[ G.R. No.

178352, June 17, 2008 ]

VIRGILIO S. DELIMA, PETITIONER, VS. SUSAN MERCAIDA GOIS, RESPONDENT.

DECISION

YNARES-SATIAGO, J.:

This petition for review under Rule 45 of the Rules of Court assails the December 21, 2006
Decision[1] of the Court of Appeals which annulled and set aside the May 31, 2006 and August
22, 2006 Resolutions of the National Labor Relations Commission (NLRC) in NLRC Case No.
V-000188-2006 and ordered herein petitioner to return the cash bond released to him. Also
assailed is the February 5, 2007 Resolution[2] denying the Motion for Reconsideration.

The antecedent facts are as follows:

A case for illegal dismissal was filed by petitioner Virgilio S. Delima against Golden Union
Aquamarine Corporation (Golden), Prospero Gois and herein respondent Susan Mercaida Gois
before the Regional Arbitration Branch No. VIII of the National Labor Relations Commission
on October 29, 2004, docketed as NLRC RAB VIII Case No. 10-0231-04.

On April 29, 2005, Labor Arbiter Philip B. Montaces rendered a decision, the dispositive
portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered-
1. Finding illegality in the dismissal of complainant Virgilio Delima from his employment;
2. Ordering respondent Golden Union Aquamarine Corporation to pay complainant the
following:
Backwages (July 30, 2004 to April 29,
a.
2005 =
9 mos.; P5,350.50 x 9 months) P 48,154.50
b. Separation Pay (P5,350.50 x 4 years) 21,402.00
c. Salary Differentials 32,679.00
d. Service Incentive Leave Pay 2,820.00
Sub-Total P105,055.50
e. Attorney's fee (10%) 10,505.55
TOTAL P115,561.05
=========
3. Dismissing all other claims for lack of merit.
SO ORDERED.[3]
Golden failed to appeal the aforesaid decision; hence, it became final and executory. A writ of
execution was issued and an Isuzu Jeep with plate number PGE-531 was attached.

Thereafter, respondent Gois filed an Affidavit of Third Party Claim claiming that the
attachment of the vehicle was irregular because said vehicle was registered in her name and
not Golden's; and that she was not a party to the illegal dismissal case filed by Delima
against Golden.[4]

In an Order[5] dated December 29, 2005, the Labor Arbiter denied respondent's third-party
claim on grounds that respondent was named in the complaint as one of the respondents;

1
that summons were served upon her and Prospero Gois; that both verified Golden's Position
Paper and alleged therein that they are the respondents; and that respondent is one of the
incorporators/officers of the corporation.

Gois filed an appeal before the NLRC. At the same time, she filed a motion before the Labor
Arbiter to release the motor vehicle after substituting the same with a cash bond in the
amount of P115,561.05.

On January 16, 2006, an Order was issued by the Labor Arbiter which states:
Filed by Third Party Claimant SUSAN M. GOIS is a Motion to Release Motor Vehicle after
substituting same with a cash bond of P115,561.05 under O.R. No. 8307036 which amount is
equivalent to the judgment award in the instant case, in the meantime that she has appealed
the Order denying her Third Party Claim.

Finding said Motion in order and with merit, Sheriff Felicisimo T. Basilio is directed to release
from his custody the Isuzu jeep with Plate No. PGE-532 and return same to SUSAN M. GOIS.

SO ORDERED.[6]
Meanwhile, on May 31, 2006, the NLRC issued a Resolution [7] which dismissed respondent's
appeal for lack of merit. A Motion for Reconsideration [8] was filed but it was denied on August
22, 2006.[9] On September 12, 2006, the NLRC Resolution became final and executory;
subsequently, an Entry of Judgment[10] was issued on September 29, 2006.

On October 13, 2006, Gois filed a petition for certiorari [11] before the Court of Appeals as well
as a Supplement to Petition[12] on October 27, 2006. Gois alleged that the NLRC committed
grave abuse of discretion when it dismissed her appeal. She claimed that by denying her
third-party claim, she was in effect condemned to pay a judgment debt issued against a
corporation of which she is neither a president nor a majority owner but merely a
stockholder. She further argued that her personality is separate and distinct from that of
Golden; thus, the judgment ordering the corporation to pay the petitioner could not be
satisfied out of her personal assets.

On December 21, 2006, the appellate court rendered a Decision in favor of respondent,
which reads in part:
In the decision dated April 29, 2005 rendered by Labor Arbiter Montaces, the dispositive
portion confined itself in directing Golden Union Aquamarine Corporation only, no more and
no less, to pay private respondent the award stated therein, but did not mention that the
liability is joint and solidary with petitioner Susan Gois although the complaint filed by the
private respondent included petitioner as among the respondents therein.

It bears stress also that corporate officers cannot be held liable for damages on account of
the employee's dismissal because the employer corporation has a personality separate and
distinct from its officers who merely acted as its agents. They are only solidarily liable with
the corporation for the termination of employment of employees if the same was done with
malice or in bad faith. In the case at bench, it was not clearly shown and established that the
termination of private respondent from employment was tainted with evident malice and bad
faith. As elucidated in the case of Reahs Corporation vs. NLRC, the main doctrine of separate
personality of a corporation should remain as the guiding rule in determining corporate
liability to its employees, and that, at the very least, to justify solidary liability, "there must
be an allegation or showing that the officers of the corporation deliberately or maliciously
designed to evade the financial obligation of the corporation to its employees."

2
Further, as wisely put by the petitioner, while it may be true that the subject vehicle was
used by the corporation in transporting the products bought by the corporation from Eastern
Samar to Manila, it does not necessarily follow that it is owned by the corporation as in fact
petitioner was able to duly establish that the said vehicle is hers and is registered under her
name. Nor does it imply that the corporation is free to dispose of the same and neither does
it imply that the said vehicle may and can be levied by respondent NLRC to satisfy a
judgment against the corporation.

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us

GRANTING the petition filed in this case, ANNULLING and SETTING ASIDE the Resolutions
dated May 31, 2006 and August 22, 2006, respectively, issued by the respondent National
Labor Relations Commission (NLRC), 4th Division in NLRC Case No. V-000188-2006 and
ORDERING private respondent to return to petitioner the cash bond earlier released to him.

SO ORDERED.[13]
Petitioner filed a Motion for Reconsideration[14] which was denied. Hence, the present petition
raising the following issues:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS, NINETEENTH (19 th) DIVISION,
ERRED:

1. WHEN IT OMMITED PRIVATE RESPONDENT AS ONE OF THE PRINCIPAL RESPONDENTS

IN THE ORIGINAL COMPLAINT AS ILLUSTRATED IN ITS BRIEF STATEMENT OF FACTS;

2. WHEN IT CONSIDERED THAT THE VEHICLE PRINCIPALLY USED IN THE BUSINESS

OPERATIONS OF THE CORPORATION, WHICH WAS REGISTERED UNDER THE NAME OF
PRIVATE RESPONDENT WHO WAS ALSO THE CORPORATION PRESIDENT, CANNOT BE
SUBJECT OF GARNISHMENT;

3. WHEN IT ANNULLED AND SET ASIDE A FINAL AND EXECUTED ORDER/RESOLUTION OF

THE NATIONAL LABOR RELATIONS COMMISSION.[15]

A corporation has a personality distinct and separate from its individual stockholders or
members and from that of its officers who manage and run its affairs. The rule is that
obligations incurred by the corporation, acting through its directors, officers and employees,
are its sole liabilities. Thus, property belonging to a corporation cannot be attached to satisfy
the debt of a stockholder and vice versa, the latter having only an indirect interest in the
assets and business of the former.[16]

Since the Decision of the Labor Arbiter dated April 29, 2005 directed only Golden to pay the
petitioner the sum of P115,561.05 and the same was not joint and solidary obligation with
Gois, then the latter could not be held personally liable since Golden has a separate and
distinct personality of its own. It remains undisputed that the subject vehicle was owned by
Gois, hence it should not be attached to answer for the liabilities of the corporation. Unless
they have exceeded their authority, corporate officers are, as a general rule, not personally
liable for their official acts, because a corporation, by legal fiction, has a personality separate
and distinct from its officers, stockholders and members. No evidence was presented to show
that the termination of the petitioner was done with malice or in bad faith for it to hold the
corporate officers, such as Gois, solidarily liable with the corporation.

We note that the Resolution of the NLRC dismissing respondent's appeal was entered in the

3
Book of Entries of Judgment on September 29, 2006 after it allegedly became final and
executory on September 12, 2006.

It will be recalled, however, that the NLRC issued the Resolution dismissing the appeal of the
respondent on May 31, 2006. A motion for reconsideration was filed on July 24, 2006 but it
was denied by the NLRC on August 22, 2006. Copy of the denial was received by the
respondent on September 1, 2006.[17] Thus, respondent has sixty (60) days from receipt of
the denial of the motion for reconsideration or until October 31, 2006, within which to file the
petition for certiorari under Section 4 of Rule 65 of the Rules of Court. Thus, the petition for
certiorari filed by respondent before the Court of Appeals on October 13, 2006 was timely.
[18]
 Consequently, the NLRC erred in declaring its May 31, 2006 Resolution final and
executory.

A decision issued by a court is final and executory when such decision disposes of the subject
matter in its entirety or terminates a particular proceeding or action, leaving nothing else to
be done but to enforce by execution what has been determined by the court, such as when
after the lapse of the reglementary period to appeal, no appeal has been perfected. [19]

In the instant case, it is undisputed that when the entry of judgment was issued by the NLRC
on September 12, 2006 and entered in the Book of Entries of Judgment on September 29,
2006, the reglementary period to file a petition for certiorari has not yet lapsed. In fact, when
the petition for certiorari was filed on October 13, 2006, the same was still within the
reglementary period. It bears stressing that a petition for certiorari under Rule 65 must be
filed "not later than 60 days from notice of the judgment, order or resolution" sought to be
annulled.[20]

The period or manner of "appeal" from the NLRC to the Court of Appeals is governed by Rule
65 pursuant to the ruling of this Court in the case of St. Martin Funeral Home v. National
Labor Relations Commission.[21] Section 4 of Rule 65, as amended, states that the "petition
may be filed not later than sixty (60) days from notice of the judgment, or resolution sought
to be assailed."[22]

Corollarily, Section 4, Rule III of the New Rules of Procedure of the NLRC expressly mandates
that "(f)or the purpose(s) of computing the period of appeal, the same shall be counted from
receipt of such decisions, awards or orders by the counsel of record." Although this rule
explicitly contemplates an appeal before the Labor Arbiter and the NLRC, we do not see any
cogent reason why the same rule should not apply to petitions for certiorari filed with the
Court of Appeals from decisions of the NLRC. [23]

We note that in the dispositive portion of its Decision, the appellate court ordered petitioner
to return to respondent the cash bond earlier released to him. However, petitioner admitted
that the monies were spent to defray the medical expenses of his ailing mother. Considering
that petitioner is legally entitled to receive said amount, Golden must reimburse respondent
Gois the amount of P115,561.05. To rule otherwise would result in unjust enrichment of
Golden. The corporation has benefited from the payment made by Gois because it was
relieved from its obligation to pay to petitioner the judgment debt.

WHEREFORE, the petition is PARTLY GRANTED. The assailed Decision of the Court of
Appeals dated December 21, 2006 annulling and setting aside the May 31, 2006 and August
22, 2006 Resolutions of the National Labor Relations Commission; and its Resolution dated
February 5, 2007 are AFFIRMED with the MODIFICATION that Golden Union Aquamarine

4
Corporation is ordered to REIMBURSE respondent Susan M. Gois the amount of
P115,561.05.

SO ORDERED.

Austria-Martinez, Chico-Nazario, Reyes, and Brion, JJ., concur.

5
 A.M. No. P-01-1464. March 13, 2001

SALVADOR O. BOOC, complainant, vs. MALAYO B. BANTUAS, SHERIFF IV, RTC,

BRANCH 3, ILIGAN CITY, Respondent.

RESOLUTION

DE LEON, JR., J.:

An affidavit-complaint dated August 31, 1999 was filed before the Office of the Court
Administrator (OCA) by Salvador Booc charging Malayo B. Bantuas, Sheriff IV of the Regional
Trial Court (RTC), Branch 3, Iligan City with Gross Ignorance of the Law and Grave Abuse of
Authority relative to Civil Case No. 1718 entitled, Felipe G. Javier, Jr. vs. Rufino Booc.

Complainant is the President of five Star Marketing Corporation. On August 22, 1994 herein
respondent Sheriff Malayo B. Bantuas, pursuant to a Writ of Execution issued in Civil Case
No. 1718 filed a Notice of Levy with the Register of Deeds, Iligan City over a parcel of land
covered by TCT No. T-19209 and owned by Five Star Marketing Corporation. Complainant
alleged that respondent sheriff, at the instance of plaintiff, former Judge Felipe Javier,
proceeded to file the Notice of Levy despite respondent sheriffs knowledge that the property
is owned by the corporation which was not a party to the civil case.

On July 31, 1995, the corporation through the complainant reiterated to respondent sheriff
that it was the owner of the property and Rufino Booc had no share or interest in the
corporation. Hence, the corporation demanded that respondent sheriff cancel the notice of
levy, otherwise the corporation would take the appropriate legal steps to protect its interest.

Respondent sheriff, however, did not heed the corporations demand inasmuch as on August
20, 1999 the corporation received a Notice of Sale on Execution of Real Property, dated
August 11, 1999, covering the subject property. Respondent sheriff scheduled the public
auction on August 31, 1999. Consequently, the corporation, to protect its rights and
interests, was compelled to file an action for Quieting of Title with the RTC, Branch 4 of Iligan
City.

Respondent sheriff, in his answer to the complaint filed against him before the OCA, said that
he filed a Notice of Levy with the Register of Deeds of Iligan City on the share, rights,
interest and participation of Rufino Booc in the parcel of land owned by Five Star Marketing
Corporation. Respondent sheriff claimed that Rufino Booc is the owner of around 200 shares
of stock in said corporation according to a document issued by the Securities and Exchange
Commission.

Respondent sheriff stressed that the levy was made on the share, rights and/or interest and
participation which Rufino Booc, as president and stockholder, may have in the parcel of land
owned by Five Star Marketing Corporation. Claiming that he was only acting pursuant to his
duties as sheriff, respondent cited Section 15, Rule 39 of the Rules of Court which states that

x x x The officer must enforce an execution of a money judgment by levying on all the
property, real and personal of every name and nature whatsoever, and which may be
disposed of for value of the judgment debtor not exempt from execution.

6
Real property stocks, shares, debts, credits, and other personal property, or any interest in
either real or personal property, may be levied upon in like manner and with like effect as
under a writ of execution.

Respondent sheriff said that while complainant Salvador Booc made a demand for the
cancellation of levy made, the former deemed it wise to have the judgment satisfied in
accordance with Section 39 of the Rules of Court. Respondent sheriff added that the trial
court where the case for Quieting of Title filed by the corporation was pending ordered the
auction sale of the shares of stock of Rufino Booc. The corporation allegedly never questioned
said order of the RTC.

Finally, respondent sheriff averred that the corporation is merely a dummy of Rufino Booc
and his brother Sheikding Booc. Respondnet sheriff submitted as an exhibit an affidavit
executed by Sheikding Booc wherein the latter admitted that when Judge Felipe Javier won in
the civil case against Rufino Booc, the latter simulated a transfer of his shares of stock in Five
Star Marketing Corporation so that the property may not be levied upon. 1cräläwvirtualibräry

Complainant, in his reply to respondent sheriffs comment belied the latters allegation that
the corporation never questioned the auction sale. Complainant averred that contrary to the
respondent sheriffs assertion, the trial court in fact issued a restraining order which was
withdrawn after plaintiffs counsel manifested that the respondent sheriff would only auction
Rufino Boocs shares of stock in the corporation and not the subject property.

The OCA found respondent sheriff liable for the charges filed against him, stating that
respondent sheriff acted in bad faith when he auctioned the subject property inasmuch as
Judge Mangotara had already warned him that the public auction should pertain only to
shares of stock owned by Rufino Booc in Five Star Marketing Corporation. Respondent sheriff,
however, in violation of the order issued by Judge Mangotara and in disregard of the
manifestation filed by plaintiffs counsel that the sale should involve only the shares of stock,
proceeded to auction the subject property. The OCA, thus, made the recommendation that:

1) The instant case be RE-DOCKETED as a regular administrative matter; and

2) Respondent Sheriff Malayo B. Bantuas be FINED in the amount of Ten Thousand Pesos
(P10,000.00) for conducting the auction sale in violation of the terms of the order issued by
Acting Presiding Judge Mamindiara P. Mangotara with a STERN WARNING that a commission
of the same or similar acts in the future shall be dealt with more severely.

A careful scrutiny of the records shows that respondent sheriff, in filing a notice of levy on
the subject property as well as in the certificate of sale, did not fail to mention that what was
being levied upon and sold was whatever shares, rights, interests and participation Rufino
Booc, as president and stockholder in Five Star Marketing Corporation may have on subject
property. Respondent sheriff, however, overstepped his authority when he disregarded the
distinct and separate personality of the corporation from that of Rufino Booc as stockholder
of the corporation by levying on the property of the corporation. Respondent sheriff should
not have made the levy based on mere conjecture that since Rufino Booc is a stockholder
and officer of the corporation, then he might have an interest or share in the subject
property.

It is settled that a corporation is clothed with a personality separate and distinct from that of
its stockholders. It may not be held liable for the personal indebtedness of its stockholders.
7
In the case of Del Rosario vs. Bascar, Jr., 2 we imposed the fine of P5,000.00 on respondent
sheriff Bascar for allocating unto himself the power of the court to pierce the veil of corporate
entity and improvidently assuming that since complainant Esperanza del Rosario is the
treasurer of Miradel Development Corporation, they are one and the same. In the said case
we reiterated the principle that the mere fact that one is a president of the corporation does
not render the property he owns or possesses the property of the corporation since the
president, as an individual, and the corporation are separate entities.

Based on the foregoing, respondent Sheriff Bantuas has clearly acted beyond his authority
when he levied the property of Five Star Marketing Corporation. The fact, however, that
respondent sheriff, in levying said property, had stated in the notice of levy as well as in the
certificate of sale that what was being levied upon and sold was whatever rights, shares
interest and/or participation Rufino Booc, as stockholder and president in the corporation,
may have on the subject property, shows that respondent sheriffs conduct was impelled
partly by ignorance of Corporation Law and partly by mere overzealousness to comply with
his duties and not by bad faith or blatant disregard of the trial courts order. Hence, we deem
that the penalty of a fine of Five Thousand Pesos (P5,000.00) to be imposed on respondent
sheriff would suffice.

WHEREFORE , respondent Malayo B. Bantuas, Sheriff IV of the RTC of Iligan City , Branch 3,
is hereby FINED in the sum of Five Thousand Pesos (P5,000.00) with the STERN WARNING
that a repetition of the same or similar acts in the future will be dealt with more severely.

SO ORDERED.

Bellosillo,  (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

8
 [G.R. NO. 150197 July 28, 2005]

PRUDENTIAL BANK, Petitioner, v. DON A. ALVIAR and GEORGIA B.

ALVIAR, Respondents.

DECISION

TINGA, J.:

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court. Petitioner
Prudential Bank seeks the reversal of the Decision1 of the Court of Appeals dated 27
September 2001 in CA-G.R. CV No. 59543 affirming the Decision of the Regional Trial Court
(RTC) of Pasig City, Branch 160, in favor of respondents.

Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners of a
parcel of land in San Juan, Metro Manila, covered by Transfer Certificate of Title (TCT) No.
438157 of the Register of Deeds of Rizal. On 10 July 1975, they executed a deed of real
estate mortgage in favor of petitioner Prudential Bank to secure the payment of a loan
worth P250,000.00.2 This mortgage was annotated at the back of TCT No. 438157. On 4
August 1975, respondents executed the corresponding promissory note, PN BD#75/C-252,
covering the said loan, which provides that the loan matured on 4 August 1976 at an interest
rate of 12% per annum with a 2% service charge, and that the note is secured by a real
estate mortgage as aforementioned.3 Significantly, the real estate mortgage contained the
following clause:

That for and in consideration of certain loans, overdraft and other credit accommodations
obtained from the Mortgagee by the Mortgagor and/or ________________ hereinafter
referred to, irrespective of number, as DEBTOR, and to secure the payment of the same and
those that may hereafter be obtained, the principal or all of which is hereby fixed at Two
Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the
Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or
any other obligation owing to the Mortgagee, whether direct or indirect, principal or
secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor
does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or
assigns, the parcels of land which are described in the list inserted on the back of this
document, and/or appended hereto, together with all the buildings and improvements now
existing or which may hereafter be erected or constructed thereon, of which the Mortgagor
declares that he/it is the absolute owner free from all liens and incumbrances. . . . 4

On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345

for P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was secured by a
"hold-out" on the mortgagor's foreign currency savings account with the bank under Account
No. 129, and that the mortgagor's passbook is to be surrendered to the bank until the
amount secured by the "hold-out" is settled.5

On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of which the
husband and wife were President and Chairman of the Board and Vice
President,6 respectively, PN BD#76/C-430 covering P545,000.000. As provided in the note,
the loan is secured by "Clean-Phase out TOD CA 3923," which means that the temporary
overdraft incurred by Donalco Trading, Inc. with petitioner is to be converted into an ordinary
loan in compliance with a Central Bank circular directing the discontinuance of overdrafts. 7

On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its approval
of a straight loan of P545,000.00, the proceeds of which shall be used to liquidate the
outstanding loan of P545,000.00 TOD. The letter likewise mentioned that the securities for
the loan were the deed of assignment on two promissory notes executed by Bancom Realty
Corporation with Deed of Guarantee in favor of A.U. Valencia and Co. and the chattel
mortgage on various heavy and transportation equipment. 8

On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the

obligations of G.B. Alviar Realty and Development, Inc. and for the release of the real estate
mortgage for the P450,000.00 loan covering the two (2) lots located at Vam Buren and
Madison Streets, North Greenhills, San Juan, Metro Manila. The payment was acknowledged
by petitioner who accordingly released the mortgage over the two properties. 9

On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on
the property covered by TCT No. 438157. Per petitioner's computation, respondents had the
total obligation of P1,608,256.68, covering the three (3) promissory notes, to wit: PN
BD#75/C-252 for P250,000.00, PN BD#76/C-345 for P382,680.83, and PN BD#76/C-340
for P545,000.00, plus assessed past due interests and penalty charges. The public auction
sale of the mortgaged property was set on 15 January 1980. 10

Respondents filed a complaint for damages with a prayer for the issuance of a writ of
preliminary injunction with the RTC of Pasig,11 claiming that they have paid their principal
loan secured by the mortgaged property, and thus the mortgage should not be foreclosed.
For its part, petitioner averred that the payment of P2,000,000.00 made on 6 March 1979
was not a payment made by respondents, but by G.B. Alviar Realty and Development Inc.,
which has a separate loan with the bank secured by a separate mortgage. 12

On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff to proceed
with the extra-judicial foreclosure.13 Respondents sought reconsideration of the decision. 14 On
24 August 1994, the trial court issued an Order setting aside its earlier decision and awarded
attorney's fees to respondents.15 It found that only the P250,000.00 loan is secured by the
mortgage on the land covered by TCT No. 438157. On the other hand, the P382,680.83 loan
is secured by the foreign currency deposit account of Don A. Alviar, while the P545,000.00
obligation was an unsecured loan, being a mere conversion of the temporary overdraft of
Donalco Trading, Inc. in compliance with a Central Bank circular. According to the trial court,
the "blanket mortgage clause" relied upon by petitioner applies only to future loans obtained
by the mortgagors, and not by parties other than the said mortgagors, such as Donalco
Trading, Inc., for which respondents merely signed as officers thereof.

On appeal to the Court of Appeals, petitioner made the following assignment of errors:

I. The trial court erred in holding that the real estate mortgage covers only the promissory
note BD#75/C-252 for the sum of P250,000.00.

II. The trial court erred in holding that the promissory note BD#76/C-345 for P2,640,000.00
(P382,680.83 outstanding principal balance) is not covered by the real estate mortgage by
expressed agreement.
III. The trial court erred in holding that Promissory Note BD#76/C-430 for P545,000.00 is not
covered by the real estate mortgage.

IV. The trial court erred in holding that the real estate mortgage is a contract of adhesion.

V. The trial court erred in holding defendant-appellant liable to pay plaintiffs-appellees

attorney's fees for P20,000.00.16

The Court of Appeals affirmed the Order of the trial court but deleted the award of attorney's
fees.17 It ruled that while a continuing loan or credit accommodation based on only one
security or mortgage is a common practice in financial and commercial institutions, such
agreement must be clear and unequivocal. In the instant case, the parties executed different
promissory notes agreeing to a particular security for each loan. Thus, the appellate court
ruled that the extrajudicial foreclosure sale of the property for the three loans is improper. 18

The Court of Appeals, however, found that respondents have not yet paid the P250,000.00
covered by PN BD#75/C-252 since the payment of P2,000,000.00 adverted to by
respondents was issued for the obligations of G.B. Alviar Realty and Development, Inc. 19

Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors raised in
the Court of Appeals as grounds herein.

Petitioner maintains that the "blanket mortgage clause" or the "dragnet clause" in the real
estate mortgage expressly covers not only the P250,000.00 under PN BD#75/C-252, but also
the two other promissory notes included in the application for extrajudicial foreclosure of real
estate mortgage.20 Thus, it claims that it acted within the terms of the mortgage contract
when it filed its petition for extrajudicial foreclosure of real estate mortgage. Petitioner relies
on the cases of Lim Julian v. Lutero,21 Tad-Y v. Philippine National Bank,22 Quimson v.
Philippine National Bank,23 C & C Commercial v. Philippine National Bank,24 Mojica v. Court of
Appeals,25 and China Banking Corporation v. Court of Appeals, 26 all of which upheld the
validity of mortgage contracts securing future advancements.

Anent the Court of Appeals' conclusion that the parties did not intend to include PN
BD#76/C-345 in the real estate mortgage because the same was specifically secured by a
foreign currency deposit account, petitioner states that there is no law or rule which prohibits
an obligation from being covered by more than one security. 27 Besides, respondents even
continued to withdraw from the same foreign currency account even while the promissory
note was still outstanding, strengthening the belief that it was the real estate mortgage that
principally secured all of respondents' promissory notes. 28 As for PN BD#76/C-345, which the
Court of Appeals found to be exclusively secured by the Clean-Phase out TOD 3923,
petitioner posits that such security is not exclusive, as the "dragnet clause" of the real estate
mortgage covers all the obligations of the respondents. 29

Moreover, petitioner insists that respondents attempt to evade foreclosure by the expediency
of stating that the promissory notes were executed by them not in their personal capacity but
as corporate officers. It claims that PN BD#76/C-430 was in fact for home construction and
personal consumption of respondents. Thus, it states that there is a need to pierce the veil of
corporate fiction.30

Finally, petitioner alleges that the mortgage contract was executed by respondents with
knowledge and understanding of the "dragnet clause," being highly educated individuals,
seasoned businesspersons, and political personalities.31 There was no oppressive use of
superior bargaining power in the execution of the promissory notes and the real estate
mortgage.32

For their part, respondents claim that the "dragnet clause" cannot be applied to the
subsequent loans extended to Don Alviar and Donalco Trading, Inc. since these loans are
covered by separate promissory notes that expressly provide for a different form of
security.33 They reiterate the holding of the trial court that the "blanket mortgage clause"
would apply only to loans obtained jointly by respondents, and not to loans obtained by other
parties.34 Respondents also place a premium on the finding of the lower courts that the real
estate mortgage clause is a contract of adhesion and must be strictly construed against
petitioner bank.35

The instant case thus poses the following issues pertaining to: (i) the validity of the "blanket
mortgage clause" or the "dragnet clause"; (ii) the coverage of the "blanket mortgage clause";
and consequently, (iii) the propriety of seeking foreclosure of the mortgaged property for the
non-payment of the three loans.

At this point, it is important to note that one of the loans sought to be included in the
"blanket mortgage clause" was obtained by respondents for Donalco Trading, Inc. Indeed, PN
BD#76/C-430 was executed by respondents on behalf of Donalco Trading, Inc. and not in
their personal capacity. Petitioner asks the Court to pierce the veil of corporate fiction and
hold respondents liable even for obligations they incurred for the corporation. The mortgage
contract states that the mortgage covers "as well as those that the Mortgagee may extend to
the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing
to the Mortgagee, whether direct or indirect, principal or secondary." Well-settled is the rule
that a corporation has a personality separate and distinct from that of its officers and
stockholders. Officers of a corporation are not personally liable for their acts as such officers
unless it is shown that they have exceeded their authority. 36 However, the legal fiction that a
corporation has a personality separate and distinct from stockholders and members may be
disregarded if it is used as a means to perpetuate 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.37 PN BD#76/C-430, being an obligation of Donalco Trading, Inc., and not of the
respondents, is not within the contemplation of the "blanket mortgage clause." Moreover,
petitioner is unable to show that respondents are hiding behind the corporate structure to
evade payment of their obligations. Save for the notation in the promissory note that the
loan was for house construction and personal consumption, there is no proof showing that
the loan was indeed for respondents' personal consumption. Besides, petitioner agreed to the
terms of the promissory note. If respondents were indeed the real parties to the loan,
petitioner, a big, well-established institution of long standing that it is, should have insisted
that the note be made in the name of respondents themselves, and not to Donalco Trading
Inc., and that they sign the note in their personal capacity and not as officers of the
corporation.

Now on the main issues.

A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is

one which is specifically phrased to subsume all debts of past or future origins. Such clauses
are "carefully scrutinized and strictly construed."38 Mortgages of this character enable the
parties to provide continuous dealings, the nature or extent of which may not be known or
anticipated at the time, and they avoid the expense and inconvenience of executing a new
security on each new transaction.39 A "dragnet clause" operates as a convenience and
accommodation to the borrowers as it makes available additional funds without their having
to execute additional security documents, thereby saving time, travel, loan closing costs,
costs of extra legal services, recording fees, et cetera.40 Indeed, it has been settled in a long
line of decisions that mortgages given to secure future advancements are valid and legal
contracts,41 and the amounts named as consideration in said contracts do not limit the
amount for which the mortgage may stand as security if from the four corners of the
instrument the intent to secure future and other indebtedness can be gathered. 42

The "blanket mortgage clause" in the instant case states:

That for and in consideration of certain loans, overdraft and other credit accommodations
obtained from the Mortgagee by the Mortgagor and/or ________________ hereinafter
referred to, irrespective of number, as DEBTOR, and to secure the payment of the same
and those that may hereafter be obtained, the principal or all of which is hereby fixed at
Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those
that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest
and expenses or any other obligation owing to the Mortgagee, whether direct or
indirect, principal or secondary as appears in the accounts, books and records of the
Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the
Mortgagee, its successors or assigns, the parcels of land which are described in the list
inserted on the back of this document, and/or appended hereto, together with all the
buildings and improvements now existing or which may hereafter be erected or constructed
thereon, of which the Mortgagor declares that he/it is the absolute owner free from all liens
and incumbrances. . . .43 (Emphasis supplied.)

Thus, contrary to the finding of the Court of Appeals, petitioner and respondents intended the
real estate mortgage to secure not only the P250,000.00 loan from the petitioner, but also
future credit facilities and advancements that may be obtained by the respondents. The
terms of the above provision being clear and unambiguous, there is neither need nor excuse
to construe it otherwise.

The cases cited by petitioner, while affirming the validity of "dragnet clauses" or "blanket
mortgage clauses," are of a different factual milieu from the instant case. There, the
subsequent loans were not covered by any security other than that for the mortgage deeds
which uniformly contained the "dragnet clause."

In the case at bar, the subsequent loans obtained by respondents were secured by other
securities, thus: PN BD#76/C-345, executed by Don Alviar was secured by a "hold-out" on
his foreign currency savings account, while PN BD#76/C-430, executed by respondents for
Donalco Trading, Inc., was secured by "Clean-Phase out TOD CA 3923" and eventually by a
deed of assignment on two promissory notes executed by Bancom Realty Corporation with
Deed of Guarantee in favor of A.U. Valencia and Co., and by a chattel mortgage on various
heavy and transportation equipment. The matter of PN BD#76/C-430 has already been
discussed. Thus, the critical issue is whether the "blanket mortgage" clause applies even to
subsequent advancements for which other securities were intended, or particularly, to PN
BD#76/C-345.

Under American jurisprudence, two schools of thought have emerged on this question. One
school advocates that a "dragnet clause" so worded as to be broad enough to cover all other
debts in addition to the one specifically secured will be construed to cover a different debt,
although such other debt is secured by another mortgage. 44 The contrary thinking maintains
that a mortgage with such a clause will not secure a note that expresses on its face that it is
otherwise secured as to its entirety, at least to anything other than a deficiency after
exhausting the security specified therein,45 such deficiency being an indebtedness within the
meaning of the mortgage, in the absence of a special contract excluding it from the
arrangement.46

The latter school represents the better position. The parties having conformed to the "blanket
mortgage clause" or "dragnet clause," it is reasonable to conclude that they also agreed to an
implied understanding that subsequent loans need not be secured by other securities, as the
subsequent loans will be secured by the first mortgage. In other words, the sufficiency of the
first security is a corollary component of the "dragnet clause." But of course, there is no
prohibition, as in the mortgage contract in issue, against contractually requiring other
securities for the subsequent loans. Thus, when the mortgagor takes another loan for which
another security was given it could not be inferred that such loan was made in reliance solely
on the original security with the "dragnet clause," but rather, on the new security given. This
is the "reliance on the security test."

Hence, based on the "reliance on the security test," the California court in the cited case
made an inquiry whether the second loan was made in reliance on the original security
containing a "dragnet clause." Accordingly, finding a different security was taken for the
second loan no intent that the parties relied on the security of the first loan could be inferred,
so it was held. The rationale involved, the court said, was that the "dragnet clause" in the
first security instrument constituted a continuing offer by the borrower to secure further
loans under the security of the first security instrument, and that when the lender accepted a
different security he did not accept the offer.47

In another case, it was held that a mortgage with a "dragnet clause" is an "offer" by the
mortgagor to the bank to provide the security of the mortgage for advances of and when
they were made. Thus, it was concluded that the "offer" was not accepted by the bank when
a subsequent advance was made because (1) the second note was secured by a chattel
mortgage on certain vehicles, and the clause therein stated that the note was secured by
such chattel mortgage; (2) there was no reference in the second note or chattel mortgage
indicating a connection between the real estate mortgage and the advance; (3) the
mortgagor signed the real estate mortgage by her name alone, whereas the second note and
chattel mortgage were signed by the mortgagor doing business under an assumed name;
and (4) there was no allegation by the bank, and apparently no proof, that it relied on the
security of the real estate mortgage in making the advance.48

Indeed, in some instances, it has been held that in the absence of clear, supportive evidence
of a contrary intention, a mortgage containing a "dragnet clause" will not be extended to
cover future advances unless the document evidencing the subsequent advance refers to the
mortgage as providing security therefor.49

It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged
property because of non-payment of all the three promissory notes. While the existence and
validity of the "dragnet clause" cannot be denied, there is a need to respect the existence of
the other security given for PN BD#76/C-345. The foreclosure of the mortgaged property
should only be for the P250,000.00 loan covered by PN BD#75/C-252, and for any amount
not covered by the security for the second promissory note. As held in one case, where deeds
absolute in form were executed to secure any and all kinds of indebtedness that might
subsequently become due, a balance due on a note, after exhausting the special security
given for the payment of such note, was in the absence of a special agreement to the
contrary, within the protection of the mortgage, notwithstanding the giving of the special
security.50 This is recognition that while the "dragnet clause" subsists, the security specifically
executed for subsequent loans must first be exhausted before the mortgaged property can be
resorted to.

One other crucial point. The mortgage contract, as well as the promissory notes subject of
this case, is a contract of adhesion, to which respondents' only participation was the affixing
of their signatures or "adhesion" thereto.51 A contract of adhesion is one in which a party
imposes a ready-made form of contract which the other party may accept or reject, but
which the latter cannot modify.52

The real estate mortgage in issue appears in a standard form, drafted and prepared solely by
petitioner, and which, according to jurisprudence must be strictly construed against the party
responsible for its preparation.53 If the parties intended that the "blanket mortgage clause"
shall cover subsequent advancement secured by separate securities, then the same should
have been indicated in the mortgage contract. Consequently, any ambiguity is to be
taken contra proferentum, that is, construed against the party who caused the ambiguity
which could have avoided it by the exercise of a little more care. 54 To be more emphatic, any
ambiguity in a contract whose terms are susceptible of different interpretations must be read
against the party who drafted it,55 which is the petitioner in this case.

Even the promissory notes in issue were made on standard forms prepared by petitioner, and
as such are likewise contracts of adhesion. Being of such nature, the same should be
interpreted strictly against petitioner and with even more reason since having been
accomplished by respondents in the presence of petitioner's personnel and approved by its
manager, they could not have been unaware of the import and extent of such contracts.

Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court
found that respondents have not yet paid the P250,000.00, and gave no credence to their
claim that they paid the said amount when they paid petitioner P2,000,000.00. Thus, the
mortgaged property could still be properly subjected to foreclosure proceedings for the
unpaid P250,000.00 loan, and as mentioned earlier, for any deficiency after D/A SFDX#129,
security for PN BD#76/C-345, has been exhausted, subject of course to defenses which are
available to respondents.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No.
59543 is AFFIRMED.

Costs against petitioner.

SO ORDERED.

Puno, J., (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 174938               October 1, 2014

GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners,

vs.
BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B.
COLAYCO, MAXIMO G. LICAUCO III, AND BENJAMIN C. RAMOS, Respondents.

DECISION

LEONEN, J.:

Corporate representatives may be compelled to submit to arbitration proceedings pursuant to

a contract entered into by the corporation they represent if there are allegations of bad faith
or malice in their acts representing the corporation.

This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision and October
5, 2006 resolution. The Court of Appeals affirmed the trial court's decision holding that
petitioners, as director, should submit themselves as parties tothe arbitration proceedings
between BF Corporation and Shangri-La Properties, Inc. (Shangri-La).

In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against
Shangri-Laand the members of its board of directors: Alfredo C. Ramos, Rufo B.Colayco,
Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III, and Benjamin C. Ramos. 1

BF Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991, it
entered into agreements with Shangri-La wherein it undertook to construct for Shangri-La a
mall and a multilevel parking structure along EDSA.2

Shangri-La had been consistent in paying BF Corporation in accordance with its progress
billing statements.3 However, by October 1991, Shangri-La started defaulting in payment. 4

BF Corporation alleged that Shangri-La induced BF Corporation to continue with the

construction of the buildings using its own funds and credit despite Shangri-La’s
default.5 According to BF Corporation, ShangriLa misrepresented that it had funds to pay for
its obligations with BF Corporation, and the delay in payment was simply a matter of delayed
processing of BF Corporation’s progress billing statements. 6

BF Corporation eventually completed the construction of the buildings. 7 Shangri-La allegedly

took possession of the buildings while still owing BF Corporation an outstanding balance. 8

BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the
balance owed to it.9 It also alleged that the Shangri-La’s directors were in bad faith in
directing Shangri-La’s affairs. Therefore, they should be held jointly and severally liable with
Shangri-La for its obligations as well as for the damages that BF Corporation incurred as a
result of Shangri-La’s default.10

On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III,
and Benjamin C. Ramos filed a motion to suspend the proceedings in view of BF
Corporation’s failure to submit its dispute to arbitration, in accordance with the arbitration
clauseprovided in its contract, quoted in the motion as follows: 11

35. Arbitration

(1) Provided always that in case any dispute or difference shall arise between the Owner or
the Project Manager on his behalf and the Contractor, either during the progress or after the
completion or abandonment of the Works as to the construction of this Contract or as to any
matter or thing of whatsoever nature arising there under or inconnection therewith (including
any matter or thing left by this Contract to the discretion of the Project Manager or the
withholding by the Project Manager of any certificate to which the Contractor may claim to be
entitled or the measurement and valuation mentioned in clause 30(5)(a) of these Conditions
or the rights and liabilities of the parties under clauses 25, 26, 32 or 33 of these Conditions),
the owner and the Contractor hereby agree to exert all efforts to settle their differences or
dispute amicably. Failing these efforts then such dispute or difference shall be referred to
arbitration in accordance with the rules and procedures of the Philippine Arbitration Law.

x x x           x x x          x x x

(6) The award of such Arbitrators shall be final and binding on the parties. The decision of
the Arbitrators shall be a condition precedent to any right of legal action that either party
may have against the other. . . .12 (Underscoring in the original)

On August 19, 1993, BF Corporation opposed the motion to suspend proceedings. 13

In the November 18, 1993 order, the Regional Trial Court denied the motion to suspend
proceedings.14

On December 8, 1993, petitioners filed an answer to BF Corporation’s complaint, with

compulsory counter claim against BF Corporation and crossclaim against Shangri-La. 15 They
alleged that they had resigned as members of Shangri-La’s board of directors as of July 15,
1991.16

After the Regional Trial Court denied on February 11, 1994 the motion for reconsideration of
its November 18, 1993 order, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco,Maximo G.
Licauco III, and Benjamin Ramos filed a petition for certiorari with the Court of Appeals. 17

On April 28, 1995, the Court of Appeals granted the petition for certiorari and ordered the
submission of the dispute to arbitration. 18

Aggrieved by the Court of Appeals’ decision, BF Corporation filed a petition for review on
certiorari with this court.19 On March 27, 1998, this court affirmed the Court of Appeals’
decision, directing that the dispute be submitted for arbitration. 20
Another issue arose after BF Corporation had initiated arbitration proceedings. BF
Corporation and Shangri-La failed to agree as to the law that should govern the arbitration
proceedings.21 On October 27, 1998, the trial court issued the order directing the parties to
conduct the proceedings in accordance with Republic Act No. 876. 22

Shangri-La filed an omnibus motion and BF Corporation an urgent motion for clarification,
both seeking to clarify the term, "parties," and whether Shangri-La’s directors should be
included in the arbitration proceedings and served with separate demands for arbitration. 23

Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying that
they be excluded from the arbitration proceedings for being non-parties to Shangri-La’s and
BF Corporation’s agreement.24

On July 28, 2003, the trial court issued the order directing service of demands for arbitration
upon all defendants in BF Corporation’s complaint.25 According to the trial court, Shangri-La’s
directors were interested parties who "must also be served with a demand for arbitration to
give them the opportunity to ventilate their side of the controversy, safeguard their interest
and fend off their respective positions."26 Petitioners’ motion for reconsideration ofthis order
was denied by the trial court on January 19, 2005. 27

Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave abuse of
discretion in the issuance of orders compelling them to submit to arbitration proceedings
despite being third parties to the contract between Shangri-La and BF Corporation. 28

In its May 11, 2006 decision,29 the Court of Appeals dismissed petitioners’ petition for
certiorari. The Court of Appeals ruled that ShangriLa’s directors were necessary parties in the
arbitration proceedings.30 According to the Court of Appeals:

[They were] deemed not third-parties tothe contract as they [were] sued for their acts in
representation of the party to the contract pursuant to Art. 31 of the Corporation Code, and
that as directors of the defendant corporation, [they], in accordance with Art. 1217 of the
Civil Code, stand to be benefited or injured by the result of the arbitration proceedings,
hence, being necessary parties, they must be joined in order to have complete adjudication
of the controversy. Consequently, if [they were] excluded as parties in the arbitration
proceedings and an arbitral award is rendered, holding [Shangri-La] and its board of
directors jointly and solidarily liable to private respondent BF Corporation, a problem will
arise, i.e., whether petitioners will be bound bysuch arbitral award, and this will prevent
complete determination of the issues and resolution of the controversy. 31

The Court of Appeals further ruled that "excluding petitioners in the arbitration
proceedings . . . would be contrary to the policy against multiplicity of suits." 32

The dispositive portion of the Court of Appeals’ decision reads:

WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28, 2003 and
January 19, 2005 of public respondent RTC, Branch 157, Pasig City, in Civil Case No. 63400,
are AFFIRMED.33

The Court of Appeals denied petitioners’ motion for reconsideration in the October 5, 2006
resolution.34
On November 24, 2006, petitioners filed a petition for review of the May 11, 2006 Court of
Appeals decision and the October 5, 2006 Court of Appeals resolution. 35

The issue in this case is whether petitioners should be made parties to the arbitration
proceedings, pursuant to the arbitration clause provided in the contract between BF
Corporation and Shangri-La.

Petitioners argue that they cannot be held personally liable for corporate acts or
obligations.36 The corporation is a separate being, and nothing justifies BF Corporation’s
allegation that they are solidarily liable with Shangri-La.37 Neither did they bind themselves
personally nor did they undertake to shoulder Shangri-La’s obligations should it fail in its
obligations.38 BF Corporation also failed to establish fraud or bad faith on their part. 39

Petitioners also argue that they are third parties to the contract between BF Corporation and
Shangri-La.40 Provisions including arbitration stipulations should bind only the parties. 41 Based
on our arbitration laws, parties who are strangers to an agreement cannot be compelled to
arbitrate.42

Petitioners point out thatour arbitration laws were enacted to promote the autonomy of
parties in resolving their disputes.43 Compelling them to submit to arbitration is against this
purpose and may be tantamount to stipulating for the parties. 44

Separate comments on the petition werefiled by BF Corporation, and Maximo G. Licauco III,
Alfredo C.Ramos and Benjamin C. Ramos.45

Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with petitioners that
Shangri-La’sdirectors, being non-parties to the contract, should not be made personally liable
for Shangri-La’s acts.46 Since the contract was executed only by BF Corporation and Shangri-
La, only they should be affected by the contract’s stipulation.47 BF Corporation also failed to
specifically allege the unlawful acts of the directors that should make them solidarily liable
with Shangri-La for its obligations.48

Meanwhile, in its comment, BF Corporation argued that the courts’ ruling that the parties
should undergo arbitration "clearly contemplated the inclusion of the directors of the
corporation[.]"49 BF Corporation also argued that while petitioners were not parties to the
agreement, they were still impleaded under Section 31 of the Corporation Code. 50 Section 31
makes directors solidarily liable for fraud, gross negligence, and bad faith. 51 Petitioners are
not really third parties to the agreement because they are being sued as Shangri-La’s
representatives, under Section 31 of the Corporation Code. 52

BF Corporation further argued that because petitioners were impleaded for their solidary
liability, they are necessary parties to the arbitration proceedings. 53 The full resolution of all
disputes in the arbitration proceedings should also be done in the interest of justice. 54

In the manifestation dated September 6, 2007, petitioners informed the court that the
Arbitral Tribunal had already promulgated its decision on July 31, 2007. 55 The Arbitral
Tribunal denied BF Corporation’s claims against them.56 Petitioners stated that "[they] were
included by the Arbitral Tribunal in the proceedings conducted . . . notwithstanding [their]
continuing objection thereto. . . ."57 They also stated that "[their] unwilling participation in
the arbitration case was done ex abundante ad cautela, as manifested therein on several
occasions."58 Petitioners informed the court that they already manifested with the trial court
that "any action taken on [the Arbitral Tribunal’s decision] should be without prejudice to the
resolution of [this] case."59

Upon the court’s order, petitioners and Shangri-La filed their respective memoranda.
Petitioners and Maximo G. Licauco III, Alfredo C. Ramos, and Benjamin C. Ramos reiterated
their arguments that they should not be held liable for Shangri-La’s default and made parties
to the arbitration proceedings because only BF Corporation and Shangri-La were parties to
the contract.

In its memorandum, Shangri-La argued that petitioners were impleaded for their solidary
liability under Section 31 of the Corporation Code. Shangri-La added that their exclusion from
the arbitration proceedings will result in multiplicity of suits, which "is not favored in this
jurisdiction."60 It pointed out that the case had already been mooted by the termination of
the arbitration proceedings, which petitioners actively participated in. 61 Moreover, BF
Corporation assailed only the correctness of the Arbitral Tribunal’s award and not the part
absolving Shangri-La’s directors from liability. 62

BF Corporation filed a counter-manifestation with motion to dismiss 63 in lieu of the required
memorandum.

In its counter-manifestation, BF Corporation pointed out that since "petitioners’ counterclaims

were already dismissed with finality, and the claims against them were likewise dismissed
with finality, they no longer have any interest orpersonality in the arbitration case. Thus,
there is no longer any need to resolve the present Petition, which mainly questions the
inclusion of petitioners in the arbitration proceedings." 64 The court’s decision in this case will
no longer have any effect on the issue of petitioners’ inclusion in the arbitration
proceedings.65

The petition must fail.

The Arbitral Tribunal’s decision, absolving petitioners from liability, and its binding effect on
BF Corporation, have rendered this case moot and academic.

The mootness of the case, however, had not precluded us from resolving issues so that
principles may be established for the guidance of the bench, bar, and the public. In De la
Camara v. Hon. Enage,66 this court disregarded the fact that petitioner in that case already
escaped from prison and ruled on the issue of excessive bails:

While under the circumstances a ruling on the merits of the petition for certiorari is
notwarranted, still, as set forth at the opening of this opinion, the fact that this case is moot
and academic should not preclude this Tribunal from setting forth in language clear and
unmistakable, the obligation of fidelity on the part of lower court judges to the unequivocal
command of the Constitution that excessive bail shall not be required. 67

This principle was repeated in subsequent cases when this court deemed it proper to clarify
important matters for guidance.68

Thus, we rule that petitioners may be compelled to submit to the arbitration proceedings in
accordance with Shangri-Laand BF Corporation’s agreement, in order to determine if the
distinction between Shangri-La’s personality and their personalities should be disregarded.
This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties to avoid
litigation and settle disputes amicably and more expeditiously by themselves and through
their choice of arbitrators.

The policy in favor of arbitration has been affirmed in our Civil Code, 69 which was approved as
early as 1949. It was later institutionalized by the approval of Republic Act No. 876, 70 which
expressly authorized, made valid, enforceable, and irrevocable parties’ decision to submit
their controversies, including incidental issues, to arbitration. This court recognized this policy
in Eastboard Navigation, Ltd. v. Ysmael and Company, Inc.:71

As a corollary to the question regarding the existence of an arbitration agreement, defendant

raises the issue that, even if it be granted that it agreed to submit its dispute with plaintiff to
arbitration, said agreement is void and without effect for it amounts to removing said dispute
from the jurisdiction of the courts in which the parties are domiciled or where the dispute
occurred. It is true that there are authorities which hold that "a clause in a contract providing
that all matters in dispute between the parties shall be referred to arbitrators and to them
alone, is contrary to public policy and cannot oust the courts of jurisdiction" (Manila Electric
Co. vs. Pasay Transportation Co., 57 Phil., 600, 603), however, there are authorities which
favor "the more intelligent view that arbitration, as an inexpensive, speedy and amicable
method of settling disputes, and as a means of avoiding litigation, should receive every
encouragement from the courts which may be extended without contravening sound public
policy or settled law" (3 Am. Jur., p. 835). Congress has officially adopted the modern view
when it reproduced in the new Civil Code the provisions of the old Code on Arbitration. And
only recently it approved Republic Act No. 876 expressly authorizing arbitration of future
disputes.72 (Emphasis supplied)

In view of our policy to adopt arbitration as a manner of settling disputes, arbitration clauses
are liberally construed to favor arbitration. Thus, in LM Power Engineering Corporation v.
Capitol Industrial Construction Groups, Inc.,73 this court said:

Being an inexpensive, speedy and amicable method of settling disputes, arbitration — along
with mediation, conciliation and negotiation — is encouraged by the Supreme Court. Aside
from unclogging judicial dockets, arbitration also hastens the resolution of disputes,
especially of the commercial kind. It is thus regarded as the "wave of the future" in
international civil and commercial disputes. Brushing aside a contractual agreement calling
for arbitration between the parties would be a step backward.

Consistent with the above-mentioned policy of encouraging alternative dispute resolution

methods, courts should liberally construe arbitration clauses. Provided such clause is
susceptible of an interpretation that covers the asserted dispute, an order to arbitrate should
be granted. Any doubt should be resolved in favor of arbitration. 74 (Emphasis supplied)

A more clear-cut statement of the state policy to encourage arbitration and to favor
interpretations that would render effective an arbitration clause was later expressed in
Republic Act No. 9285:75

SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to actively
promote party autonomy in the resolution of disputes or the freedom of the party to make
their own arrangements to resolve their disputes. Towards this end, the State shall
encourage and actively promote the use of Alternative Dispute Resolution (ADR) as an
important means to achieve speedy and impartial justice and declog court dockets. As such,
the State shall provide means for the use of ADR as an efficient tool and an alternative
procedure for the resolution of appropriate cases. Likewise, the State shall enlist active
private sector participation in the settlement of disputes through ADR. This Act shall be
without prejudice to the adoption by the Supreme Court of any ADR system, such as
mediation, conciliation, arbitration, or any combination thereof as a means of achieving
speedy and efficient means of resolving cases pending before all courts in the Philippines
which shall be governed by such rules as the Supreme Court may approve from time to time.

....

SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall have due regard to
the policy of the law in favor of arbitration.Where action is commenced by or against multiple
parties, one or more of whomare parties who are bound by the arbitration agreement
although the civil action may continue as to those who are not bound by such arbitration
agreement. (Emphasis supplied)

Thus, if there is an interpretation that would render effective an arbitration clause for
purposes ofavoiding litigation and expediting resolution of the dispute, that interpretation
shall be adopted. Petitioners’ main argument arises from the separate personality given to
juridical persons vis-à-vis their directors, officers, stockholders, and agents. Since they did
not sign the arbitration agreement in any capacity, they cannot be forced to submit to the
jurisdiction of the Arbitration Tribunal in accordance with the arbitration agreement.
Moreover, they had already resigned as directors of Shangri-Laat the time of the alleged
default.

Indeed, as petitioners point out, their personalities as directors of Shangri-La are separate
and distinct from Shangri-La.

A corporation is an artificial entity created by fiction of law.76 This means that while it is not a
person, naturally, the law gives it a distinct personality and treats it as such. A corporation,
in the legal sense, is an individual with a personality that is distinct and separate from other
persons including its stockholders, officers, directors, representatives, 77 and other juridical
entities. The law vests in corporations rights,powers, and attributes as if they were natural
persons with physical existence and capabilities to act on their own. 78 For instance, they have
the power to sue and enter into transactions or contracts. Section 36 of the Corporation Code
enumerates some of a corporation’s powers, thus:

Section 36. Corporate powers and capacity.– Every corporation incorporated under this Code
has the power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate ofincorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions of this Code;
 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell

treasury stocks in accordance with the provisions of this Code; and to admit members
to the corporation if it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and
the Constitution;

8. To enter into merger or consolidation with other corporations as provided in this

Code;

9. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any political party or candidate or for
purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and

11. To exercise such other powers asmay be essential or necessary to carry out its
purpose or purposes as stated in its articles of incorporation. (13a)

Because a corporation’s existence is only by fiction of law, it can only exercise its rights and
powers through itsdirectors, officers, or agents, who are all natural persons. A corporation
cannot sue or enter into contracts without them.

A consequence of a corporation’s separate personality is that consent by a corporation

through its representatives is not consent of the representative, personally. Its obligations,
incurred through official acts of its representatives, are its own. A stockholder, director, or
representative does not become a party to a contract just because a corporation executed a
contract through that stockholder, director or representative.

Hence, a corporation’s representatives are generally not bound by the terms of the contract
executed by the corporation. They are not personally liable for obligations and liabilities
incurred on or in behalf of the corporation.

Petitioners are also correct that arbitration promotes the parties’ autonomy in resolving their
disputes. This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty
Corporation79 that an arbitration clause shall not apply to persons who were neither parties to
the contract nor assignees of previous parties, thus:

A submission to arbitration is a contract. As such, the Agreement, containing the stipulation

on arbitration, binds the parties thereto, as well as their assigns and heirs. But only
they.80 (Citations omitted)
Similarly, in Del Monte Corporation-USA v. Court of Appeals, 81 this court ruled:

The provision to submit to arbitration any dispute arising therefrom and the relationship of
the parties is part of that contract and is itself a contract. As a rule, contracts are respected
as the law between the contracting parties and produce effect as between them, their assigns
and heirs. Clearly, only parties to the Agreement . . . are bound by the Agreement and its
arbitration clause as they are the only signatories thereto.82 (Citation omitted)

This court incorporated these rulings in Agan, Jr. v. Philippine International Air Terminals Co.,
Inc.83 and Stanfilco Employees v. DOLE Philippines, Inc., et al.84

As a general rule, therefore, a corporation’s representative who did not personally bind
himself or herself to an arbitration agreement cannot be forced to participate in arbitration
proceedings made pursuant to an agreement entered into by the corporation. He or she is
generally not considered a party to that agreement.

However, there are instances when the distinction between personalities of directors,
officers,and representatives, and of the corporation, are disregarded. We call this piercing the
veil of corporate fiction.

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." 85 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."86

When 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.

Among the persons who may be treatedas the corporation itself under certain circumstances
are its directors and officers. Section 31 of the Corporation Code provides the instances when
directors, trustees, or officers may become liable for corporate acts:

Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty,
any interest adverse to the corporation in respect of any matter which has been reposed
inhim in confidence, as to which equity imposes a disability upon him to deal in his own
behalf, he shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation. (n)
Based on the above provision, a director, trustee, or officer of a corporation may be made
solidarily liable with it for all damages suffered by the corporation, its stockholders or
members, and other persons in any of the following cases:

a) The director or trustee willfully and knowingly voted for or assented to a patently
unlawful corporate act;

b) The director or trustee was guilty of gross negligence or bad faith in directing
corporate affairs; and

c) The director or trustee acquired personal or pecuniary interest in conflict with his or
her duties as director or trustee.

Solidary liability with the corporation will also attach in the following instances:

a) "When a director or officer has consented to the issuance of watered stocks or who,
having knowledge thereof, did not forthwith file with the corporate secretary his
written objection thereto";87

b) "When a director, trustee or officer has contractually agreed or stipulated to hold

himself personally and solidarily liable with the corporation";88 and

c) "When a director, trustee or officer is made, by specific provision of law, personally

liable for his corporate action."89

When there are allegations of bad faith or malice against corporate directors or
representatives, it becomes the duty of courts or tribunals to determine if these persons and
the corporation should be treated as one. Without a trial, courts and tribunals have no basis
for determining whether the veil of corporate fiction should be pierced. Courts or tribunals do
not have such prior knowledge. Thus, the courts or tribunals must first determine whether
circumstances exist towarrant the courts or tribunals to disregard the distinction between the
corporation and the persons representing it. The determination of these circumstances must
be made by one tribunal or court in a proceeding participated in by all parties involved,
including current representatives of the corporation, and those persons whose personalities
are impliedly the sameas the corporation. This is because when the court or tribunal finds
that circumstances exist warranting the piercing of the corporate veil, the corporate
representatives are treated as the corporation itself and should be held liable for corporate
acts. The corporation’s distinct personality is disregarded, and the corporation is seen as a
mere aggregation of persons undertaking a business under the collective name of the
corporation.

Hence, when the directors, as in this case, are impleaded in a case against a corporation,
alleging malice orbad faith on their part in directing the affairs of the corporation,
complainants are effectively alleging that the directors and the corporation are not acting as
separate entities. They are alleging that the acts or omissions by the corporation that
violated their rights are also the directors’ acts or omissions.90 They are alleging that
contracts executed by the corporation are contracts executed by the directors. Complainants
effectively pray that the corporate veilbe pierced because the cause of action between the
corporation and the directors is the same.
In that case, complainants have no choice but to institute only one proceeding against the
parties.1âwphi1 Under the Rules of Court, filing of multiple suits for a single cause of action
is prohibited. Institution of more than one suit for the same cause of action constitutes
splitting the cause of action, which is a ground for the dismissal ofthe others. Thus, in Rule 2:

Section 3. One suit for a single cause of action. — A party may not institute more than one
suit for a single cause of action. (3a)

Section 4. Splitting a single cause of action;effect of. — If two or more suits are instituted on
the basis of the same cause of action, the filing of one or a judgment upon the merits in any
one is available as a ground for the dismissal of the others. (4a)

It is because the personalities of petitioners and the corporation may later be found to be
indistinct that we rule that petitioners may be compelled to submit to arbitration.

However, in ruling that petitioners may be compelled to submit to the arbitration

proceedings, we are not overturning Heirs of Augusto Salas wherein this court affirmed the
basic arbitration principle that only parties to an arbitration agreement may be compelled to
submit to arbitration. In that case, this court recognizedthat persons other than the main
party may be compelled to submit to arbitration, e.g., assignees and heirs. Assignees and
heirs may be considered parties to an arbitration agreement entered into by their assignor
because the assignor’s rights and obligations are transferred to them upon assignment. In
other words, the assignor’s rights and obligations become their own rights and obligations. In
the same way, the corporation’s obligations are treated as the representative’s obligations
when the corporate veil is pierced. Moreover, in Heirs of Augusto Salas, this court affirmed its
policy against multiplicity of suits and unnecessary delay. This court said that "to split the
proceeding into arbitration for some parties and trial for other parties would "result in
multiplicity of suits, duplicitous procedure and unnecessary delay."91 This court also intimated
that the interest of justice would be best observed if it adjudicated rights in a single
proceeding.92 While the facts of that case prompted this court to direct the trial court to
proceed to determine the issues of thatcase, it did not prohibit courts from allowing the case
to proceed to arbitration, when circumstances warrant.

Hence, the issue of whether the corporation’s acts in violation of complainant’s rights, and
the incidental issue of whether piercing of the corporate veil is warranted, should be
determined in a single proceeding. Such finding would determine if the corporation is merely
an aggregation of persons whose liabilities must be treated as one with the corporation.

However, when the courts disregard the corporation’s distinct and separate personality from
its directors or officers, the courts do not say that the corporation, in all instances and for all
purposes, is the same as its directors, stockholders, officers, and agents. It does not result in
an absolute confusion of personalities of the corporation and the persons composing or
representing it. Courts merely discount the distinction and treat them as one, in relation to a
specific act, in order to extend the terms of the contract and the liabilities for all damages to
erring corporate officials who participated in the corporation’s illegal acts. This is done so that
the legal fiction cannot be used to perpetrate illegalities and injustices.

Thus, in cases alleging solidary liability with the corporation or praying for the piercing of the
corporate veil, parties who are normally treated as distinct individuals should be made to
participate in the arbitration proceedings in order to determine ifsuch distinction should
indeed be disregarded and, if so, to determine the extent of their liabilities.
In this case, the Arbitral Tribunal rendered a decision, finding that BF Corporation failed to
prove the existence of circumstances that render petitioners and the other directors solidarily
liable. It ruled that petitioners and Shangri-La’s other directors were not liable for the
contractual obligations of Shangri-La to BF Corporation. The Arbitral Tribunal’s decision was
made with the participation of petitioners, albeit with their continuing objection. In view of
our discussion above, we rule that petitioners are bound by such decision.

WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May 11, 2006 and
resolution of October 5, 2006 are AFFIRMED.

SO ORDERED.

MARVIC M.V.F. LEONEN

Associate Justice

WE CONCUR:
 FIRST DIVISION

G.R. No. 184666, June 27, 2016

REPUBLIC OF THE PHILIPPINES, Petitioner, v. MEGA PACIFIC ESOLUTIONS, INC., WILLY

U. YU, BONNIE S. YU, ENRIQUE T. TANSIPEK, ROSITA Y. TANSIPEK, PEDRO O. TAN,
JOHNSON W. FONG, BERNARD I. FONG, AND *LAURIANO A. BARRIOS, Respondents.

DECISION

SERENO, C.J.:

The instant case is an offshoot of this Court's Decision dated 13 January 2004 (2004 Decision) in
a related case entitled Information Technology Foundation of the Philippines v. Commission on
Elections.1 chanrobleslaw

In the 2004 case, We declared void the automation contract executed by respondent Mega Pacific
eSolutions, Inc. (MPEI) and the Commission on Elections (COMELEC) for the supply of automated
counting machines (ACMs) for the 2004 national elections.

The present case involves the attempt of petitioner Republic of the Philippines to cause the
attachment of the properties owned by respondent MPEI, as well as by its incorporators and
stockholders (individual respondents in this case), in order to secure petitioner's interest and to
ensure recovery of the payments it made to respondents for the invalidated automation contract.

At bench is a Rule 45 Petition assailing the Amended Decision dated 22 September 2008
(Amended Decision) issued by the Court of Appeals (CA) in CA-G.R. SP No. 95988. 2 In said
Amended Decision, the CA directed the remand of the case to the Regional Trial Court of Makati
City, Branch 59 (RTC Makati) for the reception of evidence in relation to petitioner's application
for the issuance of a writ of preliminary attachment. The CA had reconsidered and set aside its
previous Decision dated 31 January 2008 (First Decision) 3 entitling petitioner to the issuance of
said writ.

Summarized below are the relevant facts of the case, some of which have already been discussed
in this Court's 2004 Decision:
chanRoblesvirtualLawlibrary

The Facts

Republic Act No. 8436 authorized the COMELEC to use an automated election system for the May
1998 elections. However, the automated system failed to materialize and votes were canvassed
manually during the 1998 and the 2001 elections.

For the 2004 elections, the COMELEC again attempted to implement the automated election
system. For this purpose, it invited bidders to apply for the procurement of supplies, equipment,
and services. Respondent MPEI, as lead company, purportedly formed a joint venture - known as
the Mega Pacific Consortium (MPC) - together with We Solv, SK C & C, ePLDT, Election.com and
Oracle. Subsequently, MPEI, on behalf of MPC, submitted its bid proposal to COMELEC.

The COMELEC evaluated various bid offers and subsequently found MPC and another company
eligible to participate in the next phase of the bidding process. 4 The two companies were referred
to the Department of Science and Technology (DOST) for technical evaluation. After due
assessment, the Bids and Awards Committee (BAC) recommended that the project be awarded to
MPC. The COMELEC favorably acted on the recommendation and issued Resolution No. 6074,
which awarded the automation project to MPC.

Despite the award to MPC, the COMELEC and MPEI executed on 2 June 2003 the Automated
Counting and Canvassing Project Contract (automation contract)5 for the aggregate amount of
P1,248,949,088. MPEI agreed to supply and deliver 1,991 units of ACMs and such other
equipment and materials necessary for the computerized electoral system in the 2004 elections.
Pursuant to the automation contract, MPEI delivered 1,991 ACMs to the COMELEC. The latter, for
its part, made partial payments to MPEI in the aggregate amount of P1.05 billion.

The full implementation of the automation contract was rendered impossible by the fact that,
after a painstaking legal battle, this Court in its 2004 Decision declared the contract null and
void.6 We held that the COMELEC committed a clear violation of law and jurisprudence, as well as
a reckless disregard of its own bidding rules and procedure. In addition, the COMELEC entered
into the contract with inexplicable haste, and without adequately checking and observing
mandatory financial, technical, and legal requirements. In a subsequent Resolution, We
summarized the COMELEC's grave abuse of discretion as having consisted of the following: 7

1. By a formal Resolution, it awarded the project to "Mega Pacific Consortium," an entity that

had not participated in the bidding. Despite this grant, Comelec entered into
the actual Contract with "Mega Pacific eSolutions, Inc." (MPEI), a company that joined the
bidding process but did not meet the eligibility requirements.

2. Comelec accepted and irregularly paid for MPEI's ACMs that had failed the accuracy
requirement of 99.9995 percent set up by the Comelec bidding rules. Acknowledging that
this rating could have been too steep, the Court nonetheless noted that "the essence of
public bidding is violated by the practice of requiring very high standards or unrealistic
specifications that cannot be met, x x x only to water them down after the award is
made. Such scheme, which discourages the entry of bona fide bidders, is in fact a
sure indication of fraud in the bidding, designed to eliminate fair competition."

3. The software program of the counting machines likewise failed to detect previously

downloaded precinct results and to prevent them from being reentered. This failure, which
has not been corrected x x x, would have allowed unscrupulous persons to repeatedly feed
into the computers the results favorable to a particular candidate, an act that would have
translated into massive election fraud by just a few key strokes.

4. Neither were the ACMs able to print audit trails without loss of data - a mandatory
requirement under Section 7 of Republic Act No. 8436. Audit trails would enable the
Comelec to document the identities of the ACM operators responsible for data entry and
downloading, as well as the times when the various data were processed, in order to
forestall fraud and to identify the perpetrators. The absence of audit trails would have
posed a serious threat to free and credible elections.

5. Comelec failed to explain satisfactorily why it had ignored its own bidding rules and
requirements. It admitted that the software program used to test the ACMs was merely a
"demo" version, and that the final one to be actually used in the elections was still being
developed. By awarding the Contract and irregularly paying for the supply of the ACMs
without having seen — much less, evaluated — the final product being purchased, Comelec
desecrated the law on public bidding. It would have allowed the winner to alter its bid
substantially, without any public bidding.
All in all, Comelec subverted the essence of public bidding: to give the public an opportunity for
fair competition and a clear basis for a precise comparison of bids. 8 (Emphasis supplied)
As a consequence of the nullification of the automation contract, We directed the Office of the
Ombudsman to determine the possible criminal liability of persons responsible for the
contract.9 This Court likewise directed the Office of the Solicitor General to protect the
government from the ill effects of the illegal disbursement of public funds in relation to the
automation contract.10 chanrobleslaw

After the declaration of nullity of the automation contract, the following incidents transpired: ChanRoblesVirtualawlibrary

1. Private respondents in the 2004 case moved for reconsideration of the 2004 Decision, but
the motion was denied by this Court in a Resolution dated 17 February 2004 (2004
Resolution).11 chanrobleslaw

2. The COMELEC filed a "Most Respectful Motion for Leave to Use the Automated Counting
Machines in the Custody of the Commission on Elections for use in the 8 August 2005
Elections in the Autonomous Region for Muslim Mindanao" dated 9 December 2004 (Motion
for Leave to Use ACMs), which was denied by this Court in its Resolution dated 15 June
2005 (2005 Resolution).

3. Atty. Romulo B. Macalintal (Macalintal) filed an "Omnibus Motion for Leave of Court (1) to
Reopen the Case; and (2) to Intervene and Admit the Attached Petition in Intervention,"
which was denied by this Court in its Resolution dated 22 August 2006 (2006 Resolution);
and  cralawlawlibrary

4. Respondent MPEI filed a Complaint for Damages12 (Complaint) with the RTC Makati, from
which the instant case arose.

The above-mentioned incidents are discussed in more detail below.

BACKGROUND PROCEEDINGS

Private respondents' Motion for Reconsideration

Private respondents in the 2004 case moved for reconsideration of the 2004 Decision. Aside from
reiterating the procedural and substantive arguments they had raised, they also argued that the
2004 Decision had exposed them to possible criminal prosecution. 13 chanrobleslaw

This Court denied the motion in its 2004 Resolution and ruled that no prejudgment had been
made on private respondents' criminal liability. We further ruled that although the 2004 Decision
stated that the Ombudsman shall "determine the criminal liability, if any, of the public officials
(and conspiring private individuals, if any) involved in the subject Resolution and Contract," We
did not make any premature conclusion on any wrongdoing, but precisely directed the
Ombudsman to make that determination after conducting appropriate proceedings and observing
due process.

Similarly, it appears from the record that several criminal and administrative Complaints had
indeed been filed with the Ombudsman in relation to the declaration of nullity of the automation
contract.14 The Complaints were filed against several public officials and the individual
respondents in this case.15 chanrobleslaw

In a Resolution issued on 28 June 2006,16 the Ombudsman recommended the filing of

informations before the Sandiganbayan against some of the public officials and the individual
respondents17 for violation of Section 3(e) of Republic Act No. 3019 (the Anti-Graft and Corrupt
Practices Act). However, on 27 September 2006,18 upon reconsideration, the Ombudsman
reversed its earlier ruling in a Supplemental Resolution (September Resolution), directing the
dismissal of the criminal cases against the public officials, as well as the individual respondents,
for lack of probable cause.19chanrobleslaw

With this development, a Petition for Certiorari was filed with this Court on 13 October 2006 and
docketed as G.R. No. 174777.20 In the Petition, several individuals 21 assailed the September
Resolution of the Ombudsman finding no probable cause to hold respondents criminally liable.
The case remains pending with this Court as of this date.

COMELEC's Motion for Leave to Use ACMs in the ARMM Elections

The COMELEC filed a motion with this Court requesting permission to use the 1,991 ACMs
previously delivered by respondent MPEI, for the ARMM elections, then slated to be held on 8
August 2005. In its motion, the COMELEC claimed that automation of the ARMM elections was
mandated by Republic Act No. 9333, and since the government had no available funds to finance
the automation of those elections, the ACMs could be utilized for the 2005 elections.

This Court denied the Motion in Our 2005 Resolution. We ruled that allowing the use of the ACMs
would have the effect of illegally reversing and subverting a final decision We had promulgated.
We further ruled that the COMELEC was asking for permission to do what it had precisely been
prohibited from doing under the 2004 Decision. This Court also ruled that the grant of the motion
would bar or jeopardize the recovery of government funds paid to respondents. Considering that
the COMELEC did not present any evidence to prove that the defects had been addressed, We
held that the use of the ACMs and the software would expose the ARMM elections to the same
electoral ills pointed out in the 2004 Decision.

Atty. Macalintal's Omnibus Motion

Atty. Romulo Macalintal sought to reopen the 2004 case in order that he may be allowed to
intervene as a taxpayer and citizen. His purpose for intervening was to seek another testing of
the ACMs with the ultimate objective of allowing the COMELEC to use them, this time for the 2007
national elections.

This Court denied his motion in Our 2006 Resolution, ruling that Atty. Macalintal failed to
demonstrate that certain supervening events and legal circumstances had transpired to justify the
reliefs sought. We in fact found that, after Our determination that the ACMs had failed to pass
legally mandated technical requirements in 2004, they were simply put in storage. The ACMs had
remained idle and unused since the last evaluation, at which they failed to hurdle crucial tests.
Consequently, We ruled that if the ACMs were not good enough for the 2004 national elections or
the 2005 ARMM elections, then neither would they be good enough for the 2007 national
elections, considering that nothing was done to correct the flaws that had been previously
underscored in the 2004 Decision. We held that granting the motion would be tantamount to
rendering the 2004 Decision totally ineffective and nugatory.

Moreover, because of our categorical ruling that the whole bidding process was void
and fraudulent, the proposal to use the illegally procured, demonstratively defective, and fraud-
prone ACMs was rendered nonsensical. Thus: ChanRoblesVirtualawlibrary

We stress once again that the Contract entered into by the Comelec for the supply of the ACMs
was declared VOID by the Court in its Decision, because of clear violations of law and
jurisprudence, as well as the reckless disregard by the Commission of its own bidding rules and
procedure. In addition, the poll body entered into the Contract with inexplicable haste, without
adequately checking and observing mandatory financial, technical and legal requirements. As
explained in our Decision, Comelec's gravely abusive acts consisted of the following:

chanRoblesvirtualLawlibrary xxxx

To muddle the issue, Comelec keeps on saying that the "winning" bidder presented a
lower price than the only other bidder. It ignored the fact that the whole bidding
process was VOID and FRAUDULENT. How then could there have been a "winning" bid?
22
 (Emphasis supplied)
THE INSTANT CASE

Complaint for Damages filed by respondents with the RTC Makati and petitioner's
Answer with Counterclaim, with an application for a writ of preliminary attachment,
from which the instant case arose

Upon the finality of the declaration of nullity of the automation contract, respondent MPEI filed a
Complaint for Damages before the RTC Makati, arguing that, notwithstanding the nullification of
the automation contract, the COMELEC was still bound to pay the amount of P200,165,681.89.
This amount represented the difference between the value of the ACMs and the support services
delivered on one hand, and on the other, the payment previously made by the COMELEC. 23 chanrobleslaw

Petitioner filed its Answer with Counterclaim 24 and argued that respondent MPEI could no longer
recover the unpaid balance from the void automation contract, since the payments made were
illegal disbursements of public funds. It contended that a null and void contract vests no rights
and creates no obligations, and thus produces no legal effect at all. Petitioner further posited that
respondent MPEI could not hinge its claim upon the principles of unjust enrichment and quasi-
contract, because such presume that the acts by which the authors thereof become obligated to
each other are lawful, which was not the case herein. 25cralawredchanrobleslaw

By way of a counterclaim, petitioner demanded from respondents the return of the payments
made pursuant to the automation contract.26 It argued that individual respondents, being the
incorporators of MPEI, likewise ought to be impleaded and held accountable for MPEI's liabilities.
The creation of MPC was, after all, merely an ingenious scheme to feign eligibility to bid. 27 chanrobleslaw

Pursuant to Section 1(d) of Rule 57 of the Rules of Court, petitioner prayed for the issuance of a
writ of preliminary attachment against the properties of MPEI and individual respondents. The
application was grounded upon the fraudulent misrepresentation of respondents as to their
eligibility to participate in the bidding for the COMELEC automation project and the failure of the
ACMs to comply with mandatory technical requirements. 28 chanrobleslaw

Subsequently, the trial court denied the prayer for the issuance of a writ of preliminary
attachment,29 ruling that there was an absence of factual allegations as to how the fraud was
actually committed.

The allegations of petitioner were found to be unreliable, as the latter merely copied from the
declarations of the Supreme Court in Information Technology Foundation of the Phils, v.
COMELEC the factual allegations of MPEI's lack of qualification and noncompliance with bidding
requirements. The trial court further ruled that the allegations of fraud on the part of MPEI were
not supported by the COMELEC, the office in charge of conducting the bidding for the election
automation contract. It was likewise held that there was no evidence that respondents harbored a
preconceived plan not to comply with the obligation; neither was there any evidence that MPEI's
corporate fiction was used to perpetrate fraud. Thus, it found no sufficient basis to pierce the veil
of corporate fiction or to cause the attachment of the properties owned by individual respondents.
Petitioner moved to set aside the trial court's Order denying the writ of attachment, 30 but its
motion was denied.31 chanrobleslaw

Appeal before the CA and the First Decision

Aggrieved, petitioner filed an appeal with the CA, arguing that the trial court had acted with grave
abuse of discretion in denying the application for a writ of attachment.

As mentioned earlier, the CA in its First Decision32 reversed and set aside the trial court's Orders
and ruled that there was sufficient basis for the issuance of a writ of attachment in favor of
petitioner.

The appellate court explained that the averments of petitioner in support of the latter's
application actually reflected pertinent conclusions reached by this Court in its 2004 Decision. It
held that the trial court erred in disregarding the following findings of fact, which remained
unaltered and unreversed: (1) COMELEC bidding rules provided that the eligibility and capacity of
a bidder may be proved through financial documents including, among others, audited financial
statements for the last three years; (2) MPEI was incorporated only on 27 February 2003, or 11
days prior to the bidding itself; (3) in an attempt to disguise its ineligibility, MPEI participated in
the bidding as lead company of MPC, a putative consortium, and submitted the incorporation
papers and financial statements of the members of the consortium; and (4) no proof of the joint
venture agreement, consortium agreement, memorandum of agreement, or business plan
executed among the members of the purported consortium was ever submitted to the
COMELEC.33 chanrobleslaw

According to the CA, the foregoing were glaring indicia or badges of fraud, which entitled
petitioner to the issuance of the writ. It further ruled that there was sufficient reason to pierce the
corporate veil of MPEI. Thus, the CA allowed the attachment of the properties belonging to both
MPEI and individual respondents.34 The CA likewise ruled that even if the COMELEC committed
grave abuse of discretion in capriciously disregarding the rules on public bidding, this should not
preclude or deter petitioner from pursuing its claim against respondents. After all, the State is not
estopped by the mistake of its officers and employees. 35 chanrobleslaw

Respondents moved for reconsideration36 of the First Decision of the CA.

Motion for Reconsideration before the CA and the Amended Decision

Upon review, the CA reconsidered its First Decision37 and directed the remand of the case to the
RTC Makati for the reception of evidence of allegations of fraud and to determine whether
attachment should necessarily issue.38 chanrobleslaw

The CA explained in its Amended Decision that respondents could not be considered to have
fostered a fraudulent intent to dishonor their obligation, since they had delivered 1,991 units of
ACMs.39 It directed petitioner to present proof of respondents' intent to defraud COMELEC during
the execution of the automation contract. 40 The CA likewise emphasized that the Joint Affidavit
submitted in support of petitioner's application for the writ contained allegations that needed to
be substantiated.41 It added that proof must likewise be adduced to verify the requisite fraud that
would justify the piercing of the corporate veil of respondent MPEI. 42 chanrobleslaw

The CA further clarified that the 2004 Decision did not make a definite finding as to the identities
of the persons responsible for the illegal disbursement or of those who participated in the
fraudulent dealings.43 It instructed the trial court to consider, in its determination of whether the
writ of attachment should issue, the illegal, imprudent and hasty acts in awarding the automation
contract by the COMELEC. In particular, these acts consisted of: (1) awarding the automation
contract to MPC, an entity that did not participate in the bidding; and (2) signing the actual
automation contract with respondent MPEI, the company that joined the bidding without meeting
the eligibility requirement.44 chanrobleslaw

Rule 45 Petition before Us

Consequently, petitioner filed the instant Rule 45 Petition, 45 arguing that the CA erred in ordering
the remand of the case to the trial court for the reception of evidence to determine the presence
of fraud. Petitioner contends that this Court's 2004 Decision was sufficient proof of the fraud
committed by respondents in the execution of the voided automation contract. 46 Respondents
allegedly committed fraud by securing the automation contract, although MPEI was not qualified
to bid in the first place.47 Their claim that the members of MPC bound themselves to the
automation contract was an indication of bad faith as the contract was executed by MPEI
alone.48 Neither could they deny that the software submitted during the bidding process was not
the same one that would be used on election day. 49 They could not dissociate themselves from
telltale signs such as purportedly supplying software that later turned out to be non-existent. 50 chanrobleslaw

In their respective Comments, respondents Willy Yu, Bonnie Yu, Enrique Tansipek, and Rosita
Tansipek counter51 that this Court never ruled that individual respondents were guilty of any fraud
or bad faith in connection with the automation contract, and that it was incumbent upon
petitioner to present evidence on the allegations of fraud to justify the issuance of the writ. 52 They
likewise argue that the 2004 Decision cannot be invoked against them, since petitioner and MPEI
were co-respondents in the 2004 case and not adverse parties therein. 53 Respondents further
contend that the allegations of fraud are belied by their actual delivery of 1,991 units of ACMs to
the COMELEC, which they claim is proof that they never had any intention to evade
performance.54 chanrobleslaw

They further allege that this Court, in its 2004 Decision, even recognized that it had not found
any wrongdoing on their part, and that the Ombudsman had already made a determination that
no probable cause existed with respect to charges of violation of Anti-Graft and Corrupt Practices
Act.55
chanrobleslaw

Echoing the other respondents' arguments on the lack of particularity in the allegations of
fraud,56 respondents MPEI, Johnson Wong, Bernard Fong, Pedro Tan, and Lauriano Barrios
likewise argue that they were not parties to the 2004 case; thus, the 2004 Decision thereon is not
binding on them.57 Individual respondents likewise argue that the findings of fact in the 2004
Decision were not conclusive,58 considering that eight (8) of the fifteen (15) justices allegedly
refused to go along with the factual findings as stated in the majority opinion. 59 Thereafter,
petitioner filed its Reply to the Comments. 60 chanrobleslaw

Based on the submissions of both parties, the following issues are presented to this Court for
resolution:

1. Whether petitioner has sufficiently established fraud on the part of respondents to justify
the issuance of a writ of preliminary attachment in its favor; and  cralawlawlibrary

2. Whether a writ of preliminary attachment may be issued against the properties of

individual respondents, considering that they were not parties to the 2004 case.

The Court's Ruling

The Petition is meritorious. A writ of preliminary attachment should issue in favor of petitioner
over the properties of respondents MPEI, Willy Yu (Willy) and the remaining individual
respondents, namely: Bonnie S. Yu (Bonnie), Enrique T. Tansipek (Enrique), Rosita Y. Tansipek
(Rosita), Pedro O. Tan (Pedro), Johnson W. Fong (Johnson), Bernard I. Fong (Bernard), and
Lauriano Barrios (Lauriano). The bases for the writ are the following:

1. Fraud on the part of respondent MPEI was sufficiently established by the factual findings of
this Court in its 2004 Decision and subsequent pronouncements.

2. A writ of preliminary attachment may issue over the properties of the individual
respondents using the doctrine of piercing the corporate veil.

3. The factual findings of this Court that have become final cannot be modified or altered,
much less reversed, and are controlling in the instant case.

4. The delivery of 1,991 units of ACMs does not negate fraud on the part of respondents MPEI
and Willy.

5. Estoppel does not lie against the state when it acts to rectify mistakes, errors or illegal acts
of its officials and agents.

6. The findings of the Ombudsman are not controlling in the instant case.

DISCUSSION

I.
Fraud on the part of respondent MPEI was sufficiently established by the factual
findings of this Court in the latter's 2004 Decision and subsequent pronouncements.

Petitioner argues that the findings of this Court in the 2004 Decision serve as sufficient basis to
prove that, at the time of the execution of the automation contract, there was fraud on the part
of respondents that justified the issuance of a writ of attachment. Respondents, however, argue
the contrary. They claim that fraud had not been sufficiently established by petitioner.

We rule in favor of petitioner. Fraud on the part of respondents MPEI and Willy, as well as of the
other individual respondents — Bonnie, Enrique, Rosita, Pedro, Johnson, Bernard, and Lauriano —
has been established.

A writ of preliminary attachment is a provisional remedy issued upon the order of the court where
an action is pending. Through the writ, the property or properties of the defendant may be levied
upon and held thereafter by the sheriff as security for the satisfaction of whatever judgment
might be secured by the attaching creditor against the defendant. 61 The provisional remedy of
attachment is available in order that the defendant may not dispose of the property attached, and
thus prevent the satisfaction of any judgment that may be secured by the plaintiff from the
former.62chanrobleslaw

The purpose and function of an attachment or garnishment is twofold. First, it seizes upon
property of an alleged debtor in advance of final judgment and holds it subject to appropriation,
thereby preventing the loss or dissipation of the property through fraud or other means. Second,
it subjects the property of the debtor to the payment of a creditor's claim, in those cases in which
personal service upon the debtor cannot be obtained. 63 This remedy is meant to secure a
contingent lien on the defendant's property until the plaintiff can, by appropriate proceedings,
obtain a judgment and have the property applied to its satisfaction, or to make some provision
for unsecured debts in cases in which the means of satisfaction thereof are liable to be removed
beyond the jurisdiction, or improperly disposed of or concealed, or otherwise placed beyond the
reach of creditors.64 chanrobleslaw

Petitioner relied upon Section 1(d), Rule 57 of the Rules of Court as basis for its application for a
writ of preliminary attachment. This provision states: ChanRoblesVirtualawlibrary

Section 1. Grounds upon which attachment may issue. At the commencement of the action or at
any time before entry of judgment, a plaintiff or any proper party may have the property of the
adverse party attached as security for the satisfaction of any judgment that may be recovered in
the following cases:
chanRoblesvirtualLawlibrary

xxxx

(d) In an action against a party who has been guilty of a fraud in contracting the debt or
incurring the obligation upon which the action is brought, or in the performance thereof.
(Emphasis supplied)
For a writ of preliminary attachment to issue under the above-quoted rule, the applicant must
sufficiently show the factual circumstances of the alleged fraud. 65 In Metro, Inc. v. Lara's Gift and
Decors, Inc.,66 We explained: ChanRoblesVirtualawlibrary

To sustain an attachment on this ground, it must be shown that the debtor in contracting the debt
or incurring the obligation intended to defraud the creditor. The fraud must relate to the
execution of the agreement and must have been the reason which induced the other
party into giving consent which he would not have otherwise given. To constitute a
ground for attachment in Section 1(d), Rule 57 of the Rules of Court, fraud should be committed
upon contracting the obligation sued upon. A debt is fraudulently contracted if at the time of
contracting it the debtor has a preconceived plan or intention not to pay, as it is in this case. x x
x.
The applicant for a writ of preliminary attachment must sufficiently show the factual
circumstances of the alleged fraud because fraudulent intent cannot be inferred from the debtor's
mere non-payment of the debt or failure to comply with his obligation. (Emphasis supplied)
An amendment to the Rules of Court added the phrase "in the performance thereof" to include
within the scope of the grounds for issuance of a writ of preliminary attachment those instances
relating to fraud in the performance of the obligation. 67 chanrobleslaw

Fraud is a generic term that is used in various senses and assumes so many different degrees
and forms that courts are compelled to content themselves with comparatively few general rules
for its discovery and defeat. For the same reason, the facts and circumstances peculiar to each
case are allowed to bear heavily on the conscience and judgment of the court or jury in
determining the presence or absence of fraud. In fact, the fertility of man's invention in devising
new schemes of fraud is so great that courts have always declined to define it, thus, reserving for
themselves the liberty to deal with it in whatever form it may present itself. 68 chanrobleslaw

Fraud may be characterized as the voluntary execution of a wrongful act or a wilful omission,
while knowing and intending the effects that naturally and necessarily arise from that act or
omission.69 In its general sense, fraud is deemed to comprise anything calculated to deceive—
including all acts and omission and concealment involving a breach of legal or equitable duty,
trust, or confidence justly reposed—resulting in damage to or in undue advantage over
another.70 Fraud is also described as embracing all multifarious means that human ingenuity can
device, and is resorted to for the purpose of securing an advantage over another by false
suggestions or by suppression of truth; and it includes all surprise, trick, cunning, dissembling,
and any other unfair way by which another is cheated.71 chanrobleslaw
While fraud cannot be presumed, it need not be proved by direct evidence and can well be
inferred from attendant circumstances.72 Fraud by its nature is not a thing susceptible of ocular
observation or readily demonstrable physically; it must of necessity be proved in many cases by
inferences from circumstances shown to have been involved in the transaction in question. 73 chanrobleslaw

In the case at bar, petitioner has sufficiently discharged the burden of demonstrating the
commission of fraud by respondent MPEI in the execution of the automation contract in the two
ways that were enumerated earlier and discussed below:

A. Respondent MPEI had perpetrated a scheme against petitioner to secure the

chanRoblesvirtualLawlibrary

automation contract by using MPC as supposed bidder and eventually succeeding in

signing the automation contract as MPEI alone, an entity which was ineligible to bid in
the first place.

To avoid any confusion relevant to the basis of fraud, We quote herein the pertinent portions of
this Court's 2004 Decision with regard to the identity, existence, and eligibility of MPC as bidder: 74
On the question of the identity and the existence of the real bidder, respondents insist that,
contrary to petitioners' allegations, the bidder was not Mega Pacific eSolutions, Inc.
(MPEI), which was incorporated only on February 27, 2003, or 11 days prior to the
bidding itself. Rather, the bidder was Mega Pacific Consortium (MPC), of which MPEI was but a
part. As proof thereof, they point to the March 7, 2003 letter of intent to bid, signed by the
president of MPEI allegedly for and on behalf of MPC. They also call attention to the official receipt
issued to MPC, acknowledging payment for the bidding documents, as proof that it was the
"consortium" that participated in the bidding process.

We do not agree. The March 7, 2003 letter, signed by only one signatory — "Willy U. Yu,
President, Mega Pacific eSolutions, Inc., (Lead Company/Proponent) For: Mega Pacific
Consortium" — and without any further proof, does not by itself prove the existence of the
consortium. It does not show that MPEI or its president have been duly pre-authorized by the
other members of the putative consortium to represent them, to bid on their collective behalf
and, more important, to commit them jointly and severally to the bid undertakings. The letter is
purely self-serving and uncorroborated.

Neither does an official receipt issued to MPC, acknowledging payment for the bidding documents,
constitute proof that it was the purported consortium that participated in the bidding. Such
receipts are issued by cashiers without any legally sufficient inquiry as to the real identity or
existence of the supposed payor.

To assure itself properly of the due existence (as well as eligibility and qualification) of the
putative consortium, Comelec's BAC should have examined the bidding documents submitted on
behalf of MPC. They would have easily discovered the following fatal flaws.

xxxx

The Eligibility Envelope was to contain legal documents such as articles of incorporation, x x x to

establish the bidder's financial capacity.

In the case of a consortium or joint venture desirous of participating in the bidding, it goes
without saying that the Eligibility Envelope would necessarily have to include a copy of the joint
venture agreement, the consortium agreement or memorandum of agreement — or a business
plan or some other instrument of similar import — establishing the due existence, composition
and scope of such aggrupation. Otherwise, how would Comelec know who it was dealing with,
and whether these parties are qualified and capable of delivering the products and services being
offered for bidding?

In the instant case, no such instrument was submitted to Comelec during the bidding
process. x x x

xxxx

However, there is no sign whatsoever of any joint venture agreement, consortium

agreement, memorandum of agreement, or business plan executed among the
members of the purported consortium.

The only logical conclusion is that no such agreement was ever submitted to the
Comelec for its consideration, as part of the bidding process.

It thus follows that, prior the award of the Contract, there was no documentary or
other basis for Comelec to conclude that a consortium had actually been formed
amongst MPEI, SK C&C and WeSolv, along with Election.com and ePLDT. Neither was
there anything to indicate the exact relationships between and among these firms; their diverse
roles, undertakings and prestations, if any, relative to the prosecution of the project, the extent
of their respective investments (if any) in the supposed consortium or in the project; and the
precise nature and extent of their respective liabilities with respect to the contract being offered
for bidding. And apart from the self-serving letter of March 7, 2003, there was not even any
indication that MPEI was the lead company duly authorized to act on behalf of the others.

xxxx

Hence, had the proponent MPEI been evaluated based solely on its own experience,
financial and operational track record or lack thereof, it would surely not have qualified
and would have been immediately considered ineligible to bid, as respondents readily
admit.

xxxx

At this juncture, one might ask: What, then, if there are four MOAs instead of one or none at all?
Isn't it enough that there are these corporations coming together to carry out the automation
project? Isn't it true, as respondent aver, that nowhere in the RFP issued by Comelec is it
required that the members of the joint venture execute a single written agreement to prove the
existence of a joint venture. x x x

xxxx

The problem is not that there are four agreements instead of only one. The problem is
that Comelec never bothered to check. It never based its decision on documents or other proof
that would concretely establish the existence of the claimed consortium or joint venture or
agglomeration.

xxxx

True, copies of financial statements and incorporation papers of the alleged "consortium"
members were submitted. But these papers did not establish the existence of a consortium, as
they could have been provided by the companies concerned for purposes other than to prove that
they were part of a consortium or joint venture.
xxxx

In brief, despite the absence of competent proof as to the existence and eligibility of

the alleged consortium (MPC), its capacity to deliver on the Contract, and the members'
joint and several liability therefor, Comelec nevertheless assumed that such consortium
existed and was eligible. It then went ahead and considered the bid of MPC, to which
the Contract was eventually awarded, in gross violation of the former's own bidding
rules and procedures contained in its RFP. Therein lies Comclec's grave abuse of
discretion.

Sufficiency of the Four Agreements

Instead of one multilateral agreement executed by, and effective and binding on, all the five
"consortium members" — as earlier claimed by Commissioner Tuason in open court — it turns out
that what was actually executed were four (4) separate and distinct bilateral
Agreements. Obviously, Comelec was furnished copies of these Agreements
only after the bidding process had been terminated, as these were not included in the
Eligibility Documents. x x x

 x x x x

At this point, it must be stressed most vigorously that the submission of the four
bilateral Agreements to Comelec after the end of the bidding process did nothing to
eliminate the grave abuse of discretion it had already committed on April 15, 2003.

Deficiencies Have Not Been "Cured"

In any event, it is also claimed that the automation Contract awarded by Comelec incorporates all
documents executed by the "consortium" members, even if these documents are not referred to
therein. x x x

xxxx

Thus, it is argued that whatever perceived deficiencies there were in the supplementary contracts
- those entered into by MPEI and the other members of the "consortium" as regards their joint
and several undertakings — have been cured. Better still, such deficiencies have supposedly been
prevented from arising as a result of the above-quoted provisions, from which it can be
immediately established that each of the members of MPC assumes the same joint and several
liability as the other members.

The foregoing argument is unpersuasive. First, the contract being referred to, entitled "The
Automated Counting and Canvassing Project Contract," is between Comelec and MPEI,
not the alleged consortium, MPC. To repeat, it is MPEI - not MPC - that is a party to the
Contract. Nowhere in that Contract is there any mention of a consortium or joint
venture, of members thereof, much less of joint and several liability. Supposedly
executed sometime in May 2003, the Contract bears a notarization date of June 30,
2003, and contains the signature of Willy U. Yu signing as president of MPEI (not for
and on behalf of MPC), along with that of the Comelec chair. It provides in Section 3.2
that MPEI (not MPC) is to supply the Equipment and perform the Services under the
Contract, in accordance with the appendices thereof; nothing whatsoever is said about
any consortium or joint venture or partnership.

xxxx
 Eligibility of a Consortium Based on the Collective Qualifications of Its Members

Respondents declare that, for purposes of assessing the eligibility of the bidder, the members of
MPC should be evaluated on a collective basis. Therefore, they contend, the failure of MPEI
to submit financial statements (on account of its recent incorporation) should not by
itself disqualify MPC, since the other members of the "consortium" could meet the
criteria set out in the RFP.

xxxx

Unfortunately, this argument seems to assume that the "collective" nature of the undertaking of
the members of MPC, their contribution of assets and sharing of risks, and the "community" of
their interest in the performance of the Contract entitle MPC to be treated as a joint venture or
consortium; and to be evaluated accordingly on the basis of the members' collective qualifications
when, in fact, the evidence before the Court suggest otherwise.

xxxx

Going back to the instant case, it should be recalled that the automation Contract with
Comelec was not executed by the "consortium" MPC - or by MPEI for and on behalf of
MPC - but by MPEI, period. The said Contract contains no mention whatsoever of any
consortium or members thereof. This fact alone seems to contradict all the suppositions
about a joint undertaking that would normally apply to a joint venture or consortium:
that it is a commercial enterprise involving a community of interest, a sharing of risks,
profits and losses, and so on.

xxxx

To the Court, this strange and beguiling arrangement of MPEI with the other companies does not
qualify them to be treated as a consortium or joint venture, at least of the type that government
agencies like the Comelec should be dealing with. With more reason is it unable to agree to the
proposal to evaluate the members of MPC on a collective basis. (Emphases supplied)
These findings found their way into petitioner's application for a writ of preliminary
attachment,75 in which it claimed the following as bases for fraud: (1) respondents committed
fraud by securing the election automation contract and, in order to perpetrate the fraud, by
misrepresenting the actual bidder as MPC and MPEI as merely acting on MPC's behalf; (2) while
knowing that MPEI was not qualified to bid for the automation contract, respondents still signed
and executed the contract; and (3) respondents acted in bad faith when they claimed that they
had bound themselves to the automation contract, because it was not executed by MPC—or by
MPEI on MPC's behalf—but by MPEI alone.76 chanrobleslaw

We agree with petitioner that respondent MPEI committed fraud by securing the election
automation contract; and, in order to perpetrate the fraud, by misrepresenting that the actual
bidder was MPC and not MPEI, which was only acting on behalf of MPC. We likewise rule that
respondent MPEI has defrauded petitioner, since the former still executed the automation
contract despite knowing that it was not qualified to bid for the same.

The established facts surrounding the eligibility, qualification and existence of MPC — and of MPEI
for that matter — and the subsequent execution of the automation contract with the latter, when
all taken together, constitute badges of fraud that We simply cannot ignore. MPC was considered
an illegitimate entity, because its existence as a joint venture had not been established. Notably,
the essential document/s that would have shown its eligibility as a joint venture/consortium were
not presented to the COMELEC at the most opportune time, that is, during the qualification stage
of the bidding process. The concealment by respondent MPEI of the essential documents showing
its eligibility to bid as part a joint venture is too obvious to be missed. How could it not have
known that the very document showing MPC as a joint venture should have been included in their
eligibility envelope?

Likewise notable is the fact that these supposed agreements, allegedly among the supposed
consortium members, were belatedly provided to the COMELEC after the bidding process had
been terminated; these were not included in the Eligibility Documents earlier submitted by MPC.
Similarly, as found by this Court, these documents did not prove any joint venture agreement
among the parties in the first place, but were actually individual agreements executed by each
member of the supposed consortium with respondent MPEI.

More startling to the dispassionate mind is the incongruence between the supposed actual bidder
MPC, on one hand, and, on the other, respondent MPEI, which executed the automation contract.
Significantly, respondent MPEI was not even eligible and qualified to bid in the first place; and
yet, the automation contract itself was executed and signed singly by respondent MPEI, not on
behalf of the purported bidder MPC, without any mention whatsoever of the members of the
supposed consortium.

From these established facts, We can surmise that in order to secure the automation contract,
respondent MPEI perpetrated a scheme against petitioner by using MPC as supposed bidder and
eventually succeeding in signing the automation contract as MPEI alone. Worse, it was
respondent MPEI alone, an entity that was ineligible to bid in the first place, that eventually
executed the automation contract.

To a reasonable mind, the entire situation reeks of fraud, what with the misrepresentation of
identity and misrepresentation as to creditworthiness. It is in these kinds of fraudulent instances,
when the ability to abscond is greatest, to which a writ of attachment is precisely responsive.

Further, the failure to attach the eligibility documents is tantamount to failure on the part of
respondent MPEI to disclose material facts. That omission constitutes fraud.

Pursuant to Article 1339 of the Civil Code,77 silence or concealment does not, by itself, constitute
fraud, unless there is a special duty to disclose certain facts, or unless the communication should
be made according to good faith and the usages of commerce. 78 chanrobleslaw

Fraud has been defined to include an inducement through insidious machination. Insidious
machination refers to a deceitful scheme or plot with an evil or devious purpose. Deceit exists
where the party, with intent to deceive, conceals or omits to state material facts and, by
reason of such omission or concealment, the other party was induced to give consent that would
not otherwise have been given.79 chanrobleslaw

One form of inducement is covered within the scope of the crime of estafa under Article 315,
paragraph 2, of the Revised Penal Code, in which, any person who defrauds another by using
fictitious name, or falsely pretends to possess power, influence, qualifications, property, credit,
agency, business or imaginary transactions, or by means of similar deceits executed prior to or
simultaneously with the commission of fraud is held criminally liable. In Joson v. People,80 this
Court explained the element of defraudation by means of deceit, by giving a definition of fraud
and deceit, in this wise:
ChanRoblesVirtualawlibrary

What needs to be determined therefore is whether or not the element of defraudation by means
of deceit has been established beyond reasonable doubt.

In the case of People v. Menil, Jr., the Court has defined fraud and deceit in this wise: ChanRoblesVirtualawlibrary
Fraud, in its general sense, is deemed to comprise anything calculated to deceive, including all
acts, omissions, and concealment involving a breach of legal or equitable duty, trust, or
confidence justly reposed, resulting in damage to another, or by which an undue and
unconscientious advantage is taken of another. It is a generic term embracing all multifarious
means which human ingenuity can devise, and which are resorted to by one individual to secure
an advantage over another by false suggestions or by suppression of truth and includes all
surprise, trick, cunning, dissembling and any unfair way by which another is cheated. On the
other hand, deceit is the false representation of a matter of fact, whether by words or
conduct, by false or misleading allegations, or by concealment of that which should
have been disclosed which deceives or is intended to deceive another so that he shall
act upon it to his legal injury. (Emphases supplied)
For example, in People v. Comila,81 both accused-appellants therein represented themselves to
the complaining witnesses to have the capacity to send them to Italy for employment, even as
they did not have the authority or license for the purpose. It was such misrepresentation that
induced the complainants to part with their hard-earned money for placement and medical fees.
Both accused-appellants were criminally held liable for estafa.

In American jurisprudence, fraud may be predicated on a false introduction or

identification.82 In Union Co. v. Cobb,83 the defendant therein procured the merchandise by
misrepresenting that she was Mrs. Taylor Ray and at another time she was Mrs. Ben W. Chiles,
and she forged their name on charge slips as revealed by the exhibits of the plaintiff. The sale of
the merchandise was induced by these representations, resulting in injury to the plaintiff.

In Raser v. Moomaw,84 it was ruled that the essential elements necessary to constitute actionable
fraud and deceit were present in the complaint. It was alleged that, to induce plaintiff to procure
a loan, defendant introduced him to a woman who was falsely represented to be Annie L. Knowles
of Seattle, Washington, the owner of the property, and that plaintiff had no means of ascertaining
her true identity. On the other hand, defendant knew, or in the exercise of reasonable caution
should have known, that she was an impostor, and that plaintiff relied on the representations,
induced his client to make the loan, and had since been compelled to repay it. In the same case,
the Court ruled that false representations as to the identity of a person are actionable, if made to
induce another to act thereon, and such other does so act thereon to his prejudice. 85 chanrobleslaw

In this case, analogous to the fraud and deceit exhibited in the above-mentioned circumstances,
respondent MPEI had no excuse not to be forthright with the documents showing MPC's eligibility
to bid as a joint venture. The Invitation to Bid, as quoted in our 2004 Decision, could not have
been any clearer when it stated that only bids from qualified entities, such as a joint venture,
would be entertained: ChanRoblesVirtualawlibrary

INVITATION TO APPLY FOR ELIGIBILITY AND TO BID

The Commission on Elections (COMELEC), pursuant to the mandate of Republic Act Nos. 8189 and
8436, invites interested offerers, vendors, suppliers or lessors to apply for eligibility and to bid for
the procurement by purchase, lease, lease with option to purchase, or otherwise, supplies,
equipment, materials and services needed for a comprehensive Automated Election System,
consisting of three (3) phases: (a) registration/verification of voters, (b) automated counting and
consolidation of votes, and (c) electronic transmission of election results, with an approved
budget of TWO BILLION FIVE HUNDRED MILLION (Php2,500,000,000) Pesos.

Only bids from the following entities shall be entertained:

xxxx

d. Manufacturers, suppliers and/or distributors forming themselves into a joint

venture, i.e., a group of two (2) or more manufacturers, suppliers and/or distributors
that intend to be jointly and severally responsible or liable for a particular contract,
provided that Filipino ownership thereof shall be at least sixty percent (60%); and  cralawlawlibrary

e. Cooperatives duly registered with the Cooperatives Development Authority. 86 (Emphases

supplied)
No reasonable mind would argue that documents showing the very existence of a joint venture
need not be included in the bidding envelope showing its existence, qualification, and eligibility to
undertake the project, considering that the purpose of prequalification in any public bidding is to
determine, at the earliest opportunity, the ability of the bidder to undertake the project. 87
chanrobleslaw

As found by this Court in its 2004 Decision, it appears that the documents that were submitted
after the bidding, which respondents claimed would prove the existence of the relationship among
the members of the consortium, were actually separate agreements individually executed by the
supposed members with MPEI. We had ruled that these documents were highly irregular,
considering that each of the four different and separate bilateral Agreements was valid and
binding only between MPEI and the other contracting party, leaving the other "consortium"
members total strangers thereto. Consequently, the other consortium members had nothing to do
with one another, as each one dealt only with MPEI. 88 chanrobleslaw

Considering that they merely showed MPEI's individual agreements with the other supposed
members, these agreements confirm to our mind the fraudulent intent on the part of respondent
MPEI to deceive the relevant officials about MPC. The intent was to cure the deficiency of the
winning bid, which intent miserably failed. Said this Court: 89
We are unconvinced, PBAC was guided by the rules, regulations or guidelines existing before the
bid proposals were opened on November 10, 1989. The basic rule in public bidding is that
bids should be evaluated based on the required documents submitted before and not
after the opening of bids. Otherwise, the foundation of a fair and competitive public
bidding would be defeated. Strict observance of the rules, regulations, and guidelines
of the bidding process is the only safeguard to a fair, honest and competitive public
bidding.

In underscoring the Court's strict application of the pertinent rules, regulations and guidelines of
the public bidding process, We have ruled in C & C Commercial vs. Menor (L-28360, January 27,
1983, 120 SCRA 112), that Nawasa properly rejected a bid of C & C Commercial to supply
asbestos cement pressure which bid did not include a tax clearance certificate as required by
Administrative Order No. 66 dated June 26, 1967. In Caltex (Phil.) Inc., et. al. vs. Delgado
Brothers, Inc. et. al., (96 Phil. 368, 375), We stressed that public biddings are held for the
protection of the public and the public should be given the best possible advantages by means of
open competition among the bidders.

xxxx

INTER TECHNICAL's failure to comply with what is perceived to be an elementary and

customary practice in a public bidding process, that is, to enclose the Form of Bid in the
original and eight separate copies of the bidding documents submitted to the bidding
committee is fatal to its cause. All the four pre-qualified bidders which include INTER
TECHNICAL were subject to Rule IB 2.1 of the Implementing Rules and Regulations of P.D. 1594
in the preparation of bids, bid bonds, and pre-qualification statement and Rule IB 2.8 which
states that the Form of Bid, among others, shall form part of the contract. INTER TECHNICAL's
explanation that its bid form was inadvertently left in the office (p. 6, Memorandum for Private
Respondent, p. 355, Rollo) will not excuse compliance with such a simple and basic requirement
in the public bidding process involving a multi-million project of the Government. There should
be strict application of the pertinent public bidding rules, otherwise the essential
requisites of fairness, good faith, and competitiveness in the public bidding process
would be rendered meaningless. (Emphases supplied)
All these circumstances, taken together, reveal a scheme on the part of respondent MPEI to
perpetrate fraud against the government. The purpose of the scheme was to ensure that MPEI,
an entity that was ineligible to bid in the first place, would eventually be awarded the contract.
While respondent argues that it was merely a passive participant in the bidding process, We
cannot ignore its cavalier disregard of its participation in the now voided automation contract.

B. Fraud on the part of respondent MPEI was further shown by the fact that despite the
failure of its ACMs to pass the tests conducted by the DOST, respondent still acceded to
being awarded the automation contract.

Another token of fraud is established by Our findings in relation to the failure of the ACMs to pass
the tests of the DOST. We quote herein the pertinent portions of this Court's 2004 Decision in
relation thereto:
ChanRoblesVirtualawlibrary

After respondent "consortium" and the other bidder, TIM, had submitted their respective bids on
March 10, 2003, the Comelec's BAC — through its Technical Working Group (TWG) and the DOST
— evaluated their technical proposals.

xxxx

According to respondents, it was only after the TWG and the DOST had conducted their separate
tests and submitted their respective reports that the BAC, on the basis of these reports
formulated its comments/recommendations on the bids of the consortium and TIM.

The BAG, in its Report dated April 21, 2003, recommended that the Phase II project involving the
acquisition of automated counting machines be awarded to MPEI. x x x

xxxx

The BAC, however, also stated on page 4 of its Report: "Based on the 14 April 2003
report (Table 6) of the DOST, it appears that both Mega-Pacific and TIM (Total
Information Management Corporation) failed to meet some of the requirements. x x x

xxxx

Failure to Meet the Required Accuracy Rating

The first of the key requirements was that the counting machines were to have an accuracy rating
of at least 99.9995 percent. The BAC Report indicates that both Mega Pacific and TIM
failed to meet this standard.

The key requirement of accuracy rating happens to be part and parcel of the Comelec's
Request for Proposal (RFP). x x x

xxxx

x x x Whichever accuracy rating is the right standard — whether 99.995 or 99.9995 percent —
the fact remains that the machines of the so-called "consort him" failed to even reach the lesser
of the two. On this basis alone, it ought to have been disqualified and its bid rejected outright.

At this point, the Court stresses that the essence of public bidding is violated by the
practice of requiring very high standards or unrealistic specifications that cannot be
met — like the 99.9995 percent accuracy rating in this case — only to water them
down after the bid has been award.[sic] Such scheme, which discourages the entry of
prospective bona fide bidders, is in fact a sure indication of fraud in the bidding,
designed to eliminate fair competition. Certainly, if no bidder meets the mandatory
requirements, standards or specifications, then no award should be made and a failed
bidding declared.

xxxx

Failure of Software to Detect Previously Downloaded Data

Furthermore, on page 6 of the BAC Report, it appears that the "consortium" as well as
TIM failed to meet another key requirement — for the counting machine's software
program to be able to detect previously downloaded precinct results and to prevent
these from being entered again into the counting machine. This same deficiency on the
part of both bidders reappears on page 7 of the BAC Report, as a result of the recurrence of their
failure to meet the said key requirement.

That the ability to detect previously downloaded data at different canvassing or consolidation
levels is deemed of utmost importance can be seen from the fact that it is repeated three times in
the RFP. x x x.

Once again, though, Comelec chose to ignore this crucial deficiency, which should have been a
cause for the gravest concern. x x x.

xxxx

Inability to Print the Audit Trail

But that grim prospect is not all. The BAC Report, on pages 6 and 7, indicate that the ACMs of
both bidders were unable to print the audit trail without any loss of data. In the case of MPC, the
audit trail system was "not yet incorporated" into its ACMs.

xxxx

Thus, the RFP on page 27 states that the ballot counting machines and ballot counting
software must print an audit trail of all machine operations for documentation and
verification purposes. Furthermore, the audit trail must be stored on the internal storage
device and be available on demand for future printing and verifying. On pages 30-31, the RFP
also requires that the city/municipal canvassing system software be able to print an audit trail
of the canvassing operations, including therein such data as the date and time the canvassing
program was started, the log-in of the authorized users (the identity of the machine operators),
the date and time the canvass data were downloaded into the canvassing system, and so on and
so forth. On page 33 of the RFP, we find the same audit trail requirement with respect to
the provincial/district canvassing system software; and again on pages 35-36 thereof, the same
audit trail requirement with respect to the national canvassing system software.

xxxx

The said provision which respondents have quoted several times, provides that ACMs are to
possess certain features divided into two classes: those that the statute itself
considers mandatory and other features or capabilities that the law deems optional. Among
those considered mandatory are "provisions for audit trails"! x x x.

In brief, respondents cannot deny that the provision requiring audit trails is indeed
mandatory, considering the wording of Section 7 of RA 8436. Neither can Respondent
Comelec deny that it has relied on the BAC Report, which indicates that the machines or the
software was deficient in that respect. And yet, the Commission simply disregarded this
shortcoming and awarded the Contract to private respondent, thereby violating the very law it
was supposed to implement.90 (Emphases supplied)
The above-mentioned findings were further echoed by this Court in its 2006 Resolution with a
categorical conclusion that the bidding process was void and fraudulent. 91 chanrobleslaw

Again, these factual findings found their way into the application of petitioner for a writ of
preliminary attachment,92 as it claimed that respondents could not dissociate themselves from
their telltale acts of supplying defective machines and nonexistent software. 93 The latter offered
no defense in relation to these claims.

We see no reason to deviate from our finding of fraud on the part of respondent MPEI in the 2004
Decision and 2006 Resolution. Despite its failure to meet the mandatory requirements set forth in
the bidding procedure, respondent still acceded to being awarded the contract. These
circumstances reveal its ploy to gain undue advantage over the other bidders in general, even to
the extent of cheating the government.

The word "bidding" in its comprehensive sense means making an offer or an invitation to
prospective contractors, whereby the government manifests its intention to make proposals for
the purpose of securing supplies, materials, and equipment for official business or public use, or
for public works or repair.94 Three principles involved in public bidding are as follows: (1) the offer
to the public; (2) an opportunity for competition, and (3) a basis for an exact comparison of bids.
A regulation of the matter, which excludes any of these factors, destroys the distinctive character
of the system and thwarts the purpose of its adoption. 95 chanrobleslaw

In the instant case, We infer from the circumstances that respondent MPEI welcomed and allowed
the award of the automation contract, as it executed the contract despite the full knowledge that
it had not met the mandatory requirements set forth in the RFP. Respondent acceded to and
benefitted from the watering down of these mandatory requirements, resulting in undue
advantage in its favor. The fact that there were numerous mandatory requirements that were
simply set aside to pave the way for the award of the automation contract does not escape the
attention of this Court. Respondent MPEI, through respondent Willy, signed and executed the
automation contract with COMELEC. It is therefore preposterous for respondent argue that it was
a "passive participant" in the whole bidding process.

We reject the CA's denial of petitioner's plea for the ancillary remedy of preliminary attachment,
considering that the cumulative effect of the factual findings of this Court establishes a sufficient
basis to conclude that fraud had attended the execution of the automation contract. Such fraud is
deducible from the 2004 Decision and further upheld in the 2006 Resolution. It was incongruous,
therefore, for the CA to have denied the application for a writ of preliminary attachment, when
the evidence on record was the same that was used to demonstrate the propriety of the issuance
of the writ of preliminary attachment. This was the same evidence that We had already
considered and passed upon, and on which We based Our 2004 Decision to nullify the automation
contract. It would not be right for this Court to ignore these illegal transactions, as to do so would
be tantamount to abandoning its constitutional duty of safeguarding public interest.
 II.
Application of the piercing doctrine justifies the issuance of a writ of preliminary
attachment over the properties of the individual respondents.

Individual respondents argue that since they were not parties to the 2004 case, any factual
findings or conclusions therein should not be binding upon them. 96 Since they were strangers to
that case, they are not bound by the judgment rendered by this Court. 97 They claim that their
fundamental right to due process would be violated if their properties were to be attached for a
purported corporate debt on the basis of a court ruling in a case in which they were not given the
right or opportunity to be heard.98chanrobleslaw

We cannot subscribe to this argument. In the first place, it could not be reasonably expected that
individual respondents would be impleaded in the 2004 case. As admitted by respondents, the
issues resolved in the 2004 Decision were limited to the following: (1) whether to declare
Resolution No. 6074 of the COMELEC null and void; (2) whether to enjoin the implementation of
any further contract that may have been entered into by COMELEC with MPC or MPEI; and (3)
whether to compel COMELEC to conduct a rebidding of the project. To implead individual
respondents then was improper, considering that the automation contract was entered into by
respondent MPEI. This Court even acknowledged this fact by directing that the liabilities of
persons responsible for the nullity of the contract be determined in another appropriate
proceeding and by directing the OSG to undertake measures to protect the interests of the
government.

At any rate, individual respondents have been fully afforded the right to due process by being
impleaded and heard in the subsequent proceedings before the courts a quo. Finally, they cannot
argue violation of due process, as respondent MPEI, of which they are incorporators/stockholders,
remains vulnerable to the piercing of its corporate veil.

A. There are red flags indicating that MPEI was used to perpetrate the fraud against
petitioner, thus allowing the piercing of its corporate veil.

Petitioner seeks the issuance of a writ of preliminary attachment over the personal assets of the
individual respondents, notwithstanding the doctrine of separate juridical personality. 99 It invokes
the use of the doctrine of piercing the corporate veil, to which the canon of separate juridical
personality is vulnerable, as a way to reach the personal properties of the individual respondents.
Petitioner paints a picture of a sham corporation set up by all the individual respondents for the
purpose of securing the automation contract.

We agree with petitioner.

Veil-piercing in fraud cases requires that the legal fiction of separate juridical personality is used
for fraudulent or wrongful ends.100 For reasons discussed below, We see red flags of fraudulent
schemes in public procurement, all of which were established in the 2004 Decision, the totality of
which strongly indicate that MPEI was a sham corporation formed merely for the purpose of
perpetrating a fraudulent scheme.

The red flags are as follows: (1) overly narrow specifications; (2) unjustified recommendations
and unjustified winning bidders; (3) failure to meet the terms of the contract; and (4) shell or
fictitious company. We shall discuss each in detail.

Overly Narrow Specifications

The World Bank's Fraud and Corruption Awareness Handbook: A Handbook for Civil Servants
Involved in Public Procurement, (Handbook) identifies an assortment of fraud and corruption
indicators and relevant schemes in public procurement. 101 One of the schemes recognized by the
Handbook is rigged specifications: ChanRoblesVirtualawlibrary

Scheme: Rigged specifications. In a competitive market for goods and services, any
specifications that seem to be drafted in a way that favors a particular company deserve
closer scrutiny. For example, specifications that are too narrow can be used to exclude
other qualified bidders or justify improper sole source awards. Unduly vague or broad
specifications can allow an unqualified bidder to compete or justify fraudulent change orders
after the contract is awarded. Sometimes, project officials will go so far as to allow the favored
bidder to draft the specifications.102 chanroblesvirtuallawlibrary

In Our 2004 Decision, We identified a red flag of rigged bidding in the form of overly narrow
specifications. As already discussed, the accuracy requirement of 99.9995 percent was set up by
COMELEC bidding rules. This Court recognized that this rating was "too high and was a sure
indication of fraud in the bidding, designed to eliminate fair competition."103 Indeed, "the
essence of public bidding is violated by the practice of requiring very high standards or unrealistic
specifications that cannot be met...only to water them down after the bid has been
award(ed)."104chanrobleslaw

Unjustified Recommendations and Unjustified Winning Bidders

Questionable evaluation in a Bid Evaluation Report (BER) is an indicator of bid rigging. The
Handbook expounds: ChanRoblesVirtualawlibrary

Questionable evaluation and unusual bid patterns may emerge in the BER. After the
completion of the evaluation process, the Bid Evaluation Committee should present to
the implementing agency its BER, which describes the results and the process by which
the BEC has evaluated the bids received. The BER may include a number of indicators of
bid rigging, e.g., questionable disqualifications, and unusual bid patterns. 105 chanroblesvirtuallawlibrary

The Handbook lists unjustified recommendations and unjustified winning bidders as red flags of a
rigged bidding.106 chanrobleslaw

The red flags of questionable recommendation and unjustified awards are raised in this case. As
earlier discussed, the project was awarded to MPC, which proved to be a nonentity. It was MPEI
that actually participated in the bidding process, but it was not qualified to be a bidder in the first
place. Moreover, its ACMs failed the accuracy requirement set by COMELEC. Yet, MPC — the
nonentity — obtained a favorable recommendation from the BAC, and the automation contract
was awarded to the former.

Failure to Meet Contract Terms

Failure to meet the terms of a contract is regarded as a fraud by the Handbook: ChanRoblesVirtualawlibrary

Scheme: Failure to meet contract terms. Firms may deliberately fail to comply with contract
requirements. The contractor will attempt to conceal such actions often by falsifying or forging
supporting documentation and bill for the work as if it were done in accordance with
specifications. In many cases, the contractors must bribe inspection or project personnel to
accept the substandard goods or works, or supervision agents are coerced to approve
substandard work. x x x107 chanroblesvirtuallawlibrary

As mentioned earlier, this Court already found the ACMs to be below the standards set by the
COMELEC. We reiterated their noncompliant status in Our 2005 and 2006 Resolutions.

As early as 2005, when the COMELEC sought permission from this Court to utilize the ACMs in the
then scheduled ARMM elections, We declared that the proposed use of the machines would
expose the ARMM elections to the same dangers of massive electoral fraud that would have been
inflicted by the projected automation of the 2004 national elections. We based this
pronouncement on the fact that the COMELEC failed to show that the deficiencies had been
cured.108 Yet again, this Court in 2006 blocked another attempt to use the ACMs, this time for the
2007 elections. We reiterated that because the ACMs had merely remained idle and unused since
their last evaluation, in which they failed to hurdle the crucial tests, then their defects and
deficiencies could not have been cured by then.109 chanrobleslaw

Based on the foregoing, the ACMs delivered were plagued with defects that made them fail the
requirements set for the automation project.

Shell or fictitious company

The Handbook regards a shell or fictitious company as a "serious red flag," a concept that it
elaborates upon: ChanRoblesVirtualawlibrary

Fictitious companies are by definition fraudulent and may also serve as fronts for government
officials. The typical scheme involves corrupt government officials creating a fictitious company
that will serve as a "vehicle" to secure contract awards. Often, the fictitious—or ghost— company
will subcontract work to lower cost and sometimes unqualified firms. The fictitious company may
also utilize designated losers as subcontractors to deliver the work, thus indicating collusion.

Shell companies have no significant assets, staff or operational capacity. They pose a serious
red flag as a bidder on public contracts, because they often hide the interests of project or
government officials, concealing a conflict of interest and opportunities for money
laundering. Also, by definition, they have no experience.110 chanroblesvirtuallawlibrary

MPEI qualifies as a shell or fictitious company. It was nonexistent at the time of the invitation to
bid; to be precise, it was incorporated only 11 days before the bidding. It was a newly formed
corporation and, as such, had no track record to speak of.

Further, MPEI misrepresented itself in the bidding process as "lead company" of the supposed
joint venture. The misrepresentation appears to have been an attempt to justify its lack of
experience. As a new company, it was not eligible to participate as a bidder. It could do so only
by pretending that it was acting as an agent of the putative consortium.

The timing of the incorporation of MPEI is particularly noteworthy. Its close nexus to the date of
the invitation to bid and the date of the bidding (11 days) provides a strong indicium of the intent
to use the corporate vehicle for fraudulent purposes. This proximity unmistakably indicates that
the automation contract served as motivation for the formation of MPEI: a corporation had to be
organized so it could participate in the bidding by claiming to be an agent of a pretended joint
venture.

The timing of the formation of MPEI did not escape the scrutiny of Justice Angelina Sandoval-
Gutierrez, who made this observation in her Concurring Opinion in the 2004 Decision: ChanRoblesVirtualawlibrary

At this juncture, it bears stressing that MPEI was incorporated only on February 27, 2003 as
evidenced by its Certificate of Incorporation. This goes to show that from the time the COMELEC
issued its Invitation to Bid (January 28, 2003) and Request for Proposal (February 17, 2003) up
to the time it convened the Pre-bid Conference (February 18, 2003), MPEI was literally a non-
existent entity. It came into being only on February 27, 2003 or eleven (11) days prior to the
submission of its bid, i.e. March 10, 2003. This poses a legal obstacle to its eligibility as a
bidder. The Request for Proposal requires the bidder to submit financial documents that will
establish to the BAC's satisfaction its financial capability which include: ChanRoblesVirtualawlibrary

(1) audited financial statements of the Bidder's firm for the last three (3) calendar years,
stamped "RECEIVED" by the appropriate government agency, to show its capacity to finance the
manufacture and supply of Goods called for and a statement or record of volumes of sales;
(2) Balance Sheet;

(3) Income Statement; and  cralawlawlibrary

(4) Statement of Cash Flow.

As correctly pointed out by petitioners, how could MPEI comply with the above requirement of
audited financial statements for the last three (3) calendar years if it came into existence only
eleven (11) days prior to the bidding?

To do away with such complication, MPEI asserts that it was MP CONSORTIUM who submitted the
bid on March 10, 2003. It pretends compliance with the requirements by invoking the financial
capabilities and long time existence of the alleged members of the MP CONSORTIUM, namely,
Election.Com, WeSolv, SK CeC, ePLDT and Oracle. It wants this Court to believe that it is MP
CONSORTIUM who was actually dealing with the COMELEC and that its (MPEI) participation is
merely that of a "lead company and proponent" of the joint venture. This is hardly convincing. For
one, the contract for the supply and delivery of ACM was between COMELEC and MPEI, not MP
CONSORTIUM. As a matter of fad, there cannot be found in the contract any reference to the MP
CONSORTIUM or any member thereof for that matter. For another, the agreements among the
alleged members of MP CONSORTIUM do not show the existence of a joint-venture agreement.
Worse, MPEI cannot produce the agreement as to the "joint and several liability" of the alleged
members of the MP CONSORTIUM as required by this Court in its Resolution dated October 7,
2003.111chanroblesvirtuallawlibrary

Respondent MPEI was formed to perpetrate the fraud against petitioner.

The totality of the red flags found in this case leads Us to the inevitable conclusion that MPEI was
nothing but a sham corporation formed for the purpose of defrauding petitioner. Its ultimate
objective was to secure the P1,248,949,088 automation contract. The scheme was to put up a
corporation that would participate in the bid and enter into a contract with the COMELEC, even if
the former was not qualified or authorized to do so.

Without the incorporation of MPEI, the defraudation of the government would not have been
possible. The formation of MPEI paved the way for its participation in the bid, through its claim
that it was an agent of a supposed joint venture, its misrepresentations to secure the automation
contract, its misrepresentation at the time of the execution of the contract, its delivery of the
defective ACMs, and ultimately its acceptance of the benefits under the automation contract.

The foregoing considered, veil-piercing is justified in this case.

We shall next consider the question of whose assets shall be reached by the application of the
piercing doctrine.

B. Because all the individual respondents actively participated in the perpetration of

the fraud against petitioner, their personal assets may be subject to a writ of
preliminary attachment by piercing the corporate veil.

A corporation's privilege of being treated as an entity distinct and separate from the stockholders
is confined to legitimate uses, and is subject to equitable limitations to prevent its being exercised
for fraudulent, unfair, or illegal purposes.112 As early as the 19th century, it has been held that:ChanRoblesVirtualawlibrary

The general proposition that a corporation is to be regarded as a legal entity, existing separate
and apart from the natural persons composing it, is not disputed; but that the statement is a
mere fiction, existing only in idea, is well understood, and not controverted by any one who
pretends to accurate knowledge on the subject. It has been introduced for the convenience of the
company in making contracts, in acquiring property for corporate purposes, in suing and being
sued, and to preserve the limited liability of the stockholder by distinguishing between the
corporate debts and property of the company and of the stockholders in their capacity as
individuals. All fictions of law have been introduced for the purpose of convenience, and
to subserve the ends of justice. It is in this sense that the maxim in fictione juris subsistit
aequitas is used, and the doctrine of fictions applied. But when they are urged to an intent
and purpose not within the reason and policy of the fiction, they have always been
disregarded by the courts. Broom's, Legal Maxims 130. "It is a certain rule," says Lord
Mansfield, C.J., "that a fiction of law never be contradicted so as to defeat the end for which it
was invented, but for every other purpose it may be contradicted." Johnson v. Smith, 2 Burr,
962.113
chanroblesvirtuallawlibrary

The main effect of disregarding the corporate fiction is that stockholders will be held personally
liable for the acts and contracts of the corporation, whose existence, at least for the purpose of
the particular situation involved, is ignored. 114
chanrobleslaw

We have consistently held that when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as
an association of persons.115 Thus, considering that We find it justified to pierce the corporate veil
in the case before Us, MPEI must, perforce, be treated as a mere association of persons whose
assets are unshielded by corporate fiction. Such persons' individual liability shall now be
determined with respect to the matter at hand.

Contrary to respondent Willy's claims, his participation in the fraud is clearly established by his
unequivocal agreement to the execution of the automation contract with the COMELEC, and his
signature that appears on the voided contract. As far back as in the 2004 Decision, his
participation as a signatory' to the automation contract was already established: ChanRoblesVirtualawlibrary

The foregoing argument is unpersuasive. First, the contract being referred to, entitled "The
Automated Counting and Canvassing Project Contract," is between Comelec and MPEI, not the
alleged consortium, MPC. To repeat, it is MPEI - not MPC - that is a party to the
Contract. Nowhere in that Contract is there any mention of a consortium or joint venture, of
members thereof much less of joint and several liability. Supposedly executed sometime in May
2003, the Contract bears a notarization date of June 30, 2003, and contains the signature of
Willy U. Yu signing as president of MPEI (not for and on behalf of MPC), along with that
of the Comelec chair. It provides in Section 3.2 that MPEI (not MPC) is to supply the Equipment
and perform the Services under the Contract, in accordance with the appendices thereof; nothing
whatsoever is said about any consortium or joint venture or partnership. x x x (Emphasis
supplied)
That his signature appears on the automation contract means that he agreed and acceded to its
terms.116 His participation in the fraud involves his signing and executing the voided contract.

The execution of the automation contract with a non-eligible entity and the subsequent award of
the contract despite the failure to meet the mandatory requirements were "badges of fraud" in
the procurement process that should have been recognized by the CA to justify the issuance of
the writ of preliminary attachment against the properties of respondent Willy.

With respect to the other individual respondents, petitioner, in its Answer with Counterclaim,
alleged: ChanRoblesVirtualawlibrary

30. Also, inasmuch as MPEI is in truth a mere shell corporation with no real assets in its name,
incorporated merely to feign eligibility for the bidding of the automated contract when it in fact
had none, to the great prejudice of the Republic, plaintiffs individual incorporators should
likewise be made liable together with MPEI for the automated contract amount paid to and
received by the latter. The following circumstances altogether manifest that the individual
incorporators merely cloaked themselves with the veil of corporate fiction to perpetrate a fraud
and to eschew liability therefor, thus:
 chanRoblesvirtualLawlibrary x x x x 
 
f. From the time it was incorporated until today, MPEI has not complied with the reportorial requirements of the Securities and
Exchange Commission;

g. Individual incorporators, acting fraudulently through MPEI, and in violation of the bidding rules,
then subcontracted the automation contract to four (4) other corporations, namely: WeSolve Corporation, SK C&C,
ePLDT and election.com, to comply with the capital requirements, requisite five (5)-year corporate standing and the technical
qualifications of the Request for Proposal;

x x x x117 chanroblesvirtuallawlibrary

In response to petitioner's allegations, respondents Willy and Bonnie stated in their Reply and
Answer (Re: Answer with Counterclaim dated 28 June 2004): 118
3.3 As far as plaintiff MPEI and defendants-in-counterclaim are concerned, they dealt with
the COMELEC with full transparency and in utmost good faith. All documents support its
eligibility to bid for the supply of the ACMs and their peripheral services, were submitted to the
COMELEC for its evaluation in full transparency. Pertinently, neither plaintiff MPEI nor any of its
directors, stockholders, officers or employees had any participation in the evaluation of the bids
and eventual choice of the winning bidder.119 chanroblesvirtuallawlibrary

Respondents Johnson's and Bernard's denials were made in paragraphs 2.17 and 3.3 of their
Answer with Counterclaim to the Republic's Counterclaim, to wit: 120
2.17 The erroneous conclusion of fact and law in paragraph 30 (f) and (g) of the Republic's
answer is denied, having been pleaded in violation of the requirement, that only ultimate facts arc
to be stated in the pleadings and they are falsehoods. The truth of the matter is that there could
not have been fraud, as these agreements were submitted to the COMELEC for its evaluation and
assessment, as to the qualification of the Consortium as a bidder, a showing of transparency in
plaintiffs dealings with the Republic. 121 chanrobleslaw

3.3 As far as plaintiff MPEI and defendants-in-counterclaim are concerned, they dealt with
the COMELEC with full transparency and in utmost good faith. All documents support its
eligibility to bid for the supply of the automated counting machines and its peripheral services,
were submitted to the COMELEC for its evaluation in full transparency. Pertinently, the plaintiff or
any of its directors, stockholders, officers or employees had no participation in the evaluation of
the bids and eventual choice of the winning bidder. 122 chanroblesvirtuallawlibrary

As regards Enrique and Rosita, the relevant paragraphs in the Answer with Counterclaim to the
Republic's Counterclaim123 are quoted below: ChanRoblesVirtualawlibrary

2.17. The erroneous conclusion of fact and law in paragraph 30 (F) and (G) of the Republic's
answer is denied, having been pleaded in violation of the requirement, that only ultimate facts
are to be stated in the pleadings and they are falsehoods. The truth of the matter is that there
could not have been fraud, as these agreements were submitted to the COMELEC for its
evaluation and assessment, as to the qualification of the Consortium as a bidder, a showing of
transparency in plaintiffs dealings with the Republic. 124 chanrobleslaw

3.3. As far as the plaintiff and herein answering defendants-in-counterclaim are

concerned, they dealt with the Commission on Elections with full transparency and in
utmost good faith. All documents in support of its eligibility to bid for the supply of the
automated counting machines and its peripheral services were submitted to the Commission on
Elections for its evaluation in full transparency. Pertinently, the plaintiff or any of its directors,
stockholders, officers or employees had no participation in the evaluation of the bids and eventual
choice of the winning bidder.125 chanroblesvirtuallawlibrary

Pedro and Laureano offer a similar defense in paragraph 3.3 of their Reply and Answer with
Counterclaim to the Republic's Counterclaim126 dated 28 June 2004, which reads: ChanRoblesVirtualawlibrary
3.3. As far as plaintiff MPEI and defendants-in-counterclaim are concerned, they dealt with the
COMELEC with full transparency and in utmost good faith. All documents support its
eligibility to bid for the supply of the ACMs and their peripheral services, were submitted to the
COMELEC for its evaluation in full transparency. Pertinently, neither plaintiff MPEI nor any of its
directors, stockholders, officers or employees had any participation in the evaluation of the bids
and eventual choice of the winning bidder.127 chanroblesvirtuallawlibrary

It can be seen from the above-quoted paragraphs that the individual respondents never denied
their participation in the questioned transactions of MPEI, merely raising the defense of good faith
and shifting the blame to the COMELEC. The individual respondents have, in effect, admitted that
they had knowledge of and participation in the fraudulent subcontracting of the automation
contract to the four corporations.

It bears stressing that the remaining individual respondents, together with respondent Willy,
incorporated MPEI. As incorporators, they are expected to be involved in the management of the
corporation and they are charged with the duty of care. This is one of the reasons for the
requirement of ownership of at least one share of stock by an incorporator: ChanRoblesVirtualawlibrary

The reason for this, as explained by the lawmakers, is to avoid the confusion and/or ambiguities
arising in a situation under the old corporation law where there exists one set of
incorporators who are not even shareholders and another set of directors/incorporators
who must all be shareholders of the corporation. The people who deal with said corporation
at such an early stage are confused as to who are the persons or group really authorized to act in
behalf of the corporation. (Proceedings of the Batasan Pambansa on the Proposed Corporation
Code). Another reason may be anchored on the presumption that when an incorporator
has pecuniary interest in the corporation, no matter how minimal, he will be more
involved in the management of corporate affairs and to a greater degree, be concerned
with the welfare of the corporation.128 chanroblesvirtuallawlibrary

As incorporators and businessmen about to embark on a new business venture involving a

sizeable capital (P300 million), the remaining individual respondents should have known of Willy's
scheme to perpetrate the fraud against petitioner, especially because the objective was a billion
peso automation contract. Still, they proceeded with the illicit business venture.

It is clear to this Court that inequity would result if We do not attach personal liability to all the
individual respondents. With a definite finding that MPEI was used to perpetrate the fraud against
the government, it would be a great injustice if the remaining individual respondents would enjoy
the benefits of incorporation despite a clear finding of abuse of the corporate vehicle. Indeed, to
allow the corporate fiction to remain intact would not subserve, but instead subvert, the ends of
justice.

III.
The factual findings of this Court that have become final cannot be modified or altered,
much less reversed, and are controlling in the instant case.

Respondents argue that the 2004 Decision did not resolve and could not have resolved the factual
issue of whether they had committed any fraud, as the Supreme Court is not a trier of facts; and
the 2004 case, being a certiorari case, did not deal with questions of fact. 129 chanrobleslaw

Further, respondents argue that the findings of this Court ought to be confined only to those
issues actually raised and resolved in the 2004 case, in accordance with the principle of
conclusiveness of judgment. 130 They explain that the issues resolved in the 2004 Decision were
only limited to the following: (1) whether to declare COMELEC Resolution No. 6074 null and void;
(2) whether to enjoin the implementation of any further contract that may have been entered into
by COMELEC with MPC or MPEI; and (3) whether to compel COMELEC to conduct a rebidding of
the project.131
chanrobleslaw
It is obvious that respondents are merely trying to escape the implications or effects of the nullity
of the automation contract that they had executed. Section 1, Rule 65 of the Rules of Court,
clearly sets forth the instances when a petition for certiorari can be used as a proper remedy: ChanRoblesVirtualawlibrary

Section 1. Petition for certiorari. — When any tribunal, board or officer exercising judicial or
quasi-judicial functions has acted without or in excess of its jurisdiction, or with grave abuse of
discretion amounting to lack or excess of jurisdiction, and there is no appeal, or any plain,
speedy, and adequate remedy in the ordinary course of law. a person aggrieved thereby may file
a verified petition in the proper court, alleging the facts with certainty and praying that judgment
be rendered annulling or modifying the proceedings of such tribunal, board or officer, and
granting such incidental reliefs as law and justice may require.
The term "grave abuse of discretion" has a specific meaning. An act of a court or tribunal can only
be considered to have been committed with grave abuse of discretion when the act is done in a
"capricious or whimsical exercise of judgment as is equivalent to lack of jurisdiction." 132 The abuse
of discretion must be so patent and gross as to amount to an "evasion of a positive duty or to a
virtual refusal to perform a duty enjoined by law, or to act at all in contemplation of law, as where
the power is exercised in an arbitrary and despotic manner by reason of passion and
hostility."133 Furthermore, the use of a petition for certiorari is restricted only to "truly
extraordinary cases wherein the act of the lower court or quasi-judicial body is wholly
void."134 From the foregoing definition, it is clear that the special civil action of certiorari under
Rule 65 can only strike down an act for having been done with grave abuse of discretion if the
petitioner could manifestly show that such act was patent and gross. 135 chanrobleslaw

We had to ascertain from the evidence whether the COMELEC committed grave abuse of
discretion, and in the process, were justified in making some factual findings. The conclusions
derived from the factual findings are inextricably intertwined with this Court's determination of
grave abuse of discretion. They have a direct bearing and are in fact necessary to illustrate that
the award of the automation contract was done hastily and in direct violation of law. This Court
has indeed made factual findings based on the evidence presented before it; in turn, these factual
findings constitute the controlling legal rule between the parties that cannot be modified or
amended by any of them. This Court is bound to consider the factual findings made in the 2004
Decision in order to declare that there is fraud for the purpose of issuing the writ of preliminary
attachment.

Respondents appear to have misunderstood the implications of the principle of conclusiveness of

judgment on their cause. Contrary to their claims, the factual findings are conclusive and have
been established as the controlling legal rule in the instant case, on the basis of the principle
of res judicata—more particularly, the principle of conclusiveness of judgment.

This doctrine of res judicata which is set forth in Section 47 of Rule 39 of the Rules of
Court136 lays down two main rules, namely: (1) the judgment or decree of a court of competent
jurisdiction on the merits concludes the litigation between the parties and their privies and
constitutes a bar to a new action or suit involving the same cause of action either before the
same or any other tribunal; and (2) any right, fact, or matter in issue directly adjudicated or
necessarily involved in the determination of an action before a competent court in which a
judgment or decree is rendered on the merits is conclusively settled by the judgment therein and
cannot again be litigated between the parties and their privies whether or not the claims or
demands, purposes, or subject matters of the two suits are the same. 137 chanrobleslaw

These two main rules mark the distinction between the principles governing the two typical cases
in which a judgment may operate as evidence.138 The first general rule stated above and
corresponding to the afore-quoted paragraph (b) of Section 47, Rule 39 of the Rules of Court, is
referred to as "bar by former judgment"; while the second general rule, which is embodied in
paragraph (c) of the same section and rule, is known as "conclusiveness of judgment." 139 chanrobleslaw

In Calalang v. Register of Deeds of Quezon City,140 We discussed the concept of conclusiveness of

judgment as pertaining even to those matters essentially connected with the subject of litigation
in the first action. This Court explained therein that the bar on re-litigation extends to those
questions necessarily implied in the final judgment, although no specific finding may have been
made in reference thereto, and although those matters were directly referred to in the pleadings
and were not actually or formally presented. If the record of the former trial shows that the
judgment could not have been rendered without deciding a particular matter, it will be considered
as having settled that matter as to all future actions between the parties; and if a judgment
necessarily presupposes certain premises, they are as conclusive as the judgment itself: ChanRoblesVirtualawlibrary

The second concept — conclusiveness of judgment — states that a fact or question

which was in issue in a former suit and was there judicially passed upon and
determined by a court of competent jurisdiction, is conclusively settled by the judgment
therein as far as the parties to that action and persons in privity with them are
concerned and cannot be again litigated in any future action between such parties or
their privies, in the same court or any other court of concurrent jurisdiction on either
the same or different cause of action, while the judgment remains unreversed by
proper authority. It has been held that in order that a judgment in one action can be conclusive
as to a particular matter in another action between the same parties or their privies, it is essential
that the issue be identical. If a particular point or question is in issue in the second action,
and the judgment will depend on the determination of that particular point or question,
a former judgment between the same parties or their privies will be final and
conclusive in the second if that same point or question was in issue and adjudicated in
the first suit (Nabus v. Court of Appeals, 193 SCRA 732 [1991]). Identity of cause of action is
not required but merely identity of issue.

Justice Fcliciano, in Smith Bell & Company (Phils.), Inc. v. Court of Appeals (197 SCRA 201, 210
[1991]), reiterated Lopez v. Reyes (76 SCRA 179 [1977]) in regard to the distinction between bar
by former judgment which bars the prosecution of a second action upon the same claim, demand,
or cause of action, and conclusiveness of judgment which bars the relitigation of particular facts
or issues in another litigation between the same parties on a different claim or cause of action.
The general rule precluding the re-litigation of material facts or questions which were
in issue and adjudicated in former action are commonly applied to all matters
essentially connected with the subject matter of the litigation. Thus, it extends to
questions necessarily implied in the final judgment, although no specific finding may
have been made in reference thereto and although such matters were directly referred
to in the pleadings and were not actually or formally presented. Under this rule, if the
record of the former trial shows that the judgment could not have been rendered
without deciding the particular matter, it will be considered as having settled that
matter as to all future actions between the parties and if a judgment necessarily
presupposes certain premises, they are as conclusive as the judgment
itself.141 (Emphases supplied)
The foregoing disquisition finds application to the case at bar.

Undeniably, the present case is merely an adjunct of the 2004 case, in which the automation
contract was declared to be a nullity. Needless to say, the 2004 Decision has since become final.
As earlier explained, this Court arrived at several factual findings showing the illegality of the
automation contract; in turn, these findings were used as basis to justify the declaration of
nullity.

A closer scrutiny of the 2004 Decision would reveal that the judgment could not have been
rendered without deciding particular factual matters in relation to the following: (1) identity,
existence and eligibility of MPC as a bidder; (2) failure of the ACMs to pass DOST technical tests;
and (3) remedial measures undertaken by the COMELEC after the award of the automation
contract. Under the principle of conclusiveness of judgment, We are precluded from re-litigating
these facts, as these were essential to the question of nullity. Otherwise stated, the judgment
could not have been rendered without necessarily deciding on the above-enumerated factual
matters.

Thus, under the principle of conclusiveness of judgment, those material facts became binding and
conclusive on the parties, in this case MPEI and, ultimately, the persons that comprised it. When
a right or fact has been judicially tried and determined by a court of competent jurisdiction, or
when an opportunity for that trial has been given, the judgment of the court—as long as it
remains unreversed—should be conclusive upon the parties and those in privity with
them.142 Thus, the CA should not have required petitioner to present further evidence of fraud on
the part of respondent Willy and MPEI, as it was already necessarily adjudged in the 2004 case.

To allow respondents to argue otherwise would be violative of the principle of immutability of

judgment. When a final judgment becomes executory, it becomes immutable and unalterable and
may no longer undergo any modification, much less any reversal. 143 In Navarro v. Metropolitan
Bank & Trust Company144 this Court explained that the underlying reason behind this principle is
to avoid delay in the administration of justice and to avoid allowing judicial controversies to drag
on indefinitely, viz.:
ChanRoblesVirtualawlibrary

No other procedural law principle is indeed more settled than that once a judgment
becomes final, it is no longer subject to change, revision, amendment or reversal,
except only for correction of clerical errors, or the making of nunc pro tunc entries
which cause no prejudice to any party, or where the judgment itself is void. The
underlying reason for the rule is two-fold: (1) to avoid delay in the administration of justice and
thus make orderly the discharge of judicial business, and (2) to put judicial controversies to an
end, at the risk of occasional errors, inasmuch as controversies cannot be allowed to drag on
indefinitely and the rights and obligations of every litigant must not hang in suspense for an
indefinite period of time. As the Court declared in Yau v. Silverio,
Litigation must end and terminate sometime and somewhere, and it is essential to an effective
and efficient administration of justice that, once a judgment has become final, the winning party
be, not through a mere subterfuge, deprived of the fruits of the verdict. Courts must therefore
guard against any scheme calculated to bring about that result. Constituted as they are to put an
end to controversies, courts should frown upon any attempt to prolong them.
Indeed, just as a losing party has the right to file an appeal within the prescribed period, the
winning party also has the correlative right to enjoy the finality of the resolution of his case by
the execution and satisfaction of the judgment. Any attempt to thwart this rigid rule and deny the
prevailing litigant his right to savor the fruit of his victory must immediately be struck down. x x
x. (Emphasis supplied)145 chanroblesvirtuallawlibrary

In the instant case, adherence to respondents' position would mean a complete disregard of the
factual findings We made in the 2004 Decision, and would certainly be tantamount to reversing
the same. This would invariably cause further delay in the efforts to recover the amounts of
government money illegally disbursed to respondents back in 2004.

Next, respondents argue that the findings of fact in the 2004 Decision are not
conclusive146 considering that eight (8) of the fifteen (15) justices of this Court refused to go
along with the factual findings as stated in the majority opinion. 147 This argument fails to
convince.

Fourteen (14) Justices participated in the promulgation of the 2004 Decision. Out of the fourteen
(14) Justices, three (3) Justices registered their dissent, 148 and two (2) Justices wrote their
Separate Opinions, each recommending the dismissal of the Petition. 149 Of the nine (9) Justices
who voted to grant the Petition, four (4) joined the ponente in his disposition of the case,150 and
two (2) Justices wrote Separate Concurring Opinions.151 As to the remaining two (2) Justices, one
(1) Justice152 merely concurred in the result, while the other joined another Justice in her
Separate Opinion.153chanrobleslaw

Contrary to the allegations of respondents, an examination of the voting shows that nine (9)
Justices voted in favor of the majority opinion, without any qualification regarding the factual
findings made therein. In fact, the two (2) Justices who wrote their own Concurring Opinions
echoed the lack of eligibility of MPC and the failure of the ACMs to pass the mandatory
requirements.

Finally, respondents cannot argue that, from the line of questioning of then Justice Leonardo A.
Quisumbing during the oral arguments in the 2004 case, he did not agree with the factual
findings of this Court. Oral arguments before this Court are held precisely to test the soundness
of each proponent's contentions. The questions and statements propounded by Justices during
such an exercise are not to be construed as their definitive opinions. Neither are they indicative of
how a Justice shall vote on a particular issue; indeed, Justice Quisumbing clearly states in the
2004 Decision that he concurs in the results. At any rate, statements made by Our Members
during oral arguments are not stare decisis; what is conclusive are the decisions reached by the
majority of the Court.

IV.
The delivery of 1,991 units of ACMs does not negate fraud on the part of respondents
Willy and MPEI.

The CA in its Amended Decision explained that respondents could not be considered to have
fostered a fraudulent intent to not honor their obligation, since they delivered 1,991 units of
ACMs.154 In turn, respondents argue that respondent MPEI had every intention of fulfilling its
obligation, because it in fact delivered the ACMs as required by the automation contract. 155chanrobleslaw

We disagree with the CA and respondents. The fact that the ACMs were delivered cannot induce
this Court to disregard the fraud respondent MPEI had employed in securing the award of the
automation contract, as established above. Furthermore, they cannot cite the fact of delivery in
their favor, considering that the ACMs delivered were substandard and noncompliant with the
requirements initially set for the automation project.

In Our 2004 Decision, We already found the ACMs to be below the standards set by the
COMELEC. The noncompliant status of these ACMs was reiterated by this Court in its 2005 and
2006 Resolutions. The CA therefore gravely erred in considering the delivery of 1,991 ACMs as
evidence of respondents' willingness to perform the obligation (and thus, their lack of fraud)
considering that, as exhaustively discussed earlier, the ACMs delivered were plagued with defects
and failed to meet the requirements set for the automation project.

Under Article 1233 of the New Civil Code, a debt shall not be understood to have been paid,
unless the thing or service in which the obligation consists has been completely delivered or
rendered. In this case, respondents cannot be considered to have performed their obligation,
because the ACMs were defective.

V.
Estoppel does not lie against the State when it acts to rectify the mistakes, errors or
illegal acts of its officials and agents.

Respondents claim that the 2004 Decision may not be invoked against them, since the petitioner
and the respondents were co-respondents and not adverse parties in the 2004 case. Respondents
further explain that since petitioner and respondents were on the same side at the time, had the
same interest, and took the same position on the validity and regularity of the automation
contract, petitioner cannot now invoke the 2004 Decision against them. 156 chanrobleslaw

Contrary to respondents' contention, estoppel generally finds no application against the State
when it acts to rectify mistakes, errors, irregularities, or illegal acts of its officials and agents,
irrespective of rank. This principle ensures the efficient conduct of the affairs of the State without
any hindrance to the implementation of laws and regulations by the government. This holds true
even if its agents' prior mistakes or illegal acts shackle government operations and allow others—
some by malice—to profit from official error or misbehavior, and even if the rectification
prejudices parties who have meanwhile received benefit. 157 Indeed, in the 2004 Decision, this
Court even directed the Ombudsman to determine the possible criminal liability of public officials
and private persons responsible for the contract, and the OSG to undertake measures to protect
the government from the ill effects of the illegal disbursement of public funds. 158 chanrobleslaw

The equitable doctrine of estoppel for the prevention of injustice and is for the protection of those
who have been misled by that which on its face was fair and whose character, as represented,
parties to the deception will not, in the interest of justice, be heard to deny. 159 It cannot therefore
be utilized to insulate from liability the very perpetrators of the injustice complained of.

VI.
The findings of the Office of the Ombudsman are not controlling in the instant case.

Respondents further claim that this Court has recognized the fact that it did not determine or
adjudge any fraud that may have been committed by individual respondents. Rather, it referred
the matter to the Ombudsman for the determination of criminal liability. 160 The Ombudsman in
fact made its own determination that there was no probable cause to hold individual respondents
criminally liable.161
chanrobleslaw

Respondents miss the point. The main issue in the instant case is whether respondents are guilty
of fraud in obtaining and executing the automation contract, to justify the issuance of a writ of
preliminary attachment in petitioner's favor. Meanwhile, the issue relating to the proceedings
before the Ombudsman (and this Court in G.R. No. 174777) pertains to the finding of lack of
probable cause for the possible criminal liability of respondents under the Anti-Graft and Corrupt
Practices Act.

The matter before Us involves petitioner's application for a writ of preliminary attachment in
relation to its recovery of the expended amount under the voided contract, and not the
determination of whether there is probable cause to hold respondents liable for possible criminal
liability due to the nullification of the automation contract. Whether or not the Ombudsman has
found probable cause for possible criminal liability on the part of respondents is not controlling in
the instant case.

CONCLUSION

If the State is to be serious in its obligation to develop and implement coordinated anti-corruption
policies that promote proper management of public affairs and public property, integrity,
transparency and accountability,162 it needs to establish and promote effective practices aimed at
the prevention of corruption,163 as well as strengthen our efforts at asset recovery. 164 chanrobleslaw

As a signatory to the United Nations Convention Against Corruption (UNCAC), 165 the Philippines
acknowledges its obligation to establish appropriate systems of procurement based on
transparency, competition and objective criteria in decision-making that are effective in
preventing corruption.166 To promote transparency, and in line with the country's efforts to curb
corruption, it is useful to identify certain fraud indicators or "red flags" that can point to corrupt
activity.167 This case - arguably the first to provide palpable examples of what could be reasonably
considered as "red flags" of fraud and malfeasance in public procurement - is the Court's
contribution to the nation's continuing battle against corruption, in accordance with its mandate
to dispense justice and safeguard the public interest.

WHEREFORE, premises considered, the Petition is GRANTED. The Amended Decision dated 22
September 2008 of the Court of Appeals in CA-G.R. SP. No. 95988 is ANNULLED AND SET
ASIDE. A new one is entered DIRECTING the Regional Trial Court of Makati City, Branch 59,
to ISSUE in Civil Case No. 04-346, entitled Mega Pacific eSolutions, Inc., vs. Republic of the
Philippines, the Writ of Preliminary Attachment prayed for by petitioner Republic of the Philippines
against the properties of respondent Mega Pacific eSolutions, Inc., and Willy U. Yu, Bonnie S. Yu,
Enrique T. Tansipek, Rosita Y. Tansipek, Pedro O. Tan, Johnson W. Fong, Bernard I. Fong and
Lauriano Barrios.

No costs.

SO ORDERED. chanRoblesvirtualLawlibrary

Leonardo-De Castro, Bersamin, Perlas-Bernabe, and Caguioa, JJ., concur.

 THIRD DIVISION

G.R. No. 198967, March 07, 2016

JOSE EMMANUEL P. GUILLERMO, Petitioner, v. CRISANTO P. USON, Respondent.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking to annul and set aside the Court of Appeals Decision 1 dated June 8, 2011 and
Resolution2 dated October 7, 2011 in CA G.R. SP No. 115485, which affirmed in toto the
decision of the National Labor Relations Commission (NLRC).

The facts of the case follow.

On March 11, 1996, respondent Crisanto P. Uson (Uson) began his employment with Royal
Class Venture Phils., Inc. (Royal Class Venture) as an accounting clerk.3 Eventually, he was
promoted to the position of accounting supervisor, with a salary of Php13,000.00 a month,
until he was allegedly dismissed from employment on December 20, 2000. 4

On March 2, 2001, Uson filed with the Sub-Regional Arbitration . Branch No. 1, Dagupan
City, of the NLRC a Complaint for Illegal Dismissal, with prayers for backwages,
reinstatement, salaries and 13th month pay, moral and exemplary damages and attorney's
fees against Royal Class Venture.5

Royal Class Venture did not make an appearance in the case despite its receipt of summons. 6

On May 15, 2001, Uson filed his Position Paper7 as complainant.

On October 22, 2001, Labor Arbiter Jose G. De Vera rendered a Decision 8 in favor of the
complainant Uson and ordering therein respondent Royal Class Venture to reinstate him to
his former position and pay his backwages, 13th month pay as well as moral and exemplary
damages and attorney's fees.

Royal Class Venture, as the losing party, did not file an appeal of the decision. 9 Consequently,
upon Uson's motion, a Writ of Execution10 dated February 15, 2002 was issued to implement
the Labor Arbiter's decision.

On May 17, 2002, an Alias Writ of Execution11 was issued. But with the judgment still
unsatisfied, a Second Alias Writ of Execution12 was issued on September 11, 2002.

Again, it was reported in the Sheriff's Return that the Second Alias Writ of Execution dated
September 11, 2002 remained "unsatisfied." Thus, on November 14, 2002, Uson filed a
Motion for Alias Writ of Execution and to Hold Directors and Officers of Respondent Liable for
Satisfaction of the Decision.13 The motion quoted from a portion of the Sheriffs Return, which
states:
chanRoblesvirtualLawlibrary
On September 12, 2002, the undersigned proceeded at the stated present business office
address of the respondent which is at Minien East, Sta. Barbara, Pangasinan to serve the writ
of execution. Upon arrival, I found out that the establishment erected thereat is not [in] the
respondent's name but JOEL and SONS CORPORATION, a family corporation owned by the
Guillermos of which, Jose Emmanuel F. Guillermo the General Manager of the respondent, is
one of the stockholders who received the writ using his nickname "Joey," [and who]
concealed his real identity and pretended that he [was] the brother of Jose, which [was]
contrary to the statement of the guard-on-duty that Jose and Joey [were] one and the same
person. The former also informed the undersigned that the respondent's (sic) corporation has
been dissolved.

On the succeeding day, as per [advice] by the [complainant's] counsel that the respondent
has an account at the Bank of Philippine Islands Magsaysay Branch, A.B. Fernandez Ave.,
Dagupan City, the undersigned immediately served a notice of garnishment, thus, the bank
replied on the same day stating that the respondent [does] not have an account with the
branch.14ChanRoblesVirtualawlibrary
On December 26, 2002, Labor Arbiter Irenarco R. Rimando issued an Order 15 granting the
motion filed by Uson. The order held that officers of a corporation are jointly and severally
liable for the obligations of the corporation to the employees and there is no denial of due
process in holding them so even if the said officers were not parties to the case when the
judgment in favor of the employees was rendered.16 Thus, the Labor Arbiter pierced the veil
of corporate fiction of Royal Class Venture and held herein petitioner Jose Emmanuel
Guillermo (Guillermo), in his personal capacity, jointly and severally liable with the
corporation for the enforcement of the claims of Uson. 17

Guillermo filed, by way of special appearance, a Motion for Reconsideration/To Set Aside the
Order of December 26, 2002.18 The same, however, was not granted as, this time, in an
Order dated November 24, 2003, Labor Arbiter Niña Fe S. Lazaga-Rafols sustained the
findings of the labor arbiters before her and even castigated Guillenno for his unexplained
absence in the prior proceedings despite notice, effectively putting responsibility on Guillermo
for the case's outcome against him.19

On January 5, 2004, Guillermo filed a Motion for Reconsideration of the above Order, 20 but
the same was promptly denied by the Labor Arbiter in an Order dated January 7, 2004. 21

On January 26, 2004, Uson filed a Motion for Alias Writ of Execution, 22 to which Guillermo
filed a Comment and Opposition on April 2, 2004.23

On May 18, 2004, the Labor Arbiter issued an Order 24 granting Uson's Motion for the
Issuance of an Alias Writ of Execution and rejecting Guillermo's arguments posed in his
Comment and Opposition.

Guillermo elevated the matter to the NLRC by filing a Memorandum of Appeal with Prayer for
a (Writ of) Preliminary Injunction dated June 10, 2004. 25cralawred

In a Decision26 dated May 11, 2010, the NLRC dismissed Guillermo's appeal and denied his
prayers for injunction.

On August 20, 2010, Guillermo filed a Petition for Certiorari27 before the Court of Appeals,
assailing the NLRC decision.
On June 8, 2011, the Court of Appeals rendered its assailed Decision 28 which denied
Guillermo's petition and upheld all the findings of the NLRC.

The appellate court found that summons was in fact served on Guillermo as President and
General Manager of Royal Class Venture, which was how the Labor Arbiter acquired
jurisdiction over the company.29 But Guillermo subsequently refused to receive all notices of
hearings and conferences as well as the order to file Royal Class Venture's position
paper.30 Then, it was learned during execution that Royal Class Venture had been
dissolved.31 However, the Court of Appeals held that although the judgment had become final
and executory, it may be modified or altered "as when its execution becomes impossible or
unjust."32 It also noted that the motion to hold officers and directors like Guillermo personally
liable, as well as the notices to hear the same, was sent to them by registered mail, but no
pleadings were submitted and no appearances were made by anyone of them during the said
motion's pendency.33 Thus, the court held Guillermo liable, citing jurisprudence that hold the
president of the corporation liable for the latter's obligation to illegally dismissed
employees.34 Finally, the court dismissed Guillermo's allegation that the case is an intra-
corporate controversy, stating that jurisdiction is determined by the allegations in the
complaint and the character of the relief sought.35

From the above decision of the appellate court, Guillermo filed a Motion for
Reconsideration36 but the same was again denied by the said court in the assailed
Resolution37 dated October 7, 2011.

Hence, the instant petition.

Guillermo asserts that he was impleaded in the case only more than a year after its Decision
had become final and executory, an act which he claims to be unsupported in law and
jurisprudence.38 He contends that the decision had become final, immutable and unalterable
and that any amendment thereto is null and void.39 Guillermo assails the so-called "piercing
the veil" of corporate fiction which allegedly discriminated against him when he alone was
belatedly impleaded despite the existence of other directors and officers in Royal Class
Venture.40 He also claims that the Labor Arbiter has no jurisdiction because the case is one of
an intra-corporate controversy, with the complainant Uson also claiming to be a stockholder
and director of Royal Class Venture.41

In his Comment,42 Uson did not introduce any new arguments but merely cited verbatim the
disquisitions of the Court of Appeals to counter Guillermo's assertions in his petition.

To resolve the case, the Court must confront the issue of whether an officer of a corporation
may be included as judgment obligor in a labor case for the first time only after the decision
of the Labor Arbiter had become final and executory, and whether the twin doctrines of
"piercing the veil of corporate fiction" and personal liability of company officers in labor cases
apply.

The petition is denied.

In the earlier labor cases of Claparols v. Court of Industrial Relations43 and A.C. Ransom

Labor Union-CCLU v. NLRC,44 persons who were not originally impleaded in the case were,
even during execution, held to be solidarity liable with the employer corporation for the
latter's unpaid obligations to complainant-employees. These included a newly-formed
corporation which was considered a mere conduit or alter ego of the originally impleaded
corporation, and/or the officers or stockholders of the latter corporation. 45 Liability attached,
especially to the responsible officers, even after final judgment and during execution, when
there was a failure to collect from the employer corporation the judgment debt awarded to its
workers.46 In Naguiat v. NLRC,47 the president of the corporation was found, for the first time
on appeal, to be solidarily liable to the dismissed employees. Then, in Reynoso v. Court of
Appeals,48 the veil of corporate fiction was pierced at the stage of execution, against a
corporation not previously impleaded, when it was established that such corporation had
dominant control of the original party corporation, which was a smaller company, in such a
manner that the latter's closure was done by the former in order to defraud its creditors,
including a former worker.

The rulings of this Court in A.C. Ransom, Naguiat, and Reynoso, however, have since been
tempered, at least in the aspects of the lifting of the corporate veil and the assignment of
personal liability to directors, trustees and officers in labor cases. The subsequent cases
of McLeod v. NLRC,49Spouses Santos v. NLRC50 and Carag v. NLRC,51 have all established,
save for certain exceptions, the primacy of Section 3152 of the Corporation Code in the matter
of assigning such liability for a corporation's debts, including judgment obligations in labor
cases. According to these cases, a corporation is still an artificial being invested by law with a
personality separate and distinct from that of its stockholders and from that of other
corporations to which it may be connected.53 It is not in every instance of inability to collect
from a corporation that the veil of corporate fiction is pierced, and the responsible officials
are made liable. Personal liability attaches only when, as enumerated by the said Section 31
of the Corporation Code, there is a wilfull and knowing assent to patently unlawful acts of the
corporation, there is gross negligence or bad faith in directing the affairs of the corporation,
or there is a conflict of interest resulting in damages to the corporation. 54 Further, in another
labor case, Pantranco Employees Association (PEA-PTGWO), et al. v. NLRC, et al.,55 the
doctrine of piercing the corporate veil is held to apply only in three (3) basic areas, namely: (
1) defeat of public convenience as when the corporate fiction is used as a vehicle for the
evasion of an existing obligation; (2) fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime; or (3) alter ego cases, where a corporation
is merely a farce since it is a mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation. In the absence
of malice, bad faith, or a specific provision of law making a corporate officer liable, such
corporate officer cannot be made personally liable for corporate liabilities. 56 Indeed, in Reahs
Corporation v. NLRC,57 the conferment of liability on officers for a corporation's obligations to
labor is held to be an exception to the general doctrine of separate personality of a
corporation.

It also bears emphasis that in cases where personal liability attaches, not even all officers are
made accountable. Rather, only the "responsible officer," i.e., the person directly responsible
for and who "acted in bad faith" in committing the illegal dismissal or any act violative of the
Labor Code, is held solidarily liable, in cases wherein the corporate veil is pierced. 58 In other
instances, such as cases of so-called corporate tort of a close corporation, it is the person
"actively engaged" in the management of the corporation who is held liable. 59 In the absence
of a clearly identifiable officer(s) directly responsible for the legal infraction, the Court
considers the president of the corporation as such officer. 60

The common thread running among the aforementioned cases, however, is that the veil of
corporate fiction can be pierced, and responsible corporate directors and officers or even a
separate but related corporation, may be impleaded and held answerable solidarily in a labor
case, even after final judgment and on execution, so long as it is established that such
persons have deliberately used the corporate vehicle to unjustly evade the judgment
obligation, or have resorted to fraud, bad faith or malice in doing so. When the shield of a
separate corporate identity is used to commit wrongdoing and opprobriously elude
responsibility, the courts and the legal authorities in a labor case have not hesitated to step
in and shatter the said shield and deny the usual protections to the offending party, even
after final judgment. The key element is the presence of fraud, malice or bad faith. Bad faith,
in this instance, does not connote bad judgment or negligence but imports a dishonest
purpose or some moral obliquity and conscious doing of wrong; it means breach of a known
duty through some motive or interest or ill will; it partakes of the nature of fraud. 61

As the foregoing implies, there is no hard and fast rule on when corporate fiction may be
disregarded; instead, each case must be evaluated according to its peculiar
circumstances.62 For the case at bar, applying the above criteria, a finding of personal and
solidary liability against a corporate officer like Guillermo must be rooted on a satisfactory
showing of fraud, bad

faith or malice, or the presence of any of the justifications for disregarding the corporate
fiction. As stated in McLeod,63 bad faith is a question of fact and is evidentiary, so that the
records must first bear evidence of malice before a finding of such may be made.

It is our finding that such evidence exists in the record. Like the A. C. Ransom,
and Naguiat cases, the case at bar involves an apparent family corporation. As in those two
cases, the records of the present case bear allegations and evidence that Guillermo, the
officer being held liable, is the person responsible in the actual running of the company and
for the malicious and illegal dismissal of the complainant; he, likewise, was shown to have a
role in dissolving the original obligor company in an obvious "scheme to avoid liability" which
jurisprudence has always looked upon with a suspicious eye in order to protect the rights of
labor.64

Part of the evidence on record is the second page of the verified Position Paper of
complainant (herein respondent) Crisanto P. Uson, where it was clearly alleged that Uson
was "illegally dismissed by the President/General Manager of respondent corporation (herein
petitioner) Jose Emmanuel P. Guillermo when Uson exposed the practice of the said
President/General Manager of dictating and undervaluing the shares of stock of the
corporation."65 The statement is proof that Guillermo was the responsible officer in charge of
running the company as well as the one who dismissed Uson from employment. As this
sworn allegation is uncontroverted - as neither the company nor Guillermo appeared before
the Labor Arbiter despite the service of summons and notices - such stands as a fact of the
case, and now functions as clear evidence of Guillermo's bad faith in his dismissal of Uson
from employment, with the motive apparently being anger at the latter's reporting of
unlawful activities.

Then, it is also clearly reflected in the records that it was Guillermo himself, as President and
General Manager of the company, who received the summons to the case, and who also
subsequently and without justifiable cause refused to receive all notices and orders of the
Labor Arbiter that followed.66 This makes Guillermo responsible for his and his company's
failure to participate in the entire proceedings before the said office. The fact is clearly
narrated in the Decision and Orders of the Labor Arbiter, Uson's Motions for the Issuance of
Alias Writs of Execution, as well as in the Decision of the NLRC and the assailed Decision of
the Court of Appeals,67 which Guillermo did not dispute in any of his belated motions or
pleadings, including in his petition for certiorari before the Court of Appeals and even in the
petition currently before this Court.68 Thus, again, the same now stands as a finding of fact of
the said lower tribunals which binds this Court and which it has no power to alter or
revisit.69 Guillermo's knowledge of the case's filing and existence and his unexplained refusal
to participate in it as the responsible official of his company, again is an indicia of his bad
faith and malicious intent to evade the judgment of the labor tribunals.

Finally, the records likewise bear that Guillermo dissolved Royal Class Venture and helped
incorporate a new firm, located in the same address as the former, wherein he is again a
stockl1older. This is borne by the Sherif11s Return which reported: that at Royal Class
Venture's business address at Minien East, Sta. Barbara, Pangasinan, there is a new
establishment named "Joel and Sons Corporation," a family corporation owned by the
Guillermos in which Jose Emmanuel F. Guillermo is again one of the stockholders; that
Guillermo received the writ of execution but used the nickname "Joey" and denied being Jose
Emmanuel F. Guillermo and, instead, pretended to be Jose's brother; that the guard on duty
confirmed that Jose and Joey are one and the same person; and that the respondent
corporation Royal Class Venture had been dissolved.70 Again, the facts contained in the
Sheriffs Return were not disputed nor controverted by Guillermo, either in the hearings of
Uson's Motions for Issuance of Alias Writs of Execution, in subsequent motions or pleadings,
or even in the petition before this Court. Essentially, then, the facts form part of the records
and now stand as further proof of Guillermo's bad faith and malicious intent to evade the
judgment obligation.

The foregoing clearly indicate a pattern or scheme to avoid the obligations to Uson and
frustrate the execution of the judgment award, which this Court, in the interest of justice, will
not countenance.

As for Guillermo's assertion that the case is an intra-corporate controversy, the Court
sustains the finding of the appellate court that the nature of an action and the jurisdiction of
a tribunal are determined by the allegations of the complaint at the time of its filing,
irrespective of whether or not the plaintiff is entitled to recover upon all or some of the
claims asserted therein.71 Although Uson is also a stockholder and director of Royal Class
Venture, it is settled in jurisprudence that not all conflicts between a stockholder and the
corporation are intra-corporate; an examination of the complaint must be made on whether
the complainant is involved in his capacity as a stockholder or director, or as an
employee.72 If the latter is found and the dispute does not meet the test of what qualities as
an intra-corporate controversy, then the case is a labor case cognizable by the NLRC and is
not within the jurisdiction of any other tribunal. 73 In the case at bar, Uson's allegation was
that he was maliciously and illegally dismissed as an Accounting Supervisor by Guillermo, the
Company President and General Manager, an allegation that was not even disputed by the
latter nor by Royal Class Venture. It raised no intra-corporate relationship issues between
him and the corporation or Guillermo; neither did it raise any issue regarding the regulation
of the corporation. As correctly found by the appellate court, Uson's complaint and redress
sought were centered alone on his dismissal as an employee, and not upon any other
relationship he had with the company or with Guillermo. Thus, the matter is clearly a labor
dispute cognizable by the labor tribunals.chanrobleslaw

WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated June 8, 2011
and Resolution dated October 7, 2011 in CA G.R. SP No. 115485 are AFFIRMED.
SO ORDERED.cralawlawlibrary

Velasco, Jr., (Chairperson), Perez, Reyes, and Jardeleza, JJ., concur.chanroblesvirtuallawl

G.R. No. 161759               July 2, 2014

COMMISSIONER OF CUSTOMS, Petitioner,
vs.
OILINK INTERNATIONAL CORPORATION, Respondent.

DECISION

BERSAMIN, J.:

This appeal is brought by the Commissioner of Customs to seek the review and reversal of
the decision promulgated on September 29, 2003, 1 whereby the Court of Appeals (CA)
affirmed the adverse ruling of the Court of Tax Appeals (CTA) declaring the assessment for
deficiency taxes and duties against Oilink International Corporation (Oilink) null and void.

Antecedents

The antecedents are summarized in the assailed decision.2

On September 15, 1966, Union Refinery Corporation (URC) was established under the
Corporation Code of the Philippines. In the course of its business undertakings, particularly in
the period from 1991 to 1994, URC imported oil products into the country.

On January 11, 1996, Oilink was incorporated for the primary purpose of manufacturing,
importing, exporting, buying, selling or dealing in oil and gas, and their refinements and by-
products at wholesale and retail of petroleum. URC and Oilink had interlocking directors when
Oilink started its business.

In applying for and in expediting the transfer of the operator’s name for the Customs Bonded
Warehouse thenoperated by URC, Esther Magleo, the Vice-President and General Manager of
URC, sent a letter dated January 15, 1996 to manifest that URC and Oilink had the same
Board of Directors and that Oilink was 100% owned by URC.

On March 4, 1998, Oscar Brillo, the District Collector of the Port of Manila, formally
demanded that URC pay the taxes and duties on its oil imports that had arrived between
January 6, 1991 and November 7, 1995 at the Port of Lucanin in Mariveles, Bataan.

On April 16, 1998, Brillo made another demand letter to URC for the payment of the reduced
sum of ₱289,287,486.60 for the Value-Added Taxes (VAT), special duties and excisetaxes for
the years 1991-1995.

On April 23, 1998, URC, through its counsel, responded to the demands by seeking the
landed computations of the assessments, and challenged the inconsistencies of the demands.

On November 25, 1998, then Customs Commissioner Pedro C. Mendoza formally directed
that URC pay the amount of ₱119,223,541.71 representing URC’s special duties, VAT,and
Excise Taxes that it had failed to pay at the time of the release of its 17 oil shipments that
had arrived in the Sub-port of Mariveles from January 1, 1991 to September 7, 1995.
On December 21, 1998, Commissioner Mendoza wrote again to require URC to pay deficiency
taxes but in the reduced sum of ₱99,216,580.10.

On December 23, 1998, upon his assumption of office, Customs Commissioner Nelson Tan
transmitted another demand letter to URC affirming the assessment of ₱99,216,580.10 by
Commissioner Mendoza.

On January 18, 1999, Magleo, in behalf of URC, replied by letter to Commissioner Tan’s
affirmance by denying liability, insisting instead that only ₱28,933,079.20 should be paid by
way of compromise.

On March 26, 1999, Commissioner Tan responded by rejecting Magleo’s proposal, and
directed URC to pay ₱99,216,580.10.

On May 24, 1999, Manuel Co, URC’s President, conveyed to Commissioner Tan URC’s
willingness to pay only ₱94,216,580.10, of which the initial amount of ₱28,264,974.00 would
be taken from the collectibles of Oilink from the National Power Corporation, and the balance
to be paid in monthly installments over a period ofthree years to be secured with
corresponding post-dated checks and its future available tax credits.

On July 2, 1999, Commissioner Tan made a final demand for the total liability of
₱138,060,200.49 upon URC and Oilink.

On July 8, 1999, Co requested from Commissioner Tan a complete finding of the facts and
law in support ofthe assessment made in the latter’s July 2, 1999 final demand.

Also on July 8, 1999, Oilink formally protested the assessment on the ground that it was not
the party liable for the assessed deficiency taxes.

On July 12, 1999, after receiving the July 8, 1999 letter from Co, Commissioner Tan
communicated in writing the detailed computation of the tax liability, stressing that the
Bureau of Customs (BoC) would not issue any clearance to Oilink unless the amount of
₱138,060,200.49 demanded as Oilink’s tax liability befirst paid, and a performance bond be
posted by URC/Oilink to secure the payment of any adjustments that would result from the
BIR’s review of the liabilities for VAT, excise tax, special duties, penalties, etc.

Thus, on July 30, 1999, Oilink appealed to the CTA, seeking the nullification of the
assessment for having been issued without authority and with grave abuse of discretion
tantamount to lack of jurisdiction because the Government was thereby shifting the
imposition from URC to Oilink.

Decision of the CTA

On July 9, 2001, the CTA rendered its decision declaring as null and void the assessment of
the Commissioner of Customs, to wit:

IN THE LIGHT OF ALL THE FOREGOING, the petition is hereby GRANTED. The assailed
assessment issued by Respondent against herein Petitioner OILINK INTERNATIONAL
CORPORATION is hereby declared NULL and VOID.
SO ORDERED.3

The Commissioner of Customs seasonably filed a motion for reconsideration, 4 but the CTA
denied the motion for lack of merit.5

Judgment of the CA

Aggrieved, the Commissioner of Customs brought a petition for review in the CA upon the
following issues, namely: (a) the CTA gravely erred in holding that it had jurisdiction over the
subject matter; (b) the CTA gravely erred in holding that Oilink had a cause of action; and
(c) the CTA gravely erred in holding that the Commissioner of Customs could not pierce the
veil of corporate fiction.

On the issue of the jurisdiction of the CTA, the CA held:

x x x the case at bar is very much within the purview of the jurisdiction of the Court ofTax
Appeals since it is undisputed that what is involved herein is the respondent’s liability for
payment of money to the Government as evidenced by the demand letters sent by the
petitioner. Hence, the Court of Tax Appeals did noterr in taking cognizance of the petition for
review filed by the respondent.

xxxx

We find the petitioner’s submission untenable. The principle of non-exhaustion of

administrative remedy is not an iron-clad rule for there are instances that immediate resort
to judicial action may be proper. Verily, a cursory examination of the factual milieu of the
instant case indeed reveals that exhaustion ofadministrative remedy would be unavailing
because it was the Commissioner of Customs himself who was demanding from the
respondent payment of tax liability. In addition, it may be recalled that a crucial issue inthe
petition for review filed by the respondent before the CTA is whether or not the doctrine of
piercing the veil of corporate fiction validly applies. Indubitably, this is purely a question of
law where judicial recourse may certainly be resorted to. 6

As to whether or not the Commissioner of Customs could lawfully pierce the veil of corporate
fiction in order to treat Oilink as the mere alter ego of URC, the CA concurred with the CTA,
quoting the latter’s following findings:

In the case at bar, the said wrongdoing was not clearly and convincingly established by
Respondent. He did not submit any evidence to support his allegations but merely submitted
the case for decision based on the pleadings and evidence presented by petitioner. Stated
otherwise, should the Respondent sufficiently provethat OILINK was merely set up in order to
avoid the payment of taxes or for some other purpose which will defeat public convenience,
justify wrong, protect fraud or defend crime, this Court will not hesitate to pierce the veil of
corporate fiction by URC and OILINK.7

Issues

Hence, this appeal, whereby the Commissioner of Customs reiterates the issues raised in the
CA.
Ruling of the Court

We affirm the judgment of the CA.

1.

The CTA had jurisdiction over the controversy

There is no question that the CTA had the jurisdiction over the case. Republic Act No. 1125,
the law creating the CTA, defined the appellate jurisdiction of the CTA as follows:

Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate
jurisdiction to review by appeal, as herein provided:

xxxx

2. Decisions of the Commissioner ofCustoms in cases involving liability for Customs duties,
fees or other money charges; seizure, detention or release of property affected; fines,
forfeitures or other penalties imposed in relation thereto;or other matters arising under the
Customs Law or other law or part of law administered by the Bureau of Customs;

xxxx

Nonetheless, the Commissioner of Customs contends that the CTA should not take
cognizance of the casebecause of the lapse of the 30-day period within which to appeal,
arguing that on November 25, 1998 URC had already received the BoC’s final assessment
demanding payment of the amount due within 10 days, but filed the petition only on July 30,
1999.8

We rule against the Commissioner of Customs. The CTA correctly ruled that the reckoning
date for Oilink’s appeal was July 12, 1999, not July 2, 1999, because it was on the former
date that the Commissioner of Customs denied the protest of Oilink.Clearly, the filing of the
petition on July 30, 1999 by Oilink was well within its reglementary period to appeal. The
insistence by the Commissioner of Customs on reckoning the reglementary period to appeal
from November 25, 1998, the date when URC received the final demand letter, is
unwarranted. We note that the November 25, 1998 final demand letter of the BoC was
addressed to URC, not to Oilink. As such, the final demand sentto URC did not bind Oilink
unless the separate identities of the corporations were disregarded in order to consider them
as one.

2.

Oilink had a valid cause of action

The Commissioner of Customs positsthat the final demand letter dated July 2, 1999 from
which Oilink appealed was not the final "action" or "ruling" from which an appeal could be
taken as contemplated by Section 2402 of the Tariff and Customs Code; that what Section 7
of RA No. 1125 referred to as a decision that was appealable to the CTA was a judgment or
order of the Commissioner of Customs that was final in nature, not merely an interlocutory
one; that Oilink did notexhaust its administrative remedies under Section 2308 of the Tariff
and Customs Code by paying the assessment under protest; that only when the ensuing
decision of the Collector and then the adverse decision of the Commissioner of Customs
would it be proper for Oilink to seek judicial relief from the CTA; and that, accordingly, the
CTA should have dismissed the petition for lack of cause of action.

The position of the Commissioner of Customs lacks merit.

The CA correctly held that the principle of non-exhaustion of administrative remedies was not
an iron-clad rule because there were instances in which the immediate resort to judicial
action was proper. This was one such exceptional instance when the principle did not apply.
As the records indicate, the Commissioner of Customs already decided to deny the protest by
Oilink on July 12, 1999, and stressed then that the demand to pay was final. In that
instance, the exhaustion of administrative remedies would have been an exercise in futility
because it was already the Commissioner of Customs demanding the payment of the
deficiency taxes and duties.

3.

There was no ground to pierce

the veil of corporate existence

A corporation, upon coming into existence, is invested by law with a personality separate and
distinct from those of the persons composing it as well as from any other legal entity to
which it may be related. For this reason, a stockholder is generally not made to answer for
the acts or liabilities of the corporation, and viceversa. The separate and distinct personality
of the corporation is, however, a mere fiction established by law for convenience and to
promote the ends of justice. It may not be used or invoked for ends that subvert the policy
and purpose behind its establishment, or intended by law to which the corporation owes its
being. This is true particularly when the fiction is used to defeat public convenience, to justify
wrong, to protectfraud, to defend crime, to confuse legitimate legal or judicial issues, to
perpetrate deception or otherwise to circumvent the law. This is likewise true where the
corporate entity is being used as an alter ego, adjunct, or business conduit for the sole
benefit of the stockholders or of another corporate entity. In such instances, the veil of
corporate entity will be pierced or disregarded with reference to the particular transaction
involved.9

In Philippine National Bank v. Ritratto Group, Inc.,10 the Court has outlined the following
circumstances thatare useful in the determination of whether a subsidiary is a mere
instrumentality of the parent-corporation, viz:

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

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

In applying the "instrumentality" or"alter ego" doctrine, the courts are concerned with reality,
not form, and with how the corporation operated and the individual defendant's relationship
to the operation.11 Consequently, the absence of any one of the foregoing elements
disauthorizes the piercing of the corporate veil.

Indeed, the doctrine of piercing the corporate veil has no application here because the
Commissioner of Customs did not establish that Oilink had been set up to avoid the payment
of taxes or duties, or for purposes that would defeat public convenience, justify wrong,
protect fraud, defend crime, confuse legitimate legal or judicial issues, perpetrate deception
or otherwise circumvent the law. It is also noteworthy that from the outset the Commissioner
of Customs sought to collect the deficiency taxes and duties from URC, and that it was only
on July 2, 1999 when the Commissioner of Customs sent the demand letter to both URC and
Oilink. That was revealing, because the failure of the Commissioner of Customs to pursue the
remedies against Oilink from the outset manifested that its belated pursuit of Oilink was only
an afterthought. WHEREFORE, the Court AFFIRMS the decision promulgated by the Court of
Appeals on September 29, 2003.

No pronouncement on costs of suit.

SO ORDERED.

LUCAS P. BERSMAIN
Associate Justice

WE CONCUR:
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 182770               September 17, 2014

WPM INTERNATIONAL TRADING, INC. and WARLITO P. MANLAPAZ, Petitioners,

vs.
FE CORAZON LABAYEN, Respondent.

DECISION

BRION, J.:

We review in this petition for review on certiorari1 the decision2 dated September 28, 2007 and the
resolution3 dated April 28, 2008 of the Court of Appeals (CA) in CA-G.R. CV No. 68289 that affirmed
with modification the decision4 of the Regional Trial Court (RTC), Branch 77, Quezon City.

The Factual Background

The respondent, Fe Corazon Labayen, is the owner of H.B.O. Systems Consultants, a management
and consultant firm. The petitioner, WPM International Trading, Inc. (WPM), is a domestic corporation
engaged in the restaurant business, while Warlito P. Manlapaz (Manlapaz) is its president.

Sometime in 1990, WPM entered into a management agreement with the respondent, by virtue of
which the respondent was authorized to operate, manage and rehabilitate Quickbite, a restaurant
owned and operated by WPM. As part of her tasks, the respondent looked for a contractor who would
renovate the two existing Quickbite outlets in Divisoria, Manila and Lepanto St., University Belt,
Manila. Pursuant to the agreement, the respondent engaged the services of CLN Engineering Services
(CLN) to renovate Quickbite-Divisoria at the cost of ₱432,876.02.

On June 13, 1990, Quickbite-Divisoria’s renovation was finally completed, and its possession was
delivered to the respondent. However, out of the ₱432,876.02 renovation cost, only the amount of
₱320,000.00 was paid to CLN, leaving a balance of ₱112,876.02.

Complaint for Sum of Money (Civil Case No. Q-90-7013)

On October 19, 1990, CLN filed a complaint for sum of money and damages before the RTC against
the respondent and Manlapaz, which was docketed as Civil Case No. Q-90-7013. CLN later amended
the complaint to exclude Manlapaz as defendant. The respondent was declared in default for her
failure to file a responsive pleading.

The RTC, in its January 28, 1991 decision, found the respondent liable to pay CLN actual damages
inthe amount of ₱112,876.02 with 12% interest per annum from June 18,1990 (the date of first
demand) and 20% of the amount recoverable as attorney’s fees.

Complaint for Damages (Civil Case No. Q-92-13446)

Thereafter, the respondent instituted a complaint for damages against the petitioners, WPM and
Manlapaz. The respondent alleged that in Civil Case No. Q-90-7013, she was adjudged liable for a
contract that she entered into for and in behalf of the petitioners, to which she should be entitled to
reimbursement; that her participation in the management agreement was limited only to introducing
Manlapaz to Engineer Carmelo Neri (Neri), CLN’s general manager; that it was actually Manlapaz and
Neri who agreed on the terms and conditions of the agreement; that when the complaint for damages
was filed against her, she was abroad; and that she did not know of the case until she returned to the
Philippines and received a copy of the decision of the RTC.

In her prayer, the respondent sought indemnification in the amount of ₱112,876.60 plus interest at
12%per annum from June 18, 1990 until fully paid; and 20% of the award as attorney’s fees. She
likewise prayed that an award of ₱100,000.00 as moral damages and ₱20,000.00 as attorney’s fees
be paid to her.

In his defense, Manlapaz claims that it was his fellow incorporator/director Edgar Alcansajewho was
in-charge with the daily operations of the Quick bite outlets; that when Alcansaje left WPM, the
remaining directors were compelled to hire the respondent as manager; that the respondent had
entered into the renovation agreement with CLN in her own personal capacity; that when he found the
amount quoted by CLN too high, he instructed the respondent to either renegotiate for a lower price
or to look for another contractor; that since the respondent had exceeded her authority as agent of
WPM, the renovation agreement should only bind her; and that since WPM has a separate and distinct
personality, Manlapaz cannot be made liable for the respondent’s claim.

Manlapaz prayed for the dismissal of the complaint for lack of cause of action, and by way of
counterclaim, for the award of ₱350,000.00 as moral and exemplary damages and ₱50,000.00
attorney’s fees.

The RTC, through an order dated March 2, 1993 declared WPM in default for its failure to file a
responsive pleading.

The Decision of the RTC

In its decision, the RTC held that the respondent is entitled to indemnity from Manlapaz. The RTC
found that based on the records, there is a clear indication that WPM is a mere instrumentality or
business conduit of Manlapaz and as such, WPM and Manlapaz are considered one and the same. The
RTC also found that Manlapaz had complete control over WPM considering that he is its chairman,
president and treasurer at the same time. The RTC thus concluded that Manlapaz is liable in his
personal capacity to reimburse the respondent the amount she paid to CLN inconnection with the
renovation agreement.

The petitioners appealed the RTC decision with the CA. There, they argued that in view of the
respondent’s act of entering into a renovation agreement with CLN in excess of her authority as
WPM’s agent, she is not entitled to indemnity for the amount she paid. Manlapaz also contended that
by virtue ofWPM’s separate and distinct personality, he couldn’t be made solidarily liable with WPM.

The Ruling of the Court of Appeals

On September 28, 2007, the CA affirmed, with modification on the award of attorney’s fees, the
decision of the RTC.The CA held that the petitioners are barred from raising as a defense the
respondent’s alleged lack of authority to enter into the renovation agreement in view of their tacit
ratification of the contract.
The CA likewise affirmed the RTC ruling that WPM and Manlapaz are one and the same based on the
following: (1) Manlapaz is the principal stockholder of WPM; (2) Manlapaz had complete control over
WPM because he concurrently held the positions of president, chairman of the board and treasurer, in
violation of the Corporation Code; (3) two of the four other stockholders of WPM are employed by
Manlapaz either directly or indirectly; (4) Manlapaz’s residence is the registered principal office of
WPM; and (5) the acronym "WPM" was derived from Manlapaz’s initials. The CA applied the principle
of piercing the veil of corporate fiction and agreed with the RTC that Manlapaz cannot evade his
liability by simply invoking WPM’s separate and distinct personality.

After the CA's denial of their motion for reconsideration, the petitioners filed the present petition for
review on certiorari under Rule 45 of the Rules of Court.

The Petition

The petitioners submit that the CA gravely erred in sustaining the RTC’s application of the principle of
piercing the veil of corporate fiction. They argue that the legal fiction of corporate personality could
only be discarded upon clear and convincing proof that the corporation is being used as a shield to
avoid liability or to commit a fraud. Since the respondent failed to establish that any of the
circumstances that would warrant the piercing is present, Manlapaz claims that he cannot be made
solidarily liable with WPM to answerfor damages allegedly incurred by the respondent.

The petitioners further argue that, assuming they may be held liable to reimburse to the
respondentthe amount she paid in Civil Case No. Q-90-7013, such liability is only limited to the
amount of ₱112,876.02, representing the balance of the obligation to CLN, and should not include the
twelve 12% percent interest, damages and attorney’s fees.

The Issues

The core issues are: (1) whether WPM is a mere instrumentality, alter-ego, and business conduit of
Manlapaz; and (2) whether Manlapaz is jointly and severally liable with WPM to the respondent for
reimbursement, damages and interest.

Our Ruling

We find merit in the petition.

We note, at the outset, that the question of whether a corporation is a mere instrumentality or alter-
ego of another is purely one of fact. 5 This is also true with respect to the question of whether the
totality of the evidence adduced by the respondentwarrants the application of the piercing the veil of
corporate fiction doctrine.6

Generally, factual findings of the lower courts are accorded the highest degree of respect, if not
finality. When adopted and confirmed by the CA, these findings are final and conclusive and may not
be reviewed on appeal,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 single stockholder 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 concurrently held 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 absolute control over WPM.

In this connection, we stress that the 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 to speak, 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
knowledge that they were dealing with WPM for the renovation of the latter’s restaurant, and not with
Manlapaz. That WPM later reneged on its monetary obligation to CLN, resulting to the filing of a civil
case for sum of money against the respondent, does not automatically indicate fraud, in the absence
of any proof to support it.

This Court also observed that the CA failed to demonstrate how the separate and distinct personalityof
WPM was used by Manlapaz to defeat the respondent’s right for reimbursement. Neither was there
any showing that WPM attempted to avoid liability or had no property against which to proceed.

Since no harm could be said to have been proximately caused by Manlapaz for which the latter could
be held solidarily liable with WPM, and considering that there was no proof that WPM had insufficient
funds, there was no sufficient justification for the RTC and the CA to have ruled that Manlapaz should
be held jointly and severally liable to the respondent for the amount she paid to CLN. Hence, only
WPM is liable to indemnify the respondent.

Finally, we emphasize that the piercing of the veil of corporate fiction is frowned upon and thus, must
be done with caution.15 It can only be done if it has been clearly established that the separate and
distinct personality of the corporation is used to justify a wrong, protect fraud, or perpetrate a
deception. The court must be certain that the corporate fiction was misused to such an extent that
injustice, fraud, or crime was committed against another, in disregard of its rights; it cannot be
presumed.

On the Award of Moral Damages

On the award of moral damages, we find the same in order in view of WPM's unjustified refusal to pay
a just debt. Under Article 2220 of the New Civil Code, 16 moral damages may be awarded in cases of a
breach of contract where the defendant acted fraudulently or in bad faith or was guilty of gross
negligence amounting to bad faith.

In the present case, when payment for the balance of the renovation cost was demanded, WPM,
instead of complying with its obligation, denied having authorized the respondent to contract in its
behalf and accordingly refused to pay. Such cold refusal to pay a just debt amounts to a breach of
contract in bad faith, as contemplated by Article 2220. Hence, the CA's order to pay moral damages
was in order.

WHEREFORE, in light of the foregoing, the decision dated September 28, 2007 of the Court of Appeals
in CA-G.R. CV No. 68289 is MODIFIED and.that petitioner Warlito P. Manlapaz is ABSOLVED from any
liability under the renovation agreement.

SO ORDERED.
ARTURO D. BRION
Associate Justice

WE CONCUR:
G.R. No. 167530               March 13, 2013

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

x-----------------------x

G.R. No. 167561

ASSET PRIVATIZATION TRUST, Petitioner,

vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

x-----------------------x

G.R. No. 167603

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,

vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

These petitions for review on certiorari1 assail the Decision 2 dated November 30, 2004 and the
Resolution3 dated March 22, 2005 of the Court of Appeals in CA-G.R. CV No. 57553. The said Decision
affirmed the Decision4 dated November 6, 1995 of the Regional Trial Court (RTC) of Makati City,
Branch 62, granting a judgment award of ₱8,370,934.74, plus legal interest, in favor of respondent
Hydro Resources Contractors Corporation (HRCC) with the modification that the Privatization and
Management Office (PMO), successor of petitioner Asset Privatization Trust (APT), 5 has been held
solidarily liable with Nonoc Mining and Industrial Corporation (NMIC) 6 and petitioners Philippine
National Bank (PNB) and Development Bank of the Philippines (DBP), while the Resolution denied
reconsideration separately prayed for by PNB, DBP, and APT.

Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the properties
of Marinduque Mining and Industrial Corporation (MMIC). As a result of the foreclosure, DBP and PNB
acquired substantially all the assets of MMIC and resumed the business operations of the defunct
MMIC by organizing NMIC.7 DBP and PNB owned 57% and 43% of the shares of NMIC, respectively,
except for five qualifying shares.8 As of September 1984, the members of the Board of Directors of
NMIC, namely, Jose Tengco, Jr., Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada,
were either from DBP or PNB.9

Subsequently, NMIC engaged the services of Hercon, Inc., for NMIC’s Mine Stripping and Road
Construction Program in 1985 for a total contract price of ₱35,770,120. After computing the payments
already made by NMIC under the program and crediting the NMIC’s receivables from

Hercon, Inc., the latter found that NMIC still has an unpaid balance of ₱8,370,934.74. 10 Hercon, Inc.
made several demands on NMIC, including a letter of final demand dated August 12, 1986, and when
these were not heeded, a complaint for sum of money was filed in the RTC of Makati, Branch 136
seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the amount owing Hercon,
Inc.11 The case was docketed as Civil Case No. 15375.

Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This
prompted the amendment of the complaint to substitute HRCC for Hercon, Inc. 12

Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50
creating the APT for the expeditious disposition and privatization of certain government corporations
and/or the assets thereof. Pursuant to the said Proclamation, on February 27, 1987, DBP and PNB
executed their respective deeds of transfer in favor of the National Government assigning, transferring
and conveying certain assets and liabilities, including their respective stakes in NMIC. 13 In turn and on
even date, the National Government transferred the said assets and liabilities to the APT as trustee
under a Trust Agreement.14 Thus, the complaint was amended for the second time to implead and
include the APT as a defendant.

In its answer,15 NMIC claimed that HRCC had no cause of action. It also asserted that its contract with
HRCC was entered into by its then President without any authority. Moreover, the said contract
allegedly failed to comply with laws, rules and regulations concerning government contracts. NMIC
further claimed that the contract amount was manifestly excessive and grossly disadvantageous to
the government. NMIC made counterclaims for the amounts already paid to Hercon, Inc. and
attorney’s fees, as well as payment for equipment rental for four trucks, replacement of parts and
other services, and damage to some of NMIC’s properties. 16

For its part, DBP’s answer17 raised the defense that HRCC had no cause of action against it because
DBP was not privy to HRCC’s contract with NMIC. Moreover, NMIC’s juridical personality is separate
from that of DBP. DBP further interposed a counterclaim for attorney’s fees. 18

PNB’s answer19 also invoked lack of cause of action against it. It also raised estoppel on HRCC’s part
and laches as defenses, claiming that the inclusion of PNB in the complaint was the first time a
demand for payment was made on it by HRCC. PNB also invoked the separate juridical personality of
NMIC and made counterclaims for moral damages and attorney’s fees. 20

APT set up the following defenses in its answer21: lack of cause of action against it, lack of privity
between Hercon, Inc. and APT, and the National Government’s preferred lien over the assets of
NMIC.22

After trial, the RTC of Makati rendered a Decision dated November 6, 1995 in favor of HRCC. It
pierced the corporate veil of NMIC and held DBP and PNB solidarily liable with NMIC:

On the issue of whether or not there is sufficient ground to pierce the veil of corporate fiction, this
Court likewise finds for the plaintiff.

From the documentary evidence adduced by the plaintiff, some of which were even adopted by
defendants and DBP and PNB as their own evidence (Exhibits "I", "I-1", "I-2", "I-3", "I-4", "I-5", "I5-
A", "I-5-B", "I-5-C", "I-5-D" and submarkings, inclusive), it had been established that except for five
(5) qualifying shares, NMIC is owned by defendants DBP and PNB, with the former owning 57%
thereof, and the latter 43%. As of September 24, 1984, all the members of NMIC’s Board of Directors,
namely, Messrs. Jose Tengco, Jr., Rolando M. Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino
Agbada are either from DBP or PNB (Exhibits "I-5", "I-5-C", "I-5-D").
The business of NMIC was then also being conducted and controlled by both DBP and PNB. In fact, it
was Rolando M. Zosa, then Governor of DBP, who was signing and entering into contracts with third
persons, on behalf of NMIC.

In this jurisdiction, it is well-settled that "where it appears that the business enterprises are owned,
conducted and controlled by the same parties, both law and equity will, when necessary to protect the
rights of third persons, disregard legal fiction that two (2) corporations are distinct entities, and treat
them as identical." (Phil. Veterans Investment Development Corp. vs. CA, 181 SCRA 669).

From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both DBP
and PNB. Thus, the DBP and PNB are jointly and severally liable with NMIC for the latter’s unpaid
obligations to plaintiff.23

Having found DBP and PNB solidarily liable with NMIC, the dispositive portion of the Decision of the
trial court reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff HYDRO
RESOURCES CONTRACTORS CORPORATION and against the defendants NONOC

MINING AND INDUSTRIAL CORPORATION, DEVELOPMENT BANK OF THE PHILIPPINES and PHILIPPINE
NATIONAL BANK, ordering the aforenamed defendants, to pay the plaintiff jointly and severally, the
sum of ₱8,370,934.74 plus legal interest thereon from date of demand, and attorney’s fees equivalent
to 25% of the judgment award.

The complaint against APT is hereby dismissed. However, APT, as trustee of NONOC MINING AND
INDUSTRIAL CORPORATION is directed to ensure compliance with this Decision. 24

DBP and PNB filed their respective appeals in the Court of Appeals. Both insisted that it was wrong for
the RTC to pierce the veil of NMIC’s corporate personality and hold DBP and PNB solidarily liable with
NMIC.25

The Court of Appeals rendered the Decision dated November 30, 2004, affirmed the piercing of the
veil of the corporate personality of NMIC and held DBP, PNB, and APT solidarily liable with NMIC. In
particular, the Court of Appeals made the following findings:

In the case before Us, it is indubitable that [NMIC] was owned by appellants DBP and PNB to the
extent of 57% and 43% respectively; that said two (2) appellants are the only stockholders, with the
qualifying stockholders of five (5) consisting of its own officers and included in its charter merely to
comply with the requirement of the law as to number of incorporators; and that the directorates of
DBP, PNB and [NMIC] are interlocked.

xxxx

We find it therefore correct for the lower court to have ruled that:

"From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both
DBP and PNB. Thus, the DBP and PNB are jointly and severally liable with NMIC for the latter’s unpaid
obligation to plaintiff."26 (Citation omitted.)

The Court of Appeals then concluded that, "in keeping with the concept of justice and fair play," the
corporate veil of NMIC should be pierced, ratiocinating:
For to treat NMIC as a separate legal entity from DBP and PNB for the purpose of securing beneficial
contracts, and then using such separate entity to evade the payment of a just debt, would be the
height of injustice and iniquity. Surely that could not have been the intendment of the law with
respect to corporations. x x x.27

The dispositive portion of the Decision of the Court of Appeals reads:

WHEREFORE, premises considered, the Decision appealed from is hereby MODIFIED. The judgment in
favor of appellee Hydro Resources Contractors Corporation in the amount of ₱8,370,934.74 with legal
interest from date of demand is hereby AFFIRMED, but the dismissal of the case as against Assets
Privatization Trust is REVERSED, and its successor the Privatization and Management Office is
INCLUDED as one of those jointly and severally liable for such indebtedness. The award of attorney’s
fees is DELETED.

All other claims and counter-claims are hereby DISMISSED.

Costs against appellants.28

The respective motions for reconsideration of DBP, PNB, and APT were denied. 29

Hence, these consolidated petitions.30

All three petitioners assert that NMIC is a corporate entity with a juridical personality separate and
distinct from both PNB and DBP. They insist that the majority ownership by DBP and PNB of NMIC is
not a sufficient ground for disregarding the separate corporate personality of NMIC because NMIC was
not a mere adjunct, business conduit or alter ego of DBP and PNB. According to them, the application
of the doctrine of piercing the corporate veil is unwarranted as nothing in the records would show that
the ownership and control of the shareholdings of NMIC by DBP and PNB were used to commit fraud,
illegality or injustice. In the absence of evidence that the stock control by DBP and PNB over NMIC
was used to commit some fraud or a wrong and that said control was the proximate cause of the
injury sustained by HRCC, resort to the doctrine of "piercing the veil of corporate entity" is
misplaced.31

DBP and PNB further argue that, assuming they may be held solidarily liable with NMIC to pay NMIC’s
exclusive and separate corporate indebtedness to HRCC, such liability of the two banks was
transferred to and assumed by the National Government through the APT, now the PMO, under the
respective deeds of transfer both dated February 27, 1997 executed by DBP and PNB pursuant to
Proclamation No. 50 dated December 8, 1986 and Administrative Order No. 14 dated February 3,
1987.32

For its part, the APT contends that, in the absence of an unqualified assumption by the National
Government of all liabilities incurred by NMIC, the National Government through the APT could not be
held liable for NMIC’s contractual liability. The APT asserts that HRCC had not sufficiently shown that
the APT is the successor-in-interest of all the liabilities of NMIC, or of DBP and PNB as transferors, and
that the adjudged liability is included among the liabilities assigned and transferred by DBP and PNB in
favor of the National Government.33

HRCC counters that both the RTC and the CA correctly applied the doctrine of "piercing the veil of
corporate fiction." It claims that NMIC was the alter ego of DBP and PNB which owned, conducted and
controlled the business of NMIC as shown by the following circumstances: NMIC was owned by DBP
and PNB, the officers of DBP and PNB were also the officers of NMIC, and DBP and PNB financed the
operations of NMIC. HRCC further argues that a parent corporation may be held liable for the
contracts or obligations of its subsidiary corporation where the latter is a mere agency, instrumentality
or adjunct of the parent corporation.34

Moreover, HRCC asserts that the APT was properly held solidarily liable with DBP, PNB, and NMIC
because the APT assumed the obligations of DBP and PNB as the successor-in-interest of the said
banks with respect to the assets and liabilities of NMIC.35 As trustee of the Republic of the Philippines,
the APT also assumed the responsibility of the Republic pursuant to the following provision of Section
2.02 of the respective deeds of transfer executed by DBP and PNB in favor of the Republic:

SECTION 2. TRANSFER OF BANK’S LIABILITIES

xxxx

2.02 With respect to the Bank’s liabilities which are contingent and those liabilities where the Bank’s
creditors consent to the transfer thereof is not obtained, said liabilities shall remain in the books of the
BANK with the GOVERNMENT funding the payment thereof. 36

After a careful review of the case, this Court finds the petitions impressed with merit.

A corporation is an artificial entity created by operation of law. It possesses the right of succession
and such powers, attributes, and properties expressly authorized by law or incident to its
existence.37 It has a personality separate and distinct from that of its stockholders and from that of
other corporations to which it may be connected.38 As a consequence of its status as a distinct legal
entity and as a result of a conscious policy decision to promote capital formation, 39 a corporation
incurs its own liabilities and is legally responsible for payment of its obligations. 40 In other words, by
virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the debt
or credit of the stockholder.41 This protection from liability for shareholders is the principle of limited
liability.42

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. 43

However, the rule is that a court should be careful in assessing the milieu where the doctrine of the
corporate veil may be applied. Otherwise an injustice, although unintended, may result from its
erroneous application.44 Thus, cutting through the corporate cover requires an approach characterized
by due care and caution:

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. x x x.45 (Emphases supplied; citations omitted.)

Sarona v. National Labor Relations Commission 46 has defined the scope of application of the doctrine
of piercing the corporate veil:

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of
public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing
obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or
defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation. (Citation omitted.)

Here, HRCC has alleged from the inception of this case that DBP and PNB (and the APT as assignee of
DBP and PNB) should be held solidarily liable for using NMIC as alter ego. 47 The RTC sustained the
allegation of HRCC and pierced the corporate veil of NMIC pursuant to the alter ego theory when it
concluded that NMIC "is a mere adjunct, business conduit or alter ego of both DBP and PNB." 48 The
Court of Appeals upheld such conclusion of the trial court. 49 In other words, both the trial and
appellate courts relied on the alter ego theory when they disregarded the separate corporate
personality of NMIC.

In this connection, case law lays down a three-pronged test to determine the application of the alter
ego theory, which is also known as the instrumentality theory, 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 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 right; and

(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust
loss complained of.50 (Emphases omitted.)

The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be
completely under the control and domination of the parent. 51 It examines the parent corporation’s
relationship with the subsidiary.52 It inquires whether a subsidiary corporation is so organized and
controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent
corporation such that its separate existence as a distinct corporate entity will be ignored. 53 It seeks to
establish whether the subsidiary corporation has no autonomy and the parent corporation, though
acting through the subsidiary in form and appearance, "is operating the business directly for itself." 54

The second prong is the "fraud" test. This test requires that the parent corporation’s conduct in using
the subsidiary corporation be unjust, fraudulent or wrongful. 55 It examines the relationship of the
plaintiff to the corporation.56 It recognizes that piercing is appropriate only if the parent corporation
uses the subsidiary in a way that harms the plaintiff creditor.57 As such, it requires a showing of "an
element of injustice or fundamental unfairness." 58

The third prong is the "harm" test. This test requires the plaintiff to show that the defendant’s control,
exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. 59 A
causal connection between the fraudulent conduct committed through the instrumentality of the
subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The
plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the
defendant’s exercise of control and improper use of the corporate form and, thereby, suffer
damages.60

To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of
three elements: control of the corporation by the stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the
fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the
corporate veil.61

This Court finds that none of the tests has been satisfactorily met in this case.

In applying the 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. 62 With respect to
the control element, it refers not to paper or formal control by majority or even complete stock control
but actual control which amounts to "such domination of finances, 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."63 In addition, the control must be shown to have been exercised at the time
the acts complained of took place.64

Both the RTC and the Court of Appeals applied the alter ego theory and penetrated the corporate
cover of NMIC based on two factors: (1) the ownership by DBP and PNB of effectively all the stocks of
NMIC, and (2) the alleged interlocking directorates of DBP, PNB and NMIC. 65 Unfortunately, the
conclusion of the trial and appellate courts that the DBP and PNB fit the alter ego theory with respect
to NMIC’s transaction with HRCC on the premise of complete stock ownership and interlocking
directorates involved a quantum leap in logic and law exposing a gap in reason and fact.

While ownership by one corporation of all or a great majority of stocks of another corporation and
their interlocking directorates may serve as indicia of control, by themselves and without more,
however, these circumstances are insufficient to establish an alter ego relationship or connection
between DBP and PNB on the one hand and NMIC on the other hand, that will justify the puncturing of
the latter’s corporate cover. This Court has declared that "mere ownership by a single stockholder or
by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personality." 66 This Court has likewise ruled that the
"existence of interlocking directors, corporate officers and shareholders is not enough justification to
pierce the veil of corporate fiction in the absence of fraud or other public policy considerations." 67

True, the findings of fact of the Court of Appeals are conclusive and cannot be reviewed on appeal to
this Court, provided they are borne out of the record or are based on substantial evidence. 68 It is
equally true that the question of whether one corporation is merely an alter ego of another is purely
one of fact. So is the question of whether a corporation is a paper company, a sham or subterfuge or
whether the requisite quantum of evidence has been adduced warranting the piercing of the veil of
corporate personality.69 Nevertheless, it has been held in Sarona v. National Labor Relations
Commission70 that this Court has the power to resolve a question of fact, such as whether a
corporation is a mere alter ego of another entity or whether the corporate fiction was invoked for
fraudulent or malevolent ends, if the findings in the assailed decision are either not supported by the
evidence on record or based on a misapprehension of facts.

In this case, nothing in the records shows that the corporate finances, policies and practices of NMIC
were dominated by DBP and PNB in such a way that NMIC could be considered to have no separate
mind, will or existence of its own but a mere conduit for DBP and PNB. On the contrary, the evidence
establishes that HRCC knew and acted on the knowledge that it was dealing with NMIC, not with
NMIC’s stockholders. The letter proposal of Hercon, Inc., HRCC’s predecessor-in-interest, regarding
the contract for NMIC’s mine stripping and road construction program was addressed to and accepted
by NMIC.71 The various billing reports, progress reports, statements of accounts and communications
of Hercon, Inc./HRCC regarding NMIC’s mine stripping and road construction program in 1985
concerned NMIC and NMIC’s officers, without any indication of or reference to the control exercised by
DBP and/or PNB over NMIC’s affairs, policies and practices. 72
HRCC has presented nothing to show that DBP and PNB had a hand in the act complained of, the
alleged undue disregard by NMIC of the demands of HRCC to satisfy the unpaid claims for services
rendered by HRCC in connection with NMIC’s mine stripping and road construction program in 1985.
On the contrary, the overall picture painted by the evidence offered by HRCC is one where HRCC was
dealing with NMIC as a distinct juridical person acting through its own corporate officers. 73

Moreover, the finding that the respective boards of directors of NMIC, DBP, and PNB were interlocking
has no basis. HRCC’s Exhibit "I-5,"74 the initial General Information Sheet submitted by NMIC to the
Securities and Exchange Commission, relied upon by the trial court and the Court of Appeals may
have proven that DBP and PNB owned the stocks of NMIC to the extent of 57% and 43%,
respectively. However, nothing in it supports a finding that NMIC, DBP, and PNB had interlocking
directors as it only indicates that, of the five members of NMIC’s board of directors, four were
nominees of either DBP or PNB and only one was a nominee of both DBP and PNB. 75 Only two
members of the board of directors of NMIC, Jose Tengco, Jr. and Rolando Zosa, were established to be
members of the board of governors of DBP and none was proved to be a member of the board of
directors of PNB.76 No director of NMIC was shown to be also sitting simultaneously in the board of
governors/directors of both DBP and PNB.

In reaching its conclusion of an alter ego relationship between DBP and PNB on the one hand and
NMIC on the other hand, the Court of Appeals invoked Sibagat Timber Corporation v. Garcia, 77 which it
described as "a case under a similar factual milieu."78 However, in Sibagat Timber Corporation, this
Court took care to enumerate the circumstances which led to the piercing of the corporate veil of
Sibagat Timber Corporation for being the alter ego of Del Rosario & Sons Logging Enterprises, Inc.
Those circumstances were as follows: holding office in the same building, practical identity of the
officers and directors of the two corporations and assumption of management and control of Sibagat
Timber Corporation by the directors/officers of Del Rosario & Sons Logging Enterprises, Inc.

Here, DBP and PNB maintain an address different from that of NMIC. 79 As already discussed, there
was insufficient proof of interlocking directorates. There was not even an allegation of similarity of
corporate officers. Instead of evidence that DBP and PNB assumed and controlled the management of
NMIC, HRCC’s evidence shows that NMIC operated as a distinct entity endowed with its own legal
personality. Thus, what obtains in this case is a factual backdrop different from, not similar to, Sibagat
Timber Corporation.

In relation to the second element, to disregard the separate juridical personality of a corporation, the
wrongdoing or unjust act in contravention of a plaintiff’s legal rights must be clearly and convincingly
established; it cannot be presumed. Without a demonstration that any of the evils sought to be
prevented by the doctrine is present, it does not apply. 80

In this case, the Court of Appeals declared:

We are not saying that PNB and DBP are guilty of fraud in forming NMIC, nor are we implying that
NMIC was used to conceal fraud. x x x.81

Such a declaration clearly negates the possibility that DBP and PNB exercised control over NMIC which
DBP and PNB used "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." It is a
recognition that, even assuming that DBP and PNB exercised control over NMIC, there is no evidence
that the juridical personality of NMIC was used by DBP and PNB to commit a fraud or to do a wrong
against HRCC.
There being a total absence of evidence pointing to a fraudulent, illegal or unfair act committed
against HRCC by DBP and PNB under the guise of NMIC, there is no basis to hold that NMIC was a
mere alter ego of DBP and PNB. As this Court ruled in Ramoso v. Court of Appeals 82:

As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason
to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an association of
persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud
that may work inequities among members of the corporation internally, involving no rights of the
public or third persons. In both instances, there must have been fraud, and proof of it. For the
separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.

As regards the third element, in the absence of both control by DBP and PNB of NMIC and fraud or
fundamental unfairness perpetuated by DBP and PNB through the corporate cover of NMIC, no harm
could be said to have been proximately caused by DBP and PNB on HRCC for which HRCC could hold
DBP and PNB solidarily liable with NMIC.1âwphi1

Considering that, under the deeds of transfer executed by DBP and PNB, the liability of the APT as
transferee of the rights, titles and interests of DBP and PNB in NMIC will attach only if DBP and PNB
are held liable, the APT incurs no liability for the judgment indebtedness of NMIC. Even HRCC
recognizes that "as assignee of DBP and PNB 's loan receivables," the APT simply "stepped into the
shoes of DBP and PNB with respect to the latter's rights and obligations" in NMIC. 83 As such assignee,
therefore, the APT incurs no liability with respect to NMIC other than whatever liabilities may be
imputable to its assignors, DBP and PNB.

Even under Section 2.02 of the respective deeds of transfer executed by DBP and PNB which HRCC
invokes, the APT cannot be held liable. The contingent liability for which the National Government,
through the APT, may be held liable under the said provision refers to contingent liabilities of DBP and
PNB. Since DBP and PNB may not be held solidarily liable with NMIC, no contingent liability may be
imputed to the APT as well. Only NMIC as a distinct and separate legal entity is liable to pay its
corporate obligation to HRCC in the amount of ₱8,370,934.74, with legal interest thereon from date of
demand.

As trustee of the. assets of NMIC, however, the APT should ensure compliance by NMIC of the
judgment against it. The APT itself acknowledges this.84

WHEREFORE, the petitions are hereby GRANTED.

The complaint as against Development Bank of the Philippines, the Philippine National Bank, and the
Asset Privatization Trust, now the Privatization and Management Office, is DISMISSED for lack of
merit. The Asset Privatization Trust, now the Privatization and Management Office, as trustee of Nonoc
Mining and Industrial Corporation, now the Philnico Processing Corporation, is DIRECTED to ensure
compliance by the Nonoc Mining and Industrial Corporation, now the Philnico Processing Corporation,
with this Decision.

SO ORDERED.

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

WE CONCUR: CHIEF JUSTICE SERRENO

 SECOND DIVISION

[G.R. NO. 151438 July 15, 2005]

JARDINE DAVIES, INC., Petitioners, v. JRB REALTY, INC., Respondent.

DECISION

CALLEJO, SR., J.:

Before us is a Petition for Review of the Decision 1 of the Court of Appeals (CA) in CA-G.R. CV No. 54201
affirming in toto  that of the Regional Trial Court (RTC) in Civil Case No. 90-237 for specific performance;
and the Resolution dated January 11, 2002 denying the motion for reconsideration thereof.

The facts are as follows:

In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building, named Blanco Center, on its parcel
of land located at 119 Alfaro St., Salcedo Village, Makati City. An air conditioning system was needed for
the Blanco Law Firm housed at the second floor of the building. On March 13, 1980, the respondent's
Executive Vice-President, Jose R. Blanco, accepted the contract quotation of Mr. A.G. Morrison, President of
Aircon and Refrigeration Industries, Inc. (Aircon), for two (2) sets of Fedders Adaptomatic 30,000 kcal
(Code: 10-TR) air conditioning equipment with a net total selling price of P99,586.00.2 Thereafter, two (2)
brand new packaged air conditioners of 10 tons capacity each to deliver 30,000 kcal or 120,000
BTUH3 were installed by Aircon. When the units with rotary compressors were installed, they could not
deliver the desired cooling temperature. Despite several adjustments and corrective measures, the
respondent conceded that Fedders Air Conditioning USA's technology for rotary compressors for big
capacity conditioners like those installed at the Blanco Center had not yet been perfected. The parties
thereby agreed to replace the units with reciprocating/semi-hermetic compressors instead. In a Letter
dated March 26, 1981,4 Aircon stated that it would be replacing the units currently installed with new ones
using rotary compressors, at the earliest possible time. Regrettably, however, it could not specify a date
when delivery could be effected.

TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the maintenance of the units,
inclusive of parts and services. In October 1987, the respondent learned, through newspaper ads, 5 that
Maxim Industrial and Merchandising Corporation (Maxim, for short) was the new and exclusive licensee of
Fedders Air Conditioning USA in the Philippines for the manufacture, distribution, sale, installation and
maintenance of Fedders air conditioners. The respondent requested that Maxim honor the obligation of
Aircon, but the latter refused. Considering that the ten-year period of prescription was fast approaching, to
expire on March 13, 1990, the respondent then instituted, on January 29, 1990, an action for specific
performance with damages against Aircon & Refrigeration Industries, Inc., Fedders Air Conditioning USA,
Inc., Maxim Industrial & Merchandising Corporation and petitioner Jardine Davies, Inc. 6 The latter was
impleaded as defendant, considering that Aircon was a subsidiary of the petitioner. The respondent prayed
that judgment be rendered, as follows:

1. Ordering the defendants to jointly and severally at their account and expense deliver, install and place in
operation two
brand new units of each 10-tons capacity Fedders unitary packaged air conditioners with Fedders USA's
technology perfected rotary compressors to always deliver 30,000 kcal or 120,000 BTUH to the second
floor of the Blanco Center building at 119 Alfaro St., Salcedo Village, Makati, Metro Manila;

2. Ordering defendants to jointly and severally reimburse plaintiff not only the sums of P415,118.95 for
unsaved electricity from 21st October 1981 to 7th January 1990 and P99,287.77 for repair costs of the two
service units from 7th March 1987 to 11th January 1990, with legal interest thereon from the filing of this
Complaint until fully reimbursed, but also like unsaved electricity costs and like repair costs therefrom until
Prayer No. 1 above shall have been complied with;

3. Ordering defendants to jointly and severally pay plaintiff's P150,000.00 attorney's fees and other costs
of litigation, as well as exemplary damages in an amount not less than or equal to Prayer 2 above; and cralawlibrary

4. Granting plaintiff such other and further relief as shall be just and equitable in the premises. 7

Of the four defendants, only the petitioner filed its Answer. The court did not acquire jurisdiction over
Aircon because the latter ceased operations, as its corporate life ended on December 31, 1986. 8 Upon
motion, defendants Fedders Air Conditioning USA and Maxim were declared in default. 9

On May 17, 1996, the RTC rendered its Decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered ordering defendants Jardine Davies, Inc., Fedders Air
Conditioning USA, Inc. and Maxim Industrial and Merchandising Corporation, jointly and severally:

1. To deliver, install and place into operation the two (2) brand new units of Fedders unitary packaged
airconditioning units each of 10 tons capacity with rotary compressors to deliver 30,000 kcal or 120,000
BTUH to the second floor of the Blanco Center building, or to pay plaintiff the current price for two such
units;

2. To reimburse plaintiff the amount of P556,551.55 as and for the unsaved electricity bills from October
21, 1981 up to April 30, 1995; and another amount of P185,951.67 as and for repair costs;

3. To pay plaintiff P50,000.00 as and for attorney's fees; and cralawlibrary

4. Cost of suit.10

The petitioner filed its notice of appeal with the CA, alleging that the trial court erred in holding it liable
because it was not a party to the contract between JRB Realty, Inc. and Aircon, and that it had a
personality separate and distinct from that of Aircon.

On March 23, 2000, the CA affirmed the trial court's ruling in toto; hence, this petition.

The petitioner raises the following assignment of errors:

I.

THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE FOR THE ALLEGED CONTRACTUAL BREACH
OF AIRCON SOLELY BECAUSE THE LATTER WAS FORMERLY JARDINE'S SUBSIDIARY.

II.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINE'S MERE ALTER EGO, THE COURT
OF APPEALS ERRED IN NOT DECLARING AIRCON'S OBLIGATION TO DELIVER THE TWO (2)
AIRCONDITIONING UNITS TO JRB AS HAVING BEEN SUBSTANTIALLY COMPLIED WITH IN GOOD FAITH.

III.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINE'S MERE ALTER EGO, THE COURT
OF APPEALS ERRED IN NOT DECLARING JRB'S CAUSES OF ACTION AS HAVING BEEN BARRED BY LACHES.
 IV.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINE'S MERE ALTER EGO, THE COURT
OF APPEALS ERRED IN FINDING JRB ENTITLED TO RECOVER ALLEGED UNSAVED ELECTRICITY EXPENSES.

V.

THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE TO PAY ATTORNEY'S FEES.

VI.

THE COURT OF APPEALS ERRED IN NOT HOLDING JRB LIABLE TO JARDINE FOR DAMAGES. 11

It is the well-settled rule that factual findings of the trial court, as affirmed by the CA, are accorded high
respect, even finality at times. However, considering that the factual findings of the CA and the RTC were
based on speculation and conjectures, unsupported by substantial evidence, the Court finds that the
instant case falls under one of the excepted instances. There is, thus, a need to correct the error.

The trial court ruled that Aircon was a subsidiary of the petitioner, and concluded, thus:

Plaintiff's documentary evidence shows that at the time it contracted with Aircon on March 13, 1980
(Exhibit "D") and on the date the revised agreement was reached on March 26, 1981, Aircon was a
subsidiary of Jardine. The phrase "A subsidiary of Jardine Davies, Inc." was printed on Aircon's letterhead
of its March 13, 1980 contract with plaintiff (Exhibit "D-1"), as well as the Aircon's letterhead of Jardine's
Director and Senior Vice-President A.G. Morrison and Aircon's President in his March 26, 1981 letter to
plaintiff (Exhibit "J-2") confirming the revised agreement. Aircon's newspaper ads of April 12 and 26, 1981
and a press release on August 30, 1982 (Exhibits "E," "F" and "L") also show that defendant Jardine
publicly represented Aircon to be its subsidiary.

Records from the Securities and Exchange Commission (SEC) also reveal that as per Jardine's December
31, 1986 and 1985 Financial Statements that "The company acts as general manager of its subsidiaries"
(Exhibit "P"). Jardine's Consolidated Balance Sheet as of December 31, 1979 filed with the SEC listed
Aircon as its subsidiary by owning 94.35% of Aircon (Exhibit "P-1"). Also, Aircon's reportorial General
Information Sheet as of April 1980 and April 1981 filed with the SEC show that Jardine was 94.34% owner
of Aircon (Exhibits "Q" and "R") and that out of seven members of the Board of Directors of Aircon, four (4)
are also of Jardine.

Defendant Jardine's witness, Atty. Fe delos Santos-Quiaoit admitted that defendant Aircon, renamed Aircon
& Refrigeration Industries, Inc. "is one of the subsidiaries of Jardine Davies" (TSN, September 22, 1995, p.
12). She also testified that Jardine nominated, elected, and appointed the controlling majority of the Board
of Directors and the highest officers of Aircon (Ibid, pp. 10,13-14).

The foregoing circumstances provide justifiable basis for this Court to disregard the fiction of corporate
entity and treat defendant Aircon as part of the instrumentality of co-defendant Jardine. 12

The respondent court arrived at the same conclusion basing its ruling on the following documents, to wit:

(a) Contract/Quotation #78-No. 80-1639 dated March 03, 1980 (Exh. D-1);

(b) Newspaper Advertisements (Exhs. E-1 and F-1);

(c) Letter dated March 26, 1981 of A.G. Morrison, President of Aircon, to Atty. J.R. Blanco (Exh. J);

(d) News items of Bulletin Today dated August 30, 1982 (Exh. L);
(e) Balance Sheet of Jardine Davies, Inc. as of December 31, 1979 listing Aircon as one of its subsidiaries
(Exh. P);

(f) Financial Statement of Aircon as of December 31, 1982 and 1981 (Exh. S);

(g) Financial Statement of Aircon as of December 31, 1981 (Exh. S-1). 13

Applying the doctrine of piercing the veil of corporate fiction, both the respondent and trial courts
conveniently held the petitioner liable for the alleged omissions of Aircon, considering that the latter was its
instrumentality or corporate alter ego. The petitioner is now before us, reiterating its defense of
separateness, and the fact that it is not a party to the contract.

We find merit in the petition.

It is an elementary and fundamental principle of corporation law that a corporation is an artificial being
invested by law with a personality separate and distinct from its stockholders and from other corporations
to which it may be connected. While a corporation is allowed to exist solely for a lawful purpose, the law
will regard it as an association of persons or in case of two corporations, merge them into one, when this
corporate legal entity is used as a cloak for fraud or illegality. 14 This is the doctrine of piercing the veil of
corporate
fiction which applies only when such corporate fiction is used to defeat public convenience, justify wrong,
protect fraud or defend crime.15 The rationale behind piercing a corporation's identity is to remove the
barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal
schemes of those who use the corporate personality as a shield for undertaking certain proscribed
activities.16

While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that Aircon's
corporate legal existence can just be disregarded. In Velarde v. Lopez, Inc.,17 the Court categorically held
that a subsidiary has an independent and separate juridical personality, distinct from that of its parent
company; hence, any claim or suit against the latter does not bind the former, and vice versa. In applying
the doctrine, the following requisites must be established: (1) control, not merely majority or complete
stock control; (2) such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest acts in contravention of
plaintiff's legal rights; and (3) the aforesaid control and breach of duty must proximately cause the injury
or unjust loss complained of.18

The records bear out that Aircon is a subsidiary of the petitioner only because the latter acquired Aircon's
majority of capital stock. It, however, does not exercise complete control over Aircon; nowhere can it be
gathered that the petitioner manages the business affairs of Aircon. Indeed, no management agreement
exists between the petitioner and Aircon, and the latter is an entirely different entity from the petitioner. 19

Jardine Davies, Inc., incorporated as early as June 28, 1946, 20 is primarily a financial and trading company.
Its Articles of Incorporation states among many others that the purposes for which the said corporation
was formed, are as follows:

(a) To carry on the business of merchants, commission merchants, brokers, factors, manufacturers, and
agents;

(b) Upon complying with the requirements of law applicable thereto, to act as agents of companies and
underwriters doing and engaging in any and all kinds of insurance business. 21

On the other hand, Aircon, incorporated on December 27, 1952, 22 is a manufacturing firm. Its Articles of
Incorporation states that its purpose is mainly -
To carry on the business of manufacturers of commercial and household appliances and accessories of any
form, particularly to manufacture, purchase, sell or deal in air conditioning and refrigeration products of
every class and description as well as accessories and parts thereof, or other kindred articles; and to erect,
or buy, lease, manage, or otherwise acquire manufactories, warehouses, and depots for manufacturing,
assemblage, repair and storing, buying, selling, and dealing in the aforesaid appliances, accessories and
products. '23

The existence of interlocking directors, corporate officers and shareholders, which the respondent court
considered, is not enough justification to pierce the veil of corporate fiction, in the absence of fraud or
other public policy considerations.24 But even when there is dominance over the affairs of the subsidiary,
the doctrine of piercing the veil of corporate fiction applies only when such fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime. 25 To warrant resort to this extraordinary
remedy, there must be proof that the corporation is being used as a cloak or cover for fraud or illegality, or
to work injustice.26 Any piercing of the corporate veil has to be done with caution. 27 The wrongdoing must
be clearly and convincingly established. It cannot just be presumed. 28

In the instant case, there is no evidence that Aircon was formed or utilized with the intention of defrauding
its creditors or evading its contracts and obligations. There was nothing fraudulent in the acts of Aircon in
this case. Aircon, as a manufacturing firm of air
conditioners, complied with its obligation of providing two air conditioning units for the second floor of the
Blanco Center in good faith, pursuant to its contract with the respondent. Unfortunately, the performance
of the air conditioning units did not satisfy the respondent despite several adjustments and corrective
measures. In a Letter29 dated October 22, 1980, the respondent even conceded that Fedders Air
Conditioning USA has not yet perhaps perfected its technology of rotary compressors, and agreed to
change the compressors with the semi-hermetic type. Thus, Aircon substituted the units with serviceable
ones which delivered the cooling temperature needed for the law office. After enjoying ten (10) years of its
cooling power, respondent cannot now complain about the performance of these units, nor can it demand a
replacement thereof.

Moreover, it was reversible error to award the respondent the amount of P556,551.55 representing the
alleged 30% unsaved electricity costs and P185,951.67 as maintenance cost without showing any basis for
such award. To justify a grant of actual or compensatory damages, it is necessary to prove with a
reasonable degree of certainty, premised upon competent proof and on the best evidence obtainable by
the injured party, the actual amount of loss.30 The respondent merely based its cause of action on Aircon's
alleged representation that Fedders air conditioners with rotary compressors can save as much as 30% on
electricity compared to other brands. Offered in evidence were newspaper advertisements published on
April 12 and 26, 1981. The respondent then recorded its electricity consumption from October 21, 1981 up
to April 3, 1995 and computed 30% thereof, which amounted to P556,551.55. The Court rules that this
amount is highly speculative and merely hypothetical, and for which the petitioner can not be held
accountable.

First. The respondent merely relied on the newspaper advertisements showing the Fedders window-type air
conditioners, which are far different from the big capacity air conditioning units installed at Blanco Center.

Second. After such print advertisements, the respondent informed Aircon that it was going to install an
electric meter to register its electric consumption so as to determine the electric costs not saved by the
presently installed units with semi-hermetic compressors. Contrary to the allegations of the respondent
that this was in pursuance to their Revised Agreement, no proof was adduced that Aircon agreed to the
respondent's proposition. It was a unilateral act on the part of the respondent, which Aircon did not oblige
or commit itself to pay.

Third. Needless to state, the amounts computed are mere estimates representing the respondent's self-
serving claim of unsaved electricity cost, which is too speculative and conjectural to merit consideration.
No other proofs, reports or bases of comparison showing that Fedders Air Conditioning USA could indeed
cut down electricity cost by 30% were adduced.
Likewise, there is no basis for the award of P185,951.67 representing maintenance cost. The respondent
merely submitted a schedule31 prepared by the respondent's accountant, listing the alleged repair costs
from March 1987 up to June 1994. Such evidence is self-serving and can not also be given probative
weight, considering that there are no proofs of receipts, vouchers, etc., which would substantiate the
amounts paid for such services. Absent any more convincing proof, the Court finds that the respondent's
claims are without basis, and cannot, therefore, be awarded.

We sustain the petitioner's separateness from that of Aircon in this case. It bears stressing that the
petitioner was never a party to the contract. Privity of contracts take effect only between parties, their
successors-in-interest, heirs and assigns. 32 The petitioner, which has a
separate and distinct legal personality from that of Aircon, cannot, therefore, be held liable.

IN VIEW OF THE FOREGOING, the petition is GRANTED. The assailed decision of the Court of Appeals,
affirming the decision of the Regional Trial Court is REVERSED and SET ASIDE. The complaint of the
respondent is DISMISSED. Costs against the respondent.

SO ORDERED.

Puno, J., (Chairman), Austria-Martinez, Tinga, and Chico-Nazario, JJ., concur.

 G.R. No. 203355, August 18, 2015

LEO R. ROSALES, EDGAR SOLIS JONATHAN G. RANIOLA, LITO FELICIANO,

RAYMUNDO DIDAL, JR., NESTOR SALIN, ARNULFO S. ABRIL, RUBEN FLORES, DANTE
FERMA AND MELCHOR SELGA, Petitioners, v. NEW A.N.J.H. ENTERPRISES & N.H. OIL
MILL CORPORATION, NOEL AWAYAN, MA. FE AWAYAN, BYRON ILAGAN, HEIDI A.
ILAGAN AND AVELINO AWAYAN, Respondents.

DECISION

VELASCO JR., J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the
September 5, 2012 Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 124395, which,
in turn, affirmed the Resolutions of the National Labor Relations Commission (NLRC) dated
December 28, 20112 and February 28, 20123 in NLRC-LAC Case No. 07-001796-11.

Respondent New ANJH Enterprises (New ANJH) is a sole proprietorship owned by respondent
Noel Awayan (Noel). Petitioners are its former employees who worked as machine operators,
drivers, helpers, lead and boiler men.

Allegedly due to dwindling capital, on February 11, 2010, Noel wrote the Director of the
Department of Labor and Employment (DOLE) Region IV-A a letter regarding New ANJH's
impending cessation of operations and the sale of its assets to respondent NH Oil Mill
Corporation (NH Oil), as well as the termination of thirty-three (33) employees by reason
thereof.4 On February 13, 2010, Noel met with the 33 affected employees, which included
petitioners, to inform them of his plan.5 On even date, he gave the employees uniformly-
worded Notices dated February 12, 20106 informing them of the cessation of operations of
New ANJH effective March 15, 2010 and the sale of its assets to a corporation. Noel also
offered the employees, including petitioners, their separation pay.

On March 5, 2010, Noel signed a Deed of Sale selling the equipment, machines, tools and/or
other devices being used by New ANJH Enterprises for the manufacturing and/or extraction of
coconut oil for P950,000 to NH Oil, as represented by respondent Heidi A. Ilagan (Heidi),
Noel's sister.7cralawrednad

Parenthetically, the Articles of Incorporation of NH Oil were prepared on January 27, 2010
with Noel appearing to have more than two-thirds (2/3) of the subscribed capital stock of the
corporation.8 The remaining shares had been subscribed by Heidi and other members of the
Awayan family.9cralawrednad

On March 8, 2010, respondents New ANJH and Noel filed before the NLRC Sub-Regional
Arbitration Branch No. IV (NLRC-SRAB-IV), San Pablo City a "Letter Request for
Intervention," which was docketed as SRAB-IV-03-5066-10-L. The letter request
reads:cralawlawlibrary
Please be informed that the business operations of the New ANJH Enterprises, a single
Proprietorship engaged in oil extraction situated in San Pablo City, will be permanently
closed effective 15 March 2010 due to lack of capital caused by enormous uncollected
receivables/debts and the necessity for the plant to undergo general repairs and
maintenance.

xxxx

In this connection, we respectfully request that we be allowed to effect the payment of the

separation benefits to our employees before your Office and with your kind intervention to
ensure that we are properly guided by the provisions of law in this
undertaking.10 (Emphasis supplied)
On March. 16, 2010, petitioners Lito Feliciano (Feliciano), Edgar Solis (Solis), and Nestor
Salin (Salin) received their respective separation pays, signed the corresponding check
vouchers and executed Quitclaims and Release before Labor Arbiter Melchisedek A. Guan (LA
Guan) of NLRC SRAB-IV San Pablo Office.11cralawrednad

On March 27, 2010, petitioner Leo Rosales (Rosales) similarly received his separation pay
from Noel and signed a Quitclaim and Release.12 On March 29, 2010, the other petitioners,
Amulfo Abril (Abril), Raymundo Didal (Didal), Ruben Flores (Flores), Melchor Selga (Selga),
Jonathan Ranola (Ranola), and Dante Ferma (Ferma) also received their separation benefits
and signed their respective Quitclaims and Release and check vouchers.13cralawrednad

Following the payments thus made to petitioners and their execution of Quitclaims and
Release, LA Guan issued four (4) Orders, to wit: three Orders all dated March 22, 2010 for
petitioners Feliciano, Solis, and Salin;14 and one Order dated April 8, 2010 for petitioners
Abril, Flores, Didal, Ferma, Rosales, Selga and Ranola. 15 In the said Orders, LA Guan declared
the "labor dispute" between New ANJH and petitioners as "dismissed with prejudice on
ground of settlement."16cralawrednad

Petitioners, however, filed a complaint for illegal dismissal, docketed as NLRC Case No. RAB-
IV-04-00649-10-L, with NLRC Regional Arbitration Branch IV (NLRC-RAB-IV) in Calamba City.
They alleged in their complaint that while New ANJH stopped its operations on March 15,
2010, it resumed its operations as NH Oil using the same machineries and with the same
owners and management.17 Petitioners thus claimed that the sale of the assets of New ANJH
to NH Oil was a circumvention of their security of tenure.

In a Decision dated April 29, 2011,18 Executive Labor Arbiter Generoso V. Santos (ELA
Santos) found that petitioners had been illegally dismissed and ordered their reinstatement
and the payment of One Million Six Thousand Forty-Five and 87/100 Pesos (P1,006,045.87)
corresponding to the petitioners' full backwages less the amount paid to them as their
respective "separation pay." In ruling for the petitioners, ELA Santos ratiocinated that the
buyer "in the 'impending sale' undisclosed in the notices of [petitioners] is divulged by
subsequent development to be practically the same as the seller." Hence, for ELA Santos, it
was extremely difficult to conclude that the sale was genuine and can validly justify the
termination of the petitioners.

Respondents filed their Notice of Appeal with Appeal Memorandum 19 along with a Verified
Motion to Reduce Bond20 with the NLRC. They also posted 60% of the award ordered by the
LA, or Six Hundred Three Thousand Six Hundred Twenty-Seven and 52/100 Pesos
(P603,627.52), as their appeal bond.21cralawrednad

Meanwhile, petitioners also filed a Memorandum of Partial Appeal contending that ELA Santos
erred in failing to award them moral and exemplary damages.22cralawrednad

On September 24, 2011, the NLRC issued a Decision23 denying respondents' Verified Motion
to Reduce Bond for lack of merit and so dismissing their appeal for non-perfection. In the
same Decision, the NLRC also granted petitioners' partial appeal by modifying ELA Santos'
Decision to include the award of P20,000.00 to each petitioner as moral and exemplary
damages.24cralawrednad

Respondents filed their Motion for Reconsideration with Motion to Admit Additional Appeal
Cash Bond25cralawred with corresponding payment of additional cash bond. 26cralawrednad

While the motion was opposed by petitioners,27 the NLRC, in its Resolution dated December
28, 2011,28 reversed its earlier Decision and ordered the dismissal of petitioners' complaint on
the ground that it was barred by the Orders issued by LA Guan under the doctrine of res
judicata. Further, the NLRC pointed out that the sale of New ANJH's assets to NH Oil Mill was
in the exercise of sound management prerogative and there was no proof that it was made to
defeat petitioners' security of tenure.

In its Resolution dated February 28, 2012,29 the NLRC denied petitioners' Motion for
Reconsideration. Hence, petitioners filed a petition for certiorari with the CA.

In the assailed Decision,30 the appellate court denied the petition for certiorari, thereby
affirming the NLRC's Resolutions dated December 28, 2011 and February 28, 2012.

In its Decision, the appellate court held that private respondents had substantially complied
with the rule requiring the posting of an appeal bond equivalent to the total award given to
the employees. More importantly, so the CA held, the Orders rendered by LA Guan in NLRC
Case No. SRAB IV-03-5066-10-L were considered final and binding upon the parties and had
the force and effect of a judgment rendered by the labor arbiter. Thus, the appellate court
declared that the petitioners' complaint for illegal dismissal was already barred by res
judicata.

Aggrieved by the CA's Decision, petitioners are now before this Court on a petition for review
on certiorari.

We find the petition to be with merit.

The suspension of the period to perfect the appeal upon the filing of a motion to
reduce bond

On the issue of perfecting the appeal, the CA was correct when it pointed out that Rule VI of
the New Rules of Procedure of the NLRC provides that a motion to reduce bond shall be
entertained "upon the posting of a bond in a reasonable amount in relation to the monetary
award." As to what the "reasonable amount" is, the NLRC has wide discretion in determining
the reasonableness of the bond for purposes of perfecting an appeal. In Garcia v. KJ
Commercial,31 this Court explained:cralawlawlibrary
The filing of a motion to reduce bond and compliance with the two conditions stop the running
of the period to perfect an appeal. x x x

xxxx

The NLRC has full discretion to grant or deny the motion to reduce bond, and it may
rule on the motion beyond the 10-day period within which to perfect an
appeal. Obviously, at the time of the filing of the motion to reduce bond and posting of a
bond in a reasonable amount, there is no assurance whether the appellant's motion is indeed
based on "meritorious ground" and whether the bond he or she posted is of a "reasonable
amount." Thus, the appellant always runs the risk of failing to perfect an appeal.

x x x In order to give full effect to the provisions on motion to reduce bond, the appellant
must be allowed to wait for the ruling of the NLRC on the motion even beyond the
10-day period to perfect an appeal. If the NLRC grants the motion and rules that there is
indeed meritorious ground and that the amount of the bond posted is reasonable, then the
appeal is perfected. If the NLRC denies the motion, the appellant may still file a
motion for reconsideration as provided under Section 15, Rule VII of the Rules. If
the NLRC grants the motion for reconsideration and rules that there is indeed
meritorious ground and that the amount of the bond posted is reasonable, then the
appeal is perfected. If the NLRC denies the motion, then the decision of the labor arbiter
becomes final and executory.

xxx

In any case, the rule that the filing of a motion to reduce bond shall not stop the running of
the period to perfect an appeal is not absolute. The Court may relax the rule. In Intertranz
Container Lines, Inc. v. Bautista, the Court held:cralawlawlibrary
"Jurisprudence tells us that in labor cases, an appeal from a decision involving a monetary
award may be perfected only upon the posting of cash or surety bond. The Court, however,
has relaxed this requirement under certain exceptional circumstances in order to resolve
controversies on their merits. These circumstances include: (1) fundamental consideration of
substantial justice; (2) prevention of miscarriage of justice or of unjust enrichment; and (3)
special circumstances of the case combined with its legal merits, and the amount and the
issue involved."32 (emphasis and underscoring supplied)
In this case, the NLRC had reconsidered its original position and declared that the 60% bond
was reasonable given the merits of the justification provided by respondents in their Motion
to Reduce Bond, as supplemented by their Motion for Reconsideration with Motion to Admit
Additional Appeal Cash Bond. The CA affirmed the merits of the grounds cited by respondents
in their motions and the reasonableness of the bond originally posted by respondents. This is
in accord with the guidelines established in McBurnie v. Ganzon,33 where this Court declared
that the posting of a provisional cash or surety bond equivalent to ten percent (10%) of the
monetary award subject of the appeal is sufficient provided that there is meritorious ground
therefor, viz:cralawlawlibrary
[O]n the matter of the filing and acceptance of motions to reduce appeal bond, as provided in
Section 6, Rule VI of the 2011 NLRC Rules of Procedure, the Court hereby RESOLVES that
henceforth, the following guidelines shall be observed:cralawlawlibrary
(a) The filing of a motion to reduce appeal bond shall be entertained by the NLRC subject to
the following conditions: (1) there is meritorious ground; and (2) a bond in a reasonable
amount is posted;

(b) For purposes of compliance with condition no. (2), a motion shall be accompanied by the
posting of a provisional cash or surety bond equivalent to ten percent (10%) of the
monetary award subject of the appeal, exclusive of damages and attorney's fees;

(c) Compliance with the foregoing conditions shall suffice to suspend the running of the 10-
day reglementary period to perfect an appeal from the labor arbiter's decision to the NLRC;

(d) The NLRC retains its authority and duty to resolve the motion to reduce bond and
determine the final amount of bond that shall be posted by the appellant, still in accordance
with the standards of meritorious grounds and reasonable amount; and

(e) In the event that the NLRC denies the motion to reduce bond, or requires a bond
that exceeds the amount of the provisional bond, the appellant shall be given a
fresh period of ten (10) days from notice of the NLRC order within which to perfect
the appeal by posting the required appeal bond. 34 emphasis and underscoring added)
It is noted that the respondents have eventually posted the full amount of the award ordered
by the labor arbiter. Thus, given the absence of grave abuse of discretion on the part of the
NLRC and the affirmation of the CA of the reasonableness of the motions and the amount of
bond posted, there is no ground for this Court to reverse the CA's finding that the appeal had
been perfected.

Res Judicata does not bar the filing of the complaints for illegal dismissal

On the matter of the application of the doctrine of res judicata, however, this Court is loath to
sustain the finding of the appellate court and the NLRC. For res judicata to apply, the
concurrence of the following requisites must be verified: (1) the former judgment is final; (2)
it is rendered by a court having jurisdiction over the subject matter and the parties; (3) it is a
judgment or an order on the merits; (4) there is-between the first and the second actions-
identity of parties, of subject matter, and of causes of action. 35cralawrednad

The petitioners dispute the existence of all of the foregoing requisites. First, petitioners
contend that LA Guan does not have jurisdiction to issue the Orders in SRAB-IV-03-5066-10-
L since, in the first place, Noel's letter request for guidance in the payment of separation pay
is allegedly not a "labor dispute."

Article 219 (previously Article 212) of the Labor Code defines a "labor dispute" as "any
controversy or matter concerning terms and conditions of employment or the
association or representation of persons in negotiating, fixing, maintaining, changing or
arranging the terms and conditions of employment, regardless of whether the disputants
stand in the proximate relation of employer and employee." As separation pay concerns a
term and condition of employment, Noel's request to be guided in the payment thereof is
clearly a labor dispute under the Labor Code.

The proper payment of separation pay further falls under the jurisdiction of the labor arbiter
pursuant to Art. 224 (previously Art. 217) of the Labor Code, as it is mandated as a
necessary condition for the termination of employees, viz,:cralawlawlibrary
Art. 224. Jurisdiction of the Labor Arbiters and the Commission.

(a) Except as otherwise provided under this Code,the Labor Arbiters shall have original and
exclusive jurisdiction to hear and decide, within thirty (30) calendar days after the submission
of the case by the parties for decision without extension, even in the absence of stenographic
notes, the following cases involving all workers, whether agricultural or non
agricultural:ChanRoblesvirtualLawlibrary

     1. Unfair labor practice cases;

     2. Termination disputes;

     x x x x

6. Except claims for employees compensation, social security, medicare and maternity
benefits, all other claims arising from employer-employee relations, including
those of persons in domestic or household service, involving an amount exceeding five
thousand pesos (P5,000.00) regardless of whether accompanied with a claim for
reinstatement. (Emphasis supplied)

The invocation of the labor arbiter's jurisdiction by way of a letter request instead of a
complaint is of no moment, as it is well-settled that the application of technical rules of
procedure is relaxed in labor cases.

The third requisite, however, is not present. The Orders rendered by LA Guan cannot be
considered as constituting a judgment on the merits. The Orders simply manifest that
petitioners "are amenable to the computations made by the company respecting their
separation pay." Nothing more. They do not clearly state the petitioners' right or New ANJH's
corresponding duty as a result of the termination. 36cralawrednad

Similarly, the fourth requisite is- also absent. While there may be substantial identity of the
parties, there is no identity of subject matter or cause of action. In SME Bank, Inc. v. De
Guzman,37 this Court held that the acceptance of separation pay is an issue distinct from the
legality of the dismissal of the employees. We held:cralawlawlibrary
The conformity of the employees to the corporation's act of considering them as terminated
and their subsequent acceptance of separation pay does not remove the taint of illegal
dismissal. Acceptance of separation pay does not bar the employees from
subsequently contesting the legality of their dismissal, nor does it estop them from
challenging the legality of their separation from the service. 38 (Emphasis supplied)
In the absence of the third and fourth requisites, the appellate court should have proceeded
to rule on the validity of petitioners' termination.

Piercing the veil of corporate existence is justified in the present case.

The application of the doctrine of piercing the veil of corporate fiction is frowned upon.
However, this Court will not hesitate to disregard the corporate fiction if it is used to such an
extent that injustice, fraud, or crime is committed against another in disregard of his
rights.39cralawrednad

In this case, petitioners advance the application of the doctrine because they were terminated
from employment on the pretext that there will be an impending permanent closure of the
business as a result of an intended sale of its assets to an undisclosed corporation, and that
there will be a change in the management. The termination notices received by petitioners
identically read:cralawlawlibrary
Nais po naming ipaabot sa inyo na ang New ANJH Enterprises ay ihihinto na ang operasyon
dahil sa nagpasya ako bilang may-ari na ipagbili na ang ari-arian nito sa iba kung kayat
magkakaroon ng pagpapalit sa pamumunuan nito.

Kaugnay po nito at ayon sa itinatadhana ng batas ay nais kong ipaabot sa inyo na 30 araw
matapos ninyong matanggap ang pasabing ito o simula sa Marso 15, 2010 ay ititigil na ang
operasyon ng New ANJH Enterprises at sa nasabi ring petsa ay matatapos na rin ang
pagtratrabaho o "employment" ninyo sa New ANJH Enterprises. 40
Subsequent events, however, revealed that the buyer of the assets of their employer was a
corporation owned by the same employer and members of his family. Furthermore, the
business re-opened in less than a month under the same management.

Admittedly, mere ownership by a single stockholder of all or nearly all of the capital stock of
the corporation does not by itself justify piercing the corporate veil. Nonetheless, in this case,
other circumstances show that the buyer of the assets of petitioners' employer is none other
than his alter ego.41 We quote with approval the observations of ELA Santos:cralawlawlibrary
Respondents did not allege that they informed complainants neither did they state in the
notices of termination that the buyer in the "impending sale" is NH Oil Mill. Pondering on
these observations, this Office finds it too difficult to surmise that respondents' omission was
not deliberate, and so this Office holds that Noel was not in good faith in dealing with
complainants. The information disclosed by the Certificate of Registration and Articles of
Incorporation of NH Oil Mill explains respondents' motive. Its stockholders are members
of [Noel's] family known to complainants, and Noel is the controlling stockholder
and director. The immediate resumption of operation after cessation of operation on March
15, 2010 further explains it. While complainants failed to prove that the stockholders in NH
Oil Mill were those who managed ANJH, respondents did not dispute that there was no
change in the management people, premises, tools, devices, equipment, and
machinery under NH Oil Mill. The buyer in the "impending sale" undisclosed in the
notices to complainants is divulged by subsequent development to be practically the
same as the seller. These things are inconsistent with good faith.

xxxx

Here, complainants' employment was terminated for the alleged sale of assets of ANJH to NH
Oil Mill that would allegedly entail [a] change of management. The Deed of Sale dated March
5, 2010 [that] respondents presented (Annex "20", respondents position paper) to prove the
"sale," states that [for] the consideration of Nine Hundred Fifty Thousand Pesos
(Php950,000.00), Noel sold to NH Oil Mill the equipment, machines, tool and/or other devises
being used by ANJH for manufacturing and/or extraction of coconut oil. This Office cannot
simply accept it as sufficient proof of sale by the seller to a distinct and separate entity.

xxxx

The subscribed capital stock of Noel and Heidi [in NH Oil] are worth Php790,000.00 and
Php190,000.00, respectively, or the total of Php980,000.00. Respondents claim that Noel
was managing ANJH and Heidi was its Secretary. The Deed of Sale is signed by Noel
and Heidi, Noel as [sellerl, and Heidi as representative of NH Oil Mill. Respondents did
not enumerate what [were] the equipment etc. subject of the "sale," and how they were
depreciated, and what [were] the equipment/machines owned by Avelino and rented by NH
Oil Mill and for how much? Therefrom, it is extremely difficult to conclude by quantum of
evidence acceptable to [a] reasonable mind, [that] the "sale to a distinct entity" is genuine.
And while the notices of termination state that there would be [a] change in
management, this Office notes that respondents do not deny that Noel and Heidi
continue to manage NH Oil Mill. Therefore, as far as complainants' employment is
concerned, this Office pierces the veil of corporate fiction of NH Oil Mill and finds that the
purported sale thereto of the assets of ANJH is insufficient to validly terminate such
employment. This Office cannot rule otherwise without running afoul to the mandate of the
Constitution securing to the workingman his employment, and guaranteeing to him full
protection. So this Office declares that complainants were illegally dismissed. 42 (emphasis and
underscoring supplied)
Clearly, the milieu of the present case compels this Court to remove NH Oil's corporate mask
as it had become, and was used as, a shield for fraud, illegality and inequity against the
petitioners.

WHEREFORE, the instant petition is GRANTED and the Decision dated September 5, 2012
of the Court of Appeals in CA-G.R. SP No. 124395, affirming the Resolutions of the National
Labor Relations Commission (NLRC) dated December 28, 2011 and February 28, 2012 in
NLRC-LAC Case No. 07-001796-11, is hereby REVERSED and SET ASIDE. The Decision of
Executive Labor Arbiter Generoso Santos in NLRC Case No. RAB-IV-04-00649-10-L to the
effect that petitioners were illegally dismissed is REINSTATED.

SO ORDERED.chanrobles virtuallawlibrary

Sereno, C.J., Carpio, Leonardo-De Castro, Brion, Peralta, Bersamin, Del Castillo, Perez,
Mendoza, Perlas-Bernabe, Leonen, and Jardeleza, JJ., concur.ChanRoblesVirtualawlibrary
Villarama, Jr., J., on official leave.
Reyes, J., on leave.
 [ G.R. No. 191525, December 13, 2017 ]
INTERNATIONAL ACADEMY OF MANAGEMENT AND ECONOMICS (I/AME),
PETITIONER, V. LITTON AND COMPANY, INC., RESPONDENT.

DECISION

SERENO, C.J.:

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

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

THE FACTS

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

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

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

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

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

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

Upon motion for reconsideration of I/AME, the MeTC reversed its earlier ruling and ordered the
cancellation of the annotations of levy as well as the writ of execution. Litton then elevated the case to
the RTC, which in turn reversed the Order granting I/AME's motion for reconsideration and reinstated
the original Order dated 29 October 2004.
I/AME then filed a petition with the CA to contest the judgment of the RTC, which was eventually
denied by the appellate court.

THE CA RULING

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

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

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

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

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

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

THE ISSUES

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

OUR RULING

We deny the petition.

There was no violation of due process against I/AME

Petitioner avers that its right to due process was violated when it was dragged into the case and its
real property made an object of a writ of execution in a judgment against Santos. It argues that since
it was not impleaded in the main case, the court a quo never acquired jurisdiction over it. Indeed,
compliance with the recognized modes of acquisition of jurisdiction cannot be dispensed with even in
piercing the veil of corporation.[21]

In a petition for review on certiorari under Rule 45, only questions of law shall be entertained. This
Court considers the determination of the existence of any of the circumstances that would warrant the
piercing of the veil of corporate fiction as a question of fact which ordinarily cannot be the subject of a
petition for review on certiorari under Rule 45. We will only take cognizance of factual issues if the
findings of the lower court are not supported by the evidence on record or are based on a
misapprehension of facts.[22] Once the CA affirms the factual findings of the trial court, such findings
are deemed final and conclusive and thus, may not be reviewed on appeal, unless the judgment of the
CA depends on a misapprehension of facts, which if properly considered, would justify a different
conclusion.[23] Such exception however, is not applicable in this case.
The 29 October 2004 MeTC judgment, the RTC judgment, and the CA decision are one in accord on
the matters presented before this Court.

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

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

Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used as a
means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation,
the circumvention of statutes, or to confuse legitimate issues." It is also warranted in alter ego cases
"where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation."

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

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

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

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

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

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

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

Piercing the Corporate Veil may Apply to Non-stock

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

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

This Court agrees with the CA.

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

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

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

As held in Barineau v. Barineau:[36]

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

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

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

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

Piercing the Corporate Veil may Apply to Natural

Persons

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

b) Reverse Piercing of the Corporate Veil

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SO ORDERED.

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

[35]
 Id. at 390. Citing Robledo v. National Labor Relations Commission, 308 Phil. 51, 57 (1994), the
Court in this case, explained when the doctrine of piercing the veil of corporate entity is used:

The doctrine of piercing the veil of corporate entity is used whenever a court finds that the corporate
fiction is being used to defeat public convenience, justify wrong, protect fraud, or defend crime or to
confuse legitimate issues, or that 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. (Emphasis supplied).

[58]
 Rule 39, Section 9.  Execution of judgments for money, how enforced.-

xxx

(b)  Satisfaction by levy. - If the judgment obligor cannot pay all or part of the obligation in cash, certified bank check or other mode of payment acceptable to
the judgment obligee, the officer shall levy upon the properties of the judgment obligor of every kind and nature whatsoever which may be disposed of for value
and not otherwise exempt from execution giving the latter the option to immediately choose which property or part thereof may be levied upon, sufficient to
satisfy the judgment. If the judgment obligor does not exercise the option, the office shall first levy on the personal properties, if any, and then on the real
properties if the personal properties are insufficient to answer for the judgment.

The sheriff shall sell only a sufficient portion of the personal or real property of the judgment obligor which has been levied upon.

When there is more property of the judgment obligor than is sufficient to satisfy the judgment and lawful fees, he must sell only so much of the personal or real
property as is sufficient to satisfy the judgment and lawful fees.

Real property, stocks, shares, debts, credits, and other personal property, or any interest in either real or personal property, may be levied upon in like manner
and with like effect as under a writ of attachment. x x x.
 [G.R. NO. 137916 : December 8, 2004]

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, v. COURT OF APPEALS, ELPIDIO O.

CUCIO, SPOUSES JACINTO GOTANGCO and CHARITY BANTUG, 1 Respondents.

DECISION

CALLEJO, SR., J.:

This is a Petition for Review on Certiorari of the Decision2 of the Court of Appeals (CA) in CA-G.R. CV
No. 37873 which affirmed, with modification, the Decision 3 of the Regional Trial Court (RTC) of
Palayan City, Branch 40, in Civil Case No. 0061-P.

The Spouses Jacinto Gotangco and Charity Bantug were the owners of seven parcels of land located in
Palayan City, with a total area of 21,000 square meters, covered by Transfer Certificates of Title (TCT)
Nos. NT-166092 to NT-166098. The Spouses Gotangco were also the awardees of a parcel of land,
identified as Lot No. 168, NG-130 (Pls-378), located in Canaderia, Palayan City, per Order of the
Director of the Bureau of Lands dated February 22, 1961. The Spouses Gotangco declared Lot No. 168
for taxation purposes under Tax Declaration (TD) No. 0502 in 1980.

On August 22, 1980, the Spouses Gotangco secured a loan for their poultry project in Palayan City
from the Development Bank of the Philippines (DBP) in the amount of P121,400.00. They then
executed a real estate mortgage over the parcels of land. 4

On December 16, 1981, the Spouses Gotangco executed a Deed of Undertaking 5 wherein they obliged
themselves to secure a sales patent in their favor from the Bureau of Lands over Lot No. 168 covered
by TD No. 0502 within two (2) years from the execution thereof. They also undertook to deliver to the
DBP the owner's duplicate of the certificate of title over the property for the annotation of the real
estate mortgage in favor of DBP at the dorsal portion thereof. 6

On July 17, 1982, the Spouses Gotangco, as vendors, executed in favor of Elpidio O. Cucio a contract
to sell over the seven parcels of land mortgaged to DBP for P50,000.00, payable in two installments.
The parties agreed that the said amount shall be paid directly to DBP and applied to the mortgage
indebtedness of the Spouses Gotangco and that, upon full payment of the purchase price, the Spouses
shall execute a deed of sale over the said parcels of land in favor of Cucio. 7 The contract to sell was
known to DBP.

Thereafter, Cucio made the following remittances to DBP in payment of the purchase price of the
seven parcels of land: (a) P16,000.00 per Official Receipt (OR) No. 2418258 dated January 13, 1983;
and (b) P5,000.00. The DBP considered the remittances as deposits and issued OR No. 2792644 dated
February 18, 1983 to Cucio for the total amount of P21,000.00. The DBP informed Jacinto Gotangco,
on February 18, 1983, of the said remittances made by Cucio. 8 It also requested the Spouses
Gotangco to turn over the owner's copy of the title over the property covered by TD No. 0502 so that
it could effect the substitution of the seven (7) parcels of land mortgaged by the Spouses Gotangco
for the said lot.

Subsequently, the Spouses Gotangco were able to secure a sales patent over the parcel of land
covered by TD No. 0502, on the basis of which TCT No. NT-177647 was issued by the Register of
Deeds on March 23, 1983. Conformably to the request of DBP, the Spouses Gotangco turned over the
owner's duplicate of TCT No. NT-177647, and the mortgage executed in favor of DBP was duly
annotated at the back of the said title. DBP kept the owner's copies of TCT Nos. NT-166092 to NT-
166098 and TCT No. NT-177647.

On July 23, 1983, Jacinto Gotangco remitted the total amount of P57,097.36 to DBP in partial
payment of his loan account for which DBP issued OR Nos. 324501 to 324504. 9 In 1984, Cucio paid
the balance of the purchase price of the seven parcels of land to DBP.

In the meantime, the Spouses Gotangco applied for a restructuring of their loan with the DBP which
was, thereafter, approved. In a Letter dated October 14, 1983, the DBP informed Cucio of the
approval of the restructuring of the loan of the Spouses Gotangco and requested him to complete the
downpayment of the purchase price of the seven (7) parcels of land so that the appropriate
substitution of the property covered by TCT No. NT-177647, in lieu of the seven (7) other properties
issued by the said Spouses as collateral for their loan, could be effected, and the appropriate deed of
absolute sale over TCT Nos. NT-166092 to NT-166098 could then be executed by the said Spouses in
favor of Cucio.10 As such, Cucio paid the balance of the purchase price of the said lots to DBP on
October 1, 1984.11

On July 3, 1988, the poultry farm of the Spouses Gotangco and the improvements thereon were
gutted by fire.

On December 6, 1988, the DBP Pool of Accredited Insurance Companies informed the DBP that it had
offered to settle the claim of the Spouses Gotangco for the proceeds of the insurance on their poultry
farm for P167,149.14.12 The Spouses apparently did not respond.

On February 20, 1989, the DBP wrote the Spouses Gotangco demanding payment of the balance of
their loan in the amount of P408,026.96 within ten (10) days from notice thereof. However, the
Spouses failed to respond or pay their account with the DBP.

By September 30, 1989, the outstanding account of the Spouses Gotangco on the DBP or the principal
of their loan account amounted to P246,183.74.13 The DBP then wrote the Spouses Gotangco
reminding them that their loan would mature on June 30, 1991.

Cucio then filed a complaint against the Spouses Gotangco and the DBP with the RTC of Palayan City
for injunction and damages. Cucio alleged, inter alia, that despite his payment of the full purchase
price of the seven (7) parcels of land covered by TCT Nos. NT-166092 to NT-166098 and his demands
for the turnover of the owner's duplicates of the said title to the Spouses Gotangco, the DBP refused
to do so. He further alleged that the DBP even demanded the payment of the interest on the loan
account of the Spouses Gotangco. Furthermore, the Spouses Gotangco refused to execute a deed of
absolute sale of the said parcels of land in his favor. Cucio prayed that, after due proceedings,
judgment be rendered in his favor, thus:

WHEREFORE, it is respectfully prayed that a Writ of Preliminary Mandatory Injunction be issued

ordering defendants Jacinto Gotangco and Charity Bantug to execute the final Deed of Sale over TCT
Nos. NT-166092, NT-166093, NT-166094, NT-166095, NT-166096, NT-166097 and NT-166098 and to
submit additional collaterals to the Development Bank of the Philippines (DBP) and the DBP to release
the owner's copies of said titles from its possession and deliver them to plaintiff.

After hearing, making the preliminary injunction permanent and ordering the defendants, jointly and
severally, to pay plaintiff moral damages, the amount of which is left to the sound discretion of the
Honorable Court; actual damages of P50,000.00; attorney's fee of P30,000.00 and the cost of the
suit.
Plaintiff prays for other remedies under the premises. 14

The Spouses Gotangco filed their answer15 with counterclaim, alleging that they could not be faulted
for their failure to execute a deed of sale in favor of Cucio over the said parcels of land because the
latter did not notify them that he had already made the complete payment of the P50,000.00
purchase price thereof to DBP. According to the Spouses Gotangco, considering that the DBP had
given its implied consent to the contract to sell over the subject parcels of land, it was the DBP's
obligation to release the titles after complete payment was made, following the submission to it of TCT
No. NT-177647, the substitute collateral for their loan.

In their cross-claim against the DBP, the Spouses Gotangco alleged the following:

24. That on account of non-approval of loan and non-release of collaterals/securities by the DBP, the
defendants Gotangcos were unnecessarily dragged into litigation by the plaintiff where the DBP alone
should have been sued in the first place, for all these, the DBP alone should suffer if ever the Spouses
Gotangco will be adjudged liable to the plaintiff; for all the damages. 16

The Spouses Gotangco prayed that, after due proceedings, judgment be rendered in their favor, thus:

WHEREFORE, facts and premises considered, it is most respectfully prayed that JUDGMENT BE
RENDERED:

1. DISMISSING THE COMPLAINT for lack of cause of action and other grounds stated in the Special
and Affirmative Defenses;

2. ON COUNTERCLAIM, condemning the plaintiff to pay moral damages of P100,000.00, attorney's

fees of P25,000.00, more or less, and litigation expenses of P10,000.00;

3. By way of cross-claim, ordering the other defendant DBP to pay whatever amount the defendants
Gotangcos may suffer in the event they may be adjudged liable to the plaintiff.

GRANTING UNTO THE DEFENDANTS SPOUSES GOTANGCO reliefs and other remedies just and proper
under the premises and the law.17

In its answer,18 the DBP admitted that it charged Cucio interest on the Spouses Gotangco's loan;
however, it denied that it consented to the transaction between the Spouses Gotangco relative to the
seven (7) parcels of land claimed by Cucio. In its answer to the cross-claim, 19 the DBP, likewise,
admitted receiving the P50,000.00 purchase price of the seven parcels of land from Cucio but only as
deposit, and agreeing verbally to the release of the properties, but only after the Spouses Gotangco
shall have fulfilled the conditions set forth in the real estate mortgage. It further alleged that the
Spouses Gotangco failed to comply with the said conditions, and that their account remained
dormant; hence, it refused to release the owner's duplicate copies of the titles of the properties to the
Spouses Gotangco.

While the case was pending, the DBP informed the Spouses Gotangco in a Letter dated February 20,
199020 that it was going to have the mortgage foreclosed for their failure to settle their account.
Jacinto Gotangco arrived at the Cabanatuan branch office of the DBP to ascertain the balance of his
bank account but received no satisfactory answer. But the DBP sent a letter 21 to the Spouses
Gotangco on May 24, 1990, warning them anew that it would institute foreclosure proceedings for
their failure to fulfill their loan obligations which already amounted to P737,474.33 as of April 30,
1990. On June 8, 1990, the Spouses Gotangco wrote the DBP requesting for an updated statement of
their account and the application of their payments, inclusive of the proceeds of their insurance
claims.22

On the same date, the DBP filed an application for the extrajudicial foreclosure of the real estate
mortgage executed in its favor by the Spouses Gotangco.23 Appended to the application was a
statement of account of the Spouses. On June 7, 1990, Deputy Sheriff Rubentito Elonia issued a
Notice of Sale set on June 28, 1990 to satisfy the obligation of the Spouses Gotangco to the DBP. 24

The Spouses Gotangco wrote DBP anew, on June 14, 1990, protesting the foreclosure, claiming that
they owed DBP only the amount of P246,183.74 as of October 31, 1988.25 However, the DBP was
undaunted.

The Spouses Gotangco forthwith filed a petition before the trial court for a writ of preliminary
injunction26 to enjoin the public auction, alleging that the extrajudicial foreclosure of the real estate in
favor of the DBP would render the decision of the court on the merits moot and academic. 27

The DBP opposed the motion, contending that the balance of the account of the Spouses Gotangco as
of April 30, 1990 was P737,474.33, exclusive of interests and expenses. 28

The trial court issued a Temporary Restraining Order dated June 26, 1990. After due hearing, the trial
court issued an Order on October 4, 1990, granting the petition of the Spouses Gotangco for a writ of
preliminary injunction on a bond of P50,000.00 pending the resolution of the matters raised in the
main case.29 A writ of preliminary injunction was issued by the trial court after the Spouses Gotangco
posted a bond of P50,000.00. Consequently, the writ was issued on November 12, 1990. 30

The trial court issued a subpoena duces tecum to the cashier of the DBP in Cabanatuan City for the
production of the Spouses Gotangco's bank records reflecting the balance of their account. However,
the cashier failed to comply.31 During the trial, Jacinto Gotangco testified that he suffered mental
anguish and serious anxieties because of the threatened extrajudicial foreclosure of the real estate
mortgage in favor of DBP. Charity Gotangco failed to testify. The Spouses also adduced in evidence
the statement of their account from the DBP. 32

On February 8, 1992, Jacinto Gotangco died intestate and was survived by his wife Charity Bantug
Gotangco and their children, Jojina Ann Gotangco, Jaime Gotangco and Jacinto B. Gotangco, Jr. 33

On April 14, 1992, the RTC rendered judgment as follows:

WHEREFORE, judgment is hereby rendered:

(1) Ordering DBP to release the owner's duplicate certificates of TCT Nos. NT-166092 to NT-166098 to
the Gotangcos;

(2) Declaring the owner's duplicate certificate TCT No. NT-177647 in the name of the Gotangcos as a
replacement thereof as their collateral to their restructured loan with DBP;

(3) Ordering the Gotangcos to, thereafter, execute a deed of absolute sale covering the properties
described in TCT Nos. NT-166092 to NT-166098 in favor of Cucio;

(4) Declaring the writ of preliminary injunction issued on November 12, 1990, enjoining DBP from
foreclosing the properties of the Gotangcos covered by TCT No. NT-166092 to NT-166098 and TCT No.
NT-177647 and from the scheduled auction sale thereof permanent;
(5) Ordering DBP to pay the Gotangcos the sum of P250,000.00 as moral damages; andcralawlibrary

(6) Ordering DBP to pay costs.34

The trial court declared that the DBP was legally bound to release the Spouses Gotangco's owner's
duplicate of the certificates of title over the seven (7) parcels of land; the latter, in turn, could execute
a deed of sale over the property covered by TCT No. NT-177647 in favor of Cucio. The trial court
further ruled that the DBP prematurely sought the extrajudicial foreclosure of the mortgaged
properties considering that as of September 30, 1989, the outstanding loan balance of the Spouses
Gotangco was P246,183.74 with maturity date set on June 30, 1991; and yet the DBP foreclosed the
mortgage extrajudicially for the amount of P737,474.33. It declared that the extrajudicial foreclosure
of the mortgage was evidently made in bad faith and meant to harass the Spouses Gotangco during
the pendency of the case. As such, according to the trial court, the DBP was liable for moral damages
to the said Spouses.

On appeal by the DBP, the CA affirmed the decision, but reduced the award of moral damages
to P50,000.00. The fallo of the decision of the CA reads:

WHEREFORE, premises considered, the decision of the Regional Trial Court of Palayan City, Nueva
Ecija, Branch 40, in Civil Case No. 0061-P is AFFIRMED with modifications. Appellant DBP is hereby
ordered to release the owner's duplicate certificates of TCT Nos. NT-166092 to NT-166098 to the
Gotangcos and the Gotangco spouses to execute the Deed of Sale in favor of Elpidio O. Cucio who
shall cause the annotation of the mortgage in favor of DBP at the back of the new certificates of title
in his name. Appellant DBP is further ordered to pay the amount of P50,000.00 as moral damages to
the Gotangcos. No pronouncement as to costs. 35

The appellate court modified its decision on motion of the DBP, as follows:

WHEREFORE, premises considered, the decision of the Regional Trial Court of Palayan City, Nueva
Ecija, Branch 40, in Civil Case No. 0061-P, is AFFIRMED with modifications. Appellant DBP is hereby
ordered to release the owner's duplicate certificates of TCT Nos. NT-166092 to 166098 to the
Gotangcos and the Gotangco spouses to execute the Deed of Sale in favor of Elpidio O. Cucio who
shall cause the annotation of the mortgage in favor of DBP at the back of the new certificates of title
in his name. Thereafter, pursuant to the subsisting mortgage agreements, DBP shall be
entitled to the possession of the new certificates of title until the mortgage indebtedness is
fully satisfied. Appellant DBP is further ordered to pay the amount of P50,000.00 as moral damages
to the Gotangcos. No pronouncement as to costs. 36

The Present Petition

The DBP, now the petitioner, filed the instant petition raising as errors the following:

1. THE PERMANENT INJUNCTION ISSUED BY THE TRIAL COURT AND AFFIRMED BY THE RESPONDENT
COURT OF APPEALS EFFECTIVELY NULLIFIES DBP'S MORTGAGE LIEN OVER THE PROPERTIES AND
WILL CONTRAVENE THE MANDATORY PROVISIONS OF P.D. NO. 385.

2. THERE IS NEITHER FACTUAL NOR LEGAL BASIS FOR THE GRANT OF MORAL DAMAGES IN FAVOR
OF THE GOTANGCOS AS AGAINST PETITIONER DBP.37

Prefatorily, the issue of whether or not the petitioner caused the extrajudicial foreclosure of the real
estate mortgage to harass the respondents, the Spouses Gotangco, despite the pendency of the case
before the trial court, is one of fact. Under Rule 45 of the Rules of Civil Procedure, only questions of
law may be raised in this Court on Petition for Review on Certiorari . However, the Court may delve
into and resolve questions of facts if grave abuse is shown or such findings are contrary to the
evidence on record or are not supported by preponderant evidence. 38

The petitioner asserts that it had the right to enforce its mortgage lien over the property
notwithstanding the transfer of ownership over the same to a third party. It contends that it had the
right to institute foreclosure proceedings, considering that the respondents Spouses Gotangco failed to
comply with the terms of the real estate mortgage executed in favor of DBP. The petitioner argues
that, with the permanent writ of preliminary injunction issued by the trial court against the petitioner
as affirmed by the respondent court, the petitioner is forever barred from foreclosing the properties
mortgaged in the event the loan obligation is never paid, in contravention with the provisions of
Presidential Decree (P.D.) No. 385.39 It posits that it cannot be held liable for moral damages for
exercising its right under the real estate mortgage and the law. The petitioner further argues that,
even if the respondents Spouses Gotangco suffered mental anguish as a result of the foreclosure, the
same qualifies as damnum absque injuria. Besides, the foreclosure did not push through because of
the trial court's injunction order; hence, there was no damage done to the respondents Spouses
Gotangco.

There is merit in petitioner's contention.

The petitioner and the CA, however, misconstrued the width and breadth of the permanent injunction
issued by the RTC and affirmed by the CA, as well as the purpose of the trial court in issuing the said
writ.

It bears stressing that an injunction order must be as definite, clear and precise as possible and, when
practicable, it should inform the defendant of the act he is refrained from doing, without calling on him
for inferences or conclusions about which persons might well differ. A permanent injunction should not
be more comprehensive or restrictive than justified by the pleadings, evidence and usages of
equity.40 Such must be tailored to each case; they should not infringe upon a conduct that does not
produce the harm sought to be avoided.41 An injunction should be limited to the requirements of the
case.42 An injunctive order should never be broader than is necessary to secure [to] the injured party,
without injustice to the adversary, relief warranted by the circumstances of the particular case. The
order should be adequately particularized, especially where some activities may be permissible and
proper.43

Obviously, the trial court issued a permanent injunction to enjoin the petitioner from pursuing its
application for the extrajudicial foreclosure of the real estate mortgage on May 24, 1990 and the sale
at public auction of the property covered by the said mortgage, on its finding that the petitioner failed
to prove how much was the balance of the account of the respondents Spouses Gotangco to the
petitioner as of said date during the trial. The RTC did not perpetually foreclose the right of the
petitioner to file, under any and all circumstances, another application for the extrajudicial foreclosure
of the said mortgage for failure of the respondents spouses to pay the correct balance of their account
secured by the said mortgage. Otherwise, it would have deprived the petitioner of its right to foreclose
the real estate mortgage, to cause the sale of the property at public auction and collect the balance of
the account of the respondents spouses as provided for under the Real Estate Mortgage and the New
Civil Code.44 It would have given the Spouses carte blanche not to pay the balance of their account to
the petitioner without the mortgage being foreclosed by the latter. The trial court would have deprived
the petitioner of its lien over the property without due process of law.

It must be noted that the petitioner had a mortgage lien over the parcels of land covered by the real
estate mortgage. It is a right in rem, a lien on the property.45 Like an attachment lien, it is a vested
interest, an actual and substantial security, affording specific security for the satisfaction of the debt
put in suit, which constitutes a cloud on the legal title. 46 The lien subsists until the destruction thereof
by sale of the property.47

Patently, the trial court issued the writ of preliminary injunction not so much because of the failure of
the respondents Spouses Gotangco to pay at least 20% of their account as provided for in Section 1 of
P.D. No. 385, but because of the then still unresolved issue of whether the petitioner was obliged to
turn over the owner's duplicate copies of TCT Nos. NT-166092 to NT-166098 to the respondents
Spouses Gotangco even after the latter had substituted the property covered by TCT No. NT-177647
as security for their loan. This is indubitable from the Order of the trial court dated October 4, 1990
granting the petition of the respondents Spouses Gotangco for the issuance of a writ of preliminary
injunction:

The right of the Gotangcos over the subject properties sought to be protected at this stage of the
proceedings in the case filed against them by Elpidio O. Cucio consists not so much against the lack of
legal and factual basis on the part of the DBP in foreclosing their properties because their arrearages
on their account with it fall short of the requirement under Sec. 1 of PD 385, but more on the liability
of the DBP to release the owner's duplicate certificates of TCT Nos. NT-166092 to NT-166098 in view
of their having already substituted them with TCT No. NT-177647 covering the parcel of land under
Tax Declaration No. 0502 (Exh. 5, Injunction, record, p. 106). In fact, said exhibit speaks of Mayor
Cucio's purchase of the properties mortgaged by the Gotangcos with the DBP. This is precisely the
cause of action of Mayor Cucio against the Gotangcos who, in turn, filed a cross-claim against the
DBP.

What actually is left for the determination of the Court now during the hearing on the merits of the
main case is whether or not Mayor Cucio has completed the payment of the agreed price on the
mortgaged properties of the Gotangcos with the DBP so that the DBP will finally be ordered to release
the owner's duplicate certificates of TCT No. NT-166092 to NT-166098 and for the Gotangcos to
execute the final deed of sale thereon in the event that DBP fails (1) to prove that it did not give its
consent or express conformity to the contract to sell executed between Mayor Cucio and the
Gotangcos; and (2) to prove that the Gotangcos failed to comply with the alleged conditions for the
release of the properties (record, pp. 39-40).

Pending resolution on the matters raised in the main case, to allow foreclosure of the properties by
the DBP at this time would, indeed, render the main case nugatory and ineffectual. 48

Indeed, the trial court made it clear that it granted the petition of the respondents Spouses Gotangco
for the issuance of a writ of preliminary injunction "pending resolution on the matters raised in the
main case."49 The Spouses Gotangco, in fact, declared in their motion for a writ of preliminary
injunction that they filed the said motion to prevent the issues in the main case from becoming moot
and academic.

The trial court had already resolved the matter in its decision when it ruled that the petitioner was
obliged to turn over the owner's duplicate certificates of said titles over the seven parcels of land to
the respondents Spouses Gotangco to enable the latter to execute a deed of sale over the said
property in favor of Cucio. In a real sense, the writ of preliminary injunction issued by the RTC had
become functus officio. There was no longer a valid justification for the issuance of a permanent
injunction to perpetually enjoin the petitioner from foreclosing the real estate mortgage.

In affirming the decision of the RTC, permanently enjoining the petitioner from foreclosing the real
estate mortgage in its favor, the CA ruled that since the trial court failed to determine the exact
amount of the balance of the account of the respondents Spouses Gotangco due to the petitioner's
refusal to produce before the trial court the records showing the balance of the account of the
respondents spouses, it cannot be determined whether the latter failed to pay the twenty percent
(20%) of their total outstanding obligation as envisaged in Section 1 of P.D. No. 385. 50

We do not agree with the CA. For one thing, no less than the respondents Spouses Gotangco adduced
in evidence the statement of account issued by the petitioner showing the balance of their account. 51

For another, the trial court itself decided that it issued its order granting the petition of the
respondents Spouses Gotangco not so much because of the latter's failure to pay at least 20% of their
total outstanding obligation to the DBP, but because the extrajudicial foreclosure of the real estate
mortgage would render moot and academic the issues raised by the parties in the case. One of these
issues was whether the petitioner was obliged to turn over the owner's duplicate copies of TCT Nos.
NT-166092 to NT-166098 to the respondents spouses to enable them to execute a deed of absolute
sale over the said lots covered by the said titles to the petitioner. The failure of the cashier of the
Cabanatuan branch of the DBP to produce the DBP records showing the precise balance of the account
of the respondents spouses is not and should not be a justification to perpetually deprive the
petitioner of its right to foreclose the mortgage.

On the issue of moral damages, we agree with the trial court and the CA that the initiation of
extrajudicial foreclosure by the petitioner of the real estate mortgage pendente lite was premature;
hence, inappropriate. Although the Spouses Gotangco failed to heed the petitioner's repeated
demands for the updating of their account and the payment of the balance of the loan, it behooved
the petitioner to tarry until the trial court had decided, with finality, the case on its merits.

Nevertheless, we find no sufficient basis for the award of moral damages in favor of the respondents
spouses based on Article 19 of the New Civil Code as a result of petitioner's application for foreclosure
of real estate mortgage. For one thing, Charity Bantug Gotangco did not testify. There is no factual
basis for the award of moral damages in her favor.

Abuse of right under Article 19 of the New Civil Code, on which the RTC anchored its award for
damages and attorney's fees, provides:

Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.

The elements of abuse of rights are the following: (a) the existence of a legal right or duty; (b) which
is exercised in bad faith; and (c) for the sole intent of prejudicing or injuring another. Malice or bad
faith is at the core of said provision.52 Good faith is presumed and he who alleges bad faith has the
duty to prove the same.53 Good faith refers to the state of the mind which is manifested by the acts of
the individual concerned. It consists of the intention to abstain from taking an unconscionable and
unscrupulous advantage of another. Bad faith does not simply connote bad judgment or simple
negligence, dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of
known duty due to some motives or interest or ill-will that partakes of the nature of fraud. 54 Malice
connotes ill-will or spite and speaks not in response to duty. It implies an intention to do ulterior and
unjustifiable harm. Malice is bad faith or bad motive.55

The Spouses Gotangco failed to prove malice on the part of the petitioner. There was, for sure, a
divergence of opinion between the petitioner, on the one hand, and the Spouses Gotangco, on the
other, relative to the issue of whether Cucio's payments were mere deposits or partial payments for
the lot covered by TCT No. NT-177647, and whether the respondents Spouses Gotangco had agreed
to the offer of the pool of insurers to pay the amount of P167,149.14 as indemnity for the loss of their
poultry farm. However, the bare fact that the petitioner filed its application of the extrajudicial
foreclosure of the mortgage, notwithstanding those differences, cannot thereby give rise to the
conclusion that the petitioner did so with malice, to harass the Spouses Gotangco. The records show
that, time and again, the petitioner had sent notices to the respondents spouses and demanded the
updating of their account and the payment of the balance thereof, but the respondents spouses failed
to comply. In the meantime, interests and penalties on the loan considerably accrued. Under the
terms of the real estate mortgage and its charter, the petitioner had the right to foreclose the said
mortgage extrajudicially. Hence, the petitioner was constrained to file its application for the
extrajudicial foreclosure of the mortgage for the Spouses Gotangco's past due obligation. Instead of
settling their account, the Spouses filed their petition for a writ of preliminary injunction. Because of
the preliminary injunction issued by the trial court, the foreclosure was aborted. Under the
circumstances, it cannot be gainsaid that the petitioner acted in bad faith or with malice in seeking the
extrajudicial foreclosure of the mortgage in its favor.

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The assailed Decision of
the Court of Appeals is AFFIRMED WITH MODIFICATION. The permanent injunction issued by the
Regional Trial Court, as affirmed by the Court of Appeals; and the award for moral damages in favor
of the Spouses Jacinto Gotangco and Charity Bantug are DELETED. No costs.

SO ORDERED.

Puno, (Chairman), TINGA, and Chico-Nazario, JJ., concur.

Austria-Martinez, J., no part.
 G.R. No. 51765 March 3, 1997

REPUBLIC PLANTERS BANK, Petitioner, v. HON. ENRIQUE A. AGANA, SR., as Presiding Judge,

Court of First Instance of Rizal, Branch XXVIII, Pasay City, ROBES-FRANCISCO REALTY &
DEVELOPMENT CORPORATION and ADALIA F. ROBES, Respondents.

HERMOSISIMA, JR., J.:

This is a petition for certiorari seeking the annulment of the Decision 1 of the then Court of
First Instance of Rizal 2 for having been rendered in grave abuse of discretion. Private
respondents Robes-Francisco Realty and Development Corporation (hereafter, "the
Corporation") and Adalia F. Robes filed in the court a quo, an action for specific performance
to compel petitioner to redeem 800 preferred shares of stock with a face value of P8,000.00
and to pay 1% quarterly interest thereon as quarterly dividend owing them under the terms
and conditions of the certificates of stock.

The court a quo rendered judgment in favor of private respondents; hence, this instant
petition.

Herein parties debate only legal issues, no issues of fact having been raised by them in the
court a quo. For ready reference, however, the following narration of pertinent transactions
and events is in order:

On September 18, 1961, private respondent Corporation secured a loan from petitioner in the
amount of P120,000.00. As part of the proceeds of the loan, preferred shares of stocks were
issued to private respondent Corporation, through its officers then, private respondent Adalia
F. Robes and one Carlos F. Robes. In other words, instead of giving the legal tender totaling
to the full amount of the loan, which is P120,000.00, petitioner lent such amount partially in
the form of money and partially in the form of stock certificates numbered 3204 and 3205,
each for 400 shares with a par value of P10.00 per share, or for P4,000.00 each, for a total of
P8,000.00. Said stock certificates were in the name of private respondent Adalia F. Robes and
Carlos F. Robes, who subsequently, however, endorsed his shares in favor of Adalia F. Robes.

Said certificates of stock bear the following terms and conditions:

The Preferred Stock shall have the following rights, preferences, qualifications and limitations,
to wit:

1. Of the right to receive a quarterly dividend of One Per Centum (1%), cumulative and

participating.

xxx xxx xxx

2. That such preferred shares may be redeemed, by the system of drawing lots, at any time
after two (2) years from the date of issue at the option of the Corporation. . . .

On January 31, 1979, private respondents proceeded against petitioner and filed a Complaint
anchored on private respondents' alleged rights to collect dividends under the preferred
shares in question and to have petitioner redeem the same under the terms and conditions of
the stock certificates. Private respondents attached to their complaint, a letter-demand dated
January 5, 1979 which, significantly, was not formally offered in evidence.

Petitioner filed a Motion to Dismiss 3 private respondents' Complaint on the following grounds:

(1) that the trial court had no jurisdiction over the subject-matter of the action; (2) that the
action was unenforceable under substantive law; and (3) that the action was barred by the
statute of limitations and/or laches.

Petitioner's Motion to Dismiss was denied by the trial court in an Order dated March 16,
1979. 4 Petitioner then filed its Answer on May 2, 1979. 5 Thereafter, the trial court gave the
parties ten (10) days from July 30, 1979 to submit their respective memoranda after the
submission of which the case would be deemed submitted for resolution.  6

On September 7, 1979, the trial court rendered the herein assailed decision in favor of private
respondents. In ordering petitioner to pay private respondents the face value of the stock certificates
as redemption price, plus 1% quarterly interest thereon until full payment, the trial court ruled:

There being no issue of fact raised by either of the parties who filed their respective memoranda
delineating their respective contentions, a judgment on the pleadings, conformably with an earlier
order of the Court, appears to be in order.

From a further perusal of the pleadings, it appears that the provision of the stock certificates in
question to the effect that the plaintiffs shall have the right to receive a quarterly dividend of One Per
Centum (1%), cumulative and participating, clearly and unequivocably [sic] indicates that the same
are "interest bearing stocks" which are stocks issued by a corporation under an agreement to pay a
certain rate of interest thereon (5 Thompson, Sec. 3439). As such, plaintiffs become entitled to the
payment thereof as a matter of right without necessity of a prior declaration of dividend.

On the question of the redemption by the defendant of said preferred shares of stock, the
very wordings of the terms and conditions in said stock certificates clearly allows the same.

To allow the herein defendant not to redeem said preferred shares of stock and/or pay the
interest due thereon despite the clear import of said provisions by the mere invocation of
alleged Central Bank Circulars prohibiting the same is tantamount to an impairment of the
obligation of contracts enshrined in no less than the fundamental law itself.

Moreover, the herein defendant is considered in estoppel from taking shelter behind a
General Banking Act provision to the effect that it cannot buy its own shares of stocks
considering that the very terms and conditions in said stock certificates allowing their
redemption are its own handiwork.

As to the claim by the defendant that plaintiffs' cause of action is barred by prescription,
suffice it to state that the running of the prescriptive period was considered interrupted by
the written extrajudicial demands made by the plaintiffs from the defendant.  7

Aggrieved by the decision of the trial court, petitioner elevated the case before us essentially
on pure questions of law. Petitioner's statement of the issues that it submits for us to
adjudicate upon, is as follows:
A. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION IN ORDERING PETITIONER TO PAY RESPONDENT ADALIA F.
ROBES THE AMOUNT OF P8213.69 AS INTERESTS FROM 1961 TO 1979 ON HER PREFERRED
SHARES.

B. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK

OR EXCESS OF JURISDICTION IN ORDERING PETITIONER TO REDEEM RESPONDENT ADALIA
F. ROBES' PREFERRED SHARES FOR P8,000.00.

C. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK

OR EXCESS OF JURISDICTION IN DISREGARDING THE ORDER OF THE CENTRAL BANK TO
PETITIONER TO DESIST FROM REDEEMING ITS PREFERRED SHARES AND FROM PAYING
DIVIDENDS THEREON . . . .

D. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE COMPLAINT DOES NOT STATE A
CAUSE OF ACTION.

E. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE CLAIM OF RESPONDENT ADALIA F.
ROBES IS BARRED BY PRESCRIPTION OR LACHES. 8

The petition is meritorious.

Before passing upon the merits of this petition, it may be pertinent to provide an overview on
the nature of preferred shares and the redemption thereof, considering that these issues lie
at the heart of the dispute.

A preferred share of stock, on one hand, is one which entitles the holder thereof to certain
preferences over the holders of common stock. The preferences are designed to induce
persons to subscribe for shares of a corporation. 9 Preferred shares take a multiplicity of
forms. The most common forms may be classified into two: (1) preferred shares as to assets;
and (2) preferred shares as to dividends. The former is a share which gives the holder thereof
preference in the distribution of the assets of the corporation in case of liquidation; 10 the
latter is a share the holder of which is entitled to receive dividends on said share to the
extent agreed upon before any dividends at all are paid to the holders of common
stock. 11 There is no guaranty, however, that the share will receive any dividends. Under the
old Corporation Law in force at the time the contract between the petitioner and the private
respondents was entered into, it was provided that "no corporation shall make or declare any
dividend except from the surplus profits arising from its business, or distribute its capital
stock or property other than actual profits among its members or stockholders until after the
payment of its debts and the termination of its existence by limitation or lawful
dissolution." 12 Similarly, the present Corporation Code 13 provides that the board of directors
of a stock corporation may declare dividends only out of unrestricted retained
earnings. 14 The Code, in Section 43, adopting the change made in accounting terminology,
substituted the phrase "unrestricted retained earnings," which may be a more precise term,
in place of "surplus profits arising from its business" in the former law. Thus, the declaration
of dividends is dependent upon the availability of surplus profit or unrestricted retained
earnings, as the case may be. Preferences granted to preferred stockholders, moreover, do
not give them a lien upon the property of the corporation nor make them creditors of the
corporation, the right of the former being always subordinate to the latter. Dividends are thus
payable only when there are profits earned by the corporation and as a general rule, even if
there are existing profits, the board of directors has the discretion to determine whether or
not dividends are to be declared. 15 Shareholders, both common and preferred, are
considered risk takers who invest capital in the business and who can look only to what is left
after corporate debts and liabilities are fully paid. 16

Redeemable shares, on the other hand, are shares usually preferred, which by their terms are
redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder,
or both at a certain redemption price. 17 A redemption by the corporation of its stock is, in a
sense, a repurchase of it for cancellation. 18 The present Code allows redemption of shares
even if there are no unrestricted retained earnings on the books of the corporation. This is a
new provision which in effect qualifies the general rule that the corporation cannot purchase
its own shares except out of current retained earnings. 19 However, while redeemable shares
may be redeemed regardless of the existence of unrestricted retained earnings, this is subject
to the condition that the corporation has, after such redemption, assets in its books to cover
debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where
the corporation is insolvent or if such redemption will cause insolvency or inability of the
corporation to meet its debts as they mature. 20

We come now to the merits of the case. The petitioner argues that it cannot be compelled to
redeem the preferred shares issued to the private respondent. We agree. Respondent judge,
in ruling that petitioner must redeem the shares in question, stated that:

On the question of the redemption by the defendant of said preferred shares of stock, the
very wordings of the terms and conditions in said stock certificates clearly allows the same. 21

What respondent judge failed to recognize was that while the stock certificate does allow
redemption, the option to do so was clearly vested in the petitioner bank. The redemption
therefore is clearly the type known as "optional". Thus, except as otherwise provided in the
stock certificate, the redemption rests entirely with the corporation and the stockholder is
without right to either compel or refuse the redemption of its stock. 22 Furthermore, the terms
and conditions set forth therein use the word "may". It is a settled doctrine in statutory
construction that the word "may" denotes discretion, and cannot be construed as having a
mandatory effect. We fail to see how respondent judge can ignore what, in his words, are the
"very wordings of the terms and conditions in said stock certificates" and construe what is
clearly a mere option to be his legal basis for compelling the petitioner to redeem the shares
in question.

The redemption of said shares cannot be allowed. As pointed out by the petitioner, the
Central Bank made a finding that said petitioner has been suffering from chronic reserve
deficiency, 23 and that such finding resulted in a directive, issued on January 31, 1973 by
then Gov. G.S. Licaros of the Central Bank, to the President and Acting Chairman of the
Board of the petitioner bank prohibiting the latter from redeeming any preferred share, on
the ground that said redemption would reduce the assets of the Bank to the prejudice of its
depositors and creditors. 24 Redemption of preferred shares was prohibited for a just and
valid reason. The directive issued by the Central Bank Governor was obviously meant to
preserve the status quo, and to prevent the financial ruin of a banking institution that would
have resulted in adverse repercussions, not only to its depositors and creditors, but also to
the banking industry as a whole. The directive, in limiting the exercise of a right granted by
law to a corporate entity, may thus be considered as an exercise of police power. The
respondent judge insists that the directive constitutes an impairment of the obligation of
contracts. It has, however, been settled that the Constitutional guaranty of non-impairment
of obligations of contract is limited by the exercise of the police power of the state, the
reason being that public welfare is superior to private rights. 25

The respondent judge also stated that since the stock certificate granted the private
respondents the right to receive a quarterly dividend of One Per Centum (1%) cumulative and
participating, it "clearly and unequivocably (sic) indicates that the same are "interest bearing
stocks" or stocks issued by a corporation under an agreement to pay a certain rate of interest
thereon. As such, plaintiffs (private respondents herein) become entitled to the payment
thereof as a matter of right without necessity of a prior declaration of dividend." 26 There is
no legal basis for this observation. Both Sec. 16 of the Corporation Law and Sec. 43 of the
present Corporation Code prohibit the issuance of any stock dividend without the approval of
stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a
regular or special meeting duly called for the purpose. These provisions underscore the fact
that payment of dividends to a stockholder is not a matter of right but a matter of consensus.
Furthermore, "interest bearing stocks", on which the corporation agrees absolutely to pay
interest before dividends are paid to common stockholders, is legal only when construed as
requiring payment of interest as dividends from net earnings or surplus only. 27 Clearly, the
respondent judge, in compelling the petitioner to redeem the shares in question and to pay
the corresponding dividends, committed grave abuse of discretion amounting to lack or
excess of jurisdiction in ignoring both the terms and conditions specified in the stock
certificate, as well as the clear mandate of the law.

Anent the issue of prescription, this Court so holds that the claim of private respondent is
already barred by prescription as well as laches. Art. 1144 of the New Civil Code provides that
a right of action that is founded upon a written contract prescribes in ten (10) years. The
letter-demand made by the private respondents to the petitioner was made only on January
5, 1979, or almost eighteen years after receipt of the written contract in the form of the stock
certificate. As noted earlier, this letter-demand, significantly, was not formally offered in
evidence, nor were any other evidence of demand presented. Therefore, we conclude that the
only time the private respondents saw it fit to assert their rights, if any, to the preferred
shares of stock, was after the lapse of almost eighteen years. The same clearly indicates that
the right of the private respondents to any relief under the law has already prescribed.
Moreover, the claim of the private respondents is also barred by laches. Laches has been
defined as the failure or neglect, for an unreasonable length of time, to do that which by
exercising due diligence could or should have been done earlier; it is negligence or omission
to assert a right within a reasonable time, warranting a presumption that the party entitled to
assert it either has abandoned it or declined to assert it. 28

Considering that the terms and conditions set forth in the stock certificate clearly indicate
that redemption of the preferred shares may be made at any time after the lapse of two
years from the date of issue, private respondents should have taken it upon themselves, after
the lapse of the said period, to inquire from the petitioner the reason why the said shares
have not been redeemed. As it is, not only two years had lapsed, as agreed upon, but an
additional sixteen years passed before the private respondents saw it fit to demand their
right. The petitioner, at the time it issued said preferred shares to the private respondents in
1961, could not have known that it would be suffering from chronic reserve deficiency twelve
years later. Had the private respondents been vigilant in asserting their rights, the
redemption could have been effected at a time when the petitioner bank was not suffering
from any financial crisis.

WHEREFORE, the instant petition, being impressed with merit, is hereby GRANTED. The
challenged decision of respondent judge is set aside and the complaint against the petitioner
is dismissed.

Costs against the private respondents.

SO ORDERED.

Bellosillo, Vitug and Kapunan, JJ., concur.

Padilla, J., concurs in the result.