Feliciano v. COA, GR No.
147402, January 14, The COA also denied petitioners request for COA
2004; Section 1 RCC; Annotations,
Antecedent Facts
A Special Audit Team from COA audited the
accounts of Leyte Metropolitan Water District.
LMWD received a letter from COA dated
requesting payment of auditing fees.
General Manager of LMWD, informed COAs
Regional Director that the water district could not
pay the auditing fees citing Sections 6 and 20 of
Presidential Decree 198 ("PD 198") 2, as well as
Section 18 of Republic Act No. 6758 ("RA 6758").
Petitioner Felciano wrote COA asking for refund
of all auditing fees LMWD previously paid to
COA.
COA Chairman Celso D. Gangans Resolution
denied his requests.
The Ruling of the Commission on Audit
The COA ruled that this Court has already settled
COAs audit jurisdiction over local water districts
in Davao City Water District v. Civil Service
Commission and Commission on Audit,3 as
follows:
Petitioners contention that they are private
corporations (Section 3 (B) PD 198).
It is clear therefrom that the power to appoint the
members who will comprise the members of the
Board of Directors belong to the local executives
of the local subdivision unit where such districts
are located. In contrast, the members of the Board
of Directors or the trustees of a private corporation
are elected from among members or stockholders
thereof. It would not be amiss at this point to
emphasize that a private corporation is created for
the private purpose, benefit, aim and end of its
members or stockholders.
But this is not the case here and this clearly
indicates that petitioners are not private
corporations.
to stop charging auditing fees as well as petitioners
request for COA to refund all auditing fees already
paid.
The Issues
1. Whether a Local Water District ("LWD")
created under PD 198, as amended, is a
government-owned or controlled corporation
subject to the audit jurisdiction of
COA;chanroblesvirtuallawlib
2. Whether Section 20 of PD 198, as amended,
prohibits COAs certified public accountants from
auditing local water districts; andcralawlibrary
3. Whether Section 18 of RA 6758 prohibits the
COA from charging government-owned and
controlled corporations auditing fees.
The Ruling of the Court
The petition lacks merit.
The Constitution and existing laws4 mandate COA
to audit all government agencies, including
government-owned and controlled corporations
("GOCCs") with original charters. An LWD is a
GOCC with an original charter.
Section 2(1), Article IX-D of the Constitution
provides for COAs audit jurisdiction, as follows:
SECTION 2. (1) The Commission on
Audit shall have the power, authority and
duty to examine, audit… including
government-owned and controlled
corporations with original charters, .
(Emphasis supplied)ςrωlιbrαrÿ
The COAs audit jurisdiction extends not only to
government "agencies or instrumentalities,"
but also to "government-owned and controlled
corporations with original charters" as well as
"other government-owned or controlled
corporations" without original charters.
1
ISSUE 2: Whether LWDs are Private or
Government-Owned
and Controlled Corporations with Original
Charters
The Constitution recognizes two classes of
corporations. The first refers to private
corporations created under a general law. The
second refers to government-owned or controlled
corporations created by special charters.
Section 16, Article XII of the Constitution
provides:
Sec. 16. The Congress shall not, except by
general law, provide for the formation,
organization, or regulation of private
corporations. Government-owned or
controlled corporations may be created or
established by special charters in the
interest of the common good and subject
to the test of economic viability.
The Constitution emphatically prohibits the
creation of private corporations except by a general
law applicable to all citizens. The purpose of this
constitutional provision is to ban private
corporations created by special charters, which
historically gave certain individuals, families or
groups special privileges denied to other
citizens.10 ςrνll
In short, Congress cannot enact a law creating a
private corporation with a special charter. Under
existing laws, that general law is the Corporation
Code,11 except that the Cooperative Code governs
the incorporation of cooperatives.
The Constitution authorizes Congress to create
government-owned or controlled corporations
through special charters. Since private corporations
cannot have special charters, it follows that
Congress can create corporations with special
charters only if such corporations are government-
owned or controlled.
Obviously, LWDs are not private corporations
because they are not created under the Corporation
Code. LWDs are not registered with the Securities
and Exchange Commission.
" LWDs have no articles of incorporation, no
incorporators and no stockholders or members.
There are no stockholders or members to elect the
board directors of LWDs as in the case of all
corporations registered with the Securities and
Exchange Commission. The local mayor or the
provincial governor appoints the directors of
LWDs for a fixed term of office. This Court has
ruled that LWDs are not created under the
Corporation Code, thus:
Petitioners are not created under the said code,
but on the contrary, they were created pursuant
to a special law and are governed primarily by
its provision.13 (Emphasis supplied)ςrαlαωlιbrαrÿ
LWDs exist by virtue of PD 198, which constitutes
their special charter. Since under the Constitution
only government-owned or controlled corporations
may have special charters, LWDs can validly exist
only if they are government-owned or controlled.
Unlike private corporations, which derive their
legal existence and power from the Corporation
Code, LWDs derive their legal existence and
power from PD 198. Sections 6 and 25 of PD
19814 provide:
Section 6. Formation of District. This Act is the
source of authorization and power to form and
maintain a district. For purposes of this Act, a
district shall be considered as a quasi-public
corporation performing public service and
supplying public wants. As such, a district shall
exercise the powers, rights and privileges given
to private corporations under existing laws, in
addition to the powers granted in, and subject
to such restrictions imposed, under this Act.
Clearly, LWDs exist as corporations only by virtue
of PD 198, which expressly confers on LWDs
corporate powers. Section 6 of PD 198 provides
that LWDs "shall exercise the powers,
The phrase "government-owned and controlled
corporations with original charters" means GOCCs
created under special laws and not under the
general incorporation law. There is no difference
between the term "original charters" and "special
charters."
By "government-owned or controlled
corporation with original charter," We mean
2
government owned or controlled corporation
created by a special law and not under the
Corporation Code of the Philippines. Thus, in
the case of Lumanta v. NLRC (G.R. No. 82819,
February 8, 1989, 170 SCRA 79, 82), We held:
Petitioners contention that the Sangguniang Bayan
resolution creates the LWDs assumes that the
Sangguniang Bayan has the power to create
corporations. However, the Local Government
Code17 does not vest in the Sangguniang Bayan the
power to create corporations.18 What the Local
Government Code empowers the Sangguniang
Bayan to do is to provide for the establishment of a
waterworks system "subject to existing laws."
Thus, Section 447(5) (vii) of the Local
Government Code provides:
The Sangguniang Bayan may establish a
waterworks system only in accordance with the
provisions of PD 198. The Sangguniang Bayan has
no power to create a corporate entity that will
operate its waterworks system.
The Constitution prohibits one special law to
create one private corporation, requiring instead a
"general law" to create private corporations. In
contrast, the same Section 16 states that
"Government-owned or controlled
corporations may be created or established by
special charters." Thus, the
Constitution permits Congress to create a GOCC
with a special charter. There is, however, no
prohibition on Congress to create several GOCCs
of the same class under one special enabling
charter.
The rationale behind the prohibition on private
corporations having special charters does not apply
to GOCCs. There is no danger of creating special
privileges to certain individuals, families or groups
if there is one special law creating each GOCC.
Certainly, such danger will not exist whether one
special law creates one GOCC, or one special
enabling law creates several GOCCs. Thus,
Congress may create GOCCs either by special
charters specific to each GOCC, or by one special
enabling charter applicable to a class of GOCCs,
like PD 198 which applies only to LWDs.
Petitioner also contends that LWDs are private
corporations because Section 6 of PD
19821 declares that LWDs "shall be considered
quasi-public" in nature. Petitioners rationale is that
only private corporations may be deemed "quasi-
public" and not public corporations. Put
differently, petitioner rationalizes that a public
corporation cannot be deemed "quasi-public"
because such corporation is already public.
Petitioner concludes that the term "quasi-public"
can only apply to private corporations. Petitioners
argument is inconsequential.
The Constitution vests in the COA audit
jurisdiction over "government-owned and
controlled corporations with original charters," as
well as "government-owned or controlled
corporations" without original charters. GOCCs
with original charters are subject to COA pre-
audit, while GOCCs without original charters
are subject to COA post-audit. GOCCs without
original charters refer to corporations created
under the Corporation Code but are owned or
controlled by the government. The nature or
purpose of the corporation is not material in
determining COAs audit jurisdiction. Neither is the
manner of creation of a corporation, whether under
a general or special law.
Certainly, the government owns and controls
LWDs. The government organizes LWDs in
accordance with a specific law, PD 198. There is
no private party involved as co-owner in the
creation of an LWD. Just prior to the creation of
LWDs, the national or local government owns and
controls all their assets. The government controls
LWDs because under PD 198 the municipal or city
mayor, or the provincial governor, appoints all the
board directors of an LWD for a fixed term of six
years.24 The board directors of LWDs are not co-
owners of the LWDs. LWDs have no private
stockholders or members. The board directors and
other personnel of LWDs are government
employees subject to civil service laws25 and anti-
graft laws.
While Section 8 of PD 198 states that "[N]o public
official shall serve as director" of an LWD, it only
means that the appointees to the board of directors
of LWDs shall come from the private sector. Once
such private sector representatives assume office as
directors, they become public officials governed by
the civil service law and anti-graft laws.
Otherwise, Section 8 of PD 198 would contravene
Section 2(1), Article IX-B of the Constitution
3
declaring that the civil service includes
"government-owned or controlled corporations
with original charters.
If LWDs are neither GOCCs with original charters
nor GOCCs without original charters, then they
would fall under the term "agencies or
instrumentalities" of the government and thus still
subject to COAs audit jurisdiction. However, the
stark and undeniable fact is that the government
owns LWDs. Section 4527 of PD 198 recognizes
government ownership of LWDs when Section 45
states that the board of directors may dissolve an
LWD only on the condition that "another public
entity has acquired the assets of the district and
has assumed all obligations and liabilities attached
thereto." The implication is clear that an LWD is a
public and not a private entity.
.Section 18 of RA 6758 prohibits COA personnel
from receiving any kind of compensation from any
government entity except "compensation paid
directly by COA out of its appropriations and
contributions." Thus, RA 6758 itself recognizes
an exception to the statutory ban on COA
personnel receiving compensation from GOCCs.
In Tejada v. Domingo,40 the Court declared:
There can be no question that Section 18 of
Republic Act No. 6758 is designed to strengthen
further the policy x x x to preserve the
independence and integrity of the COA, by
explicitly PROHIBITING: (1) COA officials and
employees from receiving salaries, honoraria,
bonuses, allowances or other emoluments from any
government entity, local government unit, GOCCs
and government financial institutions, except such
compensation paid directly by the COA out of
its appropriations and contributions, and (2)
government entities, including GOCCs,
government financial institutions and local
government units from assessing or billing other
government entities, GOCCs, government
financial institutions or local government units for
services rendered by the latters officials and
employees as part of their regular functions for
purposes of paying additional compensation to said
officials and employees.
The first aspect of the strategy is directed to the
COA itself, while the second aspect is addressed
directly against the GOCCs and government
financial institutions. Under the first, COA
personnel assigned to auditing units of GOCCs
or government financial institutions can receive
only such salaries, allowances or fringe benefits
paid directly by the COA out of its
appropriations and contributions. The
contributions referred to are the cost of audit
services earlier mentioned which cannot include
the extra emoluments or benefits now claimed
by petitioners. The COA is further barred from
assessing or billing GOCCs and government
financial institutions for services rendered by its
personnel as part of their regular audit functions
for purposes of paying additional compensation to
such personnel. x x x. (Emphasis
supplied)ςrαlαωlιbrαrÿ
In Tejada, the Court explained the meaning of the
word "contributions" in Section 18 of RA 6758,
which allows COA to charge GOCCs the cost of
its audit services:
COA may charge GOCCs "actual audit cost" but
GOCCs must pay the same directly to COA and
not to COA auditors. Petitioner has not alleged that
COA charges LWDs auditing fees in excess of
COAs "actual audit cost." Neither has petitioner
alleged that the auditing fees are paid by LWDs
directly to individual COA auditors. Thus,
petitioners contention must fail.
G.R. No. L-23145      November 29, 1968
TESTATE ESTATE OF IDONAH SLADE
PERKINS, deceased. RENATO D.
TAYAG, ancillary administrator-appellee,
vs. BENGUET CONSOLIDATED,
INC., oppositor-appellant.
Idonah Slade Perkins, an American citizen who
died in New York City, left among others, two
stock certificates issued by Benguet Consolidated,
a corporation domiciled in the Philippines. As
ancillary administrator of Perkins’ estate in the
Philippines, Tayag now wants to take possession
of these stock certificates but County Trust
Company of New York, the domiciliary
administrator, refused to part with them. Thus, the
probate court of the Philippines was forced to issue
an order declaring the stock certificates as lost and
ordering Benguet Consolidated to issue new stock
certificates representing Perkins’ shares. Benguet
4
Consolidated appealed the order, arguing that the
stock certificates are not lost as they are in
existence and currently in the possession of County
Trust Company of New York.
A dispute arose between the domiciary
administrator in New York and the ancillary
administrator in the Philippines as to which of
them was entitled to the possession of the stock
certificates in question. In 1964 County Trust
Company, did not comply with the order of CFI
Manila to "produce and deposit" them with the
ancillary administrator or with the Clerk of Court.
The ancillary administrator petitioned the court to
"issue an order declaring the certificate or
certificates of stocks covering the 33,002 shares
issued in the name of Idonah Slade Perkins by
Benguet Consolidated, Inc., be declared [or]
considered as lost.
Benguet Consolidated, Inc. admits that "it is
immaterial" as far as it is concerned as to "who is
entitled to the possession of the stock certificates
in question; appellant opposed the petition of the
ancillary administrator because the said stock
certificates are in existence, they are today in the
possession of the domiciliary administrator, the
County Trust Company, in New York, U.S.A...." 4
Under the circumstances, the stock certificates
cannot be declared or considered as lost.
Moreover, it would allege that there was a failure
to observe certain requirements of its by-laws
before new stock certificates could be issued.
Hence, its appeal.
ISSUE:
No. Benguet Consolidated is a corporation who
owes its existence to Philippine laws. It has been
given No. Benguet Consolidated is a corporation
who owes its existence to Philippine laws. It has
been given
rights and privileges under the law. Corollary, it
also has obligations under the law and one of those
is to
follow valid legal court orders. It is not immune
from judicial control because it is domiciled here
in the
Philippines. BCI is a Philippine corporation owing
full allegiance and subject to the unrestricted
jurisdiction
of local courts. Its shares of stock cannot therefore
be considered in any wise as immune from lawful
court
orders. Further, to allow BCI’s opposition is to
render the court order against CTC-NY a mere
scrap of
paper. It will leave Tayag without any remedy
simply because CTC-NY, a foreign entity refuses
to comply
with a valid court order. The final recourse then is
for our local courts to create a legal fiction such
that the
stock certificates in issue be declared lost even
though in reality they exist in the hands of CTC-
NY. This is
valid. As held time and again, fictions which the
law may rely upon in the pursuit of legitimate ends
have
played an important part in its development.
Further still, the argument invoked by BCI that it
can only issue new stock certificates in accordance
with its
bylaws is misplaced. It is worth noting that CTC-
NY did not appeal the order of the court – it simply
refused
to turn over the stock certificates hence ownership
can be said to have been settled in favor of estate
of
Perkins here. Also, assuming that there really is a
conflict between BCI’s bylaws and the court order,
what should prevail is the lawful court order. It
would be highly irregular if court orders would
yield to the bylaws of a corporation. Again, a
corporation is not immune from judicial orders.
When a person dies intestate owning property in
the country of his domicile as well as in a foreign
country, administration is had in both countries.
That which is granted in the jurisdiction of
decedent's last domicile is termed the principal
administration, while any other administration is
termed the ancillary administration. The reason for
the latter is because a grant of administration does
not ex proprio vigore  have any effect beyond the
limits of the country in which it is granted. Hence,
an administrator appointed in a foreign state has no
authority in the [Philippines]. The ancillary
administration is proper, whenever a person dies,
leaving in a country other than that of his last
domicile, property to be administered in the nature
5
of assets of the deceased liable for his individual
debts or to be distributed among his heirs."7
The authority of the probate court to require that
ancillary administrator's right to "the stock
certificates covering the 33,002 shares ... standing
in her name in the books of [appellant] Benguet
Consolidated, Inc...." be respected is equally
beyond question. For appellant is a Philippine
corporation owing full allegiance and subject to the
unrestricted jurisdiction of local courts. Its shares
of stock cannot therefore be considered in any wise
as immune from lawful court orders.
Our holding in Wells Fargo Bank and Union v.
Collector of Internal Revenue8 finds application.
"In the instant case, the actual situs of the shares of
stock is in the Philippines, the corporation being
domiciled [here]." To the force of the above
undeniable proposition, not even appellant is
insensible. It does not dispute it. Nor could it
successfully do so even if it were so minded.
2. In the face of such incontrovertible doctrines
that argue in a rather conclusive fashion for the
legality of the challenged order, how does
appellant, Benguet Consolidated, Inc. propose to
carry the extremely heavy burden of persuasion of
precisely demonstrating the contrary? It would
assign as the basic error allegedly committed by
the lower court its "considering as lost the stock
certificates covering 33,002 shares of Benguet
belonging to the deceased Idonah Slade
Perkins, ..."9 More specifically, appellant would
stress that the "lower court could not "consider as
lost" the stock certificates in question when, as a
matter of fact, his Honor the trial Judge knew, and
does know, and it is admitted by the appellee, that
the said stock certificates are in existence and are
today in the possession of the domiciliary
administrator in New York."
Appellant Benguet Consolidated, Inc. would seek
to bolster the above contention by its invoking one
of the provisions of its by-laws which would set
forth the procedure to be followed in case of a lost,
stolen or destroyed stock certificate; it would stress
that in the event of a contest or the pendency of an
action regarding ownership of such certificate or
certificates of stock allegedly lost, stolen or
destroyed, the issuance of a new certificate or
certificates would await the "final decision by [a]
court regarding the ownership [thereof]."15
Such reliance is misplaced. In the first place, there
is no such occasion to apply such by-law. It is
admitted that the foreign domiciliary administrator
did not appeal from the order now in question.
Moreover, there is likewise the express admission
of appellant that as far as it is concerned, "it is
immaterial ... who is entitled to the possession of
the stock certificates ..." Even if such were not the
case, it would be a legal absurdity to impart to such
a provision conclusiveness and finality. Assuming
that a contrariety exists between the above by-law
and the command of a court decree, the latter is to
be followed.
What is more the view adopted by appellant
Benguet Consolidated, Inc. is fraught with
implications at war with the basic postulates of
corporate theory.
The well-known authority Fletcher said that "A
corporation is not in fact and in reality a person,
but the law treats it as though it were a person by
process of fiction, or by regarding it as an artificial
person distinct and separate from its individual
stockholders.... It owes its existence to law. It is an
artificial person created by law for certain specific
purposes, the extent of whose existence, powers
and liberties is fixed by its charter."19 Dean Pound's
terse summary, a juristic person, resulting from an
association of human beings granted legal
personality by the state, puts the matter neatly.20
There is thus a rejection of
Gierke's genossenchaft theory, the basic theme of
which to quote from Friedmann, "is the reality of
the group as a social and legal entity, independent
of state recognition and concession."
A corporation as known to Philippine
jurisprudence is a creature without any existence
until it has received the imprimatur of the state
according to law. It is logically inconceivable
therefore that it will have rights and privileges of a
higher priority than that of its creator. More than
that, it cannot legitimately refuse to yield
obedience to acts of its state organs, certainly not
excluding the judiciary, whenever called upon to
do so.
6
As a matter of fact, a corporation once it comes
into being, following American law still of
persuasive authority in our jurisdiction, comes
more often within the ken of the judiciary than the
other two coordinate branches. It institutes the
appropriate court action to enforce its right.
Correlatively, it is not immune from judicial
control in those instances, where a duty under the
law as ascertained in an appropriate legal
proceeding is cast upon it.
SC: Appeal should be rejected. The provisions of
the U.S. Code, invoked by the Benguet (appellant),
make the decisions of the U.S. Veterans'
Administrator final and conclusive when made on
claims property submitted to him for resolution;
but they are not applicable to the present case,
where the Administrator is not acting as a judge
but as a litigant. There is a great difference
between actions against the Administrator (which
must be filed strictly in accordance with the
conditions that are imposed by the Veterans' Act,
including the exclusive review by United States
courts), and those actions where the Veterans'
Administrator seeks a remedy from our courts and
submits to their jurisdiction by filing actions
therein. Our attention has not been called to any
law or treaty that would make the findings of the
Veterans' Administrator, in actions where he is a
party, conclusive on our courts. That, in effect,
would deprive our tribunals of judicial discretion
and render them mere subordinate instrumentalities
of the Veterans' Administrator."
It is bad enough as the Viloria decision made
patent for our judiciary to accept as final and
conclusive, determinations made by foreign
governmental agencies. It is infinitely worse if
through the absence of any coercive power by our
courts over juridical persons within our
jurisdiction, the force and effectivity of their orders
could be made to depend on the whim or caprice of
alien entities. It is difficult to imagine of a situation
more offensive to the dignity of the bench or the
honor of the country.
Yet that would be the effect, even if unintended, of
the proposition to which appellant Benguet
Consolidated seems to be firmly committed as
shown by its failure to accept the validity of the
order complained of; it seeks its reversal. Certainly
we must at all pains see to it that it does not
succeed. The deplorable consequences attendant on
appellant prevailing attest to the necessity of
negative response from us. That is what appellant
will get.
That is all then that this case presents. It is obvious
why the appeal cannot succeed. It is always easy to
conjure extreme and even oppressive possibilities.
That is not decisive. It does not settle the issue.
What carries weight and conviction is the result
arrived at, the just solution obtained, grounded in
the soundest of legal doctrines and distinguished
by its correspondence with what a sense of realism
requires. For through the appealed order, the
imperative requirement of justice according to law
is satisfied and national dignity and honor
maintained.
WHEREFORE, the appealed order of the
Honorable Arsenio Santos, the Judge of the Court
of First Instance, dated May 18, 1964, is affirmed.
With costs against oppositor-appelant Benguet
Consolidated, Inc
Ang Pue and Co v Secretary of Commerce and
Industry, 5 SCRA 645
FACTS: On May 1, 1953, Ang Pue and Tan Siong,
both Chinese citizens, organized the partnership
Ang Pue & Company for a term of five years from
May 1, 1953, extendible by their mutual consent.
The purpose of the partnership was "to maintain
the business of general merchandising, buying and
selling at wholesale and retail, particularly of
lumber, hardware and other construction materials
for commerce, either native or foreign. "On June
19, 1954 Republic Act No. 1180 was enacted to
regulate the retail business. It provided ,among
other things, that, after its enactment, a partnership
not wholly formed by Filipinos couldcontinue to
engage in the retail business until the expiration of
its term. On April 15, 1958 -- prior to the
expiration of the five-year term of the partnership
Ang Pue & Company, but after the enactment of
the Republic Act 1180, the partners already
mentioned amended the original articles of part
ownership so as to extend the term of life of the
partnership to another five years. When the
amended articles were presented for registration in
the Office of the Securities &Exchange
Commission on April 16, 1958, registration was
refused upon the ground that the extension was in
violation of the aforesaid Act.
7
ISSUE: Whether or not the refusal for the
extension of the life of the partnership was valid
The question before us is too clear to require an
extended discussion. To organize a corporation or
a partnership that could claim a juridical
personality of its own and
transact business as such, is not a matter of absolut
e right but a privilege which may be enjoyed only
under such terms as the State may deem necessary
to impose. That the State, through Congress, and in
the manner provided by law, had the right to enact
Republic Act No. 1180 and to provide therein that
only Filipinos and concerns wholly owned by
Filipinos may engage in the
retail business can not be seriously disputed. That t
his provision was clearly intended to apply to partn
ership already existing at the time of the enactment 
of the law is clearly showing by its provision givin
g them the right
to continue engaging in their retail business until
the expiration of their term or life.
To argue that because the original articles of
partnership provided that the partners could extend
the term of the partnership, the provisions of
Republic Act 1180 cannot be adversely affect
appellants herein, is to erroneously assume that the
aforesaid provision constitute a property right of
which the partners can not be deprived without due
process or without their consent. The agreement
contain therein must be deemed subject to the law
existing at the time when the partners
came to agree regarding the extension. In the prese
nt case, as already stated, when the partners
amended the articles of partnership, the provisions
of Republic Act 1180 were already inforce, and
there can be not the slightest doubt that the right
claimed by appellants to extend the original term
of their partnership to another five years would be
in violation of the clear intent and purpose of the
law aforesaid
Torres v. Court of Appeals, 278 SCRA 793
Manuel Torres, Jr. vs Court of Appeals
278 SCRA 793 – Business Organization –
Corporation Law – Transfer of Shares of Stocks –
Corporate Records
FACTS: Judge Manuel Torres, Jr. owns about 81%
of the capital stocks of Tormil Realty &
Development Corporation (TRDC). TRDC is a
small family owned corporation and other
stockholders thereof include Judge Torres’ nieces
and nephews.
However, even though Judge Torres owns the
majority of TRDC and was also the president
thereof, he is only entitled to one vote among the
9-seat Board of Directors, hence, his vote can be
easily overridden by minority stockholders. So in
1987, before the regular election of TRDC officers,
Judge Torres assigned one share (qualifying share)
each to 5 “outsiders” for the purpose of qualifying
them to be elected as directors in the board and
thereby strengthen Judge Torres’ power over other
family members. However, the said assignment of
shares was not recorded by the corporate secretary,
Ma. Christina Carlos (niece) in the stock and
transfer book of TRDC.
When the validity of said, assignments were
questioned, Judge Torres ratiocinated that it is
impractical for him to order Carlos to make the
entries because Carlos is one of his opposition. So,
what Judge Torres did was to make the entries
himself because he was keeping the stock and
transfer book. He further ratiocinated that he can
do what a mere secretary can do because in the
first place, he is the president.
Since the other family members were against the
inclusion of the five outsiders, they refused to take
part in the election. Judge Torres and his five
assignees then decided to conduct the election
among themselves considering that the 6 of them
constitute a quorum.
ISSUE: Whether or not the inclusion of the five
outsiders are valid. Whether or not the subsequent
election is valid.
HELD: No. The assignment of the shares of stocks
did not comply with procedural requirements. It
did not comply with the by-laws of TRDC nor did
it comply with Section 74 of the Corporation Code.
Section 74 provides that the stock and transfer
book should be kept at the principal office of the
corporation. Here, it was Judge Torres who was
keeping it and was bringing it with him. Further,
his excuse of not ordering the secretary to make
the entries is flimsy. The proper procedure is to
order the secretary to make the entry of said
assignment in the book, and if she refuses, Judge
Torres can come to court and compel her to make
the entry.
8
There are judicial remedies for this. Needless to
say, the subsequent election is invalid because the
assignment of shares is invalid by reason of
procedural infirmity. The Supreme Court also
emphasized: all corporations, big or small, must
abide by the provisions of the Corporation Code.
Being a simple family corporation is not an
exemption. Such corporations cannot have rules
and practices other than those established by law.
Philippine Stock Exchange Inc. vs Court of
Appeals
281 SCRA 232 [GR No. 125469 October 27,
1997]
Facts: The Puerto Azul Land Inc. (PALI), a
domestic real estate corporation, had sought to
offer its shares to the public in order to raise funds
allegedly to develop its properties and pay its loans
with several banking institutions. In January, 1995,
PALI was issued a permit to sell its shares to the
public by the Securities and Exchange
Commission (SEC). To facilitate the trading of its
shares among investors, PALI sought to course the
trading of its shares through the Philippine Stock
Exchange Inc. (PSEi), for which purpose it filed
with the said stock exchange an application to list
its shares, with supporting documents attached
pending the approval of the PALI’s listing
application, a letter was received by PSE from the
heirs of Ferdinand Marcos to which the latter
claims to be the legal and beneficial owner of some
of the properties forming part of PALI’s assets. As
a result, PSE denied PALI’s application which
caused the latter to file a complaint before the
SEC. The SEC issued an order to PSE to grant
listing application of PALI on the ground that
PALI have certificate of title over its assets and
properties and that PALI have complied with all
the requirements to enlist with PSE.
Issue: Whether or not the denial of PALI’s
application is proper.
Held: Yes. This is in accord with the “Business
Judgement Rule” whereby the SEC and the courts
are barred from intruding into business judgements
of corporations, when the same are made in good
faith. The same rule precludes the reversal of the
decision of the PSE, to which PALI had previously
agreed to comply, the PSE retains the discretion to
accept of reject applications for listing. Thus, even
if an issuer has complied with the PSE listing rules
and requirements, PSE retains the discretion to
accept or reject the issuer’s listing application if
the PSE determines that the listing shall not serve
the interests of the investing public.
It is undeniable that the petitioner PSE is not an
ordinary corporation, in that although it is clothed
with the markings of a corporate entity, it functions
as the primary channel through which the vessels
of capital trade ply. The PSEi’s relevance to the
continued operation and filtration of the securities
transaction in the country gives it a distinct color
of importance such that government intervention in
its affairs becomes justified, if not necessarily.
Indeed, as the only operational stock exchange in
the country today, the PSE enjoys  monopoly of
securities transactions, and as such it yields a
monopoly of securities transactions, and as such, it
yields an immerse influence upon the country’s
economy.
REPORT THIS AD
The SEC’s power to look into the subject ruling of
the PSE, therefore, may be implied from or be
considered as necessary or incidental to the
carrying out of the SEC’s express power to insure
fair dealing in securities traded upon a stock
exchange or to ensure the fair administration of
such exchange. It is likewise, observed that the
principal function of the SEC is the supervision
and control over corporations, partnerships and
associations with the end in view that investment
in these entities may be encouraged and protected
and their activities for the promotion of economic
development.
A corporation is but an association of individuals,
allowed to transact under an assumed corporate
name, and with a distinct legal personality. In
organizing itself as a collective body, it waives no
constitutional immunities and requisites
appropriate to such a body as to its corporate and
management decisions, therefore, the state will
generally not interfere with the same. Questions of
policy and management are left to the honest
decision of the officers and directors of a
corporation, and the courts are without authority to
substitute their judgements for the judgement of
9
the board of directors. The board is the business
manager of the corporation and so long as it acts in
good faith, its orders are not reviewable by the
courts.
In matters of application for listing in the market
the SEC may exercise such power only if the
PSE’s judgement is attended by bad faith.
The petitioner was in the right when it refused
application of PALI, for a contrary ruling was not
to the best interest of the general public
ISSUE: WON the SEC has authority to order the
PSE to list PALI’s shares
HELD: YES, but only if the exercise of the PSE’s
powers was attended with bad faith. The denial of
the application of PALI is proper due to the
controversies surrounding its ownership.
Sec. 3 of P.D. 902-A, give the SEC the special
mandate to be vigilant in the supervision of the
affairs of stock exchanges so that the interests of
the investing public may be fully safeguard.
Section 3 of Presidential Decree 902-A, standing
alone, is enough authority to uphold the SEC’s
challenged control authority over the petitioner
PSE even as it provides that “the Commission shall
have absolute jurisdiction, supervision, and control
over all corporations, partnerships or associations,
who are the grantees of primary franchises and/or a
license or permit issued by the government to
operate in the Philippines. . .” The SEC’s
regulatory authority over private corporations
encompasses a wide margin of areas, touching
nearly all of a corporation’s concerns. This
authority springs from the fact that a corporation
owes its existence to the concession of its
corporate franchise from the state.
SEC is the entity with the primary say as to
whether or not securities, including shares of stock
of a corporation, may be traded or not in the stock
exchange. This is in line with the SEC’s mission to
ensure proper compliance with the laws, such as
the Revised Securities Act and to regulate the sale
and disposition of securities in the country.
This is not to say, however, that the PSE’s
management prerogatives are under the absolute
control of the SEC. The PSE is, alter all, a
corporation authorized by its corporate franchise to
engage in its proposed and duly approved business.
One of the PSE’s main concerns, as such, is still
the generation of profit for its stockholders.
Moreover, the PSE has all the rights pertaining to
corporations, including the right to sue and be
sued, to hold property in its own name, to enter (or
not to enter) into contracts with third persons, and
to perform all other legal acts within its allocated
express or implied powers.
Thus, notwithstanding the regulatory power of the
SEC over the PSE, and the resultant authority to
reverse the PSE’s decision in matters of
application for listing in the market, the SEC may
exercise such power only if the PSE’s judgment is
attended by bad faith. Bad faith does not simply
connote bad judgment or negligence. It imports a
dishonest purpose or some moral obliquity and
conscious doing of wrong. It means a breach of a
known duty through some motive or interest of ill
will, partaking of the nature of fraud.
The petitioner was in the right when it refused
application of PALI, for a contrary ruling was not
to the best interest of the general public. The
purpose of the Revised Securities Act, after all, is
to give adequate and effective protection to the
investing public against fraudulent representations,
or false promises, and the imposition of worthless
ventures.
In any case, for the purpose of determining
whether PSE acted correctly in refusing the
application of PALI, the true ownership of the
properties of PALI need not be determined as an
absolute fact. What is material is that the
uncertainty of the properties’ ownership and
alienability exists, and this puts to question the
qualification of PALI’s public offering. In sum, the
Court finds that the SEC had acted arbitrarily in
arrogating unto itself the discretion of approving
the application for listing in the PSE of the private
respondent PALI, since this is a matter addressed
to the sound discretion of the PSE, a corporation
entity, whose business judgments are respected in
the absence of bad faith.
Palay Inc. v. Clave
10
G.R. No. L-56076 September 21, 1983
Facts:
1. On March 28, 1965, petitioner Palay, Inc.,
through its President, Albert Onstott sold a parcel
of land owned by the corporation to the private
respondent, Nazario Dumpit, by virtue of a
Contract to Sell. The sale price was P23,300.00
with 9% interest per annum, payable with a down
payment of P4,660.00 and monthly instalments of
P246.42 until fully paid. Paragraph 6 of the
contract provided for automatic extrajudicial
rescission upon default in payment of any monthly
instalment after the lapse of 90 days from the
expiration of the grace period of one month,
without need of notice and with forfeiture of all
instalments paid.
2. Respondent Dumpit paid the down payment
and several instalments amounting to P13,722.50
with the last payment was made on December 5,
1967 for instalments up to September 1967.
Almost six (6) years later, private respondent
wrote petitioner offering to update all his overdue
accounts and sought consent to the assignment of
his rights to a certain Lourdes Dizon. Petitioners
informed respondent that his Contract to Sell had
long been rescinded pursuant to paragraph 6 of the
contract, and that the lot had already been resold.
3. Respondent filed a letter complaint with the
National Housing Authority (NHA) questioning
the validity of the rescission. The NHA held that
the rescission is void in the absence of either
judicial or notarial demand. Palay, Inc. and
Onstott in his capacity as President of the
corporation, jointly and severally, was ordered to
refund Dumpit the amount paid plus 12% interest
from the filing of the complaint. Petitioners' MR
was denied by the NHA. Respondent Presidential
Executive Assistant, on May 2, 1980, affirmed the
Resolution of the NHA. Reconsideration sought by
petitioners was denied for lack of merit. Thus, the
present petition.
Issue: W/N demand is necessary to rescind a
contract
Ruling: As held in previous jurisprudence, the
judicial action for the rescission of a contract is not
necessary where the contract provides that it may
be revoked and cancelled for violation of any of its
terms and conditions. However, even in the cited
cases, there was at least a written notice sent to the
defaulter informing him of the rescission. A
written notice is indispensable to inform the
defaulter of the rescission. Hence, the resolution by
petitioners of the contract was ineffective and
inoperative against private respondent for lack of
notice of resolution (as held in the U.P. vs.
Angeles case). The act of a party in treating a
contract as cancelled should be made known to the
other.
Later, RA 6551 6551 entitled "An Act to Provide
Protection to Buyers of Real Estate on Instalment
Payments,” emphasized the indispensability of
notice of cancellation to the buyer when it
specifically provided:
Sec. 3(b) ... the actual cancellation of the contract
shall take place after thirty days from receipt by
the buyer of the notice of cancellation or the
demand for rescission of the contract by a notarial
act and upon full payment of the cash surrender
value to the buyer. (Emphasis supplied).
Moreover, there was no waiver on the part of the
private respondent of his right to be notified under
paragraph 6 of the contract since it was a contract
of adhesion, a standard form of petitioner
corporation, and private respondent had no
freedom to stipulate. Finally, it is a matter of
public policy to protect buyers of real estate on
instalment payments against onerous and
oppressive conditions. Waiver of notice is one
such onerous and oppressive condition to buyers of
real estate on instalment payments.
As a consequence of the resolution by petitioners,
rights to the lot should be restored to private
respondent or the same should be replaced by
another acceptable lot but since the property had
already been sold to a third person and there is no
evidence on record that other lots are still
available, private respondent is entitled to the
refund of instalments paid plus interest at the legal
rate of 12% computed from the date of the
institution of the action. It would be most
inequitable if petitioners were to be allowed to
retain private respondent's payments and at the
same time appropriate the proceeds of the second
sale to another.
Onstott not personally liable
Onstott was made liable because he was then the
President of the corporation and the controlling
stockholder but there was no sufficient proof that
he used the corporation to defraud private
respondent. He cannot, therefore, be made
personally liable just because he "appears to be the
11
controlling stockholder". Mere ownership by a
single stockholder or by another corporation is not
of itself sufficient ground for disregarding the
separate corporate personality.
Finally, there are no badges of fraud on the
petitioners' part. They had literally relied, albeit
mistakenly, on paragraph 6 (supra) of the contract
when it rescinded the contract to sell
extrajudicially and had sold it to a third person.
Petitioner Palay, Inc. is liable to refund to
respondent Dumpit the amount of P13,722.50, with
interest at twelve (12%) p.a. from November 8,
1974, the date of the filing of the Complaint.
ISSUE
1. Whether the doctrine of piercing the veil of
corporate fiction has application to the case.
2. Whether petitioner On Stott can be held
solidarity liable with petitioner Corporation for the
refund of the installment payments made by
respondent Dump it.
RULING
The doctrine of piercing the veil of corporate
fiction has no application to the case.
Consequently, petitioner Onstott cannot be held
solidarity liable with petitioner Corporation for the
refund of the installment payments made by
respondent Dumpit. A corporation is invested by
law with a personality separate and distinct from
those of the persons composing it. As a general
rule, a corporation may not be made to answer for
acts or liabilities of its stockholders or those of the
legal entities to which it may be connected and
vice versa.
However, the veil of corporate fiction may be
pierced when: it is used as a shield to further an
end subversive of justice; or for purposes that
could not have been intended by the law that
created it; or to defeat public convenience, justify
wrong, protect fraud, or defend crime; or to
perpetrate fraud or con fuse legitimate issues; or to
circumvent the law or perpetuate deception; or as
an alter ego, adjunct or business conduit for the
sole benefit of the stockholders. In this case
however, there are no badges of fraud on the part
of the petitioners. They had literally relied,
although mistakenly, on paragraph 6 of the
contract with respondent when they rescinded the
contract to sell extra judicially. Although On Stott
appears to be the controlling stockholder, there
being no fraud, he cannot be made personally
liable.
Soriano v Court of Appeals, 174 SCRA 195
SMITH, BELL & COMPANY (LTD.), v
JOAQUIN NATIVIDAD 40 PHIL 136 Facts:
Smith, Bell & Co., (Ltd.), is a corporation
organized and existing under the laws of the
Philippine Islands. A majority of its stockholders
are British subjects. It is the owner of a motor
vessel known as the Bato built for it in the
Philippine Islands in 1916, of more than fifteen
tons gross The Bato was brought to Cebu in the
present year for the purpose of transporting
plaintiff's merchandise between ports in the
Islands. Application (Certificate of Philippine
Regitry) was made at Cebu, the home port of the
vessel, to the Collector of Customs for a certificate
of Philippine registry. The Collector refused to
issue the certificate, giving as his reason that all
the stockholders of Smith, Bell & Co., Ltd., were
not citizens either of the United States or of the
Philippine Islands under Act No. 2761 which
provides:
SEC. 1172. Certificate of Philippine register. —
Upon registration of a vessel of domestic
ownership, and of more than fifteen tons gross, a
certificate of Philippine register shall be issued for
it. If the vessel is of domestic ownership and of
fifteen tons gross or less, the taking of the
certificate of Philippine register shall be optional
with the owner.
SEC. 1176. Investigation into character of vessel.
— No application for a certificate of Philippine
register shall be approved until the collector of
customs is satisfied from an inspection of the
vessel that it is engaged or destined to be
engaged in legitimate trade and that it is of
domestic ownership as such ownership is defined
in section eleven hundred and seventy-two of this
Code.
Counsel says that Act No. 2761 denies to Smith,
Bell & Co., Ltd., the equal protection of the laws
because it, in effect, prohibits the corporation from
owning vessels, and because classification of
corporations based on the citizenship of one or
more of their stockholders is capricious, and that
Act No. 2761 deprives the corporation of its
12
properly without due process of law because by the
passage of the law company was automatically
deprived of every beneficial attribute of ownership
in the Bato and left with the naked title to a boat it
could not use.
Issue: Whether the legislature through Act no.
2761 can deny registry of vessel with foreign
stockholders.
Ruling: Yes. We are inclined to the view that while
Smith, Bell & Co. Ltd., a corporation having
alien stockholders, is entitled to the protection
afforded by the due-process of law and equal
protection of the laws clause of the Philippine
Bill of Rights, nevertheless, Act No. 2761 of the
Philippine Legislature, in denying to
corporations such as Smith, Bell &. Co. Ltd.,
the right to register vessels in the Philippines
coastwise trade, does not belong to that vicious
species of class legislation which must always be
condemned, but does fall within authorized
exceptions, notably, within the purview of the
police power, and so does not offend against the
constitutional provision.
The guaranties of the Fourteenth Amendment and
so of the first paragraph of the Philippine Bill of
Rights, are universal in their application to all
person within the territorial jurisdiction, without
regard to any differences of race, color, or
nationality. The word "person" includes aliens.
Private corporations, likewise, are "persons" within
the scope of the guaranties in so far as their
property is concerned. Classification with the end
in view of providing diversity of treatment may
be made among corporations, but must be
based upon some reasonable ground and not be
a mere arbitrary selection.
A literal application of general principles to the
facts before us would, of course, cause the
inevitable deduction that Act No. 2761 is
unconstitutional by reason of its denial to a
corporation, some of whole members are
foreigners, of the equal protection of the laws.
To justify that portion of Act no. 2761 which
permits corporations or companies to obtain a
certificate of Philippine registry only on condition
that they be composed wholly of citizens of the
Philippine Islands or of the United States or both,
as not infringing Philippine Organic Law, it must
be done under some one of the exceptions.
One of the exceptions to the general rule, most
persistent and far reaching in influence is, broad
and comprehensive as it is, nor any other
amendment, "was designed to interfere with the
power of the State, sometimes termed its `police
power,' to prescribe regulations to promote the
health, peace, morals, education, and good order of
the people, and legislate so as to increase the
industries of the State, develop its resources and
add to its wealth and prosperity. From the very
necessities of society, legislation of a special
character, having these objects in view, must often
be had in certain districts. This is the same police
power which the United States Supreme Court say
"extends to so dealing with the conditions which
exist in the state as to bring out of them the
greatest welfare in of its people." For quite similar
reasons, none of the provision of the Philippine
Organic Law could could have had the effect of
denying to the Government of the Philippine
Islands, acting through its Legislature, the right to
exercise that most essential, insistent, and
illimitable of powers, the sovereign police power,
in the promotion of the general welfare and the
public interest.
Without any subterfuge, the apparent purpose of
the Philippine Legislature is seen to be to enact an
anti-alien shipping act. The ultimate purpose of the
Legislature is to encourage Philippine ship-
building.
Stonehill vs Diokno 20 SCRA 383
Facts: Respondents herein secured a total of 42
search warrants against petitioners herein and/or
the corporations of which they were officers, to
search “books of accounts, financial records,
vouchers, correspondence, receipts, ledgers,
journals, portfolios, credit journals, typewriters,
and other documents and/or papers showing all
business transactions including disbursements
receipts, balance sheets and profit and loss
statements and Bobbins (cigarette wrappers),” as
“the subject of the offense; stolen or embezzled
and proceeds or fruits of the offense,” or “used or
intended to be used as the means of committing the
offense,” which is described in the applications
adverted to above as “violation of Central Bank
13
Laws, Tariff and Customs Laws, Internal Revenue
(Code) and the Revised Penal Code.”
The petitioner contended that the search warrants
are null and void as their issuance violated the
Constitution and the Rules of Court for being
general warrants.
The documents, papers, and things seized under
the alleged authority of the warrants in question
may be split into two (2) major groups, namely: (a)
those found and seized in the offices of the
aforementioned corporations, and (b) those found
and seized in the residences of petitioners herein.
Issue: Whether petitioners can validly assail the
search warrant against the corporation.
Held: No.
As regards the first group, we hold that petitioners
herein have no cause of action to assail the legality
of the contested warrants and of the seizures made
in pursuance thereof, for the simple reason that
said corporations have their respective
personalities, separate and distinct from the
personality of herein petitioners, regardless of the
amount of shares of stock or of the interest of each
of them in said corporations, and whatever the
offices they hold therein may be. Indeed, it is well
settled that the legality of a seizure can be
contested only  by the party whose rights have been
impaired thereby, and that the objection to an
unlawful search and seizure is purely personal and
cannot be availed of by third
parties. Consequently, petitioners herein may not
validly object to the use in evidence against them
of the documents, papers and things seized from
the offices and premises of the corporations
adverted to above, since the right to object to the
admission of said papers in evidence
belongs exclusively to the corporations, to whom
the seized effects belong, and may not be invoked
by the corporate officers in proceedings against
them in their individual capacity.  corporation on Ayala Avenue, Makati, Rizal.
Bache & Co Inc vs. Ruiz
GR L-32409, 27 February 1971
Facts:
On 24 February 1970, Misael P. Vera,
Commissioner of Internal Revenue, wrote a letter
addressed to Judge Vivencio M. Ruiz requesting
the issuance of a search warrant against Bache &
Co. (Phil.), Inc. and Frederick E. Seggerman for
violation of Section 46(a) of the National Internal
Revenue Code (NIRC), in relation to all other
pertinent provisions thereof, particularly Sections
53, 72, 73, 208 and 209, and authorizing Revenue
Examiner Rodolfo de Leon to make and file the
application for search warrant which was attached
to the letter.
In the afternoon of the following day, De Leon and
his witness, Arturo Logronio, went to the Court of
First Instance (CFI) of Rizal. They brought with
them the following papers: Vera’s letter-request;
an application for search warrant already filled up
but still unsigned by De Leon; an affidavit of
Logronio subscribed before De Leon; a deposition
in printed form of Logronio already accomplished
and signed by him but not yet subscribed; and a
search warrant already accomplished but still
unsigned by Judge. At that time the Judge was
hearing a certain case; so, by means of a note, he
instructed his Deputy Clerk of Court to take the
depositions of De Leon and Logronio.
After the session had adjourned, the Judge was
informed that the depositions had already been
taken. The stenographer, upon request of the
Judge, read to him her stenographic notes; and
thereafter, the Judge asked Logronio to take the
oath and warned him that if his deposition was
found to be false and without legal basis, he could
be charged for perjury.
The Judge signed de Leon’s application for search
warrant and Logronio’s deposition. Search
Warrant 2-M-70 was then signed by Judge and
accordingly issued. 3 days later (a Saturday), the
BIR agents served the search warrant to the
corporation and Seggerman at the offices of the
The corporation’s lawyers protested the search on
the ground that no formal complaint or transcript
of testimony was attached to the warrant. The
agents nevertheless proceeded with their search
which yielded 6 boxes of documents.
On 3 March 1970, the corporation and Seggerman
filed a petition with the Court of First Instance
(CFI) of Rizal praying that the search warrant be
14
quashed, dissolved or recalled, that preliminary
prohibitory and mandatory writs of injunction be
issued, that the search warrant be declared null and
void, and that Vera, Logronio, de Leon, et. al., be
ordered to pay the corporation and Seggerman,
jointly and severally, damages and attorney’s fees.
After hearing and on 29 July 1970, the court issued
an order dismissing the petition for dissolution of
the search warrant. In the meantime, or on 16 April
1970, the Bureau of Internal Revenue made tax
assessments on the corporation in the total sum of
P2,594,729.97, partly, if not entirely, based on the
documents thus seized.
The corporation and Seggerman filed an action for
certiorari, prohibition, and mandamus.
Issue:
Whether the corporation has the right to contest the
legality of the seizure of documents from its office.
Held:
The legality of a seizure can be contested only by
the party whose rights have been impaired thereby,
and that the objection to an unlawful search and
seizure is purely personal and cannot be availed of
by third parties. In Stonehill, et al. vs. Diokno, et
al. (GR L-19550, 19 June 1967; 20 SCRA 383) the
Supreme Court impliedly recognized the right of a
corporation to object against unreasonable searches
and seizures; holding that the corporations have
their respective personalities, separate and distinct
from the personality of the corporate officers,
regardless of the amount of shares of stock or the
interest of each of them in said corporations,
whatever, the offices they hold therein may be; and
that the corporate officers therefore may not
validly object to the use in evidence against them
of the documents, papers and things seized from
the offices and premises of the corporations, since
the right to object to the admission of said papers
in evidence belongs exclusively to the
corporations, to whom the seized effects belong,
and may not be invoked by the corporate officers
in proceedings against them in their individual
capacity.
The distinction between the Stonehill case and the
present case is that: in the former case, only the
officers of the various corporations in whose
offices documents, papers and effects were
searched and seized were the petitioners; while in
the latter, the corporation to whom the seized
documents belong, and whose rights have thereby
been impaired, is itself a petitioner.
On that score, the corporation herein stands on a
different footing from the corporations in
Stonehill. Moreover, herein, the search warrant
was void inasmuch as First, there was no personal
examination conducted by the Judge of the
complainant (De Leon) and his witness (Logronio).
The Judge did not ask either of the two any
question the answer to which could possibly be the
basis for determining whether or not there was
probable cause against Bache & Co. and
Seggerman. The participation of the Judge in the
proceedings which led to the issuance of Search
Warrant 2-M-70 was thus limited to listening to
the stenographer’s readings of her notes, to a few
words of warning against the commission of
perjury, and to administering the oath to the
complainant and his witness. This cannot be
consider a personal examination.
Second, the search warrant was issued for more
than one specific offense. The search warrant was
issued for at least 4 distinct offenses under the Tax
Code. The first is the violation of Section 46(a),
Section 72 and Section 73 (the filing of income tax
returns), which are interrelated. The second is the
violation of Section 53 (withholding of income
taxes at source).
The third is the violation of Section 208 (unlawful
pursuit of business or occupation); and the fourth
is the violation of Section 209 (failure to make a
return of receipts, sales, business or gross value of
output actually removed or to pay the tax due
thereon). Even in their classification the 6
provisions are embraced in 2 different titles:
Sections 46(a), 53, 72 and 73 are under Title II
(Income Tax); while Sections 208 and 209 are
under Title V (Privilege Tax on Business and
Occupation).
15
Lastly, the search warrant does not particularly the price to P3.00 per picul. This Tuazon does not
describe the things to be seized. Search Warrant want hence he backed out from the agreement.
No. 2-M-70 tends to defeat the major objective of This resulted to Tapnio not being able to realize
the Bill of Rights, i.e., the elimination of general profit and at the same time rendered her unable to
warrants, for the language used therein is so all- pay her P2,000.00 crop loan which would have
embracing as to include all conceivable records of been covered by her agreement with Tuazon.
the corporation, which, if seized, could possibly
render its business inoperative. Thus, Search Eventually, Tapnio was sued by her other creditors
Warrant 2-M-70 is null and void. and Tapnio filed a third party complaint against
PNB where she alleged that her failure to pay her
debts was because of PNB’s negligence and
unreasonableness.
PNB v Court of Appeals, 83 SCRA 237
ISSUE: Whether or not Tapnio is correct.
FACTS:
HELD: Yes. In this type of transaction, time is of
83 SCRA 237 – Business Organization –
the essence considering that Tapnio’s sugar quota
Corporation Law – Corporation’s Liability for
for said year needs to be utilized ASAP otherwise
Negligence
her allotment may be assigned to someone else,
and if she can’t use it, she won’t be able to export
 PNB executed its bond w/ Rita Gueco
her crops. It is unreasonable for PNB’s board of
Tapnio as principal, in favor of the PNB to
directors to disallow the agreement between
guarantee the payment of Tapnio's account
Tapnio and Tuazon because of the mere difference
with PNB.
of 0.20 in the agreed price rate. What makes it
 Indemnity Agreement w/ 12% int.
more unreasonable is the fact that the P2.80 was
and 15% atty. fees
recommended both by the bank manager and
 Sept 18 1957:  PNB sent a letter of
PNB’s VP yet it was disapproved by the board.
demand for Tapnio to pay the reduced amount
Further, the P2.80 per picul rate is the minimum
of 2,379.91
allowable rate pursuant to prevailing market trends
 PNB demanded both oral and written but
that time. This unreasonable stand reflects PNB’s
to no avail
lack of the reasonable degree of care and vigilance
in attending to the matter. PNB is therefore
Rita Tapnio owes PNB an amount of
negligent.
P2,000.00.Tapnio mortgaged to the bank her lease
agreement w/ Jacobo Tuazon for her unused export
A corporation is civilly liable in the same manner
sugar quota at P2.80 per picular or a total of
as natural persons for torts, because “generally
P2,800 which was more than the value of the bond.
speaking, the rules governing the liability of a
principal or master for a tort committed by an
The amount is secured by her sugar crops about to
agent or servant are the same whether the principal
be harvested including her export quota allocation
or master be a natural person or a corporation, and
worth 1,000 piculs. The said export quota was later
whether the servant or agent be a natural or
dealt by Tapnio to a certain Jacobo Tuazon at
artificial person. All of the authorities agree that a
P2.50 per picul or a total of P2,500. Since the
principal or master is liable for every tort which it
subject of the deal is mortgaged with PNB, the
expressly directs or authorizes, and this is just as
latter has to approve it. The branch manager of
true of a corporation as of a natural person, a
PNB recommended that the price should be at
corporation is liable, therefore, whenever a tortious
P2.80 per picul which was the prevailing minimum
act is committed by an officer or agent under
amount allowable. Tapnio and Tuazon agreed to
express direction or authority from the
the said amount. And so the bank manager
stockholders or members acting as a body, or,
recommended the agreement to the vice president
generally, from the directors as the governing
of PNB. The vice president in turn recommended it
body.”
to the board of directors of PNB.

However, the Board of Directors wanted to raise

16

ISSUE: W/N PNB should be liable for tort
HELD: YES. affirmed.
 While Tapnio had the ultimate authority of
approving or disapproving the proposed lease
since the quota was mortgaged to the bank, it
certainly CANNOT escape its responsibility of
observing, for the protection of the interest of
Tapnio and Tuazon, that the degree of care,
precaution and vigilance which the
circumstances justly demand in approving or
disapproving the lease of said sugar quota
 Art. 21 of the Civil Code: any person who
wilfully causes loss or injury to another in a
manner that is contrary to morals, good
customs or public policy shall compensate the
latter for the damage.
G.R. No. L-19190 November 29, 1922THE
PEOPLE OF THE PHILIPPINE ISLANDS,
plaintiff-appellee, vs. VENANCIO
CONCEPCION, defendant-appellant.
FACTS:
Venancio Concepcion, President of the Philippine
National Bank, sent telegrams and a confirmation
letter to the manager of the Aparri branch of PNB,
authorizing an extension of credit in favour of
Puno y Concepcion, S. en C. in the amount of
P300,000.00. This special authorization limited the
discretional power of the local manager of the
Aparri branch to grant loans and discount
negotiable documents to P5,000, which in certain
cases, could be increased to P10,000. Pursuant to
this authorization, credit aggregating P300,000 was
granted to Puno y Concepcion, S. en C., the only
security required consisting of six demand notes.
This Puno y Concepcion, S. en C., in reality is a
copartnership capitalized at P100,000 wherein,
Venancio Concepcion’s wife owns half of the
copartnership. Venancio Concepcion was found
guilty by the CFI for violation of Section 354 of
Act 2747 which provides that: : "The National
Bank shall not, directly or indirectly, grant loans to
any of the members of the board of directors of the
bank nor to agents of the branch banks."
ISSUES:
1. Whether or not the granting of a credit of
P300,000 to the copartnership was a “loan” within
the meaning of Section 35 of Act No. 2747.
YES. The "credit" of an individual means his
ability to borrow money by virtue of the
confidence or trust reposed by a lender that he will
pay what he may promise. A "loan" means the
delivery by one party and the receipt by the other
party of a given sum of money, upon an
agreement, express or implied, to repay the sum
loaned, with or without interest. The concession of
a "credit" necessarily involves the granting of
"loans" up to the limit of the amount fixed in the
"credit,"
2. Whether or not the granting of a credit of
P300,000 to the copartnership was a “loan” or a
“discount”.
LOAN. Discounts are favored by bankers because
of their liquid nature, growing, as they do, out of
an actual, live, transaction. But in its last analysis,
to discount a paper is only a mode of loaning
money, with, however, these distinctions: (1) In a
discount, interest is deducted in advance, while in
a loan, interest is taken at the expiration of a credit;
(2) a discount is always on double-name paper; a
loan is generally on single-name paper.
Conceding, without deciding, the law covers loans
and not discounts, yet the conclusion is inevitable
that the demand notes signed by the firm "Puno y
Concepcion, S. en C." were not discount paper but
were mere evidences of indebtedness, because (1)
interest was not
deducted from the face of the notes, but was paid
when the notes fell due; and (2) they were single-
name and not double-name paper.
3. Whether or not the granting of a credit of
P300,000 to the copartnershop was an “indirect
loan” within the meaning of Section 35 of Act
2747.
YES. In the interpretation and construction of
statutes, the primary rule is to ascertain and give
effect to the intention of the Legislature. In this
instance, the purpose of the Legislature is plainly
to erect a wall of safety against temptation for a
director of the bank. The prohibition against
indirect loans is a recognition of the familiar
17
maxim that no man may serve two masters — that
where personal interest clashes with fidelity to
duty the latter almost always suffers. If, therefore,
it is shown that the husband is financially
interested in the success or failure of his wife's
business venture, a loan to partnership of which the
wife of a director is a member, falls within the
prohibition.
Various provisions of the Civil serve to establish
the familiar relationship called a conjugal
partnership. (Articles 1315, 1393, 1401, 1407,
1408, and 1412 can be specially noted.) A loan,
therefore, to a partnership of which the wife of
a director of a bank is a member, is an indirect
loan to such director.
That it was the intention of the Legislature to
prohibit exactly such an occurrence is shown by
the acknowledged fact that in this instance the
defendant was tempted to mingle his personal and
family affairs with his official duties, and to permit
the loan P300,000 to a partnership of no
established reputation and without asking for
collateral security.
PEOPLE OF THE PHILIPPINE ISLANDS,
PLAINTIFF-APPELLANT V. TAN BOON
KONG, DEFENDANT-APPELLEE
GR NO L-35262 MARCH 15, 1930 OSTRAND, J.
SV: Tan Boon Kong, manager of a corporation
engaged in buying and selling copra, sugar and
other goods was charged in an information for
violation of a law requiring the making of true
returns of receipts and sales. The demurrer to the
info was sustained on the ground that the offense
was committed by the corporation and not by the
officials or agents
SC: a corporation can only act through its officers
and agents, in this case, the false return was caused
by the manager and he should bear its
consequences.
1. An information was filed against Tan Boon
Kong charging him with the violation of
1
sec. 1458 of Act 2711 as amended.
2. According to the information the Tan “as
corporation” organized under the laws of
the Philippine islands and engaged in the
purchase and sale of sugar, “bayon”, copra
and other native products and should be
subject to pay internal-revenue taxes.
3. Allegedly he only declared in 1924 for the
purpose of taxation the sum of
P2,352,761.94 when in fact he knew that
the total gross sales of the said corporation
amounted to P2,543,303.44 (difference
P190,541.50, which he failed to declare)
rd
4. Judge of the 23 judicial district sustained the
demurrer to the information charging Tan
with the said violation. Hence this appeal
1
SEC. 1458. Payment of percentage taxes —
Quarterly reports of earnings. — The percentage
taxes on business shall be payable at the end of
each calendar quarter in the amount lawfully due
on the business transacted during each quarter; and
it shall be on the duty of every person conducting a
business subject to such tax, within the same
period as is allowed for the payment of the
quarterly installments of the fixed taxes without
penalty, to make a true and complete return of the
amount of the receipts or earnings of his business
during the preceeding quarter and pay the tax due
thereon. . . . (Act No. 2711.)
ISSUE: should Tan as manager of the
corporation be liable criminally under the sec.
2
2723 of act no. 2711 for violation of sec 1458
of the same act for the benefit of the said
corporation? YES
• the court below based the ruling on the ground
that the offense charged must be regarded
as committed by the corporation and not
by its officials or agents.
• But a corporation can act only through its
officers and agents and where the business
itself involves a violation of the law, the
rule is that all who participate in it are
liable
18
• State v. Burnam: the manager of a corporation
was criminally liable for the violation of a
statute by the corporation though he was
not present when it was committed
• In the present case, the info alleges that Tan was
the manager of the corporation, he made a
false return for the purposes of taxation,
and such false return constitutes a
violation of law. Tan, as the author of the
illegal act, must answer for its
consequences if the allegations are proven.
Ruling appealed from REVERSED. Case
remanded for further proceedings not
inconsistent with the SC ruling.
2 was drawn on July 3, 1968, whereby the Republic
SEC. 2723. Failure to make true return of
receipts and sales. — Any person who, being
required by law to make a return of the amount of
his receipts, sales, or business, shall fail or neglect
to make such return within the time required, shall
be punished by a fine not exceeding two thousand
pesos or by imprisonment for a term not exceeding
one year, or both.And any such person who shall
make a false or fraudulent return shall be punished
by a fine not exceeding ten thousand pesos or by
imprisonment for a term not exceeding two years,
or both. (Act No. 2711.)
Sia V. People (1983) (Strange And Exceptional)
FACTS:
Sia was the President and General Manager of the
Metal Manufacturing of the Philippines Inc.
(MEMAP)  MMIC as mortgagor, agreed to constitute a
He obtained 150 M/T Cold Rolled Sheets
consigned to Continental Bank and converted it
into personal used instead of selling it and turning
over the proceeds
 It resulted to a damage of 46,819 php,
interest of 28,736.47 php and forfeited deposit
of 71,023.60 php
ISSUE: W/N Sia can be criminally charged.
HELD: NO. Acquit.
 Sia did not act for and on behalf of
MEMAP
 For crimes committed by corp. officers
criminally charged, existence of criminal
liability for which the petition is being
prosecuted must be clear and certain, here it
may not be said to be beyond reasonable doubt
 Allegation v. evidence = strictly in
harmony
 The merchandise was manufactured
before sold but although the bank was aware
of this, it was not in the trust agreement
Asset Privatization Trust vs Court of Appeals
300 SCRA 579 [GR No. 121171 December 29,
1998]
Facts: The development, exploration and
utilization  of the mineral deposits in the Surigao
Mineral Reservation have been authorized by the
Republic Act No. 1528, as amended by Republic
Act No. 2077 and Republic Act No. 4167, by
virtue of which laws, a memorandum of agreement
of the Philippines thru the Surigao Mineral
Reservation Board, granted MMIC the exclusive
right to explore, develop and exploit nickel, cobalt,
and other minerals in the Surigao Mineral
Reservation. MMIC is a domestic corporation
engaged in mining with respondent Jesus S.
Cabarrus Sr. as president and among its original
stockholders. The Philippine government
undertook to support the financing of MMIC by
purchase of MMIC debenture bonds and extension
of guarantees. Further, from the DBP and/or the
government financing institutions to subscribe in
MMIC and issue guarantee/s of foreign loans or
deferred payment arrangements secured from the
US Eximbank, Asian  Development Bank (ADB),
Kobe steel of amount not exceeding US$100
million. On July 13, 1981, MMIC, PNB, and DBP
executed a mortgage trust agreement whereby
mortgage in favor of PNB and DBP as mortgages,
over all MMIC assets; subject of real estate and
chattel mortgage executed by the mortgagor, and
additional assets described and identified,
including assets of whatever kind, nature or
description, which the mortgagor may acquire
whether in substitution of, in replenishment or in
addition thereto. Due to the unsettled obligations, a
financial restructuring plan (FRP) was suggested,
however not finalized. The obligations matured
and the mortgage was foreclosed. The foreclosed
assets were sold to PNB as the lone bidder and
were assigned to the  newly formed corporations
namely Nonoc Mining Corporation, Maricalum
Mining and Industrial Corporation and Island
Cement Corporation. In 1986, these assets were
19
transferred to the asset privatization trust. On
February  28, 1985, Jesus S. Cabarrus Sr. together
with the other stockholders of MMIC, filed a
derivative suit against DBP and PNB before the
RTC of Makati branch 62, for annulment of
foreclosures, specific performance and damages.
The suit docketed as civil case no. 9900, prayed
that the court: 1.) Annul the foreclosures, restore
the foreclosed assets to MMIC, and require the
banks to account for their use and operation in the
interim; 2.) Direct the banks to honor and perform
their commitments under the alleged FRP; 3.) Pay
moral and exemplary damages, attorney’s fees,
litigation expenses and costs. A compromise and
arbitration agreement was entered by the parties to
which committee awarded damages in favor of
Cabarrus.
Issue: Whether or not the award granted to
Cabarrus was proper.
Held: No. Civil case no. 9900 filed before the
RTC being a derivative suit, MMIC should have
been impleaded as a party. It was not joined as a
part plaintiff or party defendant at any stage before
of the proceedings as it is, the award for damages
to MMIC, which was not  party before the
arbitration committee is a complete nullity.
Settled is the doctrine that in a derivative suit, the
corporation is the real party in interest while the
stockholder filing suit for the corporation’s behalf
is only a nominal party. The corporation should be
included s a party in the suit.
An individual stockholder is permitted to institute
a derivative suit on behalf of the corporation
wherein he holds stock in order to protect or
vindicate corporate rights, whenever the officials
of the corporation refuse to sue, or are the ones to
be sued or hold the control of the corporation. In
such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real part
in interest.
It is a condition sine qua non that the corporation
be impleaded as a party because – not only is the
corporation an indispensable party, but it is also
the present rule that it must be served with process.
The reason given is that the judgement must be
made binding upon the corporation in order that
the corporation may get the benefit of the suit and
may not bring a subsequent suit against the same
defendants for the same cause of action. In other
words the corporation must be joined as a party
because it is its cause of action that is being
litigated and because judgement must be a res
judicata against it.
The reasons given for not allowing direct
individual suit are:
1. That the prior rights of the creditors may
be prejudiced. Thus, our Supreme Court
held in the case of Evangelista vs Santos
that the “Stockholders may not directly
claim those damages for themselves for
that would result in the appropriation by,
and the distribution among them of part of
the corporate assets before the
2. The universally recognized doctrine that a
stockholder in a corporation has no title
legal or equitable to the corporate
property; that both of these are in the
corporation itself for the benefit of the
stockholders. In other words, to allow
shareholders to sue separately would
conflict with the separate corporate entity
principle.
3. dissolution of the corporation and the
liquidation of its debts and liabilities,
something which cannot be legally done in
view of section 16 of the corporation law.
4. The filing of such suits would conflict
with the duty of the management to sue
for the protection of all concerned;
5. It would produce wasteful multiplicity of
suits; and
6. It would involve confusion in ascertaining
the effect of partial recovery by an
individual on the damages recoverable by
the corporation for the same act.
ABS-CBN V. CA (1999)
G.R. No. 128690  January 21, 1999
Lessons Applicable: Who may recover (Torts and
Damages)
Laws Applicable: Articles 19, 20, and 21 of the
Civil Code
20
FACTS:
 Viva, through Del Rosario, offered ABS-
CBN through its vice-president Charo Santos-
Concio, a list of 3 film packages or 36
titles from which ABS-CBN may exercise its
right of first refusal   
 Mrs. Concio informed Vic through a letter
that they can only purchase 10 titles to be
schedules on non-primetime slots because they
were very adult themes which the ruling of
the MTRCB advises to be aired at 9:00 p.m
 February 27, 1992: Del Rosario
approached ABS-CBN's Ms. Concio with a
list consisting of 52 original movie titles as
well as 104 re-runs proposing to sell to ABS-
CBN airing rights for P60M (P30M cash
and P30M worth of television spots)
 April 2, 1992: Del Rosario and ABS-CBN
general manager, Eugenio Lopez III met
wherein Del Rosario allegedly agreed to grant
rights for 14 films for  P30M
 April 06, 1992: Del Rosario and Mr.
Graciano Gozon of RBS Senior vice-president
for Finance discussed the terms and conditions
of Viva's offer to sell the 104 films, after the
rejection of the same package by ABS-CBN
 April 07, 1992: Ms. Concio sent the
proposal draft of 53 films for P35M which
Viva's Board rejected since they will not
accept anything less than P60M
 April 29, 1992: Viva granted RBS
exclusive grants for P60M
 RTC: Issued TRO against RBS in showing
14 films as filed by ABS-CBN.
 RBS also set up a cross-claim
against VIVA
 RTC: ordered ABS-CBN to pay
RBS P107,727 premium paid by RBS to the
surety which issued their bond to lift the
injunction, P191,843.00 for the amount of
print advertisement for "Maging Sino Ka
Man" in various newspapers, P1M attorney's
fees, P5M moral damages, P5M exemplary
damages and costs.  Cross-claim to VIVA was
dismissed.
 ABS-CBN appealed. VIVA and Del
Rosario also appealed seeking moral and
exemplary damages and additional attorney's
fees.
 CA: reduced the awards of moral damages
to P2M, exemplary damages to P2M and
attorney's fees to P500,000.  Denied VIVA
and Del Rosario's appeal because it was RBS
and not VIVA which was actually prejudiced
when the complaint was filed by ABS-CBN
ISSUE: 
1. W/N RBS is entitled to damages. -YES
2. W/N VIVA is entitled to damages. - NO
HELD: REVERSED except as to unappealed
award of attorney's fees in favor of VIVA
Productions, Inc.
1. YES.
 One is entitled to compensation for actual
damages only for such pecuniary loss suffered
by him as he has duly proved.  The
indemnification shall comprehend not only the
value of the loss suffered, but also that of the
profits that the obligee failed to obtain. In
contracts and quasi-contracts the damages
which may be awarded are dependent on
whether the obligor acted with good faith or
otherwise, It case of good faith, the damages
recoverable are those which are the natural
and probable consequences of the breach of
the obligation and which the parties have
foreseen or could have reasonably foreseen at
the time of the constitution of the obligation. If
the obligor acted with fraud, bad faith, malice,
or wanton attitude, he shall be responsible for
all damages which may be reasonably
attributed to the non-performance of the
obligation. In crimes and quasi-delicts, the
defendant shall be liable for all damages
which are the natural and probable
consequences of the act or omission
complained of, whether or not such damages
has been foreseen or could have reasonably
been foreseen by the defendant.  Actual
damages may likewise be recovered for loss or
impairment of earning capacity in cases of
temporary or permanent personal injury, or for
injury to the plaintiff's business standing or
commercial credit. 
 The claim of RBS for actual damages did
not arise from contract, quasi-contract, delict,
or quasi-delict. It arose from the fact of filing
of the complaint despite ABS-CBN's alleged
knowledge of lack of cause of action.
Needless to state the award of actual damages
cannot be comprehended under the above law
on actual damages. RBS could only probably
21
 take refuge under Articles 19, 20, and 21 of
the Civil Code.
 In this case, ABS-CBN had not yet filed
the required bond; as a matter of fact, it asked
for reduction of the bond and even went to the
Court of Appeals to challenge the order on the
matter, Clearly then, it was not necessary for
RBS to file a counterbond. Hence, ABS-CBN
cannot be held responsible for the premium
RBS paid for the counterbond
 Neither could ABS-CBN be liable for the
print advertisements for "Maging Sino Ka
Man" for lack of sufficient legal basis.
 Article 2217 thereof defines what are
included in moral damages, while Article 2219
enumerates the cases where they may be
recovered, Article 2220 provides that moral
damages may be recovered in breaches of
contract where the defendant acted
fraudulently or in bad faith. RBS's claim for
moral damages could possibly fall only under
item (10) of Article 2219
 (10)  Acts and actions referred to
in Articles 21, 26, 27, 28, 29, 30, 32, 34, and
35.
 The award of moral damages cannot be
granted in favor of a corporation because,
being an artificial person and having existence
only in legal contemplation, it has no feelings,
no emotions, no senses, It cannot, therefore,
experience physical suffering and mental
anguish, which call be experienced only by
one having a nervous system.  A corporation
may recover moral damages if it "has a good
reputation that is debased, resulting in social
humiliation" is an obiter dictum. On this score
alone the award for damages must be set aside,
since RBS is a corporation.
 exemplary damages are imposed by way
of example or correction for the public good,
in addition to moral, temperate, liquidated or
compensatory damages. They are recoverable
in criminal cases as part of the civil liability
when the crime was committed with one or
more aggravating circumstances in quasi-
contracts, if the defendant acted with gross
negligence and in contracts and quasi-
contracts, if the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent
manner
 It may be reiterated that the claim of RBS
against ABS-CBN is not based on contract,
quasi-contract, delict, or quasi-delict, Hence,
the claims for moral and exemplary damages
can only be based on Articles 19, 20, and 21
of the Civil Code.
 There is no adequate proof that ABS-CBN
was inspired by malice or bad faith.   If
damages result from a person's exercise of a
right, it is damnum absque injuria. 
Filipinas Broadcasting Network Inc. vs. Ago
Medical and Educational Center-Bicol
Christian College of Medicine (AMEC-BCCM)
[GR 141994, 17 January 2005]
Facts: “Exposé” is a radio documentary program
hosted by Carmelo ‘Mel’ Rima (“Rima”) and
Hermogenes ‘Jun’ Alegre (“Alegre”). Exposé is
aired every morning over DZRC-AM which is
owned by Filipinas Broadcasting Network, Inc.
(“FBNI”). “Exposé” is heard over Legazpi City,
the Albay municipalities and other Bicol areas. In
the morning of 14 and 15 December 1989, Rima
and Alegre exposed various alleged complaints
from students, teachers and parents against Ago
Medical and Educational Center-Bicol Christian
College of Medicine (“AMEC”) and its
administrators. Claiming that the broadcasts were
defamatory, AMEC and Angelita Ago (“Ago”), as
Dean of AMEC’s College of Medicine, filed a
complaint for damages against FBNI, Rima and
Alegre on 27 February 1990. 
The complaint further alleged that AMEC is a
reputable learning institution. With the supposed
exposés, FBNI, Rima and Alegre “transmitted
malicious imputations, and as such, destroyed
plaintiffs’ (AMEC and Ago) reputation.” AMEC
and Ago included FBNI as defendant for allegedly
failing to exercise due diligence in the selection
and supervision of its employees, particularly
Rima and Alegre. On 18 June 1990, FBNI, Rima
and Alegre, through Atty. Rozil Lozares, filed an
Answer alleging that the broadcasts against AMEC
were fair and true. FBNI, Rima and Alegre
claimed that they were plainly impelled by a sense
of public duty to report the “goings-on in AMEC,
[which is] an institution imbued with public
interest.” Thereafter, trial ensued. During the
presentation of the evidence for the defense, Atty.
Edmundo Cea, collaborating counsel of Atty.
Lozares, filed a Motion to Dismiss on FBNI’s
behalf. The trial court denied the motion to
dismiss. Consequently, FBNI filed a separate
Answer claiming that it exercised due diligence in
22
the selection and supervision of Rima and Alegre.
FBNI claimed that before hiring a broadcaster, the
broadcaster should (1) file an application; (2) be
interviewed; and (3) undergo an apprenticeship
and training program after passing the interview.
FBNI likewise claimed that it always reminds its
broadcasters to “observe truth, fairness and
objectivity in their broadcasts and to refrain from
using libelous and indecent language.” Moreover,
FBNI requires all broadcasters to pass the
Kapisanan ng mga Brodkaster sa Pilipinas
(“KBP”) accreditation test and to secure a KBP
permit. On 14 December 1992, the trial court
rendered a Decision finding FBNI and Alegre
liable for libel except Rima. The trial court held
that the broadcasts are libelous per se. The trial
court rejected the broadcasters’ claim that their
utterances were the result of straight reporting
because it had no factual basis. The broadcasters
did not even verify their reports before airing them
to show good faith. In holding FBNI liable for
libel, the trial court found that FBNI failed to
exercise diligence in the selection and supervision
of its employees. In absolving Rima from the
charge, the trial court ruled that Rima’s only
participation was when he agreed with Alegre’s
exposé. The trial court found Rima’s statement
within the “bounds of freedom of
speech, expression, and of the press.” Both parties,
namely, FBNI, Rima and Alegre, on one hand, and
AMEC and Ago, on the other, appealed the
decision to the Court of Appeals. The Court of
Appeals affirmed the trial court’s judgment with
modification. The appellate court made Rima
solidarily liable with FBNI and Alegre. The
appellate court denied Ago’s claim for damages
and attorney’s fees because the broadcasts were
directed against AMEC, and not against her. FBNI,
Rima and Alegre filed a motion for reconsideration
which the Court of Appeals denied in its 26
January 2000 Resolution. Hence, FBNI filed the
petition for review.  obtained from Chevron. Fumitechniks defaulted in
Issue: Whether AMEC is entitled to moral
damages.  agreement but the same could not be produced,
Held: A juridical person is generally not entitled to
moral damages because, unlike a natural person, it
cannot experience physical suffering or such
sentiments as wounded feelings, serious anxiety,
mental anguish or moral shock. The Court of
Appeals cites Mambulao Lumber Co. v. PNB, et
al. to justify the award of moral damages.
However, the Court’s statement in Mambulao that
“a corporation may have a good reputation which,
if besmirched, may also be a ground for the award
of moral damages” is an obiter dictum.
Nevertheless, AMEC’s claim for moral damages
falls under item 7 of Article 2219 of the Civil
Code. This provision expressly authorizes the
recovery of moral damages in cases of libel,
slander or any other form of defamation. Article
2219(7) does not qualify whether the plaintiff is a
natural or juridical person. Therefore, a juridical
person such as a corporation can validly complain
for libel or any other form of defamation and claim
for moral damages. Moreover, where the broadcast
is libelous per se, the law implies damages. In such
a case, evidence of an honest mistake or the want
of character or reputation of the party libeled goes
only in mitigation of damages. Neither in such a
case is the plaintiff required to introduce evidence
of actual damages as a condition precedent to the
recovery of some damages. In this case, the
broadcasts are libelous per se. Thus, AMEC is
entitled to moral damages. However, the Court
found the award of P300,000 moral damages
unreasonable. The record shows that even though
the broadcasts were libelous per se, AMEC has not
suffered any substantial or material damage to its
reputation. Therefore, the Court reduced the award
of moral damages from P300,000 to P150,000.
First Lepanto-Taisho Insurance v. Chevron
(Jan 18, 2012 | J. Villarama)
Petitioner: First Lepanto-Taisho Insurance
Corporation (now FLT Prime Insurance Corp.)
Respondent: Chevron Philippines, Inc. (formerly
Caltex Philippines, Inc.)
Summary: FLT issued a surety bond (in the amt of
P15.7M) in favor of Fumitechniks. This was to
guarantee the payment of the fuel products
its obligation so Chevron claimed the payment
from FLT. FLT asked for the copy of the written
there being none. FLT denied Chevron’s claim
because of this. It said that the written agreement
has to be presented to prove execution of contract.
Chevron sued FLT, claiming that the written
agreement is only for evidentiary purposes and
because FLT already issued the bond despite the
lack of written agreement, FLT is already
estopped.
23

Issue: WON a surety is liable to the creditor in the
absence of a written contract with the principal 
No, not liable. A surety contract is merely a
collateral one, its basis is the principal contract or
undertaking which it secures. Necessarily, the
stipulations in such principal agreement must at
least be communicated or made known to the
surety particularly in this case where the bond
expressly guarantees the payment of Chevron’s
fuel products withdrawn by Fumitechniks in
accordance with the terms and conditions of their
agreement.
Facts:  Chevron sued First Lepanto-Taisho (FLT)
for the payment of unpaid oil and petroleum
purchases made by its distributor Fumitechniks
Corp.
 Fumitechniks had applied for and was issued
Surety Bond FLTICG (16) No. 01012 by FLT for
the amount of P15.7M. As stated in the attached
rider, the bond was in compliance w/ the reqt for
the grant of a credit line with Chevron “to
guarantee payment/remittance of the cost of fuel
products withdrawn within the stipulated time in
accordance with the terms and conditions of the
agreement.” The surety bond was executed on Oct
15, 2001 and will expire on Oct 15, 2002.
 Fumitechniks defaulted on its obligation. The
check it issued to Chevron in the amount of
P11,461,773.10, when presented for payment, was
dishonored for reason of “Account Closed.” 
Chevron notified FLT of Fumitechniks’ unpaid
purchases in the total amount of P15,084,030.30.
In reply, FLT requested that it be furnished copies
of the documents such as delivery receipts.
Chevron complied by sending copies of invoices
showing deliveries of fuel and petroleum products.
 Simultaneously, a letter was sent to Fumitechniks
demanding that the latter submit to FLT the
following: o A comment on Chevron’s letter; o A
copy of the agreement secured by the Bond,
together with copies of docs such as delivery
receipts; and o information on the particulars,
including “the terms and conditions, of any
arrangement that Fumitechniks might have made
or any ongoing negotiation with Caltex in
connection with the settlement of the obligations
subject of the Caltex letter.
 Fumitechniks told FLT that it cannot submit the
requested agreement since no such agreement was
executed between Fumitechniks and Chevron.
 Consequently, FLT advised Chevron of the non-
existence of the principal agreement as confirmed
by Fumitechniks. FLT explained that being an
accessory contract, the bond cannot exist without a
principal agreement as it is essential that the copy
of the basic contract be submitted to the proposed
surety for the appreciation of the extent of the
obligation to be covered by the bond applied for. 
Chevron formally demanded from FLT the
payment of its claim under the surety bond.
However, FLT reiterated its position that without
the basic contract subject of the bond, it cannot act
on Chevron’s claim.
 Chevron prayed for judgment ordering FLT to
pay the sum of P15,080,030.30, plus interest, costs
and atty’s fees.  FLT, meanwhile, asserted that the
Surety Bond was issued for the purpose of
securing the performance of the obligations
embodied in the Principal Agreement stated
therein, w/c contract should have been attached
and made part thereof.  RTC: dismissed the
complaint & FLT’s counterclaim. Said court found
that the terms and conditions of the oral credit line
agreement between Chevron and Fumitechniks
have not been relayed to FLT. Since the surety
bond is a mere accessory contract, the bond cannot
stand in the absence of the written agreement
secured thereby. The RTC noted the practice of
FLT to attach a copy of the written agreement
(principal contract) whenever it issues a surety
bond, or to be submitted later if not yet in the
possession of the assured, and in case of failure to
submit the said written agreement, the surety
contract will not be binding despite payment of the
premium. (This was upheld by SC)  CA ruled in
favor of Chevron. FLT is estopped from assailing
the oral credit line agreement, having consented to
the same upon presentation by Fumitechniks of the
surety bond it issued.
Issue: Whether a surety is liable to the creditor in
the absence of a written contract with the principal
 No, not liable
Held: Petition is PARTLY GRANTED. CA
decision is REVERSED. RTC decision is
REINSTATED and UPHELD. Ratio: What is a
contract of suretyship? (Sec 175) 1. Suretyship
arises upon the solidary binding of a person –
deemed the surety – with the principal debtor, for
24
the purpose of fulfilling an obligation. Such
undertaking makes a surety agreement an ancillary
contract as it presupposes the existence of a
principal contract.
2. Although the contract of a surety is in essence
secondary only to a valid principal obligation, the
surety becomes liable for the debt or duty of
another although it possesses no direct or personal
interest over the obligations nor does it receive any
benefit therefrom. And notwithstanding the fact
that the surety contract is secondary to the
principal obligation, the surety assumes liability as
a regular party to the undertaking. 3. The extent of
a surety’s liability is determined by the language of
the suretyship contract or bond itself. It cannot be
extended by implication, beyond the terms of the
contract. 4. To determine whether FLT is liable to
Chevron under the surety bond, it becomes
necessary to examine the terms of the contract
itself. 1 FLT claims: Non-compliance with the
submission of the written agreement, w/c by the
express terms of the surety bond, should be
attached and made part thereof, rendered the bond
ineffective. The unmistakable intention of the
parties was to secure only those terms and
conditions of the written agreement. By deleting
the required submission & attachment of the
written agreement & replacing it with the oral
credit agreement, the obligations of the surety have
been extended beyond the limits of the surety
contract.
Chevron contends: The delivery of the bond and
acceptance of premium payment by FLT binds the
latter as surety, notwithstanding, the non-
submission of the oral distributorship and credit
agreement, which understandably cannot be
attached to the bond. Also, because FLT still
issued the bond even without the written
agreement being attached, this shows that the
agreement was for evidentiary purposes only.
Supreme Court’s findings:  A reading of Surety
Bond shows that it secures the payment of
purchases on credit by Fumitechniks in accordance
with the terms and conditions of the “agreement” it
entered into with Chevron. “Agreement” refers to
the distributorship agreement, the principal
contract and by implication included the credit
agreement mentioned in the rider.
 However, it turned out that Chevron has executed
written agreements only with its direct customers
but not distributors like Fumitechniks and it also
never relayed the terms and conditions of its
distributorship agreement to FLT after the delivery
of the bond. This was admitted by Chevron’s Mktg
Coordinator, Alden Casas Fajardo in his testimony.
A surety contract is based on a principal
contract/undertaking.
 The law is clear that a surety contract should be
read and interpreted together with the contract
entered into between the creditor and the principal:
Sec. 176. The liability of the surety or sureties
shall be joint and several with the obligor and shall
be limited to the amount of the bond. It is
determined strictly by the terms of the contract of
suretyship in relation to the principal contract
between the obligor and the obligee.
 A surety contract is merely a collateral one, its
basis is the principal contract or undertaking which
it secures.
 Necessarily, the stipulations in such principal
agreement must at least be communicated or made
known to the surety particularly in this case where
the bond expressly guarantees the payment of
Chevron’s fuel products withdrawn by
Fumitechniks in accordance with the terms and
conditions of their agreement.
 The bond specifically makes reference to a
written agreement. It is basic that if the terms of a
contract are clear and leave no doubt upon the
intention of the contracting parties, the literal
meaning of its stipulations shall control.
 Moreover, being an onerous undertaking, a
surety agreement is strictly construed against the
creditor, and every doubt is resolved in favor of the
solidary debtor.
 Having accepted the bond, Chevron as creditor
must be held bound by the recital in the surety
bond that the terms and conditions of its
distributorship contract be reduced in writing or at
the very least communicated in writing to the
surety. Such non-compliance by the creditor
(Chevron) impacts not on the validity or legality of
the surety contract but on the creditor’s right to
demand performance. The contract of suretyship
imports entire good faith and confidence between
the parties in regard to the whole transaction,
although it has been said that the creditor does not
stand as a fiduciary in his relation to the surety.
 The creditor is generally held bound to a faithful
observance of the rights of the surety and to the
performance of every duty necessary for the
protection of those rights. Also, obligations arising
25
from contracts have the force of law between the
parties and should be complied with in good faith.
 Chevron is charged with notice of the specified
form of the agreement or at least the disclosure of
basic terms and conditions of its distributorship
and credit agreements with its client Fumitechniks
after its acceptance of the bond delivered by the
latter.
 However, it never made any effort to relay those
terms and conditions of its contract with
Fumitechniks upon the commencement of its
transactions with said client, w/c obligations are
covered by the surety bond issued by FLT.
 Contrary to Chevron’s assertion, there is no
indication in the records that FLT had actual
knowledge of its alleged business practice of not
having written contracts with distributors; and
even assuming FLT was aware of such practice,
the bond issued to Fumitechniks and accepted by
Chevron specifically referred to a “written
agreement.” 1 (Omitted a lot, basta ito relevant)
xxx
WHEREAS, the above-bounden principal, on 15th
day of October, 2001 entered into [an] agreement
with CALTEX PHILIPPINES, INC. to fully and
faithfully a copy of which is attached hereto and
made a part hereof: xxx
NOW THEREFORE, if the principal shall well
and truly perform and fulfill all the undertakings,
covenants, terms, conditions, and agreements
stipulated in said agreement then this obligation
shall be null and void; otherwise it shall remain in
full force and effect. xxx THE RIDER
ATTACHED TO THE BOND SETS FORTH THE
FOLLOWING: xxx WHEREAS, the obligee
requires the Principal to post a bond to guarantee
payment/remittance of the cost of fuel products
withdrawn within the stipulated time in accordance
with terms and conditions of the agreement; xxx
 G. R. No. 164317   February 6, 2006
Lessons Applicable: Corp. Officers or employees,
through whose act, default or omission the corp.
commits a crime, are themselves individually
guilty of the crime (Corporate Law)
FACTS:
 Sept-Oct 1980: PBMI, through
Ching, Senior VP of Philippine Blooming
Mills, Inc. (PBMI), applied with the Rizal
Commercial Banking Corporation (RCBC) for
the issuance of commercial letters of credit to
finance its importation of assorted goods
 RCBC approved the application, and
irrevocable letters of credit were issued in
favor of Ching. 
 The goods were purchased and delivered
in trust to PBMI.  
 Ching signed 13 trust receipts as
surety, acknowledging delivery of the goods
 Under the receipts, Ching agreed
to hold the goods in trust for RCBC, with
authority to sell but not by way of conditional
sale, pledge or otherwise
 In case such goods were
sold, to turn over the proceeds thereof as soon
as received, to apply against the relative
acceptances and payment of other
indebtedness to respondent bank.
 In case the goods
remained unsold within the specified period,
the goods were to be returned to RCBC
without any need of demand. 
 goods, manufactured
products or proceeds thereof, whether in the
form of money or bills, receivables, or
accounts separate and capable of identification
- RCBC’s property
 When the trust receipts matured, Ching
failed to return the goods to RCBC, or to
return their value amounting toP6,940,280.66
despite demands.
 RCBC filed a criminal complaint
for estafa against petitioner in the Office of the
City Prosecutor of Manila.
 December 8, 1995: no
probable cause to charge petitioner with
violating P.D. No. 115, as petitioner’s liability
was only civil, not criminal, having signed the
trust receipts as surety
 RCBC appealed the resolution to the
Department of Justice (DOJ) via petition for
review
 On July 13, 1999:  reversed the
assailed resolution of the City Prosecutor
 execution of said receipts is
enough to indict the Ching as the official
responsible for violation of P.D. No. 115
 April 22, 2004: CA dismissed the petition
for lack of merit and on procedural grounds
26
 Ching filed a petition for certiorari,
prohibition and mandamus with the CA
ISSUE: W/N Ching should be held criminally
liable.
HELD: YES.  DENIED for lack of merit
 There is no dispute that it was the Ching
executed the 13 trust receipts.   or other juridical entity, the directors, officers,
 law points to him as the official
responsible for the offense
 Since a corporation CANNOT be
proceeded against criminally because it
CANNOT commit crime in which personal
violence or malicious intent is required,
criminal action is limited to the corporate
agents guilty of an act amounting to a crime
and never against the corporation itself
 execution by Ching of receipts is
enough to indict him as the official responsible
for violation of PD 115
 RCBC is estopped to still contend
that PD 115 covers only goods which are
ultimately destined for sale and not goods, like
those imported by PBM, for use in
manufacture.  such can be committed only by the
 Moreover, PD 115 explicitly
allows the prosecution of corporate officers
‘without prejudice to the civil liabilities
arising from the criminal offense’ thus, the
civil liability imposed on respondent in RCBC
vs. Court of Appeals case is clearly separate
and distinct from his criminal liability under
PD 115
 Ching’s being a Senior Vice-President of
the Philippine Blooming Mills does not
exculpate him from any liability
 The crime defined in P.D. No. 115
is malum prohibitum but is classified
as estafa under paragraph 1(b), Article 315 of
the Revised Penal Code, or estafa with abuse
of confidence.  It may be committed by a
corporation or other juridical entity or by
natural persons. However, the penalty for the
crime is imprisonment for the periods
provided in said Article 315.
 law specifically makes the officers,
employees or other officers or persons
responsible for the offense, without prejudice
to the civil liabilities of such corporation
and/or board of directors, officers, or other
officials or employees responsible for the
offense 
 rationale: officers or employees
are vested with the authority and responsibility
to devise means necessary to ensure
compliance with the law and, if they fail to do
so, are held criminally accountable; thus, they
have a responsible share in the violations of
the law
 If the crime is committed by a corporation
employees or other officers thereof
responsible for the offense shall be charged
and penalized for the crime, precisely because
of the nature of the crime and the penalty
therefor.  A corporation cannot be arrested and
imprisoned; hence, cannot be penalized for a
crime punishable by imprisonment.  However,
a corporation may be charged and prosecuted
for a crime if the imposable penalty is fine.
Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be
prosecuted and, if found guilty, may be fined
 When a criminal statute designates an act
of a corporation or a crime and prescribes
punishment therefor, it creates a criminal
offense which, otherwise, would not exist and
corporation. But when a penal statute does
not expressly apply to corporations, it does not
create an offense for which a corporation may
be punished.  On the other hand, if the State,
by statute, defines a crime that may be
committed by a corporation but prescribes the
penalty therefor to be suffered by the officers,
directors, or employees of such corporation or
other persons responsible for the offense, only
such individuals will suffer such penalty.
Corporate officers or employees, through
whose act, default or omission the corporation
commits a crime, are themselves individually
guilty of the crime.  The principle applies
whether or not the crime requires the
consciousness of wrongdoing. It applies to
those corporate agents who themselves
commit the crime and to those, who, by virtue
of their managerial positions or other similar
relation to the corporation, could be deemed
responsible for its commission, if by virtue of
their relationship to the corporation, they had
the power to prevent the act.  Benefit is not an
operative fact.
27
ABS-CBN allowed Reuters Television Service
(Reuters) to air the... footages it had taken earlier
under a special embargo agreement.
ABS-CBN alleged that under the special embargo
agreement, any of the footages it took would be for
the "use of Renter's international subscribers only,
and shall be considered and treated by Reuters
under 'embargo' against use by other subscribers in
the Philippines. . . . [N]o... other Philippine
subscriber of Reuters would be allowed to use
ABS-CBN footage without the latter's consent."
GMA-7... subscribes to both Reuters and Cable
News Network (CNN). It received a live video
feed of the coverage of Angelo dela Cruz's arrival
from Reuters.
GMA-7 immediately carried the live newsfeed in
its program "Flash Report," together with its live
broadcast.[13] Allegedly, GMA-7 did not receive
any notice or was not aware that Reuters was
airing footages of ABS-CBN.[14] GMA-7's news...
control room staff saw neither the "No Access
Philippines" notice nor a notice that the video feed
was under embargo in favor of ABS-CBN.
ABS-CBN filed the Complaint for copyright
infringement under Sections 177[16] and 211[17]
of the Intellectual Property Code.
Assistant City Prosecutor Dindo Venturanza issued
the Resolution finding probable cause to indict
Dela Peña-Reyes and Manalastas. Department of
Justice Secretary Raul M. Gonzalez (Secretary
Gonzalez) ruled in favor of... respondents and held
that good faith may be raised as a defense in the
case.
Department of Justice Acting Secretary Alberto C.
Agra (Secretary Agra) issued the Resolution (Agra
Resolution) that reversed the Gonzalez Resolution
and found probable cause
He ruled that:Court of Appeals rendered the
Decision granting the Petition and reversing and
setting aside the Agra Resolution.
Court of Appeals said: However, it is an admitted
fact that petitioner GMA had only aired a five (5)
second footage of the disputed live video feed that
it had received from Reuters and CNN as a
subscriber. Indeed, petitioners had no notice of the
right of ownership of private respondent over the...
same. Without notice of the "No Access
Philippines" restriction of the live video feed,
petitioner cannot he faulted for airing a live video
feed from Reuters and CNN.
Verily, as aptly opined by Secretary Gonzalez in
his earlier Resolution, the act of petitioners in
airing the five (5) second footage was undeniably
attended by good faith and it thus serves to
exculpate them from criminal liability under the
Code.  While the Intellectual Properly Code is a
special law, and thus generally categorized as
malum prohibitum, it bears to stress that the
provisions of the Code itself do not ipso facto
penalize a person or entity for copyright
infringement by the mere fact that one had used a...
copyrighted work or material.
Certainly so, in the exercise of one's moral and
economic or copyrights, the very provisions of Part
IV of the Intellectual Property Code provide for
the scope and limitations on copyright protection
under Section 184 and in fact permit fair use of
copyrighted work under Section 185
With the aforesaid statutory limitations on
one's economic and copyrights and the
allowable instances where the other
persons can legally use a copyrighted
work, criminal culpability clearly attaches
only when the infringement had been
knowingly and intentionally... committed.
Issues:
Whether there is probable cause to charge
respondents with infringement under Republic Act
No. 8293, otherwise known as the Intellectual
Property Code
Third, whether there was fair use of the broadcast
material;
Fourth, whether lack of knowledge that a material
is copyrighted is a defense against copyright
infringement;
Fifth, whether good faith is a defense in a criminal
prosecution for violation of the Intellectual
Property Code
Ruling:
The news footage is copyrightable.
The Intellectual Property Code is clear about the
rights afforded to authors of various kinds of work.
Under the Code, "works are protected by the sole
fact of their creation, irrespective of their mode or
form of expression, as well as of their content,
quality and purpose."79 These include
"[a]udiovisual works and cinematographic works
and works produced by a process analogous to
cinematography or any process for making
audiovisual recordings."80
28
Contrary to the old copyright law,81 the Intellectual
Property Code does not require registration of the
work to fully recover in an infringement suit.
Nevertheless, both copyright laws provide that
copyright for a work is acquired by an intellectual
creator from the moment of creation.82
It is true that under Section 175 of the Intellectual
Property Code, "news of the day and other
miscellaneous facts having the character of mere
items of press information" are considered
unprotected subject matter.83 However, the Code
does not state that expression of the news of the
day, particularly when it underwent a creative
process, is not entitled to protection.
HELD:The Supreme Court PARTIALLY
GRANTED ABS-CBN’s petition and ordered RTC
Q.C. Branch 93 to continue with the criminal
proceedings against Grace Dela PeñaReyes and
John Oliver Manalastas due to copyright
infringement.
The other respondents, Atty. Felipe Gozon,
Gilberto Duavit Jr., Marissa L. Flores, and Jessica
A. Soho were held not liable for the (criminal) act
of copyright infringement.
The Court held that their mere membership in
GMA7's Board of Directors does not mean that
they have knowledge, approval, or participation in
the criminal act of copyright infringement., as
there is a need for their direct/active participation
in such act. Also, there was lack of proof that they
actively participated or exercised moral
ascendancy over Manalastas and Dela Cruz-Pena.
Contrary to GMA’s contention, the Supreme Court
deemed GMA's mere act of rebroadcast of ABS-
CBN’s news footage (arrival and homecoming of
OFW Angelo dela Cruz at NAIA from Iraq last 22
July 2004) for 2 mins and 40 secs.without the
latter's authority creates probable cause to find
GMA's news personnel Manalastas and Dela Peña-
Reyes criminally liable for violating provisions of
Intellectual Property Code (Section   216217   of   used in relation to the copyrighted work as a
RA   8293,   as   amended) that imposes strict
liability for copyright infringement, since they
have not been diligent in their functions to prevent
that footage from being aired on television.
They knew that there would be consequences in
carrying ABS-CBN’s footage in their broadcast –
which is why they allegedly cut the feed from
Reuters upon seeing ABS-CBN’s logo and
reporter. The difference of an act mala in se and
mala prohibita was stated in the present case. Acts
mala in se requires presence of criminal intent and
the person's knowledge of the nature of his/her act,
while in acts mala prohibita, presence of criminal
intent and the person's knowledge is not necessary.
The Court also stated that Philippine laws on
copyright infringement does not require criminal
intent (mens rea) and does not support good faith
as a defense. Thus, the act of infringement and not
the intent is the one that causes the damage. It held
that ABS-CBN's video footage is copyrightable
because it is under “audiovisual works and
cinematographic works and works produced by a
process analogous to cinematography or any
process for making audiovisual recordings.” It also
stated that news or the event itself is not
copyrightable. The Court differentiated idea and
expression – idea meant as “a form, the look or
appearance of a thing” while expression is its
reality or the “external, perceptible world of
articulate sounds and visible written symbols that
others can understand.”
Thus, the Supreme Court stated that “only the
expression of an idea is protected by copyright, not
the idea itself”, citing the US Supreme Court's
decision in Baker vs Selden (101 U.S. 99).
In the present case, expression applies to the event
captured and presented in a specific medium via
cinematography or processes analogous to it.
The Court also gave the four-fold test under the
Fair Use Doctrine (stated in section 185 of RA
8293 or the Intellectual Property Code, as
amended) to determine fair use:
a. The purpose and character of the use, including
whether such use is of a commercial nature or is
for non-profit educational purposes;
b. The nature of the copyrighted work;
c. The amount and substantiality of the portion
whole; and
d. The effect of the use upon the potential market
for or value of the copyrighted work.
Fair use, which is an exception to copyright
owner’s monopoly of the work's usage, was
defined by the Supreme Court as privilege to use
29
the copyrighted material in a reasonable manner
without the copyright owner's consent or by
copying the material's theme or idea rather than its
expression. It also said that determination of
whether the Angelo dela Cruz footage is subject to
fair use is better left to the trial court where the
proceedings are currently pending.

30