPHIC, and
accordingly, advised the sheriff to cease and desist from carrying
out the scheduled auction sale on July 26, 1974. Notwithstanding
the said letter, the sheriff proceeded with the scheduled auction
sale, sold the property to the petitioner, it being the highest bidder,
and issued a Certificate of Sale in favor of petitioner (Rollo, p. 48).
More than five (5) hours after the auction sale and the issuance of
the certificate of sale, PADCO filed an "Affidavit of Third Party
Claim" with the Office of the City Sheriff (Ibid., p. 47). Thereafter, on
July 30,1974, PADCO filed with the Court of First Instance of Manila,
Branch XXIII, a Motion to Nullify Sale on Execution (With Injunction)
(Ibid., pp, 49-55), which was opposed by the petitioner (Ibid., pp.
5668). Respondent judge, in an Order dated March 26, 1975 (Ibid.,
pp. 64-69), ruled in favor of PADCO. The decretal portion of the said
order, reads:
WHEREFORE, the sale of the 'Heidelberg cylinder press
executed by the Sheriff in favor of the plaintiff as well as the
levy on the said property is hereby set aside and declared to
be without any force and effect. The Sheriff is ordered to return
the said machinery to its owner, the Philippine American Drug
Co.
Petitioner filed a Motion For Reconsideration (Ibid., pp. 7093) and an
Addendum to Motion for Reconsideration (Ibid., pp. 94-08), but in an
Order dated August 13, 1975, the same was denied for lack of merit
(Ibid., p. 109). Hence, the instant petition.
In a Resolution dated September 12, 1975, the Second Division of
this Court resolved to require the respondents to comment, and to
issue a temporary restraining order (Rollo, p. 111 ). After submission
of the parties' Memoranda, the case was submitted for decision in
the Resolution of November 28, 1975 (Ibid., p. 275).
Petitioner, to support its stand, raised two (2) issues, to wit:
I
THE RESPONDENT JUDGE GRAVELY EXCEEDED, IF NOT
ACTED WITHOUT JURISDICTION WHEN HE ACTED UPON THE
MOTION OF PADCO, NOT ONLY BECAUSE SECTION 17, RULE
39 OF THE RULES OF COURT WAS NOT COMPLIED WITH, BUT
ALSO BECAUSE THE CLAIMS OF PADCO WHICH WAS NOT A
PARTY TO THE CASE COULD NOT BE VENTILATED IN THE
CASE BEFORE HIM BUT IN INDEPENDENT PROCEEDING.
II
THE RESPONDENT JUDGE GRAVELY ABUSED HIS
DISCRETION WHEN HE REFUSED TO PIERCE THE PADCO'S
(IDENTITY) AND DESPITE THE ABUNDANCE OF EVIDENCE
CLEARLY SHOWING THAT PADCO WAS CONVENIENTLY
SHIELDING UNDER THE THEORY OF CORPORATE PETITION.
Petitioner contends that respondent judge gravely exceeded, if not,
acted without jurisdiction, in nullifying the sheriffs sale not only
because Section 17, Rule 39 of the Rules of Court was not complied
with, but more importantly because PADCO could not have litigated
its claim in the same case, but in an independent civil proceeding.
This contention is well-taken.
In the case of Bayer Philippines, Inc. vs. Agana (63 SCRA 355, 366-
367 [1975]), this Court categorically ruled as follows:
In other words, constitution, Section 17 of Rule 39 of the
Revised Rules of Court, the rights of third-party claimants over
certain properties levied upon by the sheriff to satisfy the
judgment should not be decided inthe action where the third-
party claims have been presented, but in the separate action
instituted by the claimants.
... Otherwise stated, the court issuing a writ of execution is
supposed to enforce the authority only over properties of the
judgment debtor, and should a third party appeal- to claim the
property levied upon by the sheriff, the procedure laid down by
 the Rules is that such claim should be the subject of a directors and the officers of GRAPHIC and PADCO were the same;
separate and independent action. and that PADCO holds 50% share of stock of GRAPHIC. Petitioner
likewise stressed that PADCO's own evidence shows that the
xxx xxx xxx
printing machine in question had been in the premises of GRAPHIC
... This rule is dictated by reasons of convenience, as since May, 1965, long before PADCO even acquired its alleged title
"intervention is more likely to inject confusion into the issues on July 11, 1966 from Capitol Publishing. That the said machine was
between the parties in the case . . . with which the third-party allegedly leased by PADCO to GRAPHIC on January 24, 1966,
claimant has nothing to do and thereby retard instead of even before PADCO purchased it from Capital Publishing on July
facilitate the prompt dispatch of the controversy which is the 11, 1966, only serves to show that PADCO's claim of ownership
underlying objective of the rules of pleading and practice." over the printing machine is not only farce and sham but also
Besides, intervention may not be permitted after trial has been unbelievable.
concluded and a final judgment rendered in the case.
Considering the aforestated principles and the circumstances
However, the fact that petitioner questioned the jurisdiction of established in this case, respondent judge should have pierced
the court during the initial hearing of the case but nevertheless PADCO's veil of corporate Identity.
actively participated in the trial, bars it from questioning now
Respondent PADCO argues that if respondent judge erred in not
the court's jurisdiction. A party who voluntarily participated in
piercing the veil of its corporate fiction, the error is merely an error of
the trial, like the herein petitioner, cannot later on raise the
judgment and not an error of jurisdiction correctable by appeal and
issue of the court's lack of jurisdiction (Philippine National Bank
not by certiorari.
vs. Intermediate Appellate Court, 143 SCRA [1986]).
To this argument of respondent, suffice it to say that the same is a
As to the second issue (the non-piercing of PADCO's corporate
mere technicality. In the case of Rubio vs. Mariano (52 SCRA 338,
Identity) the decision of respondent judge is as follows:
343 [1973]), this Court ruled:
The plaintiff, however, contends that the controlling
While We recognize the fact that these movants — the MBTC,
stockholders of the Philippine American Drug Co. are also the
the Phillips spouses, the Phillips corporation and the Hacienda
same controlling stockholders of the Graphic Publishing, Inc.
Benito, Inc.— did raise in their respective answers the issue as
and, therefore, the levy upon the said machinery which was
to the propriety of the instant petition for certiorari on the
found in the premises occupied by the Graphic Publishing, Inc.
ground that the remedy should have been appeal within the
should be upheld. This contention cannot be sustained
reglementary period, We considered such issue as a mere
because the two corporations were duly incorporated under the
technicality which would have accomplished nothing
Corporation Law and each of them has a juridical personality
substantial except to deny to the petitioner the right to litigate
distinct and separate from the other and the properties of one
the matters he raised ...
cannot be levied upon to satisfy the obligation of the other.
This legal preposition is elementary and fundamental. Litigations should, as much as possible, be decided on their merits
and not on technicality (De las Alas vs. Court of Appeals, 83 SCRA
It is true that a corporation, upon coming into being, is invested by
200, 216 [1978]). Every party-litigant must be afforded the amplest
law with a personality separate and distinct from that of the persons
opportunity for the proper and just determination of his cause, free
composing it as well as from any other legal entity to which it may be
from the unacceptable plea of technicalities (Heirs of Ceferino
related (Yutivo & Sons Hardware Company vs. Court of Tax
Morales vs. Court of Appeals, 67 SCRA 304, 310 [1975]).
Appeals, 1 SCRA 160 [1961]; and Emilio Cano Enterprises, Inc. vs.
CIR, 13 SCRA 290 [1965]). As a matter of fact, the doctrine that a PREMISES CONSIDERED, the March 26,1975 Order of the then
corporation is a legal entity distinct and separate from the members Court of First Instance of Manila, is ANNULLED and SET ASIDE,
and stockholders who compose it is recognized and respected in all and the Temporary Restraining Order issued is hereby made
cases which are within reason and the law (Villa Rey Transit, Inc. vs. permanent.
Ferrer, 25 SCRA 845 [1968]). However, this separate and distinct
SO ORDERED.
personality is merely a fiction created by law for convenience and to
promote justice (Laguna Transportation Company vs. SSS, 107 Phil.
833 [1960]). Accordingly, this separate personality of the corporation
may be disregarded, or the veil of corporate fiction pierced, in cases
where it is used as a cloak or cover for fraud or illegality, or to work
an injustice, or where necessary to achieve equity or when
necessary for the protection of creditors (Sulo ng Bayan, Inc. vs.
Araneta, Inc., 72 SCRA 347 [1976]). Corporations are composed of
natural persons and the legal fiction of a separate corporate
personality is not a shield for the commission of injustice and
inequity (Chenplex Philippines, Inc., et al. vs. Hon. Pamatian et al.,
57 SCRA 408 (19741). Likewise, this is true when the corporation is
merely an adjunct, business conduit or alter ego of another
corporation. In such case, the fiction of separate and distinct
corporation entities should be disregarded (Commissioner of Internal
Revenue vs. Norton & Harrison, 11 SCRA 714 [1964]).
In the instant case, petitioner's evidence established that PADCO
was never engaged in the printing business; that the board of
G.R. No. 182729 September 29, 2010
KUKAN INTERNATIONAL CORPORATION, Petitioner,
vs.
HON. AMOR REYES, in her capacity as Presiding Judge of the
Regional Trial Court of Manila, Branch 21, and ROMEO M.
MORALES, doing business under the name and style "RM
Morales Trophies and Plaques," Respondents.
DECISION
VELASCO, JR., J.:
The Case
This Petition for Review on Certiorari under Rule 45 seeks to nullify
and reverse the January 23, 2008 Decision 1 and the April 16, 2008
Resolution2 rendered by the Court of Appeals (CA) in CA-G.R. SP
No. 100152.
The assailed CA decision affirmed the March 12, 20073 and June 7,
20074 Orders of the Regional Trial Court (RTC) of Manila, Branch
21, in Civil Case No. 99-93173, entitled Romeo M. Morales, doing
business under the name and style RM Morales Trophies and
Plaques v. Kukan, Inc. In the said orders, the RTC disregarded the
separate corporate identities of Kukan, Inc. and Kukan International
Corporation and declared them to be one and the same entity.
Accordingly, the RTC held Kukan International Corporation, albeit
not impleaded in the underlying complaint of Romeo M. Morales,
liable for the judgment award decreed in a Decision dated
November 28, 20025 in favor of Morales and against Kukan, Inc.
The Facts
Sometime in March 1998, Kukan, Inc. conducted a bidding for the
supply and installation of signages in a building being constructed in
Makati City. Morales tendered the winning bid and was awarded the
PhP 5 million contract. Some of the items in the project award were
later excluded resulting in the corresponding reduction of the
contract price to PhP 3,388,502. Despite his compliance with his
contractual undertakings, Morales was only paid the amount of PhP
1,976,371.07, leaving a balance of PhP 1,412,130.93, which Kukan,
Inc. refused to pay despite demands. Shortchanged, Morales filed a
Complaint6 with the RTC against Kukan, Inc. for a sum of money,
the case docketed as Civil Case No. 99-93173 and eventually raffled
to Branch 17 of the court.
Following the joinder of issues after Kukan, Inc. filed an answer with
counterclaim, trial ensued. However, starting November 2000,
Kukan, Inc. no longer appeared and participated in the proceedings
before the trial court, prompting the RTC to declare Kukan, Inc. in
default and paving the way for Morales to present his evidence ex
parte.
On November 28, 2002, the RTC rendered a Decision finding for
Morales and against Kukan, Inc., disposing as follows:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997
Rules of Civil Procedure, and by preponderance of evidence,
judgment is hereby rendered in favor of the plaintiff, ordering
Kukan, Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE
THOUSAND SEVEN HUNDRED TWENTY FOUR PESOS
(P1,201,724.00) with legal interest at 12% per annum from
February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00)
as moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS,
(P20,000.00) as reasonable attorney’s fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED
SIXTY PESOS and SIX CENTAVOS (P7,960.06) as litigation
expenses.
For lack of factual foundation, the counterclaim is DISMISSED.
IT IS SO ORDERED.7
After the above decision became final and executory, Morales
moved for and secured a writ of execution 8 against Kukan, Inc. The
sheriff then levied upon various personal properties found at what
was supposed to be Kukan, Inc.’s office at Unit 2205, 88 Corporate
Center, Salcedo Village, Makati City. Alleging that it owned the
properties thus levied and that it was a different corporation from
Kukan, Inc., Kukan International Corporation (KIC) filed an Affidavit
of Third-Party Claim. Notably, KIC was incorporated in August 2000,
or shortly after Kukan, Inc. had stopped participating in Civil Case
No. 99-93173.
In reaction to the third party claim, Morales interposed an Omnibus
Motion dated April 30, 2003. In it, Morales prayed, applying the
principle of piercing the veil of corporate fiction, that an order be
issued for the satisfaction of the judgment debt of Kukan, Inc. with
the properties under the name or in the possession of KIC, it being
alleged that both corporations are but one and the same entity. KIC
opposed Morales’ motion. By Order of May 29, 2003 9 as reiterated
in a subsequent order, the court denied the omnibus motion.
In a bid to establish the link between KIC and Kukan, Inc., and thus
determine the true relationship between the two, Morales filed a
Motion for Examination of Judgment Debtors dated May 4, 2005. In
this motion Morales sought that subponae be issued against the
primary stockholders of Kukan, Inc., among them Michael Chan,
a.k.a. Chan Kai Kit. This too was denied by the trial court in an
Order dated May 24, 2005.10
Morales then sought the inhibition of the presiding judge, Eduardo B.
Peralta, Jr., who eventually granted the motion. The case was re-
raffled to Branch 21, presided by public respondent Judge Amor
Reyes.
Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce
the Veil of Corporate Fiction to declare KIC as having no existence
separate from Kukan, Inc. This time around, the RTC, by Order
dated March 12, 2007, granted the motion, the dispositive portion of
which reads:
WHEREFORE, premises considered, the motion is hereby
GRANTED. The Court hereby declares as follows:
1. defendant Kukan, Inc. and newly created Kukan
International Corp. as one and the same corporation;
2. the levy made on the properties of Kukan International Corp.
is hereby valid;
3. Kukan International Corp. and Michael Chan are jointly and
severally liable to pay the amount awarded to plaintiff pursuant
to the decision of November [28], 2002 which has long been
final and executory.
SO ORDERED.
From the above order, KIC moved but was denied reconsideration in
another Order dated June 7, 2007.
KIC went to the CA on a petition for certiorari to nullify the aforesaid
March 12 and June 7, 2007 RTC Orders.
On January 23, 2008, the CA rendered the assailed decision, the
dispositive portion of which states:
WHEREFORE, premises considered, the petition is hereby DENIED
and the assailed Orders dated March 12, 2007 and June 7, 2007 of
the court a quo are both AFFIRMED. No costs.
SO ORDERED.11
The CA later denied KIC’s motion for reconsideration in the assailed
resolution.
Hence, the instant petition for review, with the following issues KIC
raises for the Court’s consideration:
1. There is no legal basis for the [CA] to resolve and declare
that petitioner’s Constitutional Right to Due Process was not
violated by the public respondent in rendering the Orders dated
March 12, 2007 and June 7, 2007 and in declaring petitioner to
be liable for the judgment obligations of the corporation
"Kukan, Inc." to private respondent – as petitioner is a stranger
to the case and was never made a party in the case before the
trial court nor was it ever served a summons and a copy of the
complaint.
2. There is no legal basis for the [CA] to resolve and declare
that the Orders dated March 12, 2007 and June 7, 2007
rendered by public respondent declaring the petitioner liable to
the judgment obligations of the corporation "Kukan, Inc." to
private respondent are valid as said orders of the public
respondent modify and/or amend the trial court’s final and
executory decision rendered on November 28, 2002.
3. There is no legal basis for the [CA] to resolve and declare
that the Orders dated March 12, 2007 and June 7, 2007
rendered by public respondent declaring the petitioner [KIC]
and the corporation "Kukan, Inc." as one and the same, and,
therefore, the Veil of Corporate Fiction between them be
pierced – as the procedure undertaken by public respondent
which the [CA] upheld is not sanctioned by the Rules of Court
and/or established jurisprudence enunciated by this Honorable
Supreme Court.12
In gist, the issues to be resolved boil down to the question of, first,
whether the trial court can, after the judgment against Kukan, Inc.
has attained finality, execute it against the property of KIC; second,
whether the trial court acquired jurisdiction over KIC; and third,
whether the trial and appellate courts correctly applied, under the
premises, the principle of piercing the veil of corporate fiction.
The Ruling of the Court
The petition is meritorious.
First Issue: Against Whom Can a Final and
Executory Judgment Be Executed
The preliminary question that must be answered is whether or not
the trial court can, after adjudging Kukan, Inc. liable for a sum of
money in a final and executory judgment, execute such judgment
debt against the property of KIC.
The poser must be answered in the negative.
In Carpio v. Doroja,13 the Court ruled that the deciding court has
supervisory control over the execution of its judgment:
A case in which an execution has been issued is regarded as still
pending so that all proceedings on the execution are proceedings in
the suit. There is no question that the court which rendered the
judgment has a general supervisory control over its process of
execution, and this power carries with it the right to determine every
question of fact and law which may be involved in the execution.
We reiterated the above holding in Javier v. Court of Appeals 14 in
this wise: "The said branch has a general supervisory control over
its processes in the execution of its judgment with a right to
determine every question of fact and law which may be involved in
the execution."
The court’s supervisory control does not, however, extend as to
authorize the alteration or amendment of a final and executory
decision, save for certain recognized exceptions, among which is
the correction of clerical errors. Else, the court violates the principle
of finality of judgment and its immutability, concepts which the Court,
in Tan v. Timbal,15 defined:
As we held in Industrial Management International Development
Corporation vs. NLRC:
It is an elementary principle of procedure that the resolution of the
court in a given issue as embodied in the dispositive part of a
decision or order is the controlling factor as to settlement of rights of
the parties. Once a decision or order becomes final and executory, it
is removed from the power or jurisdiction of the court which
rendered it to further alter or amend it. It thereby becomes
immutable and unalterable and any amendment or alteration which
substantially affects a final and executory judgment is null and void
for lack of jurisdiction, including the entire proceedings held for that
purpose. An order of execution which varies the tenor of the
judgment or exceeds the terms thereof is a nullity. (Emphasis
supplied.)
Republic v. Tango16 expounded on the same principle and its
exceptions:
Deeply ingrained in our jurisprudence is the principle that a decision
that has acquired finality becomes immutable and unalterable.
As such, it may no longer be modified in any respect even if the
modification is meant to correct erroneous conclusions of fact or law
and whether it will be made by the court that rendered it or by the
highest court of the land. x x x
The doctrine of finality of judgment is grounded on the fundamental
principle of public policy and sound practice that, at the risk of
occasional error, the judgment of courts and the award of quasi-
judicial agencies must become final on some definite date fixed by
law. The only exceptions to the general rule are the correction of
clerical errors, the so-called nunc pro tunc entries which cause no
prejudice to any party, void judgments, and whenever circumstances
transpire after the finality of the decision which render its execution
unjust and inequitable. None of the exceptions obtains here to merit
the review sought. (Emphasis added.)
So, did the RTC, in breach of the doctrine of immutability and
inalterability of judgment, order the execution of its final decision in a
manner as would amount to its prohibited alteration or modification?
We repair to the dispositive portion of the final and executory RTC
decision. Pertinently, it provides:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules
of Civil Procedure, and by preponderance of evidence, judgment is
hereby rendered in favor of the plaintiff, ordering Kukan, Inc.:
 1. to pay the sum of ONE MILLION TWO HUNDRED ONE
THOUSAND SEVEN HUNDRED TWENTY FOUR PESOS
(P1,201,724.00) with legal interest at 12% per annum from
February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00)
as moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS
(P20,000.00) as reasonable attorney’s fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED
SIXTY PESOS and SIX CENTAVOS (P7,960.06) as litigation
expenses.
x x x x (Emphasis supplied.)
As may be noted, the above decision, in unequivocal terms, directed
Kukan, Inc. to pay the aforementioned awards to Morales. Thus,
making KIC, thru the medium of a writ of execution, answerable for
the above judgment liability is a clear case of altering a decision, an
instance of granting relief not contemplated in the decision sought to
be executed. And the change does not fall under any of the
recognized exceptions to the doctrine of finality and immutability of
judgment. It is a settled rule that a writ of execution must conform to
the fallo of the judgment; as an inevitable corollary, a writ beyond
the terms of the judgment is a nullity.17
Thus, on this ground alone, the instant petition can already be
granted. Nonetheless, an examination of the other issues raised by
KIC would be proper.
Second Issue: Propriety of the RTC
Assuming Jurisdiction over KIC
The next issue turns on the validity of the execution the trial court
authorized against KIC and its property, given that it was neither
made a party nor impleaded in Civil Case No. 99-93173, let alone
served with summons. In other words, did the trial court acquire
jurisdiction over KIC?
In the assailed decision, the appellate court deemed KIC to have
voluntarily submitted itself to the jurisdiction of the trial court owing
to its filing of four (4) pleadings adverted to earlier, namely: (a) the
Affidavit of Third-Party Claim;18 (b) the Comment and Opposition to
Plaintiff’s Omnibus Motion;19 (c) the Motion for Reconsideration of
the RTC Order dated March 12, 2007;20 and (d) the Motion for
Leave to Admit Reply.21 The CA, citing Section 20, Rule 14 of the
Rules of Court, stated that "the procedural rule on service of
summons can be waived by voluntary submission to the court’s
jurisdiction through any form of appearance by the party or its
counsel."22
We cannot give imprimatur to the appellate court’s appreciation of
the thrust of Sec. 20, Rule 14 of the Rules in concluding that the trial
court acquired jurisdiction over KIC.
Orion Security Corporation v. Kalfam Enterprises, Inc. 23 explains
how courts acquire jurisdiction over the parties in a civil case:
Courts acquire jurisdiction over the plaintiffs upon the filing of the
complaint. On the other hand, jurisdiction over the defendants in a
civil case is acquired either through the service of summons upon
them or through their voluntary appearance in court and their
submission to its authority. (Emphasis supplied.)
In the fairly recent Palma v. Galvez,24 the Court reiterated its holding
in Orion Security Corporation, stating: "[I]n civil cases, the trial court
acquires jurisdiction over the person of the defendant either by the
service of summons or by the latter’s voluntary appearance and
submission to the authority of the former."
The court’s jurisdiction over a party-defendant resulting from his
voluntary submission to its authority is provided under Sec. 20, Rule
14 of the Rules, which states:
Section 20. Voluntary appearance. – The defendant’s voluntary
appearance in the actions shall be equivalent to service of
summons. The inclusion in a motion to dismiss of other grounds
aside from lack of jurisdiction over the person of the defendant shall
not be deemed a voluntary appearance.
To be sure, the CA’s ruling that any form of appearance by the party
or its counsel is deemed as voluntary appearance finds support in
the kindred Republic v. Ker & Co., Ltd.25 and De Midgely v.
Ferandos.26
Republic and De Midgely, however, have already been modified if
not altogether superseded27 by La Naval Drug Corporation v. Court
of Appeals,28 wherein the Court essentially ruled and elucidated on
the current view in our jurisdiction, to wit: "[A] special appearance
before the court––challenging its jurisdiction over the person through
a motion to dismiss even if the movant invokes other grounds––is
not tantamount to estoppel or a waiver by the movant of his
objection to jurisdiction over his person; and such is not constitutive
of a voluntary submission to the jurisdiction of the court." 29
In the instant case, KIC was not made a party-defendant in Civil
Case No. 99-93173. Even if it is conceded that it raised affirmative
defenses through its aforementioned pleadings, KIC never
abandoned its challenge, however implicit, to the RTC’s jurisdiction
over its person. The challenge was subsumed in KIC’s primary
assertion that it was not the same entity as Kukan, Inc. Pertinently,
in its Comment and Opposition to Plaintiff’s Omnibus Motion dated
May 20, 2003, KIC entered its "special but not voluntary
appearance" alleging therein that it was a different entity and has a
separate legal personality from Kukan, Inc. And KIC would
consistently reiterate this assertion in all its pleadings, thus
effectively resisting all along the RTC’s jurisdiction of its person. It
cannot be overemphasized that KIC could not file before the RTC a
motion to dismiss and its attachments in Civil Case No. 99-93173,
precisely because KIC was neither impleaded nor served with
summons. Consequently, KIC could only assert and claim through
its affidavits, comments, and motions filed by special appearance
before the RTC that it is separate and distinct from Kukan, Inc.
Following La Naval Drug Corporation,30 KIC cannot be deemed to
have waived its objection to the court’s lack of jurisdiction over its
person. It would defy logic to say that KIC unequivocally submitted
itself to the jurisdiction of the RTC when it strongly asserted that it
and Kukan, Inc. are different entities. In the scheme of things
obtaining, KIC had no other option but to insist on its separate
identity and plead for relief consistent with that position.
Third Issue: Piercing the
Veil of Corporate Fiction
The third and main issue in this case is whether or not the trial and
appellate courts correctly applied the principle of piercing the veil of
corporate entity––called also as disregarding the fiction of a
separate juridical personality of a corporation––to support a
conclusion that Kukan, Inc. and KIC are but one and the same
corporation with respect to the contract award referred to at the
outset. This principle finds its context on the postulate that a
corporation is an artificial being invested with a personality separate
and distinct from those of the stockholders and from other
corporations to which it may be connected or related.31
In Pantranco Employees Association (PEA-PTGWO) v. National
Labor Relations Commission,32 the Court revisited the subject
principle of piercing the veil of corporate fiction and wrote:
Under the doctrine of "piercing the veil of corporate fiction," the court
looks at the corporation as a mere collection of individuals or an
aggregation of persons undertaking business as a group,
disregarding the separate juridical personality of the corporation
unifying the group. Another formulation of this doctrine is that when
two business enterprises are owned, conducted and controlled by
the same parties, both law and equity will, when necessary to
protect the rights of third parties, disregard the legal fiction that two
corporations are distinct entities and treat them as identical or as
one and the same.
Whether the separate personality of the corporation should be
pierced hinges on obtaining facts appropriately pleaded or
proved. However, any piercing of the corporate veil has to be done
with caution, albeit the Court will not hesitate to disregard the
corporate veil when it is misused or when necessary in the interest
of justice. x x x (Emphasis supplied.)
The same principle was the subject and discussed in Rivera v.
United Laboratories, Inc.:
While a corporation may exist for any lawful purpose, the law will
regard it as an association of persons or, in case of two
corporations, merge them into one, when its corporate legal entity is
used as a cloak for fraud or illegality. This is the doctrine of piercing
the veil of corporate fiction. The doctrine applies only when such
corporate fiction is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, or when it is made as a shield to
confuse the legitimate issues, or where a corporation is the mere
alter ego or business conduit of a person, or where the corporation
is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of
another corporation.
To disregard the separate juridical personality of a corporation, the
wrongdoing must be established clearly and convincingly. It cannot
be presumed.33 (Emphasis supplied.)
Now, as before the appellate court, petitioner KIC maintains that the
RTC violated its right to due process when, in the execution of its
November 28, 2002 Decision, the court authorized the issuance of
the writ against KIC for Kukan, Inc.’s judgment debt, albeit KIC has
never been a party to the underlying suit. As a counterpoint, Morales
argues that KIC’s specific concern on due process and on the
validity of the writ to execute the RTC’s November 28, 2002
Decision would be mooted if it were established that KIC and Kukan,
Inc. are indeed one and the same corporation.
Morales’ contention is untenable.
The principle of piercing the veil of corporate fiction, and the
resulting treatment of two related corporations as one and the same
juridical person with respect to a given transaction, is basically
applied only to determine established liability; 34 it is not available to
confer on the court a jurisdiction it has not acquired, in the first
place, over a party not impleaded in a case. Elsewise put, a
corporation not impleaded in a suit cannot be subject to the court’s
process of piercing the veil of its corporate fiction. In that situation,
the court has not acquired jurisdiction over the corporation and,
hence, any proceedings taken against that corporation and its
property would infringe on its right to due process. Aguedo
Agbayani, a recognized authority on Commercial Law, stated as
much:
23. Piercing the veil of corporate entity applies to determination of
liability not of jurisdiction. x x x
This is so because the doctrine of piercing the veil of corporate
fiction comes to play only during the trial of the case after the court
has already acquired jurisdiction over the corporation. Hence, before
this doctrine can be applied, based on the evidence presented, it is
imperative that the court must first have jurisdiction over the
corporation.35 x x x (Emphasis supplied.)
The implication of the above comment is twofold: (1) the court must
first acquire jurisdiction over the corporation or corporations involved
before its or their separate personalities are disregarded; and (2) the
doctrine of piercing the veil of corporate entity can only be raised
during a full-blown trial over a cause of action duly commenced
involving parties duly brought under the authority of the court by way
of service of summons or what passes as such service.
The issue of jurisdiction or the lack of it over KIC has already been
discussed. Anent the matter of the time and manner of raising the
principle in question, it is undisputed that no full-blown trial involving
KIC was had when the RTC disregarded the corporate veil of KIC.
The reason for this actuality is simple and undisputed: KIC was not
impleaded in Civil Case No. 99-93173 and that the RTC did not
acquire jurisdiction over it. It was dragged to the case after it reacted
to the improper execution of its properties and veritably hauled to
court, not thru the usual process of service of summons, but by
mere motion of a party with whom it has no privity of contract and
after the decision in the main case had already become final and
executory. As to the propriety of a plea for the application of the
principle by mere motion, the following excerpts are instructive:
Generally, a motion is appropriate only in the absence of remedies
by regular pleadings, and is not available to settle important
questions of law, or to dispose of the merits of the case. A motion is
usually a proceeding incidental to an action, but it may be a wholly
distinct or independent proceeding. A motion in this sense is not
within this discussion even though the relief demanded is
denominated an "order."
A motion generally relates to procedure and is often resorted to in
order to correct errors which have crept in along the line of the
principal action’s progress. Generally, where there is a procedural
defect in a proceeding and no method under statute or rule of court
by which it may be called to the attention of the court, a motion is an
appropriate remedy. In many jurisdictions, the motion has replaced
the common-law pleas testing the sufficiency of the pleadings, and
various common-law writs, such as writ of error coram nobis and
audita querela. In some cases, a motion may be one of several
remedies available. For example, in some jurisdictions, a motion to
vacate an order is a remedy alternative to an appeal therefrom.
Statutes governing motions are given a liberal construction. 36
(Emphasis supplied.)
The bottom line issue of whether Morales can proceed against KIC
for the judgment debt of Kukan, Inc.––assuming hypothetically that
he can, applying the piercing the corporate veil principle––resolves
itself into the question of whether a mere motion is the appropriate
vehicle for such purpose.
Verily, Morales espouses the application of the principle of piercing
the corporate veil to hold KIC liable on theory that Kukan, Inc. was
out to defraud him through the use of the separate and distinct
personality of another corporation, KIC. In net effect, Morales’
adverted motion to pierce the veil of corporate fiction dated January
3, 2007 stated a new cause of action, i.e., for the liability of judgment
debtor Kukan, Inc. to be borne by KIC on the alleged identity of the
two corporations. This new cause of action should be properly
ventilated in another complaint and subsequent trial where the
doctrine of piercing the corporate veil can, if appropriate, be applied,
based on the evidence adduced. Establishing the claim of Morales
and the corresponding liability of KIC for Kukan Inc.’s indebtedness
could hardly be the subject, under the premises, of a mere motion
interposed after the principal action against Kukan, Inc. alone had
peremptorily been terminated. After all, a complaint is one where the
plaintiff alleges causes of action.
In any event, the principle of piercing the veil of corporate fiction
finds no application to the instant case.
As a general rule, courts should be wary of lifting the corporate veil
between corporations, however related. Philippine National Bank v.
Andrada Electric Engineering Company37 explains why:
A corporation is an artificial being created by operation of law. x x x
It has a personality separate and distinct from the persons
composing it, as well as from any other legal entity to which it may
be related. This is basic.
Equally well-settled is the principle that the corporate mask may be
removed or the corporate veil pierced when the corporation is just
an alter ego of a person or of another corporation. For reasons of
public policy and in the interest of justice, the corporate veil will
justifiably be impaled only when it becomes a shield for fraud,
illegality or inequity committed against third persons.
Hence, any application of the doctrine of piercing the corporate veil
should be done with caution. A court should be mindful of the milieu
where it is to be applied. It must be certain that the corporate fiction
was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. The
wrongdoing must be clearly and convincingly established; it cannot
be presumed. Otherwise, an injustice that was never unintended
may result from an erroneous application.
This Court has pierced the corporate veil to ward off a judgment
credit, to avoid inclusion of corporate assets as part of the estate of
the decedent, to escape liability arising from a debt, or to perpetuate
fraud and/or confuse legitimate issues either to promote or to shield
unfair objectives or to cover up an otherwise blatant violation of the
prohibition against forum-shopping. Only in these and similar
instances may the veil be pierced and disregarded. (Emphasis
supplied.)
In fine, to justify the piercing of the veil of corporate fiction, it must be
shown by clear and convincing proof that the separate and distinct
personality of the corporation was purposefully employed to evade a
legitimate and binding commitment and perpetuate a fraud or like
wrongdoings. To be sure, the Court has, on numerous occasions, 38
applied the principle where a corporation is dissolved and its assets
are transferred to another to avoid a financial liability of the first
corporation with the result that the second corporation should be
considered a continuation and successor of the first entity.
In those instances when the Court pierced the veil of corporate
fiction of two corporations, there was a confluence of the following
factors:
1. A first corporation is dissolved;
2. The assets of the first corporation is transferred to a second
corporation to avoid a financial liability of the first corporation;
and
3. Both corporations are owned and controlled by the same
persons such that the second corporation should be
considered as a continuation and successor of the first
corporation.
In the instant case, however, the second and third factors are
conspicuously absent. There is, therefore, no compelling justification
for disregarding the fiction of corporate entity separating Kukan, Inc.
from KIC. In applying the principle, both the RTC and the CA
miserably failed to identify the presence of the abovementioned
factors. Consider:
The RTC disregarded the separate corporate personalities of Kukan,
Inc. and KIC based on the following premises and arguments:
While it is true that a corporation has a separate and distinct
personality from its stockholder, director and officers, the law
expressly provides for an exception. When Michael Chan, the
Managing Director of defendant Kukan, Inc. (majority stockholder of
the newly formed corporation [KIC]) confirmed the award to plaintiff
to supply and install interior signages in the Enterprise Center he
(Michael Chan, Managing Director of defendant Kukan, Inc.) knew
that there was no sufficient corporate funds to pay its
obligation/account, thus implying bad faith on his part and fraud in
contracting the obligation. Michael Chan neither returned the interior
signages nor tendered payment to the plaintiff. This circumstance
may warrant the piercing of the veil of corporation fiction. Having
been guilty of bad faith in the management of corporate matters the
corporate trustee, director or officer may be held personally liable. x
xx
Since fraud is a state of mind, it need not be proved by direct
evidence but may be inferred from the circumstances of the case. x
x x [A]nd the circumstances are: the signature of Michael Chan,
Managing Director of Kukan, Inc. appearing in the confirmation of
the award sent to the plaintiff; signature of Chan Kai Kit, a British
National appearing in the Articles of Incorporation and signature of
Michael Chan also a British National appearing in the Articles of
Incorporation [of] Kukan International Corp. give the impression that
they are one and the same person, that Michael Chan and Chan Kai
Kit are both majority stockholders of Kukan International Corp. and
Kukan, Inc. holding 40% of the stocks; that Kukan International
Corp. is practically doing the same kind of business as that of
Kukan, Inc.39 (Emphasis supplied.)
As is apparent from its disquisition, the RTC brushed aside the
separate corporate existence of Kukan, Inc. and KIC on the main
argument that Michael Chan owns 40% of the common shares of
both corporations, obviously oblivious that overlapping stock
ownership is a common business phenomenon. It must be
remembered, however, that KIC’s properties were the ones seized
upon levy on execution and not that of Kukan, Inc. or of Michael
Chan for that matter. Mere ownership by a single stockholder or by
another corporation of a substantial block of shares of a corporation
does not, standing alone, provide sufficient justification for
disregarding the separate corporate personality. 40 For this ground to
hold sway in this case, there must be proof that Chan had control or
complete dominion of Kukan and KIC’s finances, policies, and
business practices; he used such control to commit fraud; and the
control was the proximate cause of the financial loss complained of
by Morales. The absence of any of the elements prevents the
piercing of the corporate veil.41 And indeed, the records do not show
the presence of these elements.
On the other hand, the CA held:
In the present case, the facts disclose that Kukan, Inc. entered into a
contractual obligation x x x worth more than three million pesos
although it had only Php5,000.00 paid-up capital; [KIC] was
incorporated shortly before Kukan, Inc. suddenly ceased to appear
and participate in the trial; [KIC’s] purpose is related and somewhat
akin to that of Kukan, Inc.; and in [KIC] Michael Chan, a.k.a., Chan
Kai Kit, holds forty percent of the outstanding stocks, while he
formerly held the same amount of stocks in Kukan Inc. These would
lead to the inescapable conclusion that Kukan, Inc. committed
fraudulent representation by awarding to the private respondent the
contract with full knowledge that it was not in a position to comply
with the obligation it had assumed because of inadequate paid-up
capital. It bears stressing that shareholders should in good faith put
at the risk of the business, unencumbered capital reasonably
adequate for its prospective liabilities. The capital should not be
illusory or trifling compared with the business to be done and the risk
of loss.
Further, it is clear that [KIC] is a continuation and successor of
Kukan, Inc. Michael Chan, a.k.a. Chan Kai Kit has the largest block
of shares in both business enterprises. The emergence of the former
was cleverly timed with the hasty withdrawal of the latter during the
trial to avoid the financial liability that was eventually suffered by the
latter. The two companies have a related business purpose.
Considering these circumstances, the obvious conclusion is that the
creation of Kukan International Corporation served as a device to
evade the obligation incurred by Kukan, Inc. and yet profit from the
goodwill attained by the name "Kukan" by continuing to engage in
the same line of business with the same list of clients. 42 (Emphasis
supplied.)
Evidently, the CA found the meager paid-up capitalization of Kukan,
Inc. and the similarity of the business activities in which both
corporations are engaged as a jumping board to its conclusion that
the creation of KIC "served as a device to evade the obligation
incurred by Kukan, Inc." The appellate court, however, left a gaping
hole by failing to demonstrate that Kukan, Inc. and its stockholders
defrauded Morales. In fine, there is no showing that the
incorporation, and the separate and distinct personality, of KIC was
used to defeat Morales’ right to recover from Kukan, Inc. Judging
from the records, no serious attempt was made to levy on the
properties of Kukan, Inc. Morales could not, thus, validly argue that
Kukan, Inc. tried to avoid liability or had no property against which to
proceed.
Morales further contends that Kukan, Inc.’s closure is evidenced by
its failure to file its 2001 General Information Sheet (GIS) with the
Securities and Exchange Commission. However, such fact does not
necessarily mean that Kukan, Inc. had altogether ceased
operations, as Morales would have this Court believe, for it is stated
on the face of the GIS that it is only upon a failure to file the
corporate GIS for five (5) consecutive years that non-operation shall
be presumed.
The fact that Kukan, Inc. entered into a PhP 3.3 million contract
when it only had a paid-up capital of PhP 5,000 is not an indication
of the intent on the part of its management to defraud creditors.
Paid-up capital is merely seed money to start a corporation or a
business entity. As in this case, it merely represented the
capitalization upon incorporation in 1997 of Kukan, Inc. Paid-up
capitalization of PhP 5,000 is not and should not be taken as a
reflection of the firm’s capacity to meet its recurrent and long-term
obligations. It must be borne in mind that the equity portion cannot
be equated to the viability of a business concern, for the best test is
the working capital which consists of the liquid assets of a given
business relating to the nature of the business concern.lawphil
Neither should the level of paid-up capital of Kukan, Inc. upon its
incorporation be viewed as a badge of fraud, for it is in compliance
with Sec. 13 of the Corporation Code,43 which only requires a
minimum paid-up capital of PhP 5,000.1avvphi1
The suggestion that KIC is but a continuation and successor of
Kukan, Inc., owned and controlled as they are by the same
stockholders, stands without factual basis. It is true that Michael
Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding capital
stock of both corporations. But such circumstance, standing alone,
is insufficient to establish identity. There must be at least a
substantial identity of stockholders for both corporations in order to
consider this factor to be constitutive of corporate identity.
It would not avail Morales any to rely44 on General Credit
Corporation v. Alsons Development and Investment Corporation. 45
General Credit Corporation is factually not on all fours with the
instant case. There, the common stockholders of the corporations
represented 90% of the outstanding capital stock of the companies,
unlike here where Michael Chan merely represents 40% of the
outstanding capital stock of both KIC and Kukan, Inc., not even a
majority of it. In that case, moreover, evidence was adduced to
support the finding that the funds of the second corporation came
from the first. Finally, there was proof in General Credit Corporation
of complete control, such that one corporation was a mere dummy
or alter ego of the other, which is absent in the instant case.
Evidently, the aforementioned case relied upon by Morales cannot
justify the application of the principle of piercing the veil of corporate
fiction to the instant case. As shown by the records, the name
Michael Chan, the similarity of business activities engaged in, and
incidentally the word "Kukan" appearing in the corporate names
provide the nexus between Kukan, Inc. and KIC. As illustrated,
these circumstances are insufficient to establish the identity of KIC
as the alter ego or successor of Kukan, Inc.
It bears reiterating that piercing the veil of corporate fiction is
frowned upon. Accordingly, those who seek to pierce the veil must
clearly establish that the separate and distinct personalities of the
corporations are set up to justify a wrong, protect fraud, or
perpetrate a deception. In the concrete and on the assumption that
the RTC has validly acquired jurisdiction over the party concerned,
Morales ought to have proved by convincing evidence that Kukan,
Inc. was collapsed and thereafter KIC purposely formed and
operated to defraud him. Morales has not to us discharged his
burden.
WHEREFORE, the petition is hereby GRANTED. The CA’s January
23, 2008 Decision and April 16, 2008 Resolution in CA-G.R. SP No.
100152 are hereby REVERSED and SET ASIDE. The levy placed
upon the personal properties of Kukan International Corporation is
hereby ordered lifted and the personal properties ordered returned
to Kukan International Corporation. The RTC of Manila, Branch 21 is
hereby directed to execute the RTC Decision dated November 28,
2002 against Kukan, Inc. with reasonable dispatch.
No costs.
SO ORDERED.
G.R. No. L-14441 December 17, 1966
PEDRO R. PALTING, petitioner,
vs.
SAN JOSE PETROLEUM INCORPORATED, respondent.
BARRERA, J.:
This is a petition for review of the order of August 29, 1958, later
supplemented and amplified by another dated September 9, 1958,
of the Securities and Exchange Commission denying the opposition
to, and instead, granting the registration, and licensing the sale in
the Philippines, of 5,000,000 shares of the capital stock of the
respondent-appellee San Jose Petroleum, Inc. (hereafter referred to
as SAN JOSE PETROLEUM), a corporation organized and existing
in the Republic of Panama.
On September 7, 1956, SAN JOSE PETROLEUM filed with the
Philippine Securities and Exchange Commission a sworn
registration statement, for the registration and licensing for sale in
the Philippines Voting Trust Certificates representing 2,000,000
shares of its capital stock of a par value of $0.35 a share, at P1.00
per share. It was alleged that the entire proceeds of the sale of said
securities will be devoted or used exclusively to finance the
operations of San Jose Oil Company, Inc. (a domestic mining
corporation hereafter to be referred to as SAN JOSE OIL) which has
14 petroleum exploration concessions covering an area of a little
less than 1,000,000 hectares, located in the provinces of
Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo, Cotabato, Davao
and Agusan. It was the express condition of the sale that every
purchaser of the securities shall not receive a stock certificate, but a
registered or bearer-voting-trust certificate from the voting trustees
named therein James L. Buckley and Austin G.E. Taylor, the first
residing in Connecticut, U.S.A., and the second in New York City.
While this application for registration was pending consideration by
the Securities and Exchange Commission, SAN JOSE
PETROLEUM filed an amended Statement on June 20, 1958, for
registration of the sale in the Philippines of its shares of capital
stock, which was increased from 2,000,000 to 5,000,000, at a
reduced offering price of from P1.00 to P0.70 per share. At this time
the par value of the shares has also been reduced from $.35 to $.01
per share.1
Pedro R. Palting and others, allegedly prospective investors in the
shares of SAN JOSE PETROLEUM, filed with the Securities and
Exchange Commission an opposition to registration and licensing of
the securities on the grounds that (1) the tie-up between the issuer,
SAN JOSE PETROLEUM, a Panamanian corporation and SAN
JOSE OIL, a domestic corporation, violates the Constitution of the
Philippines, the Corporation Law and the Petroleum Act of 1949; (2)
the issuer has not been licensed to transact business in the
Philippines; (3) the sale of the shares of the issuer is fraudulent, and
works or tends to work a fraud upon Philippine purchasers; and (4)
the issuer as an enterprise, as well as its business, is based upon
unsound business principles. Answering the foregoing opposition of
Palting, et al., the registrant SAN JOSE PETROLEUM claimed that it
was a "business enterprise" enjoying parity rights under the
Ordinance appended to the Constitution, which parity right, with
respect to mineral resources in the Philippines, may be exercised,
pursuant to the Laurel-Langley Agreement, only through the medium
of a corporation organized under the laws of the Philippines. Thus,
registrant which is allegedly qualified to exercise rights under the
Parity Amendment, had to do so through the medium of a domestic
corporation, which is the SAN JOSE OIL. It refused the contention
that the Corporation Law was being violated, by alleging that Section
13 thereof applies only to foreign corporations doing business in the
Philippines, and registrant was not doing business here. The mere
fact that it was a holding company of SAN JOSE OIL and that
registrant undertook the financing of and giving technical assistance
to said corporation did not constitute transaction of business in the
Philippines. Registrant also denied that the offering for sale in the
Philippines of its shares of capital stock was fraudulent or would
work or tend to work fraud on the investors. On August 29, 1958,
and on September 9, 1958 the Securities and Exchange
Commissioner issued the orders object of the present appeal.
The issues raised by the parties in this appeal are as follows:
1. Whether or not petitioner Pedro R. Palting, as a "prospective
investor" in respondent's securities, has personality to file the
present petition for review of the order of the Securities and
Exchange Commission;
2. Whether or not the issue raised herein is already moot and
academic;
3. Whether or not the "tie-up" between the respondent SAN
JOSE PETROLEUM, a foreign corporation, and SAN JOSE
OIL COMPANY, INC., a domestic mining corporation, is
violative of the Constitution, the Laurel-Langley Agreement, the
Petroleum Act of 1949, and the Corporation Law; and
4. Whether or not the sale of respondent's securities is
fraudulent, or would work or tend to work fraud to purchasers
of such securities in the Philippines.
1. In answer to the notice and order of the Securities and Exchange
Commissioner, published in 2 newspapers of general circulation in
the Philippines, for "any person who is opposed" to the petition for
registration and licensing of respondent's securities, to file his
opposition in 7 days, herein petitioner so filed an opposition. And,
the Commissioner, having denied his opposition and instead,
directed the registration of the securities to be offered for sale,
oppositor Palting instituted the present proceeding for review of said
order.
Respondent raises the question of the personality of petitioner to
bring this appeal, contending that as a mere "prospective investor",
he is not an "Aggrieved" or "interested" person who may properly
maintain the suit. Citing a 1931 ruling of Utah State Supreme Court 2
it is claimed that the phrase "party aggrieved" used in the Securities
Act3 and the Rules of Court4 as having the right to appeal should
refer only to issuers, dealers and salesmen of securities.
It is true that in the cited case, it was ruled that the phrase "person
aggrieved" is that party "aggrieved by the judgment or decree where
it operates on his rights of property or bears directly upon his
interest", that the word "aggrieved" refers to "a substantial
grievance, a denial of some personal property right or the imposition
upon a party of a burden or obligation." But a careful reading of the
case would show that the appeal therein was dismissed because the
court held that an order of registration was not final and therefore
not appealable. The foregoing pronouncement relied upon by herein
respondent was made in construing the provision regarding an order
of revocation which the court held was the one appealable. And
since the law provides that in revoking the registration of any
security, only the issuer and every registered dealer of the security
are notified, excluding any person or group of persons having no
such interest in the securities, said court concluded that the phrase
"interested person" refers only to issuers, dealers or salesmen of
securities.
We cannot consider the foregoing ruling by the Utah State Court as
controlling on the issue in this case. Our Securities Act in Section
7(c) thereof, requires the publication and notice of the registration
statement. Pursuant thereto, the Securities and Exchange
Commissioner caused the publication of an order in part reading as
follows:
. . . Any person who is opposed with this petition must file his
written opposition with this Commission within said period (2
weeks). . . .
In other words, as construed by the administrative office entrusted
with the enforcement of the Securities Act, any person (who may not
be "aggrieved" or "interested" within the legal acceptation of the
word) is allowed or permitted to file an opposition to the registration
of securities for sale in the Philippines. And this is in consonance
with the generally accepted principle that Blue Sky Laws are
enacted to protect investors and prospective purchasers and to
prevent fraud and preclude the sale of securities which are in fact
worthless or worth substantially less than the asking price. It is for
this purpose that herein petitioner duly filed his opposition giving
grounds therefor. Respondent SAN JOSE PETROLEUM was
required to reply to the opposition. Subsequently both the petition
and the opposition were set for hearing during which the petitioner
was allowed to actively participate and did so by cross-examining
the respondent's witnesses and filing his memorandum in support of
his opposition. He therefore to all intents and purposes became a
party to the proceedings. And under the New Rules of Court,5 such a
party can appeal from a final order, ruling or decision of the
Securities and Exchange Commission. This new Rule eliminating
the word "aggrieved" appearing in the old Rule, being procedural in
nature,6 and in view of the express provision of Rule 144 that the
new rules made effective on January 1, 1964 shall govern not only
cases brought after they took effect but all further proceedings in
cases then pending, except to the extent that in the opinion of the
Court their application would not be feasible or would work injustice,
in which event the former procedure shall apply, we hold that the
present appeal is properly within the appellate jurisdiction of this
Court.
The order allowing the registration and sale of respondent's
securities is clearly a final order that is appealable. The mere fact
that such authority may be later suspended or revoked, depending
on future developments, does not give it the character of an
interlocutory or provisional ruling. And the fact that seven days after
the publication of the order, the securities are deemed registered
(Sec. 7, Com. Act 83, as amended), points to the finality of the
order. Rights and obligations necessarily arise therefrom if not
reviewed on appeal.
Our position on this procedural matter — that the order is
appealable and the appeal taken here is proper — is strengthened
by the intervention of the Solicitor General, under Section 23 of Rule
3 of the Rules of Court, as the constitutional issues herein presented
affect the validity of Section 13 of the Corporation Law, which,
according to the respondent, conflicts with the Parity Ordinance and
the Laurel-Langley Agreement recognizing, it is claimed, its right to
exploit our petroleum resources notwithstanding said provisions of
the Corporation Law.
2. Respondent likewise contends that since the order of
Registration/Licensing dated September 9, 1958 took effect 30 days
from September 3, 1958, and since no stay order has been issued
by the Supreme Court, respondent's shares became registered and
licensed under the law as of October 3, 1958. Consequently, it is
asserted, the present appeal has become academic. Frankly we are
unable to follow respondent's argumentation. First it claims that the
order of August 29 and that of September 9, 1958 are not final
orders and therefor are not appealable. Then when these orders,
according to its theory became final and were implemented, it
argues that the orders can no longer be appealed as the question of
registration and licensing became moot and academic.
But the fact is that because of the authority to sell, the securities are,
in all probabilities, still being traded in the open market.
Consequently the issue is much alive as to whether respondent's
securities should continue to be the subject of sale. The purpose of
the inquiry on this matter is not fully served just because the
securities had passed out of the hands of the issuer and its dealers.
Obviously, so long as the securities are outstanding and are placed
in the channels of trade and commerce, members of the investing
public are entitled to have the question of the worth or legality of the
securities resolved one way or another.
But more fundamental than this consideration, we agree with the
late Senator Claro M. Recto, who appeared as amicus curiae in this
case, that while apparently the immediate issue in this appeal is the
right of respondent SAN JOSE PETROLEUM to dispose of and sell
its securities to the Filipino public, the real and ultimate controversy
here would actually call for the construction of the constitutional
provisions governing the disposition, utilization, exploitation and
development of our natural resources. And certainly this is neither
moot nor academic.
3. We now come to the meat of the controversy — the "tie-up"
between SAN JOSE OIL on the one hand, and the respondent SAN
JOSE PETROLEUM and its associates, on the other. The
relationship of these corporations involved or affected in this case is
admitted and established through the papers and documents which
are parts of the records: SAN JOSE OIL, is a domestic mining
corporation, 90% of the outstanding capital stock of which is owned
by respondent SAN JOSE PETROLEUM, a foreign (Panamanian)
corporation, the majority interest of which is owned by OIL
INVESTMENTS, Inc., another foreign (Panamanian) company. This
latter corporation in turn is wholly (100%) owned by PANTEPEC OIL
COMPANY, C.A., and PANCOASTAL PETROLEUM COMPANY,
C.A., both organized and existing under the laws of Venezuela. As
of September 30, 1956, there were 9,976 stockholders of
PANCOASTAL PETROLEUM found in 49 American states and U.S.
territories, holding 3,476,988 shares of stock; whereas, as of
November 30, 1956, PANTEPEC OIL COMPANY was said to have
3,077,916 shares held by 12,373 stockholders scattered in 49
American state. In the two lists of stockholders, there is no indication
of the citizenship of these stockholders,7 or of the total number of
authorized stocks of each corporation, for the purpose of
determining the corresponding percentage of these listed
stockholders in relation to the respective capital stock of said
corporation.
Petitioner, as well as the amicus curiae and the Solicitor General8
contend that the relationship between herein respondent SAN JOSE
PETROLEUM and its subsidiary, SAN JOSE OIL, violates the
Petroleum Law of 1949, the Philippine Constitution, and Section 13
of the Corporation Law, which inhibits a mining corporation from
acquiring an interest in another mining corporation. It is respondent's
theory, on the other hand, that far from violating the Constitution;
such relationship between the two corporations is in accordance
with the Laurel-Langley Agreement which implemented the
Ordinance Appended to the Constitution, and that Section 13 of the
Corporation Law is not applicable because respondent is not
licensed to do business, as it is not doing business, in the
Philippines.
Article XIII, Section 1 of the Philippine Constitution provides:
SEC. 1. All agricultural, timber, and mineral lands of the public
domain, waters, minerals, coal, petroleum, and other mineral
oils, all forces of potential energy, and other natural resources
of the Philippines belong to the State, and their disposition,
exploitation, development, or utilization shall be limited to
citizens of the Philippines, or to corporations or associations at
least sixty per centum of the capital of which is owned by such
citizens, subject to any existing right, grant, lease or
concession at the time of the inauguration of this Government
established under this Constitution. . . . (Emphasis supplied)
In the 1946 Ordinance Appended to the Constitution, this right (to
utilize and exploit our natural resources) was extended to citizens of
the United States, thus:
Notwithstanding the provisions of section one, Article Thirteen,
and section eight, Article Fourteen, of the foregoing
Constitution, during the effectivity of the Executive Agreement
entered into by the President of the Philippines with the
President of the United States on the fourth of July, nineteen
hundred and forty-six, pursuant to the provisions of
Commonwealth Act Numbered Seven hundred and thirty-three,
but in no case to extend beyond the third of July, nineteen
hundred and seventy-four, the disposition, exploitation,
development, and utilization of all agricultural, timber, and
mineral lands of the public domain, waters, minerals, coal,
petroleum, and other mineral oils, all forces of potential energy,
and other natural resources of the Philippines, and the
operation of public utilities shall, if open to any person, be open
to citizens of the United States, and to all forms of business
enterprises owned or controlled, directly or indirectly, by
citizens of the United States in the same manner as to, and
under the same conditions imposed upon, citizens of the
Philippines or corporations or associations owned or controlled
by citizens of the Philippines (Emphasis supplied.)
In the 1954 Revised Trade Agreement concluded between the
United States and the Philippines, also known as the Laurel-Langley
Agreement, embodied in Republic Act 1355, the following provisions
appear:
ARTICLE VI
1. The disposition, exploitation, development and utilization of
all agricultural, timber, and mineral lands of the public domain,
waters, minerals, coal, petroleum and other mineral oils, all
forces and sources of potential energy, and other natural
resources of either Party, and the operation of public utilities,
shall, if open to any person, be open to citizens of the other
Party and to all forms of business enterprise owned or
controlled, directly or indirectly, by citizens of such other Party
in the same manner as to and under the same conditions
imposed upon citizens or corporations or associations owned
or controlled by citizens of the Party granting the right.
2. The rights provided for in Paragraph 1 may be exercised, . .
. in the case of citizens of the United States, with respect to
natural resources in the public domain in the Philippines, only
through the medium of a corporation organized under the laws
of the Philippines and at least 60% of the capital stock of which
is owned or controlled by citizens of the United States. . . .
3. The United States of America reserves the rights of the
several States of the United States to limit the extent to which
citizens or corporations or associations owned or controlled by
citizens of the Philippines may engage in the activities
specified in this Article. The Republic of the Philippines
reserves the power to deny any of the rights specified in this
Article to citizens of the United States who are citizens of
States, or to corporations or associations at least 60% of
whose capital stock or capital is owned or controlled by citizens
of States, which deny like rights to citizens of the Philippines,
or to corporations or associations which are owned or
controlled by citizens of the Philippines. . . . (Emphasis
supplied.)
Re-stated, the privilege to utilize, exploit, and develop the natural
resources of this country was granted, by Article XIII of the
Constitution, to Filipino citizens or to corporations or associations
60% of the capital of which is owned by such citizens. With the
Parity Amendment to the Constitution, the same right was extended
to citizens of the United States and business enterprises owned or
controlled directly or indirectly, by citizens of the United States.
There could be no serious doubt as to the meaning of the word
"citizens" used in the aforementioned provisions of the Constitution.
The right was granted to 2 types of persons: natural persons
(Filipino or American citizens) and juridical persons (corporations
60% of which capital is owned by Filipinos and business enterprises
owned or controlled directly or indirectly, by citizens of the United
States). In American law, "citizen" has been defined as "one who,
under the constitution and laws of the United States, has a right to
vote for representatives in congress and other public officers, and
who is qualified to fill offices in the gift of the people. (1 Bouvier's
Law Dictionary, p. 490.) A citizen is —
One of the sovereign people. A constituent member of the
sovereignty, synonymous with the people." (Scott v. Sandford,
19 Ho. [U.S.] 404, 15 L. Ed. 691.)
A member of the civil state entitled to all its privileges. (Cooley,
Const. Lim. 77. See U.S. v. Cruikshank 92 U.S. 542, 23 L. Ed.
588; Minor v. Happersett 21 Wall. [U.S.] 162, 22 L. Ed. 627.)
These concepts clarified, is herein respondent SAN JOSE
PETROLEUM an American business enterprise entitled to parity
rights in the Philippines? The answer must be in the negative, for the
following reasons:
Firstly — It is not owned or controlled directly by citizens of the
United States, because it is owned and controlled by a corporation,
the OIL INVESTMENTS, another foreign (Panamanian) corporation.
Secondly — Neither can it be said that it is indirectly owned and
controlled by American citizens through the OIL INVESTMENTS, for
this latter corporation is in turn owned and controlled, not by citizens
of the United States, but still by two foreign (Venezuelan)
corporations, the PANTEPEC OIL COMPANY and PANCOASTAL
PETROLEUM.
Thirdly — Although it is claimed that these two last corporations are
owned and controlled respectively by 12,373 and 9,979 stockholders
residing in the different American states, there is no showing in the
certification furnished by respondent that the stockholders of
PANCOASTAL or those of them holding the controlling stock, are
citizens of the United States.
Fourthly — Granting that these individual stockholders are American
citizens, it is yet necessary to establish that the different states of
which they are citizens, allow Filipino citizens or corporations or
associations owned or controlled by Filipino citizens, to engage in
the exploitation, etc. of the natural resources of these states (see
paragraph 3, Article VI of the Laurel-Langley Agreement, supra).
Respondent has presented no proof to this effect.
Fifthly — But even if the requirements mentioned in the two
immediately preceding paragraphs are satisfied, nevertheless to
hold that the set-up disclosed in this case, with a long chain of
intervening foreign corporations, comes within the purview of the
Parity Amendment regarding business enterprises indirectly owned
or controlled by citizens of the United States, is to unduly stretch and
strain the language and intent of the law. For, to what extent must
the word "indirectly" be carried? Must we trace the ownership or
control of these various corporations ad infinitum for the purpose of
determining whether the American ownership-control-requirement is
satisfied? Add to this the admitted fact that the shares of stock of the
PANTEPEC and PANCOASTAL which are allegedly owned or
controlled directly by citizens of the United States, are traded in the
stock exchange in New York, and you have a situation where it
becomes a practical impossibility to determine at any given time, the
citizenship of the controlling stock required by the law. In the
circumstances, we have to hold that the respondent SAN JOSE
PETROLEUM, as presently constituted, is not a business enterprise
that is authorized to exercise the parity privileges under the Parity
Ordinance, the Laurel-Langley Agreement and the Petroleum Law.
Its tie-up with SAN JOSE OIL is, consequently, illegal.
What, then, would be the Status of SAN JOSE OIL, about 90% of
whose stock is owned by SAN JOSE PETROLEUM? This is a query
which we need not resolve in this case as SAN JOSE OIL is not a
party and it is not necessary to do so to dispose of the present
controversy. But it is a matter that probably the Solicitor General
would want to look into.
There is another issue which has been discussed extensively by the
parties. This is whether or not an American mining corporation may
lawfully "be in anywise interested in any other corporation (domestic
or foreign) organized for the purpose of engaging in agriculture or in
mining," in the Philippines or whether an American citizen owning
stock in more than one corporation organized for the purpose of
engaging in agriculture or in mining, may own more than 15% of the
capital stock then outstanding and entitled to vote, of each of such
corporations, in view of the express prohibition contained in Section
13 of the Philippine Corporation Law. The petitioner in this case
contends that the provisions of the Corporation Law must be applied
to American citizens and business enterprise otherwise entitled to
exercise the parity privileges, because both the Laurel-Langley
Agreement (Art. VI, par. 1) and the Petroleum Act of 1948 (Art. 31),
specifically provide that the enjoyment by them of the same rights
and obligations granted under the provisions of both laws shall be
"in the same manner as to, and under the same conditions imposed
upon, citizens of the Philippines or corporations or associations
owned or controlled by citizens of the Philippines." The petitioner
further contends that, as the enjoyment of the privilege of exploiting
mineral resources in the Philippines by Filipino citizens or
corporations owned or controlled by citizens of the Philippines
(which corporation must necessarily be organized under the
Corporation Law), is made subject to the limitations provided in
Section 13 of the Corporation Law, so necessarily the exercise of
the parity rights by citizens of the United States or business
enterprise owned or controlled, directly or indirectly, by citizens of
the United States, must equally be subject to the same limitations
contained in the aforesaid Section 13 of the Corporation Law.
In view of the conclusions we have already arrived at, we deem it
not indispensable for us to pass upon this legal question, especially
taking into account the statement of the respondent (SAN JOSE
PETROLEUM) that it is essentially a holding company, and as found
by the Securities and Exchange Commissioner, its principal activity
is limited to the financing and giving technical assistance to SAN
JOSE OIL.
4. Respondent SAN JOSE PETROLEUM, whose shares of stock
were allowed registration for sale in the Philippines, was
incorporated under the laws of Panama in April, 1956 with an
authorized capital stock of $500,000.00, American currency, divided
into 50,000,000 shares at par value of $0.01 per share. By virtue of
a 3-party Agreement of June 14, 1956, respondent was supposed to
have received from OIL INVESTMENTS 8,000,000 shares of the
capital stock of SAN JOSE OIL (at par value of $0.01 per share),
plus a note for $250,000.00 due in 6 months, for which respondent
issued in favor of OIL INVESTMENTS 16,000,000 shares of its
capital stock, at $0.01 per share or with a value of $160,000.00, plus
a note for $230,297.97 maturing in 2 years at 6% per annum
interest,9 and the assumption of payment of the unpaid price of
7,500,000 (of the 8,000,000 shares of SAN JOSE OIL).
On June 27, 1956, the capitalization of SAN JOSE PETROLEUM
was increased from $500,000.00 to $17,500,000.00 by increasing
the par value of the same 50,000,000 shares, from $0.01 to $0.35.
Without any additional consideration, the 16,000,000 shares of
$0.01 previously issued to OIL INVESTMENTS with a total value of
$160,000.00 were changed with 16,000,000 shares of the
recapitalized stock at $0.35 per share, or valued at $5,600,000.00.
And, to make it appear that cash was received for these re-issued
16,000,000 shares, the board of directors of respondent corporation
placed a valuation of $5,900,000.00 on the 8,000,000 shares of SAN
JOSE OIL (still having par value of $0.10 per share) which were
received from OIL INVESTMENTS as part-consideration for the
16,000,000 shares at $0.01 per share.
In the Balance Sheet of respondent, dated July 12, 1956, from the
$5,900,000.00, supposedly the value of the 8,000,000 shares of
SAN JOSE OIL, the sum of $5,100,000.00 was deducted,
corresponding to the alleged difference between the "value" of the
said shares and the subscription price thereof which is $800,000.00
(at $0.10 per share). From this $800,000.00, the subscription price
of the SAN JOSE OIL shares, the amount of $319,702.03 was
deducted, as allegedly unpaid subscription price, thereby giving a
difference of $480,297.97, which was placed as the amount
allegedly paid in on the subscription price of the 8,000,000 SAN
JOSE OIL shares. Then, by adding thereto the note receivable from
OIL INVESTMENTS, for $250,000.00 (part-consideration for the
16,000,000 SAN JOSE PETROLEUM shares), and the sum of
$6,516.21, as deferred expenses, SAN JOSE PETROLEUM
appeared to have assets in the sum of $736,814.18.
These figures are highly questionable. Take the item $5,900,000.00
the valuation placed on the 8,000,000 shares of SAN JOSE OIL.
There appears no basis for such valuation other than belief by the
board of directors of respondent that "should San Jose Oil Company
be granted the bulk of the concessions applied for upon reasonable
terms, that it would have a reasonable value of approximately
$10,000,000." 10 Then, of this amount, the subscription price of
$800,000.00 was deducted and called it "difference between the
(above) valuation and the subscription price for the 8,000,000
shares." Of this $800,000.00 subscription price, they deducted the
sum of $480,297.97 and the difference was placed as the unpaid
portion of the subscription price. In other words, it was made to
appear that they paid in $480,297.97 for the 8,000,000 shares of
SAN JOSE OIL. This amount ($480,297.97) was supposedly that
$250,000.00 paid by OIL INVESMENTS for 7,500,000 shares of
SAN JOSE OIL, embodied in the June 14 Agreement, and a sum of
$230,297.97 the amount expended or advanced by OIL
INVESTMENTS to SAN JOSE OIL. And yet, there is still an item
among respondent's liabilities, for $230,297.97 appearing as note
payable to Oil Investments, maturing in two (2) years at six percent
(6%) per annum. 11 As far as it appears from the records, for the
16,000,000 shares at $0.35 per share issued to OIL
INVESTMENTS, respondent SAN JOSE PETROLEUM received
from OIL INVESTMENTS only the note for $250,000.00 plus the
8,000,000 shares of SAN JOSE OIL, with par value of $0.10 per
share or a total of $1,050,000.00 — the only assets of the
corporation. In other words, respondent actually lost $4,550,000.00,
which was received by OIL INVESTMENTS.
But this is not all. Some of the provisions of the Articles of
Incorporation of respondent SAN JOSE PETROLEUM are
noteworthy; viz:
(1) the directors of the Company need not be shareholders;
(2) that in the meetings of the board of directors, any director
may be represented and may vote through a proxy who also
need not be a director or stockholder; and
(3) that no contract or transaction between the corporation and
any other association or partnership will be affected, except in
case of fraud, by the fact that any of the directors or officers of
the corporation is interested in, or is a director or officer of,
such other association or partnership, and that no such
contract or transaction of the corporation with any other person
or persons, firm, association or partnership shall be affected by
the fact that any director or officer of the corporation is a party
to or has an interest in, such contract or transaction, or has in
anyway connected with such other person or persons, firm,
association or partnership; and finally, that all and any of the
persons who may become director or officer of the corporation
shall be relieved from all responsibility for which they may
otherwise be liable by reason of any contract entered into with
the corporation, whether it be for his benefit or for the benefit of
any other person, firm, association or partnership in which he
may be interested.
These provisions are in direct opposition to our corporation law and
corporate practices in this country. These provisions alone would
outlaw any corporation locally organized or doing business in this
jurisdiction. Consider the unique and unusual provision that no
contract or transaction between the company and any other
association or corporation shall be affected except in case of fraud,
by the fact that any of the directors or officers of the company may
be interested in or are directors or officers of such other association
or corporation; and that none of such contracts or transactions of
this company with any person or persons, firms, associations or
corporations shall be affected by the fact that any director or officer
of this company is a party to or has an interest in such contract or
transaction or has any connection with such person or persons,
firms associations or corporations; and that any and all persons who
may become directors or officers of this company are hereby
relieved of all responsibility which they would otherwise incur by
reason of any contract entered into which this company either for
their own benefit, or for the benefit of any person, firm, association
or corporation in which they may be interested.
The impact of these provisions upon the traditional judiciary
relationship between the directors and the stockholders of a
corporation is too obvious to escape notice by those who are called
upon to protect the interest of investors. The directors and officers of
the company can do anything, short of actual fraud, with the affairs
of the corporation even to benefit themselves directly or other
persons or entities in which they are interested, and with immunity
because of the advance condonation or relief from responsibility by
reason of such acts. This and the other provision which authorizes
the election of non-stockholders as directors, completely
disassociate the stockholders from the government and
management of the business in which they have invested.
To cap it all on April 17, 1957, admittedly to assure continuity of the
management and stability of SAN JOSE PETROLEUM, OIL
INVESTMENTS, as holder of the only subscribed stock of the former
corporation and acting "on behalf of all future holders of voting trust
certificates," entered into a voting trust agreement 12 with James L.
Buckley and Austin E. Taylor, whereby said Trustees were given
authority to vote the shares represented by the outstanding trust
certificates (including those that may henceforth be issued) in the
following manner:
(a) At all elections of directors, the Trustees will designate a
suitable proxy or proxies to vote for the election of directors
designated by the Trustees in their own discretion, having in
mind the best interests of the holders of the voting trust
certificates, it being understood that any and all of the Trustees
shall be eligible for election as directors;
(b) On any proposition for removal of a director, the Trustees
shall designate a suitable proxy or proxies to vote for or
against such proposition as the Trustees in their own discretion
may determine, having in mind the best interest of the holders
of the voting trust certificates;
(c) With respect to all other matters arising at any meeting of
stockholders, the Trustees will instruct such proxy or proxies
attending such meetings to vote the shares of stock held by the
Trustees in accordance with the written instructions of each
holder of voting trust certificates. (Emphasis supplied.)
It was also therein provided that the said Agreement shall be binding
upon the parties thereto, their successors, and upon all holders of
voting trust certificates.
And these are the voting trust certificates that are offered to
investors as authorized by Security and Exchange Commissioner. It
can not be doubted that the sale of respondent's securities would, to
say the least, work or tend to work fraud to Philippine investors.
FOR ALL THE FOREGOING CONSIDERATIONS, the motion of
respondent to dismiss this appeal, is denied and the orders of the
Securities and Exchange Commissioner, allowing the registration of
Respondent's securities and licensing their sale in the Philippines
are hereby set aside. The case is remanded to the Securities and
Exchange Commission for appropriate action in consonance with
this decision. With costs. Let a copy of this decision be furnished the
Solicitor General for whatever action he may deem advisable to take
in the premises. So ordered.
G.R. No. 172671 April 16, 2009
MARISSA R. UNCHUAN, Petitioner,
vs.
ANTONIO J.P. LOZADA, ANITA LOZADA and THE REGISTER
OF DEEDS OF CEBU CITY, Respondents.
DECISION
QUISUMBING, J.:
For review are the Decision1 dated February 23, 2006 and
Resolution2 dated April 12, 2006 of the Court of Appeals in CA-G.R.
CV. No. 73829. The appellate court had affirmed with modification
the Order3 of the Regional Trial Court (RTC) of Cebu City, Branch
10 reinstating its Decision4 dated June 9, 1997.
The facts of the case are as follows:
Sisters Anita Lozada Slaughter and Peregrina Lozada Saribay were
the registered co-owners of Lot Nos. 898-A-3 and 898-A-4 covered
by Transfer Certificates of Title (TCT) Nos. 53258 5 and 532576 in
Cebu City.
The sisters, who were based in the United States, sold the lots to
their nephew Antonio J.P. Lozada (Antonio) under a Deed of
Sale7 dated March 11, 1994. Armed with a Special Power of
Attorney8 from Anita, Peregrina went to the house of their brother,
Dr. Antonio Lozada (Dr. Lozada), located at 4356 Faculty Avenue,
Long Beach California.9Dr. Lozada agreed to advance the purchase
price of US$367,000 or ₱10,000,000 for Antonio, his nephew. The
Deed of Sale was later notarized and authenticated at the Philippine
Consul’s Office. Dr. Lozada then forwarded the deed, special power
of attorney, and owners’ copies of the titles to Antonio in the
Philippines. Upon receipt of said documents, the latter recorded the
sale with the Register of Deeds of Cebu. Accordingly, TCT Nos.
12832210 and 12832311 were issued in the name of Antonio Lozada.
Pending registration of the deed, petitioner Marissa R. Unchuan
caused the annotation of an adverse claim on the lots. Marissa
claimed that Anita donated an undivided share in the lots to her
under an unregistered Deed of Donation12 dated February 4, 1987.
Antonio and Anita brought a case against Marissa for quieting of title
with application for preliminary injunction and restraining order.
Marissa for her part, filed an action to declare the Deed of Sale void
and to cancel TCT Nos. 128322 and 128323. On motion, the cases
were consolidated and tried jointly.
At the trial, respondents presented a notarized and duly
authenticated sworn statement, and a videotape where Anita denied
having donated land in favor of Marissa. Dr. Lozada testified that he
agreed to advance payment for Antonio in preparation for their plan
to form a corporation. The lots are to be eventually infused in the
capitalization of Damasa Corporation, where he and Antonio are to
have 40% and 60% stake, respectively. Meanwhile, Lourdes G.
Vicencio, a witness for respondents confirmed that she had been
renting the ground floor of Anita’s house since 1983, and tendering
rentals to Antonio.
For her part, Marissa testified that she accompanied Anita to the
office of Atty. Cresencio Tomakin for the signing of the Deed of
Donation. She allegedly kept it in a safety deposit box but continued
to funnel monthly rentals to Peregrina’s account.
A witness for petitioner, one Dr. Cecilia Fuentes, testified on
Peregrina’s medical records. According to her interpretation of said
records, it was physically impossible for Peregrina to have signed
the Deed of Sale on March 11, 1994, when she was reported to be
suffering from edema. Peregrina died on April 4, 1994.
In a Decision dated June 9, 1997, RTC Judge Leonardo B. Cañares
disposed of the consolidated cases as follows:
WHEREFORE, judgment is hereby rendered in Civil Case No. CEB-
16145, to wit:
1. Plaintiff Antonio J.P. Lozada is declared the absolute owner
of the properties in question;
2. The Deed of Donation (Exh. "9") is declared null and void,
and Defendant Marissa R. Unchuan is directed to surrender
the original thereof to the Court for cancellation;
3. The Register of Deeds of Cebu City is ordered to cancel the
annotations of the Affidavit of Adverse Claim of defendant
Marissa R. Unchuan on TCT Nos. 53257 and 53258 and on
such all other certificates of title issued in lieu of the
aforementioned certificates of title;
4. Defendant Marissa R. Unchuan is ordered to pay Antonio
J.P. Lozada and Anita Lozada Slaughter the sum of
₱100,000.00 as moral damages; exemplary damages of
₱50,000.00; ₱50,000.00 for litigation expenses and attorney’s
fees of ₱50,000.00; and
5. The counterclaims of defendant Marissa R. Unchuan [are]
DISMISSED.
In Civil Case No. CEB-16159, the complaint is hereby DISMISSED.
In both cases, Marissa R. Unchuan is ordered to pay the costs of
suit.
SO ORDERED.13
On motion for reconsideration by petitioner, the RTC of Cebu City,
Branch 10, with Hon. Jesus S. dela Peña as Acting Judge, issued
an Order14 dated April 5, 1999. Said order declared the Deed of Sale
void, ordered the cancellation of the new TCTs in Antonio’s name,
and directed Antonio to pay Marissa ₱200,000 as moral damages,
₱100,000 as exemplary damages, ₱100,000 attorney’s fees and
₱50,000 for expenses of litigation. The trial court also declared the
Deed of Donation in favor of Marissa valid. The RTC gave credence
to the medical records of Peregrina.
Respondents moved for reconsideration. On July 6, 2000, now with
Hon. Soliver C. Peras, as Presiding Judge, the RTC of Cebu City,
Branch 10, reinstated the Decision dated June 9, 1997, but with the
modification that the award of damages, litigation expenses and
attorney’s fees were disallowed.
Petitioner appealed to the Court of Appeals. On February 23, 2006
the appellate court affirmed with modification the July 6, 2000 Order
of the RTC. It, however, restored the award of ₱50,000 attorney’s
fees and ₱50,000 litigation expenses to respondents.
Thus, the instant petition which raises the following issues:
I.
WHETHER THE COURT OF APPEALS ERRED AND
VIOLATED PETITIONER’S RIGHT TO DUE PROCESS
WHEN IT FAILED TO RESOLVE PETITIONER’S THIRD
ASSIGNED ERROR.
II.
 WHETHER THE HONORABLE SUPREME COURT MAY AND
SHOULD REVIEW THE CONFLICTING FACTUAL FINDINGS
OF THE HONORABLE REGIONAL TRIAL COURT IN ITS
OWN DECISION AND RESOLUTIONS ON THE MOTIONS
FOR RECONSIDERATION, AND THAT OF THE
HONORABLE COURT OF APPEALS.
III.
WHETHER THE HONORABLE COURT OF APPEALS
ERRED IN HOLDING THAT PETITIONER’S CASE IS
BARRED BY LACHES.
IV.
WHETHER THE HONORABLE COURT OF APPEALS
ERRED IN HOLDING THAT THE DEED OF DONATION
EXECUTED IN FAVOR OF PETITIONER IS VOID.
V.
WHETHER THE HONORABLE COURT OF APPEALS
ERRED IN NOT HOLDING THAT ANITA LOZADA’S
VIDEOTAPED STATEMENT IS HEARSAY.15
Simply stated, the issues in this appeal are: (1) Whether the Court of
Appeals erred in upholding the Decision of the RTC which declared
Antonio J.P. Lozada the absolute owner of the questioned
properties; (2) Whether the Court of Appeals violated petitioner’s
right to due process; and (3) Whether petitioner’s case is barred by
laches.
Petitioner contends that the appellate court violated her right to due
process when it did not rule on the validity of the sale between the
sisters Lozada and their nephew, Antonio. Marissa finds it
anomalous that Dr. Lozada, an American citizen, had paid the lots
for Antonio. Thus, she accuses the latter of being a mere dummy of
the former. Petitioner begs the Court to review the conflicting factual
findings of the trial and appellate courts on Peregrina’s medical
condition on March 11, 1994 and Dr. Lozada’s financial capacity to
advance payment for Antonio. Likewise, petitioner assails the ruling
of the Court of Appeals which nullified the donation in her favor and
declared her case barred by laches. Petitioner finally challenges the
admissibility of the videotaped statement of Anita who was not
presented as a witness.
On their part, respondents pray for the dismissal of the petition for
petitioner’s failure to furnish the Register of Deeds of Cebu City with
a copy thereof in violation of Sections 3 16 and 4,17 Rule 45 of the
Rules. In addition, they aver that Peregrina’s unauthenticated
medical records were merely falsified to make it appear that she was
confined in the hospital on the day of the sale. Further, respondents
question the credibility of Dr. Fuentes who was neither presented in
court as an expert witness18 nor professionally involved in
Peregrina’s medical care.
Further, respondents impugn the validity of the Deed of Donation in
favor of Marissa. They assert that the Court of Appeals did not
violate petitioner’s right to due process inasmuch as it resolved
collectively all the factual and legal issues on the validity of the sale.
Faithful adherence to Section 14,19 Article VIII of the 1987
Constitution is indisputably a paramount component of due process
and fair play. The parties to a litigation should be informed of how it
was decided, with an explanation of the factual and legal reasons
that led to the conclusions of the court.20
In the assailed Decision, the Court of Appeals reiterates the rule that
a notarized and authenticated deed of sale enjoys the presumption
of regularity, and is admissible without further proof of due
execution. On the basis thereof, it declared Antonio a buyer in good
faith and for value, despite petitioner’s contention that the sale
violates public policy. While it is a part of the right of appellant to
urge that the decision should directly meet the issues presented for
resolution,21 mere failure by the appellate court to specify in its
decision all contentious issues raised by the appellant and the
reasons for refusing to believe appellant’s contentions is not
sufficient to hold the appellate court’s decision contrary to the
requirements of the law22 and the Constitution.23 So long as the
decision of the Court of Appeals contains the necessary findings of
facts to warrant its conclusions, we cannot declare said court in error
if it withheld "any specific findings of fact with respect to the
evidence for the defense."24 We will abide by the legal presumption
that official duty has been regularly performed, 25 and all matters
within an issue in a case were laid down before the court and were
passed upon by it.26
In this case, we find nothing to show that the sale between the
sisters Lozada and their nephew Antonio violated the public policy
prohibiting aliens from owning lands in the Philippines. Even as Dr.
Lozada advanced the money for the payment of Antonio’s share, at
no point were the lots registered in Dr. Lozada’s name. Nor was it
contemplated that the lots be under his control for they are actually
to be included as capital of Damasa Corporation. According to their
agreement, Antonio and Dr. Lozada are to hold 60% and 40% of the
shares in said corporation, respectively. Under Republic Act No.
7042,27 particularly Section 3,28 a corporation organized under the
laws of the Philippines of which at least 60% of the capital stock
outstanding and entitled to vote is owned and held by citizens of the
Philippines, is considered a Philippine National. As such, the
corporation may acquire disposable lands in the Philippines. Neither
did petitioner present proof to belie Antonio’s capacity to pay for the
lots subjects of this case.
Petitioner, likewise, calls on the Court to ascertain Peregrina’s
physical ability to execute the Deed of Sale on March 11, 1994. This
essentially necessitates a calibration of facts, which is not the
function of this Court.29 Nevertheless, we have sifted through the
Decisions of the RTC and the Court of Appeals but found no reason
to overturn their factual findings. Both the trial court and appellate
court noted the lack of substantial evidence to establish total
impossibility for Peregrina to execute the Deed of Sale.
In support of its contentions, petitioner submits a copy of Peregrina’s
medical records to show that she was confined at the Martin Luther
Hospital from February 27, 1994 until she died on April 4, 1994.
However, a Certification30 from Randy E. Rice, Manager for the
Health Information Management of the hospital undermines the
authenticity of said medical records. In the certification, Rice denied
having certified or having mailed copies of Peregrina’s medical
records to the Philippines. As a rule, a document to be admissible in
evidence, should be previously authenticated, that is, its due
execution or genuineness should be first shown.31 Accordingly, the
unauthenticated medical records were excluded from the evidence.
Even assuming that Peregrina was confined in the cited hospital, the
Deed of Sale was executed on March 11, 1994, a month before
Peregrina reportedly succumbed to Hepato Renal Failure caused by
Septicemia due to Myflodysplastic Syndrome.32 Nothing in the
records appears to show that Peregrina was so incapacitated as to
prevent her from executing the Deed of Sale. Quite the contrary, the
records reveal that close to the date of the sale, specifically on
March 9, 1994, Peregrina was even able to issue checks33 to pay for examination; (2) absence of demeanor evidence; and (3) absence of
her attorney’s professional fees and her own hospital bills. At no oath.41 It is a hornbook doctrine that an affidavit is merely hearsay
point in the course of the trial did petitioner dispute this revelation. evidence where its maker did not take the witness stand. 42 Verily,
the sworn statement of Anita was of this kind because she did not
Now, as to the validity of the donation, the provision of Article 749 of
appear in court to affirm her averments therein. Yet, a more
the Civil Code is in point:
circumspect examination of our rules of exclusion will show that they
art. 749. In order that the donation of an immovable may be valid, it do not cover admissions of a party;43 the videotaped statement of
must be made in a public document, specifying therein the property Anita appears to belong to this class. Section 26 of Rule 130
donated and the value of the charges which the donee must satisfy. provides that "the act, declaration or omission of a party as to a
relevant fact may be given in evidence against him. It has long been
The acceptance may be made in the same deed of donation or in a
settled that these admissions are admissible even if they are
separate public document, but it shall not take effect unless it is
hearsay.44 Indeed, there is a vital distinction between admissions
done during the lifetime of the donor.
against interest and declaration against interest. Admissions against
If the acceptance is made in a separate instrument, the donor shall interest are those made by a party to a litigation or by one in privity
be notified thereof in an authentic form, and this step shall be noted with or identified in legal interest with such party, and are admissible
in both instruments. whether or not the declarant is available as a witness. Declaration
against interest are those made by a person who is neither a party
When the law requires that a contract be in some form in order that
nor in privity with a party to the suit, are secondary evidence and
it may be valid or enforceable, or that a contract be proved in a
constitute an exception to the hearsay rule. They are admissible
certain way, that requirement is absolute and indispensable.34 Here,
only when the declarant is unavailable as a witness.45 Thus, a man’s
the Deed of Donation does not appear to be duly notarized. In page
acts, conduct, and declaration, wherever made, if voluntary, are
three of the deed, the stamped name of Cresencio Tomakin appears
admissible against him, for the reason that it is fair to presume that
above the words Notary Public until December 31, 1983 but below it
they correspond with the truth, and it is his fault if they do
were the typewritten words Notary Public until December 31, 1987.
not.46 However, as a further qualification, object evidence, such as
A closer examination of the document further reveals that the
the videotape in this case, must be authenticated by a special
number 7 in 1987 and Series of 1987 were merely
testimony showing that it was a faithful reproduction. 47 Lacking this,
superimposed.35 This was confirmed by petitioner’s nephew Richard
we are constrained to exclude as evidence the videotaped
Unchuan who testified that he saw petitioner’s husband write 7 over
statement of Anita. Even so, this does not detract from our
1983 to make it appear that the deed was notarized in 1987.
conclusion concerning petitioner’s failure to prove, by preponderant
Moreover, a Certification36 from Clerk of Court Jeoffrey S. Joaquino
evidence, any right to the lands subject of this case.
of the Notarial Records Division disclosed that the Deed of Donation
purportedly identified in Book No. 4, Document No. 48, and Page Anent the award of moral damages in favor of respondents, we find
No. 35 Series of 1987 was not reported and filed with said office. no factual and legal basis therefor. Moral damages cannot be
Pertinent to this, the Rules require a party producing a document as awarded in the absence of a wrongful act or omission or fraud or
genuine which has been altered and appears to have been altered bad faith. When the action is filed in good faith there should be no
after its execution, in a part material to the question in dispute, to penalty on the right to litigate. One may have erred, but error alone
account for the alteration. He may show that the alteration was is not a ground for moral damages. 48 The award of moral damages
made by another, without his concurrence, or was made with the must be solidly anchored on a definite showing that respondents
consent of the parties affected by it, or was otherwise properly or actually experienced emotional and mental sufferings. Mere
innocently made, or that the alteration did not change the meaning allegations do not suffice; they must be substantiated by clear and
or language of the instrument. If he fails to do that, the document convincing proof.49 As exemplary damages can be awarded only
shall, as in this case, not be admissible in evidence.371avvphi1 after the claimant has shown entitlement to moral
damages,50 neither can it be granted in this case.
Remarkably, the lands described in the Deed of Donation are
covered by TCT Nos. 7364538 and 73646,39 both of which had been WHEREFORE, the instant petition is DENIED. The Decision dated
previously cancelled by an Order40 dated April 8, 1981 in LRC February 23, 2006, and Resolution dated April 12, 2006 of the Court
Record No. 5988. We find it equally puzzling that on August 10, of Appeals in CA-G.R. CV. No. 73829 are AFFIRMED with
1987, or six months after Anita supposedly donated her undivided MODIFICATION. The awards of moral damages and exemplary
share in the lots to petitioner, the Unchuan Development damages in favor of respondents are deleted. No pronouncement as
Corporation, which was represented by petitioner’s husband, filed to costs.
suit to compel the Lozada sisters to surrender their titles by virtue of
SO ORDERED.
a sale. The sum of all the circumstances in this case calls for no
other conclusion than that the Deed of Donation allegedly in favor of
petitioner is void. Having said that, we deem it unnecessary to rule
on the issue of laches as the execution of the deed created no right
from which to reckon delay in making any claim of rights under the
instrument.
Finally, we note that petitioner faults the appellate court for not
excluding the videotaped statement of Anita as hearsay evidence.
Evidence is hearsay when its probative force depends, in whole or in
part, on the competency and credibility of some persons other than
the witness by whom it is sought to be produced. There are three
reasons for excluding hearsay evidence: (1) absence of cross-
G.R. No. 108734 May 29, 1996
CONCEPT BUILDERS, INC., petitioner,
vs.
THE NATIONAL LABOR RELATIONS COMMISSION, (First
Division); … respondents.
HERMOSISIMA, JR., J.:p
The corporate mask may be lifted and the corporate veil may be
pierced when a corporation is just but the alter ego of a person or of
another corporation. Where badges of fraud exist; where public
convenience is defeated; where a wrong is sought to be justified
thereby, the corporate fiction or the notion of legal entity should
come to naught. The law in these instances will regard the
corporation as a mere association of persons and, in case of two
corporations, merge them into one.
Thus, where a sister corporation is used as a shield to evade a
corporation's subsidiary liability for damages, the corporation may
not be heard to say that it has a personality separate and distinct
from the other corporation. The piercing of the corporate veil comes
into play.
This special civil action ostensibly raises the question of whether the
National Labor Relations Commission committed grave abuse of
discretion when it issued a "break-open order" to the sheriff to be
enforced against personal property found in the premises of
petitioner's sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with
principal office at 355 Maysan Road, Valenzuela, Metro Manila, is
engaged in the construction business. Private respondents were
employed by said company as laborers, carpenters and riggers.
On November, 1981, private respondents were served individual
written notices of termination of employment by petitioner, effective
on November 30, 1981. It was stated in the individual notices that
their contracts of employment had expired and the project in which
they were hired had been completed.
Public respondent found it to be, the fact, however, that at the time
of the termination of private respondent's employment, the project in
which they were hired had not yet been finished and completed.
Petitioner had to engage the services of sub-contractors whose
workers performed the functions of private respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal,
unfair labor practice and non-payment of their legal holiday pay,
overtime pay and thirteenth-month pay against petitioner.
On December 19, 1984, the Labor Arbiter rendered judgment 1
ordering petitioner to reinstate private respondents and to pay them
back wages equivalent to one year or three hundred working days.
On November 27, 1985, the National Labor Relations Commission
(NLRC) dismissed the motion for reconsideration filed by petitioner
on the ground that the said decision had already become final and
executory.2
On October 16, 1986, the NLRC Research and Information
Department made the finding that private respondents' back wages
amounted to P199,800.00.3
On October 29, 1986, the Labor Arbiter issued a writ of execution
directing the sheriff to execute the Decision, dated December 19,
1984. The writ was partially satisfied through garnishment of sums
from petitioner's debtor, the Metropolitan Waterworks and Sewerage
Authority, in the amount of P81,385.34. Said amount was turned
over to the cashier of the NLRC.
On February 1, 1989, an Alias Writ of Execution was issued by the
Labor Arbiter directing the sheriff to collect from herein petitioner the
sum of P117,414.76, representing the balance of the judgment
award, and to reinstate private respondents to their former positions.
On July 13, 1989, the sheriff issued a report stating that he tried to
serve the alias writ of execution on petitioner through the security
guard on duty but the service was refused on the ground that
petitioner no longer occupied the premises.
On September 26, 1986, upon motion of private respondents, the
Labor Arbiter issued a second alias writ of execution.
The said writ had not been enforced by the special sheriff because,
as stated in his progress report, dated November 2, 1989:
1. All the employees inside petitioner's premises at 355 Maysan
Road, Valenzuela, Metro Manila, claimed that they were employees
of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent;
2. Levy was made upon personal properties he found in the
premises;
3. Security guards with high-powered guns prevented him from
removing the properties he had levied upon.4
The said special sheriff recommended that a "break-open order" be
issued to enable him to enter petitioner's premises so that he could
proceed with the public auction sale of the aforesaid personal
properties on November 7, 1989.
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-
party claim with the Labor Arbiter alleging that the properties sought
to be levied upon by the sheriff were owned by Hydro (Phils.), Inc.
(HPPI) of which he is the Vice-President.
On November 23, 1989, private respondents filed a "Motion for
Issuance of a Break-Open Order," alleging that HPPI and petitioner
corporation were owned by the same incorporator/stockholders.
They also alleged that petitioner temporarily suspended its business
operations in order to evade its legal obligations to them and that
private respondents were willing to post an indemnity bond to
answer for any damages which petitioner and HPPI may suffer
because of the issuance of the break-open order.
In support of their claim against HPPI, private respondents
presented duly certified copies of the General Informations Sheet,
dated May 15, 1987, submitted by petitioner to the Securities
Exchange Commission (SEC) and the General Information Sheet,
dated May 25, 1987, submitted by HPPI to the Securities and
Exchange Commission.
The General Information Sheet submitted by the petitioner revealed
the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
HPPI P 6,999,500.00
Antonio W. Lim 2,900,000.00
Dennis S. Cuyegkeng 300.00
Elisa C. Lim 100,000.00
Teodulo R. Dino 100.00
Virgilio O. Casino 100.00
 2. Board of Directors Thereafter, it directed the sheriff to proceed with the auction sale of
Antonio W. Lim Chairman the properties already levied upon. It dismissed the third-party claim
for lack of merit.
Dennis S. Cuyegkeng Member
Petitioner moved for reconsideration but the motion was denied by
Elisa C. Lim Member
the NLRC in a Resolution, dated December 3, 1992.
Teodulo R. Dino Member
Hence, the resort to the present petition.
Virgilio O. Casino Member
Petitioner alleges that the NLRC committed grave abuse of
3. Corporate Officers discretion when it ordered the execution of its decision despite a
Antonio W. Lim President third-party claim on the levied property. Petitioner further contends,
that the doctrine of piercing the corporate veil should not have been
Dennis S. Cuyegkeng Assistant to the President
applied, in this case, in the absence of any showing that it created
Elisa O. Lim Treasurer HPPI in order to evade its liability to private respondents. It also
Virgilio O. Casino Corporate Secretary
contends that HPPI is engaged in the manufacture and sale of steel,
concrete and iron pipes, a business which is distinct and separate
4. Principal Office from petitioner's construction business. Hence, it is of no
355 Maysan Road consequence that petitioner and HPPI shared the same premises,
the same President and the same set of officers and subscribers. 7
Valenzuela, Metro Manila.5
We find petitioner's contention to be unmeritorious.
On the other hand, the General Information Sheet of HPPI revealed the
following: It is a fundamental principle of corporation law that a corporation is
1. Breakdown of Subscribed Capital an entity separate and distinct from its stockholders and from other
corporations to which it may be connected.8 But, this separate and
Name of Stockholder Amount Subscribed
distinct personality of a corporation is merely a fiction created by law
Antonio W. Lim P 400,000.00 for convenience and to promote justice.9 So, when the notion of
Elisa C. Lim 57,700.00
separate juridical personality is used to defeat public convenience,
justify wrong, protect fraud or defend crime, or is used as a device to
AWL Trading 455,000.00 defeat the labor laws,10 this separate personality of the corporation
Dennis S. Cuyegkeng 40,100.00 may be disregarded or the veil of corporate fiction pierced. 11 This is
true likewise when the corporation is merely an adjunct, a business
Teodulo R. Dino 100.00
conduit or an alter ego of another corporation.12
Virgilio O. Casino 100.00
The conditions under which the juridical entity may be disregarded
2. Board of Directors vary according to the peculiar facts and circumstances of each case.
Antonio W. Lim Chairman No hard and fast rule can be accurately laid down, but certainly,
there are some probative factors of identity that will justify the
Elisa C. Lim Member
application of the doctrine of piercing the corporate veil, to wit:
Dennis S. Cuyegkeng Member
1. Stock ownership by one or common ownership of both
Virgilio O. Casino Member corporations.
Teodulo R. Dino Member 2. Identity of directors and officers.
3. Corporate Officers 3. The manner of keeping corporate books and records.
Antonio W. Lim President
4. Methods of conducting the business.13
Dennis S. Cuyegkeng Assistant to the President
The SEC en banc explained the "instrumentality rule" which the
Elisa C. Lim Treasurer courts have applied in disregarding the separate juridical personality
Virgilio O. Casino Corporate Secretary of corporations as follows:

4. Principal Office
355 Maysan Road, Valenzuela, Metro Manila.6
On February 1, 1990, HPPI filed an Opposition to private
respondents' motion for issuance of a break-open order, contending
that HPPI is a corporation which is separate and distinct from
petitioner. HPPI also alleged that the two corporations are engaged
in two different kinds of businesses, i.e., HPPI is a manufacturing
firm while petitioner was then engaged in construction.
On March 2, 1990, the Labor Arbiter issued an Order which denied
private respondents' motion for break-open order.
Private respondents then appealed to the NLRC. On April 23, 1992,
the NLRC set aside the order of the Labor Arbiter, issued a break-
open order and directed private respondents to file a bond.
Where one corporation is so organized and controlled and its
affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the
corporate entity of the "instrumentality" may be disregarded.
The control necessary to invoke the rule is not majority or even
complete stock control but such domination of instances,
policies and practices that the controlled corporation has, so to
speak, no separate mind, will or existence of its own, and is but
a conduit for its principal. It must be kept in mind that the
control must be shown to have been exercised at the time the
acts complained of took place. Moreover, the control and
breach of duty must proximately cause the injury or unjust loss
for which the complaint is made.
The test in determining the applicability of the doctrine of piercing
the veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
2. Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty or dishonest and unjust
act in contravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing
the corporate veil." In applying the "instrumentality" or "alter
ego" doctrine, the courts are concerned with reality and not
form, with how the corporation operated and the individual
defendant's relationship to that operation.14
Claparols and there was no break in the succession and
continuity of the same business. This "avoiding-the-liability"
scheme is very patent, considering that 90% of the subscribed
shares of stock of the Claparols Steel Corporation (the second
corporation) was owned by respondent . . . Claparols himself,
and all the assets of the dissolved Claparols Steel and Nail
plant were turned over to the emerging Claparols Steel
Corporation.
It is very obvious that the second corporation seeks the
protective shield of a corporate fiction whose veil in the present
case could, and should, be pierced as it was deliberately and
maliciously designed to evade its financial obligation to its
employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy
upon the property subject of the execution, private respondents had
no other recourse but to apply for a break-open order after the third-
party claim of HPPI was dismissed for lack of merit by the NLRC.
This is in consonance with Section 3, Rule VII of the NLRC Manual
of Execution of Judgment which provides that:

Thus the question of whether a corporation is a mere alter ego, a Should the losing party, his agent or representative, refuse or
mere sheet or paper corporation, a sham or a subterfuge is purely prohibit the Sheriff or his representative entry to the place
one of fact.15 where the property subject of execution is located or kept, the
judgment creditor may apply to the Commission or Labor
In this case, the NLRC noted that, while petitioner claimed that it
Arbiter concerned for a break-open order.
ceased its business operations on April 29, 1986, it filed an
Information Sheet with the Securities and Exchange Commission on Furthermore, our perusal of the records shows that the twin
May 15, 1987, stating that its office address is at 355 Maysan Road, requirements of due notice and hearing were complied with.
Valenzuela, Metro Manila. On the other hand, HPPI, the third-party Petitioner and the third-party claimant were given the opportunity to
claimant, submitted on the same day, a similar information sheet submit evidence in support of their claim.
stating that its office address is at 355 Maysan Road, Valenzuela,
Hence, the NLRC did not commit any grave abuse of discretion
Metro Manila.
when it affirmed the break-open order issued by the Labor Arbiter.
Furthermore, the NLRC stated that:
Finally, we do not find any reason to disturb the rule that factual
Both information sheets were filed by the same Virgilio O. findings of quasi-judicial agencies supported by substantial evidence
Casiño as the corporate secretary of both corporations. It are binding on this Court and are entitled to great respect, in the
would also not be amiss to note that both corporations had the absence of showing of grave abuse of a discretion.18
same president, the same board of directors, the same
WHEREFORE, the petition is DISMISSED and the assailed
corporate officers, and substantially the same subscribers.
resolutions of the NLRC, dated April 23, 1992 and December 3,
From the foregoing, it appears that, among other things, the 1992, are AFFIRMED.
respondent (herein petitioner) and the third-party claimant
SO ORDERED.
shared the same address and/or premises. Under this
circumstances, (sic) it cannot be said that the property levied
upon by the sheriff were not of respondents.16
Clearly, petitioner ceased its business operations in order to evade
the payment to private respondents of back wages and to bar their
reinstatement to their former positions. HPPI is obviously a business
conduit of petitioner corporation and its emergence was skillfully
orchestrated to avoid the financial liability that already attached to
petitioner corporation.
The facts in this case are analogous to Claparols v. Court of
Industrial Relations, 17 where we had the occasion to rule:

Respondent court's findings that indeed the Claparols Steel

and Nail Plant, which ceased operation of June 30, 1957, was
SUCCEEDED by the Claparols Steel Corporation effective the
next day, July 1, 1957, up to December 7, 1962, when the
latter finally ceased to operate, were not disputed by petitioner.
It is very clear that the latter corporation was a continuation
and successor of the first entity . . . . Both predecessors and
successor were owned and controlled by petitioner Eduardo
G.R. No. 171993 December 12, 2011
MARC II MARKETING, INC. and LUCILA V. JOSON, Petitioners,
vs.
ALFREDO M. JOSON, Respondent.
DECISION
PEREZ, J.:
In this Petition for Review on Certiorari under Rule 45 of the Rules of
Court, herein petitioners Marc II Marketing, Inc. and Lucila V. Joson
assailed the Decision1 dated 20 June 2005 of the Court of Appeals
in CA-G.R. SP No. 76624 for reversing and setting aside the
Resolution2 of the National Labor Relations Commission (NLRC)
dated 15 October 2002, thereby affirming the Labor Arbiter’s
Decision3 dated 1 October 2001 finding herein respondent Alfredo
M. Joson’s dismissal from employment as illegal. In the questioned
Decision, the Court of Appeals upheld the Labor Arbiter’s jurisdiction
over the case on the basis that respondent was not an officer but a
mere employee of petitioner Marc II Marketing, Inc., thus, totally
disregarding the latter’s allegation of intra-corporate controversy.
Nonetheless, the Court of Appeals remanded the case to the NLRC
for further proceedings to determine the proper amount of monetary
awards that should be given to respondent.
Assailed as well is the Court of Appeals Resolution4 dated 7 March
2006 denying their Motion for Reconsideration.
Petitioner Marc II Marketing, Inc. (petitioner corporation) is a
corporation duly organized and existing under and by virtue of the
laws of the Philippines. It is primarily engaged in buying, marketing,
selling and distributing in retail or wholesale for export or import
household appliances and products and other items.5 It took over
the business operations of Marc Marketing, Inc. which was made
non-operational following its incorporation and registration with the
Securities and Exchange Commission (SEC). Petitioner Lucila V.
Joson (Lucila) is the President and majority stockholder of petitioner
corporation. She was also the former President and majority
stockholder of the defunct Marc Marketing, Inc.
Respondent Alfredo M. Joson (Alfredo), on the other hand, was the
General Manager, incorporator, director and stockholder of
petitioner corporation.
The controversy of this case arose from the following factual milieu:
Before petitioner corporation was officially incorporated,6 respondent
has already been engaged by petitioner Lucila, in her capacity as
President of Marc Marketing, Inc., to work as the General Manager
of petitioner corporation. It was formalized through the execution of
a Management Contract7 dated 16 January 1994 under the
letterhead of Marc Marketing, Inc.8 as petitioner corporation is yet to
be incorporated at the time of its execution. It was explicitly provided
therein that respondent shall be entitled to 30% of its net income for
his work as General Manager. Respondent will also be granted 30%
of its net profit to compensate for the possible loss of opportunity to
work overseas.9
Pending incorporation of petitioner corporation, respondent was
designated as the General Manager of Marc Marketing, Inc., which
was then in the process of winding up its business. For occupying
the said position, respondent was among its corporate officers by
the express provision of Section 1, Article IV10 of its by-laws.11
On 15 August 1994, petitioner corporation was officially incorporated
and registered with the SEC. Accordingly, Marc Marketing, Inc. was
made non-operational. Respondent continued to discharge his
duties as General Manager but this time under petitioner
corporation.
Pursuant to Section 1, Article IV12 of petitioner corporation’s by-
laws,13 its corporate officers are as follows: Chairman, President,
one or more Vice-President(s), Treasurer and Secretary. Its Board
of Directors, however, may, from time to time, appoint such other
officers as it may determine to be necessary or proper.
Per an undated Secretary’s Certificate,14 petitioner corporation’s
Board of Directors conducted a meeting on 29 August 1994 where
respondent was appointed as one of its corporate officers with the
designation or title of General Manager to function as a managing
director with other duties and responsibilities that the Board of
Directors may provide and authorized.15
Nevertheless, on 30 June 1997, petitioner corporation decided to
stop and cease its operations, as evidenced by an Affidavit of Non-
Operation16 dated 31 August 1998, due to poor sales collection
aggravated by the inefficient management of its affairs. On the same
date, it formally informed respondent of the cessation of its business
operation. Concomitantly, respondent was apprised of the
termination of his services as General Manager since his services
as such would no longer be necessary for the winding up of its
affairs.17
Feeling aggrieved, respondent filed a Complaint for Reinstatement
and Money Claim against petitioners before the Labor Arbiter which
was docketed as NLRC NCR Case No. 00-03-04102-99.
In his complaint, respondent averred that petitioner Lucila dismissed
him from his employment with petitioner corporation due to the
feeling of hatred she harbored towards his family. The same was
rooted in the filing by petitioner Lucila’s estranged husband, who
happened to be respondent’s brother, of a Petition for Declaration of
Nullity of their Marriage.18
For the parties’ failure to settle the case amicably, the Labor Arbiter
required them to submit their respective position papers.
Respondent complied but petitioners opted to file a Motion to
Dismiss grounded on the Labor Arbiter’s lack of jurisdiction as the
case involved an intra-corporate controversy, which jurisdiction
belongs to the SEC [now with the Regional Trial Court (RTC)]. 19
Petitioners similarly raised therein the ground of prescription of
respondent’s monetary claim.
On 5 September 2000, the Labor Arbiter issued an Order20 deferring
the resolution of petitioners’ Motion to Dismiss until the final
determination of the case. The Labor Arbiter also reiterated his
directive for petitioners to submit position paper. Still, petitioners did
not comply. Insisting that the Labor Arbiter has no jurisdiction over
the case, they instead filed an Urgent Motion to Resolve the Motion
to Dismiss and the Motion to Suspend Filing of Position Paper.
In an Order21 dated 15 February 2001, the Labor Arbiter denied both
motions and declared final the Order dated 5 September 2000. The
Labor Arbiter then gave petitioners a period of five days from receipt
thereof within which to file position paper, otherwise, their Motion to
Dismiss will be treated as their position paper and the case will be
considered submitted for decision.
Petitioners, through counsel, moved for extension of time to submit
position paper. Despite the requested extension, petitioners still
failed to submit the same. Accordingly, the case was submitted for
resolution.
On 1 October 2001, the Labor Arbiter rendered his Decision in favor
of respondent. Its decretal portion reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered
declaring [respondent’s] dismissal from employment illegal.
Accordingly, [petitioners] are hereby ordered:
1. To reinstate [respondent] to his former or equivalent position
without loss of seniority rights, benefits, and privileges;
2. Jointly and severally liable to pay [respondent’s] unpaid
wages in the amount of ₱450,000.00 per month from [26
March 1996] up to time of dismissal in the total amount of
₱6,300,000.00;
3. Jointly and severally liable to pay [respondent’s] full
backwages in the amount of ₱450,000.00 per month from date
of dismissal until actual reinstatement which at the time of
promulgation amounted to ₱21,600,000.00;
4. Jointly and severally liable to pay moral damages in the
amount of ₱100,000.00 and attorney’s fees in the amount of
5% of the total monetary award.22 [Emphasis supplied.]
In the aforesaid Decision, the Labor Arbiter initially resolved
petitioners’ Motion to Dismiss by finding the ground of lack of
jurisdiction to be without merit. The Labor Arbiter elucidated that
petitioners failed to adduce evidence to prove that the present case
involved an intra-corporate controversy. Also, respondent’s money
claim did not arise from his being a director or stockholder of
petitioner corporation but from his position as being its General
Manager. The Labor Arbiter likewise held that respondent was not a
corporate officer under petitioner corporation’s by-laws. As such,
respondent’s complaint clearly arose from an employer-employee
relationship, thus, subject to the Labor Arbiter’s jurisdiction.
The Labor Arbiter then declared respondent’s dismissal from
employment as illegal. Respondent, being a regular employee of
petitioner corporation, may only be dismissed for a valid cause and
upon proper compliance with the requirements of due process. The
records, though, revealed that petitioners failed to present any
evidence to justify respondent’s dismissal.
Aggrieved, petitioners appealed the aforesaid Labor Arbiter’s
Decision to the NLRC.
In its Resolution dated 15 October 2002, the NLRC ruled in favor of
petitioners by giving credence to the Secretary’s Certificate, which
evidenced petitioner corporation’s Board of Directors’ meeting in
which a resolution was approved appointing respondent as its
corporate officer with designation as General Manager. Therefrom,
the NLRC reversed and set aside the Labor Arbiter’s Decision dated
1 October 2001 and dismissed respondent’s Complaint for want of
jurisdiction.23
The NLRC enunciated that the validity of respondent’s appointment
and termination from the position of General Manager was made
subject to the approval of petitioner corporation’s Board of Directors.
Had respondent been an ordinary employee, such board action
would not have been required. As such, it is clear that respondent
was a corporate officer whose dismissal involved a purely intra-
corporate controversy. The NLRC went further by stating that
respondent’s claim for 30% of the net profit of the corporation can
only emanate from his right of ownership therein as stockholder,
director and/or corporate officer. Dividends or profits are paid only to
stockholders or directors of a corporation and not to any ordinary
employee in the absence of any profit sharing scheme. In addition,
the question of remuneration of a person who is not a mere
employee but a stockholder and officer of a corporation is not a
simple labor problem. Such matter comes within the ambit of
corporate affairs and management and is an intra-corporate
controversy in contemplation of the Corporation Code.24
When respondent’s Motion for Reconsideration was denied in
another Resolution25 dated 23 January 2003, he filed a Petition for
Certiorari with the Court of Appeals ascribing grave abuse of
discretion on the part of the NLRC.
On 20 June 2005, the Court of Appeals rendered its now assailed
Decision declaring that the Labor Arbiter has jurisdiction over the
present controversy. It upheld the finding of the Labor Arbiter that
respondent was a mere employee of petitioner corporation, who has
been illegally dismissed from employment without valid cause and
without due process. Nevertheless, it ordered the records of the
case remanded to the NLRC for the determination of the appropriate
amount of monetary awards to be given to respondent. The Court of
Appeals, thus, decreed:
WHEREFORE, the petition is by us PARTIALLY GRANTED. The
Labor Arbiter is DECLARED to have jurisdiction over the
controversy. The records are REMANDED to the NLRC for further
proceedings to determine the appropriate amount of monetary
awards to be adjudged in favor of [respondent]. Costs against the
[petitioners] in solidum.26
Petitioners moved for its reconsideration but to no avail.27
Petitioners are now before this Court with the following assignment
of errors:
THE COURT OF APPEALS ERRED AND COMMITTED
GRAVE ABUSE OF DISCRETION IN DECIDING THAT THE
NLRC HAS THE JURISDICTION IN RESOLVING A PURELY
INTRA-CORPORATE MATTER WHICH IS COGNIZABLE BY
THE SECURITIES AND EXCHANGE
COMMISSION/REGIONAL TRIAL COURT.
ASSUMING, GRATIS ARGUENDO, THAT THE NLRC HAS
JURISDICTION OVER THE CASE, STILL THE COURT OF
APPEALS SERIOUSLY ERRED IN NOT RULING THAT
THERE IS NO EMPLOYER-EMPLOYEE RELATIONSHIP
BETWEEN [RESPONDENT] ALFREDO M. JOSON AND
MARC II MARKETING, INC. [PETITIONER CORPORATION].
ASSUMING GRATIS ARGUENDO THAT THE NLRC HAS
JURISDICTION OVER THE CASE, THE COURT OF
APPEALS ERRED IN NOT RULING THAT THE LABOR
ARBITER COMMITTED GRAVE ABUSE OF DISCRETION IN
AWARDING MULTI-MILLION PESOS IN COMPENSATION
AND BACKWAGES BASED ON THE PURPORTED GROSS
INCOME OF [PETITIONER CORPORATION].
THE COURT OF APPEALS SERIOUSLY ERRED AND
COMMITTED GRAVE ABUSE OF DISCRETION IN NOT
MAKING ANY FINDINGS AND RULING THAT [PETITIONER
LUCILA] SHOULD NOT BE HELD SOLIDARILY LIABLE IN
THE ABSENCE OF EVIDENCE OF MALICE AND BAD FAITH
ON HER PART.28
Petitioners fault the Court of Appeals for having sustained the Labor
Arbiter’s finding that respondent was not a corporate officer under
petitioner corporation’s by-laws. They insist that there is no need to
amend the corporate by-laws to specify who its corporate officers
are. The resolution issued by petitioner corporation’s Board of
Directors appointing respondent as General Manager, coupled with
his assumption of the said position, positively made him its
corporate officer. More so, respondent’s position, being a creation of
petitioner corporation’s Board of Directors pursuant to its by-laws, is
a corporate office sanctioned by the Corporation Code and the
doctrines previously laid down by this Court. Thus, respondent’s
removal as petitioner corporation’s General Manager involved a
purely intra-corporate controversy over which the RTC has
jurisdiction.
Petitioners further contend that respondent’s claim for 30% of the
net profit of petitioner corporation was anchored on the purported
Management Contract dated 16 January 1994. It should be noted,
however, that said Management Contract was executed at the time
petitioner corporation was still nonexistent and had no juridical
personality yet. Such being the case, respondent cannot invoke any
legal right therefrom as it has no legal and binding effect on
petitioner corporation. Moreover, it is clear from the Articles of
Incorporation of petitioner corporation that respondent was its
director and stockholder. Indubitably, respondent’s claim for his
share in the profit of petitioner corporation was based on his
capacity as such and not by virtue of any employer-employee
relationship.
Petitioners further avow that even if the present case does not pose
an intra-corporate controversy, still, the Labor Arbiter’s multi-million
peso awards in favor of respondent were erroneous. The same was
merely based on the latter’s self-serving computations without any
supporting documents.
Finally, petitioners maintain that petitioner Lucila cannot be held
solidarily liable with petitioner corporation. There was neither
allegation nor iota of evidence presented to show that she acted with
malice and bad faith in her dealings with respondent. Moreover, the
Labor Arbiter, in his Decision, simply concluded that petitioner Lucila
was jointly and severally liable with petitioner corporation without
making any findings thereon. It was, therefore, an error for the Court
of Appeals to hold petitioner Lucila solidarily liable with petitioner
corporation.
From the foregoing arguments, the initial question is which between
the Labor Arbiter or the RTC, has jurisdiction over respondent’s
dismissal as General Manager of petitioner corporation. Its
resolution necessarily entails the determination of whether
respondent as General Manager of petitioner corporation is a
corporate officer or a mere employee of the latter.
While Article 217(a)229 of the Labor Code, as amended, provides
that it is the Labor Arbiter who has the original and exclusive
jurisdiction over cases involving termination or dismissal of workers
when the person dismissed or terminated is a corporate officer, the
case automatically falls within the province of the RTC. The
dismissal of a corporate officer is always regarded as a corporate
act and/or an intra-corporate controversy.30
Under Section 531 of Presidential Decree No. 902-A, intra-corporate
controversies are those 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. It
also includes controversies in the election or appointments of
directors, trustees, officers or managers of such corporations,
partnerships or associations.32
Accordingly, in determining whether the SEC (now the RTC) has
jurisdiction over the controversy, the status or relationship of the
parties and the nature of the question that is the subject of their
controversy must be taken into consideration.33
In Easycall Communications Phils., Inc. v. King, this Court held that
in the context of Presidential Decree No. 902-A, corporate officers
are those officers of a corporation who are given that character
either by the Corporation Code or by the corporation’s by-laws.
Section 2534 of the Corporation Code specifically enumerated who
are these corporate officers, to wit: (1) president; (2) secretary; (3)
treasurer; and (4) such other officers as may be provided for in the
by-laws.35
The aforesaid Section 25 of the Corporation Code, particularly the
phrase "such other officers as may be provided for in the by-laws,"
has been clarified and elaborated in this Court’s recent
pronouncement in Matling Industrial and Commercial Corporation v.
Coros, where it held, thus:
Conformably with Section 25, a position must be expressly
mentioned in the [b]y-[l]aws in order to be considered as a corporate
office. Thus, the creation of an office pursuant to or under a [b]y-
[l]aw enabling provision is not enough to make a position a
corporate office. [In] Guerrea v. Lezama [citation omitted] the first
ruling on the matter, held that the only officers of a corporation were
those given that character either by the Corporation Code or by the
[b]y-[l]aws; the rest of the corporate officers could be considered
only as employees or subordinate officials. Thus, it was held in
Easycall Communications Phils., Inc. v. King [citation omitted]:
An "office" is created by the charter of the corporation and the officer
is elected by the directors or stockholders. On the other hand, an
employee occupies no office and generally is employed not by the
action of the directors or stockholders but by the managing officer of
the corporation who also determines the compensation to be paid to
such employee.
xxxx
This interpretation is the correct application of Section 25 of the
Corporation Code, which plainly states that the corporate officers
are the President, Secretary, Treasurer and such other officers as
may be provided for in the [b]y-[l]aws. Accordingly, the corporate
officers in the context of PD No. 902-A are exclusively those who
are given that character either by the Corporation Code or by the
corporation’s [b]y[l]aws.
A different interpretation can easily leave the way open for the Board
of Directors to circumvent the constitutionally guaranteed security of
tenure of the employee by the expedient inclusion in the [b]y-[l]aws
of an enabling clause on the creation of just any corporate officer
position.
It is relevant to state in this connection that the SEC, the primary
agency administering the Corporation Code, adopted a similar
interpretation of Section 25 of the Corporation Code in its Opinion
dated November 25, 1993 [citation omitted], to wit:
Thus, pursuant to the above provision (Section 25 of the Corporation
Code), whoever are the corporate officers enumerated in the by-
laws are the exclusive Officers of the corporation and the Board has
no power to create other Offices without amending first the
corporate [b]y-laws. However, the Board may create appointive
positions other than the positions of corporate Officers, but the
persons occupying such positions are not considered as
corporate officers within the meaning of Section 25 of the
Corporation Code and are not empowered to exercise the
functions of the corporate Officers, except those functions lawfully
delegated to them. Their functions and duties are to be determined
by the Board of Directors/Trustees.36 [Emphasis supplied.]
A careful perusal of petitioner corporation’s by-laws, particularly
paragraph 1, Section 1, Article IV,37 would explicitly reveal that its
corporate officers are composed only of: (1) Chairman; (2)
President; (3) one or more Vice-President; (4) Treasurer; and (5)
Secretary.38 The position of General Manager was not among those
enumerated.
Paragraph 2, Section 1, Article IV of petitioner corporation’s by-laws,
empowered its Board of Directors to appoint such other officers as it
may determine necessary or proper.39 It is by virtue of this enabling
provision that petitioner corporation’s Board of Directors allegedly
approved a resolution to make the position of General Manager a
corporate office, and, thereafter, appointed respondent thereto
making him one of its corporate officers. All of these acts were done
without first amending its by-laws so as to include the General
Manager in its roster of corporate officers.
With the given circumstances and in conformity with Matling
Industrial and Commercial Corporation v. Coros, this Court rules that
respondent was not a corporate officer of petitioner corporation
because his position as General Manager was not specifically
mentioned in the roster of corporate officers in its corporate by-laws.
The enabling clause in petitioner corporation’s by-laws empowering
its Board of Directors to create additional officers, i.e., General
Manager, and the alleged subsequent passage of a board resolution
to that effect cannot make such position a corporate office. Matling
clearly enunciated that the board of directors has no power to create
other corporate offices without first amending the corporate by-laws
so as to include therein the newly created corporate office. Though
the board of directors may create appointive positions other than the
positions of corporate officers, the persons occupying such positions
cannot be viewed as corporate officers under Section 25 of the
Corporation Code.40 In view thereof, this Court holds that unless and
until petitioner corporation’s by-laws is amended for the inclusion of
General Manager in the list of its corporate officers, such position
cannot be considered as a corporate office within the realm of
Section 25 of the Corporation Code.
This Court considers that the interpretation of Section 25 of the
Corporation Code laid down in Matling safeguards the
constitutionally enshrined right of every employee to security of
tenure. To allow the creation of a corporate officer position by a
simple inclusion in the corporate by-laws of an enabling clause
empowering the board of directors to do so can result in the
circumvention of that constitutionally well-protected right.41
It is also of no moment that respondent, being petitioner
corporation’s General Manager, was given the functions of a
managing director by its Board of Directors. As held in Matling, the
only officers of a corporation are those given that character either by
the Corporation Code or by the corporate by-laws. It follows then
that the corporate officers enumerated in the by-laws are the
exclusive officers of the corporation while the rest could only be
regarded as mere employees or subordinate officials. 42 Respondent,
in this case, though occupying a high ranking and vital position in
petitioner corporation but which position was not specifically
enumerated or mentioned in the latter’s by-laws, can only be
regarded as its employee or subordinate official. Noticeably,
respondent’s compensation as petitioner corporation’s General
Manager was set, fixed and determined not by the latter’s Board of
Directors but simply by its President, petitioner Lucila. The same
was not subject to the approval of petitioner corporation’s Board of
Directors. This is an indication that respondent was an employee
and not a corporate officer.
To prove that respondent was petitioner corporation’s corporate
officer, petitioners presented before the NLRC an undated
Secretary’s Certificate showing that corporation’s Board of Directors
approved a resolution making respondent’s position of General
Manager a corporate office. The submission, however, of the said
undated Secretary’s Certificate will not change the fact that
respondent was an employee. The certification does not amount to
an amendment of the by-laws which is needed to make the position
of General Manager a corporate office.
Moreover, as has been aptly observed by the Court of Appeals, the
board resolution mentioned in that undated Secretary’s Certificate
and the latter itself were obvious fabrications, a mere afterthought.
Here we quote with conformity the Court of Appeals findings on this
matter stated in this wise:
The board resolution is an obvious fabrication. Firstly, if it had been
in existence since [29 August 1994], why did not [herein petitioners]
attach it to their [M]otion to [D]ismiss filed on [26 August 1999],
when it could have been the best evidence that [herein respondent]
was a corporate officer? Secondly, why did they report the
[respondent] instead as [herein petitioner corporation’s] employee to
the Social Security System [(SSS)] on [11 October 1994] or a later
date than their [29 August 1994] board resolution? Thirdly, why is
there no indication that the [respondent], the person concerned
himself, and the [SEC] were furnished with copies of said board
resolution? And, lastly, why is the corporate [S]ecretary’s
[C]ertificate not notarized in keeping with the customary procedure?
That is why we called it manipulative evidence as it was a
shameless sham meant to be thrown in as a wild card to muddle up
the [D]ecision of the Labor Arbiter to the end that it be overturned as
the latter had firmly pointed out that [respondent] is not a corporate
officer under [petitioner corporation’s by-laws]. Regrettably, the
[NLRC] swallowed the bait hook-line-and sinker. It failed to see
through its nature as a belatedly manufactured evidence. And even
on the assumption that it were an authentic board resolution, it did
not make [respondent] a corporate officer as the board did not first
and properly create the position of a [G]eneral [M]anager by
amending its by-laws.
(2) The scope of the term "officer" in the phrase "and such
other officers as may be provided for in the by-laws["] (Sec. 25,
par. 1), would naturally depend much on the provisions of the
by-laws of the corporation. (SEC Opinion, [4 December 1991.])
If the by-laws enumerate the officers to be elected by the
board, the provision is conclusive, and the board is without
power to create new offices without amending the by-laws.
(SEC Opinion, [19 October 1971.])
(3) If, for example, the general manager of a corporation is not
listed as an officer, he is to be classified as an employee
although he has always been considered as one of the
principal officers of a corporation [citing De Leon, H. S., The
Corporation Code of the Philippines Annotated, 1993 Ed., p.
215.]43 [Emphasis supplied.]
That respondent was also a director and a stockholder of petitioner
corporation will not automatically make the case fall within the ambit
of intra-corporate controversy and be subjected to RTC’s
jurisdiction. To reiterate, not all conflicts between the stockholders
and the corporation are classified as intra-corporate. Other factors
such as the status or relationship of the parties and the nature of the
question that is the subject of the controversy 44 must be considered
in determining whether the dispute involves corporate matters so as
to regard them as intra-corporate controversies.45 As previously
discussed, respondent was not a corporate officer of petitioner
corporation but a mere employee thereof so there was no intra-
corporate relationship between them. With regard to the subject of
the controversy or issue involved herein, i.e., respondent’s dismissal
as petitioner corporation’s General Manager, the same did not
present or relate to an intra-corporate dispute. To note, there was no
evidence submitted to show that respondent’s removal as petitioner
corporation’s General Manager carried with it his removal as its
director and stockholder. Also, petitioners’ allegation that
respondent’s claim of 30% share of petitioner corporation’s net profit
was by reason of his being its director and stockholder was without
basis, thus, self-serving. Such an allegation was tantamount to a
mere speculation for petitioners’ failure to substantiate the same.
In addition, it was not shown by petitioners that the position of
General Manager was offered to respondent on account of his being
petitioner corporation’s director and stockholder. Also, in contrast to
NLRC’s findings, neither petitioner corporation’s by-laws nor the
Management Contract stated that respondent’s appointment and
termination from the position of General Manager was subject to the
approval of petitioner corporation’s Board of Directors. If, indeed,
respondent was a corporate officer whose termination was subject
to the approval of its Board of Directors, why is it that his termination
was effected only by petitioner Lucila, President of petitioner
corporation? The records are bereft of any evidence to show that
respondent’s dismissal was done with the conformity of petitioner
corporation’s Board of Directors or that the latter had a hand on
respondent’s dismissal. No board resolution whatsoever was ever
presented to that effect.
With all the foregoing, this Court is fully convinced that, indeed,
respondent, though occupying the General Manager position, was
not a corporate officer of petitioner corporation rather he was merely
its employee occupying a high-ranking position.
Accordingly, respondent’s dismissal as petitioner corporation’s
General Manager did not amount to an intra-corporate controversy.
Jurisdiction therefor properly belongs with the Labor Arbiter and not
with the RTC.
Having established that respondent was not petitioner corporation’s
corporate officer but merely its employee, and that, consequently,
jurisdiction belongs to the Labor Arbiter, this Court will now
determine if respondent’s dismissal from employment is illegal.
It was not disputed that respondent worked as petitioner
corporation’s General Manager from its incorporation on 15 August
1994 until he was dismissed on 30 June 1997. The cause of his
dismissal was petitioner corporation’s cessation of business
operations due to poor sales collection aggravated by the inefficient
management of its affairs.
In termination cases, the burden of proving just and valid cause for
dismissing an employee from his employment rests upon the
employer. The latter's failure to discharge that burden would
necessarily result in a finding that the dismissal is unjustified.46
Under Article 283 of the Labor Code, as amended, one of the
authorized causes in terminating the employment of an employee is
the closing or cessation of operation of the establishment or
undertaking. Article 283 of the Labor Code, as amended, reads,
thus:
ART. 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 In case of retrenchment to prevent losses and in cases
of closures or cessation of operations of establishment or
undertaking not due to serious business losses or financial reverses,
the separation pay shall be equivalent to one (1) month pay or to at
least one-half (1/2) month pay for every year of service, whichever is
higher. A fraction of at least six (6) months shall be considered one
(1) whole year. [Emphasis supplied.]
From the afore-quoted provision, the closure or cessation of
operations of establishment or undertaking may either be due to
serious business losses or financial reverses or otherwise. If the
closure or cessation was due to serious business losses or financial
reverses, it is incumbent upon the employer to sufficiently and
convincingly prove the same. If it is otherwise, the employer can
lawfully close shop anytime as long as it was bona fide in character
and not impelled by a motive to defeat or circumvent the tenurial
rights of employees and as long as the terminated employees were
paid in the amount corresponding to their length of service. 47
Accordingly, under Article 283 of the Labor Code, as amended,
there are three requisites for a valid cessation of business
operations: (a) service of a written notice to the employees and to
the Department of Labor and Employment (DOLE) at least one
month before the intended date thereof; (b) the cessation of
business must be bona fide in character; and (c) payment to the
employees of termination pay amounting to one month pay or at
least one-half month pay for every year of service, whichever is
higher.
In this case, it is obvious that petitioner corporation’s cessation of
business operations was not due to serious business losses. Mere
poor sales collection, coupled with mismanagement of its affairs
does not amount to serious business losses. Nonetheless, petitioner
corporation can still validly cease or close its business operations
because such right is legally allowed, so long as it was not done for
the purpose of circumventing the provisions on termination of
employment embodied in the Labor Code. 48 As has been stressed
by this Court in Industrial Timber Corporation v. Ababon, thus:
Just as no law forces anyone to go into business, no law can compel
anybody to continue the same. It would be stretching the intent and
spirit of the law if a court interferes with management's prerogative
to close or cease its business operations just because the business
is not suffering from any loss or because of the desire to provide the
workers continued employment.49
A careful perusal of the records revealed that, indeed, petitioner
corporation has stopped and ceased business operations beginning
30 June 1997. This was evidenced by a notarized Affidavit of Non-
Operation dated 31 August 1998. There was also no showing that
the cessation of its business operations was done in bad faith or to
circumvent the Labor Code. Nevertheless, in doing so, petitioner
corporation failed to comply with the one-month prior written notice
rule. The records disclosed that respondent, being petitioner
corporation’s employee, and the DOLE were not given a written
notice at least one month before petitioner corporation ceased its
business operations. Moreover, the records clearly show that
respondent’s dismissal was effected on the same date that petitioner
corporation decided to stop and cease its operation. Similarly,
respondent was not paid separation pay upon termination of his
employment.
As respondent’s dismissal was not due to serious business losses,
respondent is entitled to payment of separation pay equivalent to
one month pay or at least one-half month pay for every year of
service, whichever is higher. The rationale for this was laid down in
Reahs Corporation v. National Labor Relations Commission,50 thus:
The grant of separation pay, as an incidence of termination of
employment under Article 283, is a statutory obligation on the part of
the employer and a demandable right on the part of the employee,
except only where the closure or cessation of operations was due to
serious business losses or financial reverses and there is sufficient
proof of this fact or condition. In the absence of such proof of serious
business losses or financial reverses, the employer closing his
business is obligated to pay his employees and workers their
separation pay.
The rule, therefore, is that in all cases of business closure or
cessation of operation or undertaking of the employer, the affected
employee is entitled to separation pay. This is consistent with the
state policy of treating labor as a primary social economic force,
affording full protection to its rights as well as its welfare. The
exception is when the closure of business or cessation of operations
is due to serious business losses or financial reverses duly proved,
in which case, the right of affected employees to separation pay is
lost for obvious reasons.51 [Emphasis supplied.]
As previously discussed, respondent’s dismissal was due to an
authorized cause, however, petitioner corporation failed to observe
procedural due process in effecting such dismissal. In Culili v.
Eastern Telecommunications Philippines, Inc., 52 this Court made the
following pronouncements, thus:
x x x there are two aspects which characterize the concept of due
process under the Labor Code: one is substantive — whether the
termination of employment was based on the provision of the Labor
Code or in accordance with the prevailing jurisprudence; the other is
procedural — the manner in which the dismissal was effected.
Section 2(d), Rule I, Book VI of the Rules Implementing the Labor
Code provides:
(d) In all cases of termination of employment, the following
standards of due process shall be substantially observed:
xxxx
For termination of employment as defined in Article 283 of the Labor
Code, the requirement of due process shall be deemed complied
with upon service of a written notice to the employee and the
appropriate Regional Office of the Department of Labor and
Employment at least thirty days before effectivity of the termination,
specifying the ground or grounds for termination.
In Mayon Hotel & Restaurant v. Adana, [citation omitted] we
observed:
The requirement of law mandating the giving of notices was
intended not only to enable the employees to look for another
employment and therefore ease the impact of the loss of their jobs
and the corresponding income, but more importantly, to give the
Department of Labor and Employment (DOLE) the opportunity to
ascertain the verity of the alleged authorized cause of termination.53
[Emphasis supplied].
The records of this case disclosed that there was absolutely no
written notice given by petitioner corporation to the respondent and
to the DOLE prior to the cessation of its business operations. This is
evident from the fact that petitioner corporation effected
respondent’s dismissal on the same date that it decided to stop and
cease its business operations. The necessary consequence of such
failure to comply with the one-month prior written notice rule, which
constitutes a violation of an employee’s right to statutory due
process, is the payment of indemnity in the form of nominal
damages.54 In Culili v. Eastern Telecommunications Philippines,
Inc., this Court further held:
In Serrano v. National Labor Relations Commission [citation
omitted], we noted that "a job is more than the salary that it carries."
There is a psychological effect or a stigma in immediately finding
one’s self laid off from work. This is exactly why our labor laws have
provided for mandating procedural due process clauses. Our laws,
while recognizing the right of employers to terminate employees it
cannot sustain, also recognize the employee’s right to be properly
informed of the impending severance of his ties with the company
he is working for. x x x.
x x x Over the years, this Court has had the opportunity to
reexamine the sanctions imposed upon employers who fail to
comply with the procedural due process requirements in terminating
its employees. In Agabon v. National Labor Relations Commission
[citation omitted], this Court reverted back to the doctrine in Wenphil
Corporation v. National Labor Relations Commission [citation
omitted] and held that where the dismissal is due to a just or
authorized cause, but without observance of the due process
requirements, the dismissal may be upheld but the employer must
pay an indemnity to the employee. The sanctions to be imposed
however, must be stiffer than those imposed in Wenphil to achieve a
result fair to both the employers and the employees.
In Jaka Food Processing Corporation v. Pacot [citation omitted], this
Court, taking a cue from Agabon, held that since there is a clear-cut
distinction between a dismissal due to a just cause and a dismissal
due to an authorized cause, the legal implications for employers who
fail to comply with the notice requirements must also be treated
differently:
Accordingly, it is wise to hold that: (1) if the dismissal is based on a
just cause under Article 282 but the employer failed to comply with
the notice requirement, the sanction to be imposed upon him should
be tempered because the dismissal process was, in effect, initiated
by an act imputable to the employee; and (2) if the dismissal is
based on an authorized cause under Article 283 but the employer
failed to comply with the notice requirement, the sanction should be
stiffer because the dismissal process was initiated by the employer's
exercise of his management prerogative.55 [Emphasis supplied.]
Thus, in addition to separation pay, respondent is also entitled to an
award of nominal damages. In conformity with this Court’s ruling in
Culili v. Eastern Telecommunications Philippines, Inc. and Shimizu
Phils. Contractors, Inc. v. Callanta, both citing Jaka Food Processing
Corporation v. Pacot,56 this Court fixed the amount of nominal
damages to ₱50,000.00.
With respect to petitioners’ contention that the Management
Contract executed between respondent and petitioner Lucila has no
binding effect on petitioner corporation for having been executed
way before its incorporation, this Court finds the same meritorious.
Section 19 of the Corporation Code expressly provides:
Sec. 19. Commencement of corporate existence. - A private business operations. Worse, respondent was not given separation
corporation formed or organized under this Code commences to pay considering that petitioner corporation’s cessation of business
have corporate existence and juridical personality and is deemed was not due to business losses or financial reverses.
incorporated from the date the Securities and Exchange
WHEREFORE, premises considered, the Decision and Resolution
Commission issues a certificate of incorporation under its official
dated 20 June 2005 and 7 March 2006, respectively, of the Court of
seal; and thereupon the incorporators, stockholders/members and
Appeals in CA-G.R. SP No. 76624 are hereby AFFIRMED with the
their successors shall constitute a body politic and corporate under
MODIFICATION finding respondent’s dismissal from employment
the name stated in the articles of incorporation for the period of time
legal but without proper observance of due process. Accordingly,
mentioned therein, unless said period is extended or the corporation
petitioner corporation, jointly and solidarily liable with petitioner
is sooner dissolved in accordance with law. [Emphasis supplied.]
Lucila, is hereby ordered to pay respondent the following; (1)
Logically, there is no corporation to speak of prior to an entity’s separation pay equivalent to one month pay or at least one-half
incorporation. And no contract entered into before incorporation can month pay for every year of service, whichever is higher, to be
bind the corporation. computed from the commencement of employment until termination;
and (2) nominal damages in the amount of ₱50,000.00.
As can be gleaned from the records, the Management Contract
dated 16 January 1994 was executed between respondent and This Court, however, finds it proper to still remand the records to the
petitioner Lucila months before petitioner corporation’s incorporation Labor Arbiter to conduct further proceedings for the sole purpose of
on 15 August 1994. Similarly, it was done when petitioner Lucila was determining the compensation that respondent was actually
still the President of Marc Marketing, Inc. Undeniably, it cannot have receiving during the period that he was the General Manager of
any binding and legal effect on petitioner corporation. Also, there petitioner corporation for the proper computation of his separation
was no evidence presented to prove that petitioner corporation pay.
adopted, ratified or confirmed the Management Contract. It is for the
Costs against petitioners.
same reason that petitioner corporation cannot be considered
estopped from questioning its binding effect now that respondent SO ORDERED.
was invoking the same against it. In no way, then, can it be enforced
against petitioner corporation, much less, its provisions fixing
respondent’s compensation as General Manager to 30% of
petitioner corporation’s net profit. Consequently, such percentage
cannot be the basis for the computation of respondent’s separation
pay. This finding, however, will not affect the undisputed fact that
respondent was, indeed, the General Manager of petitioner
corporation from its incorporation up to the time of his dismissal.

Accordingly, this Court finds it necessary to still remand the present

case to the Labor Arbiter to conduct further proceedings for the sole
purpose of determining the compensation that respondent was
actually receiving during the period that he was the General
Manager of petitioner corporation, this, for the proper computation of
his separation pay.

As regards petitioner Lucila’s solidary liability, this Court affirms the

same.
As a rule, corporation has a personality separate and distinct from
its officers, stockholders and members such that corporate officers
are not personally liable for their official acts unless it is shown that
they have exceeded their authority. However, this corporate veil can
be pierced when the notion of the legal entity is used as a means to
perpetrate fraud, an illegal act, as a vehicle for the evasion of an
existing obligation, and to confuse legitimate issues. Under the
Labor Code, for instance, when a corporation violates a provision
declared to be penal in nature, the penalty shall be imposed upon
the guilty officer or officers of the corporation.57
Based on the prevailing circumstances in this case, petitioner Lucila,
being the President of petitioner corporation, acted in bad faith and
with malice in effecting respondent’s dismissal from employment.
Although petitioner corporation has a valid cause for dismissing
respondent due to cessation of business operations, however, the
latter’s dismissal therefrom was done abruptly by its President,
petitioner Lucila. Respondent was not given the required one-month
prior written notice that petitioner corporation will already cease its
business operations. As can be gleaned from the records,
respondent was dismissed outright by petitioner Lucila on the same
day that petitioner corporation decided to stop and cease its
G.R. No. 136448 November 3, 1999
LIM TONG LIM, petitioner,
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.
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 partner, 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
plaintiff's 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 for 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 attorney's 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 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 respondents 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. 21
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 . . . .
Oviously, the ultimate undertaking of the defendants was to
divide the profits among themselves which is what a
partnership essentially is . . . . 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
14
Hence, petitioner brought this recourse before this Court.
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 LIM'S
GOODS.
In determining whether petitioner may be held liable for the fishing
nets and floats 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 Court's 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:
Art. 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 Yao's 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, Chua's FB
Lady Anne Mel and Yao's 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 petitioner's 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 court's 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 petitioner's 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 petitioner's 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.
Sec. 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 rapier's 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. 108905 October 23, 1997
GRACE CHRISTIAN HIGH SCHOOL, petitioner,
vs.
THE COURT OF APPEALS, GRACE VILLAGE ASSOCIATION,
INC., ALEJANDRO G. BELTRAN, and ERNESTO L. GO,
respondents.
MENDOZA, J.:
The question for decision in this case is the right of petitioner's
representative to sit in the board of directors of respondent Grace
Village Association, Inc. as a permanent member thereof. For fifteen
years — from 1975 until 1989 — petitioner's representative had
been recognized as a "permanent director" of the association. But
on February 13, 1990, petitioner received notice from the
association's committee on election that the latter was "reexamining"
(actually, reconsidering) the right of petitioner's representative to
continue as an unelected member of the board. As the board denied
petitioner's request to be allowed representation without election,
petitioner brought an action for mandamus in the Home Insurance
and Guaranty Corporation. Its action was dismissed by the hearing
officer whose decision was subsequently affirmed by the appeals
board. Petitioner appealed to the Court of Appeals, which in turn
upheld the decision of the HIGC's appeals board. Hence this petition
for review based on the following contentions:
1. The Petitioner herein has already acquired a vested right to
a permanent seat in the Board of Directors of Grace Village
Association;
2. The amended By-laws of the Association drafted and
promulgated by a Committee on December 20, 1975 is valid
and binding; and
3. The Practice of tolerating the automatic inclusion of
petitioner as a permanent member of the Board of Directors of
the Association without the benefit of election is allowed under
the law.1
Briefly stated, the facts are as follows:
Petitioner Grace Christian High School is an educational institution
offering preparatory, kindergarten and secondary courses at the
Grace Village in Quezon City. Private respondent Grace Village
Association, Inc., on the other hand, is an organization of lot and/or
building owners, lessees and residents at Grace Village, while
private respondents Alejandro G. Beltran and Ernesto L. Go were its
president and chairman of the committee on election, respectively,
in 1990, when this suit was brought.
As adopted in 1968, the by-laws of the association provided in
Article IV, as follows:
The annual meeting of the members of the Association shall be
held on the first Sunday of January in each calendar year at
the principal office of the Association at 2:00 P.M. where they
shall elect by plurality vote and by secret balloting, the Board of
Directors, composed of eleven (11) members to serve for one
(1) year until their successors are duly elected and have
qualified.2
It appears, that on December 20, 1975, a committee of the board of
directors prepared a draft of an amendment to the by-laws, reading
as follows:3
VI. ANNUAL MEETING
The Annual Meeting of the members of the Association shall
be held on the second Thursday of January of each year. Each
Charter or Associate Member of the Association is entitled to
vote. He shall be entitled to as many votes as he has acquired
thru his monthly membership fees only computed on a ratio of
TEN (P10.00) PESOS for one vote.
The Charter and Associate Members shall elect the Directors
of the Association. The candidates receiving the first fourteen
(14) highest number of votes shall be declared and proclaimed
elected until their successors are elected and qualified.
GRACE CHRISTIAN HIGH SCHOOL representative is a
permanent Director of the ASSOCIATION.
This draft was never presented to the general membership for
approval. Nevertheless, from 1975, after it was presumably
submitted to the board, up to 1990, petitioner was given a
permanent seat in the board of directors of the association. On
February 13, 1990, the association's committee on election in a
letter informed James Tan, principal of the school, that "it was the
sentiment that all directors should be elected by members of the
association" because "to make a person or entity a permanent
Director would deprive the right of voters to vote for fifteen (15)
members of the Board," and "it is undemocratic for a person or entity
to hold office in perpetuity." 4 For this reason, Tan was told that "the
proposal to make the Grace Christian High School representative as
a permanent director of the association, although previously
tolerated in the past elections should be reexamined." Following this
advice, notices were sent to the members of the association that the
provision on election of directors of the 1968 by-laws of the
association would be observed.
Petitioner requested the chairman of the election committee to
change the notice of election by following the procedure in previous
elections, claiming that the notice issued for the 1990 elections ran
"counter to the practice in previous years" and was "in violation of
the by-laws (of 1975)" and "unlawfully deprive[d] Grace Christian
High School of its vested right [to] a permanent seat in the board." 5
As the association denied its request, the school brought suit for
mandamus in the Home Insurance and Guaranty Corporation to
compel the board of directors of the association to recognize its right
to a permanent seat in the board. Petitioner based its claim on the
following portion of the proposed amendment which, it contended,
had become part of the by-laws of the association as Article VI,
paragraph 2, thereof:
The Charter and Associate Members shall elect the Directors
of the Association. The candidates receiving the first fourteen
(14) highest number of votes shall be declared and proclaimed
elected until their successors are elected and qualified.
GRACE CHRISTIAN HIGH SCHOOL representative is a
permanent Director of the ASSOCIATION.
It appears that the opinion of the Securities and Exchange
Commission on the validity of this provision was sought by the
association and that in reply to the query, the SEC rendered an
opinion to the effect that the practice of allowing unelected members
in the board was contrary to the existing by-laws of the association
and to §92 of the Corporation Code (B.P. Blg. 68).
Private respondent association cited the SEC opinion in its answer.
Additionally, the association contended that the basis of the petition
for mandamus was merely "a proposed by-laws which has not yet
been approved by competent authority nor registered with the SEC
or HIGC." It argued that "the by-laws which was registered with the
SEC on January 16, 1969 should be the prevailing by-laws of the
association and not the proposed amended by-laws."6
In reply, petitioner maintained that the "amended by-laws is valid
and binding" and that the association was estopped from
questioning the by-laws. 7
A preliminary conference was held on March 29, 1990 but nothing
substantial was agreed upon. The parties merely agreed that the
board of directors of the association should meet on April 17, 1990
and April 24, 1990 for the purpose of discussing the amendment of
the by-laws and a possible amicable settlement of the case. A
meeting was held on April 17, 1990, but the parties failed to reach
an agreement. Instead, the board adopted a resolution declaring the
1975 provision null and void for lack of approval by members of the
association and the 1968 by-laws to be effective.
On June 20, 1990, the hearing officer of the HIGC rendered a
decision dismissing petitioner's action. The hearing officer held that
the amended by-laws, upon which petitioner based its claim, "[was]
merely a proposed by-laws which, although implemented in the past,
had not yet been ratified by the members of the association nor
approved by competent authority"; that, on the contrary, in the
meeting held on April 17, 1990, the directors of the association
declared "the proposed by-law dated December 20, 1975 prepared
by the committee on by-laws . . . null and void" and the by-laws of
December 17, 1968 as the "prevailing by-laws under which the
association is to operate until such time that the proposed
amendments to the by-laws are approved and ratified by a majority
of the members of the association and duly filed and approved by
the pertinent government agency." The hearing officer rejected
petitioner's contention that it had acquired a vested right to a
permanent seat in the board of directors. He held that past practice
in election of directors could not give rise to a vested right and that
departure from such practice was justified because it deprived
members of association of their right to elect or to be voted in office,
not to say that "allowing the automatic inclusion of a member
representative of petitioner as permanent director [was] contrary to
law and the registered by-laws of respondent association." 8
The appeals board of the HIGC affirmed the decision of the hearing
officer in its resolution dated September 13, 1990. It cited the
opinion of the SEC based on §92 of the Corporation Code which
reads:
§92. Election and term of trustees. — Unless otherwise
provided in the articles of incorporation or the by-laws,
the board of trustees of non-stock corporations, which
may be more than fifteen (15) in number as may be fixed
in their articles of incorporation or by-laws, shall, as soon
as organized, so classify themselves that the term of
office of one-third (1/3) of the number shall expire every
year; and subsequent elections of trustees comprising
one-third (1/3) of the board of trustees shall be held
annually and trustees so elected shall have a term of
three (3) years. Trustees thereafter elected to fill
vacancies occurring before the expiration of a particular
term shall hold office only for the unexpired period.
The HIGC appeals board denied claims that the school "[was]
being deprived of its right to be a member of the Board of
Directors of respondent association," because the fact was that
"it may nominate as many representatives to the Association's
Board as it may deem appropriate." It said that "what is merely
being upheld is the act of the incumbent directors of the Board
of correcting a long standing practice which is not anchored
upon any legal basis." 9
Petitioner appealed to the Court of Appeals but petitioner again lost
as the appellate court on February 9, 1993, affirmed the decision of
the HIGC. The Court of Appeals held that there was no valid
amendment of the association's by-laws because of failure to
comply with the requirement of its existing by-laws, prescribing the
affirmative vote of the majority of the members of the association at
a regular or special meeting called for the adoption of amendment to
the by-laws. Article XIX of the by-laws provides: 10
The members of the Association by an affirmative vote of
the majority at any regular or special meeting called for
the purpose, may alter, amend, change or adopt any new
by-laws.
This provision of the by-laws actually implements §22 of the
Corporation Law (Act No. 1459) which provides:
§22. The owners of a majority of the subscribed capital
stock, or a majority of the members if there be no capital
stock, may, at a regular or special meeting duly called for
the purpose, amend or repeal any by-law or adopt new
by-laws. The owners of two-thirds of the subscribed
capital stock, or two-thirds of the members if there be no
capital stock, may delegate to the board of directors the
power to amend or repeal any by-law or to adopt new by-
laws: Provided, however, That any power delegated to
the board of directors to amend or repeal any by-law or
adopt new by-laws shall be considered as revoked
whenever a majority of the stockholders or of the
members of the corporation shall so vote at a regular or
special meeting. And provided, further, That the Director
of the Bureau of Commerce and Industry shall not
hereafter file an amendment to the by-laws of any bank,
banking institution or building and loan association,
unless accompanied by certificate of the Bank
Commissioner to the effect that such amendments are in
accordance with law.
The proposed amendment to the by-laws was never approved by
the majority of the members of the association as required by these
provisions of the law and by-laws. But petitioner contends that the
members of the committee which prepared the proposed
amendment were duly authorized to do so and that because the
members of the association thereafter implemented the provision for
fifteen years, the proposed amendment for all intents and purposes
should be considered to have been ratified by them. Petitioner
contends: 11
Considering, therefore, that the "agents" or committee
were duly authorized to draft the amended by-laws and
the acts done by the "agents" were in accordance with
such authority, the acts of the "agents" from the very
beginning were lawful and binding on the homeowners
(the principals) per se without need of any ratification or
adoption. The more has the amended by-laws become
binding on the homeowners when the homeowners
followed and implemented the provisions of the amended
by-laws. This is not merely tantamount to tacit ratification
of the acts done by duly authorized "agents" but express
approval and confirmation of what the "agents" did
pursuant to the authority granted to them.
Corollarily, petitioner claims that it has acquired a vested right to a §28. Unless otherwise provided in this Act, the corporate
permanent seat in the board. Says petitioner: powers of all corporations formed under this Act shall be
exercised, all business conducted and all property of
The right of the petitioner to an automatic membership in
such corporations controlled and held by a board of not
the board of the Association was granted by the members
less than five nor more than eleven directors to be
of the Association themselves and this grant has been
elected from among the holders of stock or, where there
implemented by members of the board themselves all
is no stock, from the members of the corporation:
through the years. Outside the present membership of
Provided, however, That in corporations, other than
the board, not a single member of the Association has
banks, in which the United States has or may have a
registered any desire to remove the right of herein
vested interest, pursuant to the powers granted or
petitioner to an automatic membership in the board. If
delegated by the Trading with the Enemy Act, as
there is anybody who has the right to take away such
amended, and similar Acts of Congress of the United
right of the petitioner, it would be the individual members
States relating to the same subject, or by Executive Order
of the Association through a referendum and not the
No. 9095 of the President of the United States, as
present board some of the members of which are
heretofore or hereafter amended, or both, the directors
motivated by personal interest.
need not be elected from among the holders of the stock,
Petitioner disputes the ruling that the provision in question, or, where there is no stock from the members of the
giving petitioner's representative a permanent seat in the board corporation. (emphasis added)
of the association, is contrary to law. Petitioner claims that that
§29. At the meeting for the adoption of the original by-
is not so because there is really no provision of law prohibiting
laws, or at such subsequent meeting as may be then
unelected members of boards of directors of corporations.
determined, directors shall be elected to hold their offices
Referring to §92 of the present Corporation Code, petitioner
for one year and until their successors are elected and
says:
qualified. Thereafter the directors of the corporation shall
It is clear that the above provision of the Corporation be elected annually by the stockholders if it be a stock
Code only provides for the manner of election of the corporation or by the members if it be a nonstock
members of the board of trustees of non-stock corporation, and if no provision is made in the by-laws for
corporations which may be more than fifteen in number the time of election the same shall be held on the first
and which manner of election is even subject to what is Tuesday after the first Monday in January. Unless
provided in the articles of incorporation or by-laws of the otherwise provided in the by-laws, two weeks' notice of
association thus showing that the above provisions [are] the election of directors must be given by publication in
not even mandatory. some newspaper of general circulation devoted to the
publication of general news at the place where the
Even a careful perusal of the above provision of the
principal office of the corporation is established or
Corporation Code would not show that it prohibits a non-
located, and by written notice deposited in the post-office,
stock corporation or association from granting one of its
postage pre-paid, addressed to each stockholder, or, if
members a permanent seat in its board of directors or
there be no stockholders, then to each member, at his
trustees. If there is no such legal prohibition then it is
last known place of residence. If there be no newspaper
allowable provided it is so provided in the Articles of
published at the place where the principal office of the
Incorporation or in the by-laws as in the instant case.
corporation is established or located, a notice of the
xxx xxx xxx election of directors shall be posted for a period of three
weeks immediately preceding the election in at least
If fact, the truth is that this is allowed and is being
three public places, in the place where the principal office
practiced by some corporations duly organized and
of the corporation is established or located. (Emphasis
existing under the laws of the Philippines.
added)
One example is the Plus XII Catholic Center, Inc. Under
The present Corporation Code (B.P. Blg. 68), which took effect on
the by-laws of this corporation, that whoever is the
May 1, 1980, 12 similarly provides:
Archbishop of Manila is considered a member of the
board of trustees without benefit of election. And not only §23. The Board of Directors or Trustees. — Unless
that. He also automatically sits as the Chairman of the otherwise provided in this Code, the corporate powers of
Board of Trustees, again without need of any election. all corporations formed under this Code shall be
exercised, all business conducted and all property of
Another concrete example is the Cardinal Santos
such corporatiomns controlled and held by the board of
Memorial Hospital, Inc. It is also provided in the by-laws
directors or trustees to be elected from among the
of this corporation that whoever is the Archbishop of
holders of stocks, or where there is no stock, from among
Manila is considered a member of the board of trustees
the members of the corporation, who shall hold office for
year after year without benefit of any election and he also
one (1) year and until their successors are elected and
sits automatically as the Chairman of the Board of
qualified. (Emphasis added)
Trustees.
These provisions of the former and present corporation law leave no
It is actually §§28 and 29 of the Corporation Law — not §92 of the
room for doubt as to their meaning: the board of directors of
present law or §29 of the former one — which require members of
corporations must be elected from among the stockholders or
the boards of directors of corporations to be elected. These
members. There may be corporations in which there are unelected
provisions read:
members in the board but it is clear that in the examples cited by
petitioner the unelected members sit as ex officio members, i.e., by
virtue of and for as long as they hold a particular office. But in the
case of petitioner, there is no reason at all for its representative to
be given a seat in the board. Nor does petitioner claim a right to
such seat by virtue of an office held. In fact it was not given such
seat in the beginning. It was only in 1975 that a proposed
amendment to the by-laws sought to give it one.
Since the provision in question is contrary to law, the fact that for
fifteen years it has not been questioned or challenged but, on the
contrary, appears to have been implemented by the members of the
association cannot forestall a later challenge to its validity. Neither
can it attain validity through acquiescence because, if it is contrary
to law, it is beyond the power of the members of the association to
waive its invalidity. For that matter the members of the association
may have formally adopted the provision in question, but their action
would be of no avail because no provision of the by-laws can be
adopted if it is contrary to law. 13
It is probable that, in allowing petitioner's representative to sit on the
board, the members of the association were not aware that this was
contrary to law. It should be noted that they did not actually
implement the provision in question except perhaps insofar as it
increased the number of directors from 11 to 15, but certainly not the
allowance of petitioner's representative as an unelected member of
the board of directors. It is more accurate to say that the members
merely tolerated petitioner's representative and tolerance cannot be
considered ratification.
Nor can petitioner claim a vested right to sit in the board on the
basis of "practice." Practice, no matter how long continued, cannot
give rise to any vested right if it is contrary to law. Even less tenable
is petitioner's claim that its right is "coterminus with the existence of
the association." 14

Finally, petitioner questions the authority of the SEC to render an

opinion on the validity of the provision in question. It contends that
jurisdiction over this case is exclusively vested in the HIGC.
But this case was not decided by the SEC but by the HIGC. The
HIGC merely cited as authority for its ruling the opinion of the SEC
chairman. The HIGC could have cited any other authority for the
view that under the law members of the board of directors of a
corporation must be elected and it would be none the worse for
doing so.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED.
SO ORDERED.