G.R. No.

58168 December 19, 1989

CONCEPCION MAGSAYSAY-LABRADOR, petitioners,
vs.
THE COURT OF APPEALS respondents.
FERNAN, C.J.:
In this petition for review on certiorari, petitioners seek to reverse and set
aside [1] the decision of the Court of Appeals dated July l3, 1981, 1 affirming
that of the Court of First Instance of Zambales and Olongapo City which
denied petitioners' motion to intervene in an annulment suit filed by herein
private respondent, and [2] its resolution dated September 7, 1981, denying
their motion for reconsideration.
Petitioners are raising a purely legal question; whether or not respondent
Court of Appeals correctly denied their motion for intervention.
The facts are not controverted.
On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow and special
administratix of the estate of the late Senator Genaro Magsaysay, brought
before the then Court of First Instance of Olongapo an action against Artemio
Panganiban, Subic Land Corporation (SUBIC), Filipinas Manufacturer's
Bank (FILMANBANK) and the Register of Deeds of Zambales. In her
complaint, she alleged that in 1958, she and her husband acquired, thru
conjugal funds, a parcel of land with improvements, known as "Pequena
Island", covered by TCT No. 3258; that after the death of her husband, she
discovered [a] an annotation at the back of TCT No. 3258 that "the land was
acquired by her husband from his separate capital;" [b] the registration of a
Deed of Assignment dated June 25, 1976 purportedly executed by the late
Senator in favor of SUBIC, as a result of which TCT No. 3258 was cancelled
and TCT No. 22431 issued in the name of SUBIC; and [c] the registration of
Deed of Mortgage dated April 28, 1977 in the amount of P 2,700,000.00
executed by SUBIC in favor of FILMANBANK; that the foregoing acts were
void and done in an attempt to defraud the conjugal partnership considering
that the land is conjugal, her marital consent to the annotation on TCT No.
3258 was not obtained, the change made by the Register of Deeds of the
titleholders was effected without the approval of the Commissioner of Land
Registration and that the late Senator did not execute the purported Deed of

Assignment or his consent thereto, if obtained, was secured by mistake,

violence and intimidation. She further alleged that the assignment in favor of
SUBIC was without consideration and consequently null and void. She
prayed that the Deed of Assignment and the Deed of Mortgage be annulled
and that the Register of Deeds be ordered to cancel TCT No. 22431 and to
issue a new title in her favor.
On March 7, 1979, herein petitioners, sisters of the late senator, filed a
motion for intervention on the ground that on June 20, 1978, their brother
conveyed to them one-half (1/2 ) of his shareholdings in SUBIC or a total of
416,566.6 shares and as assignees of around 41 % of the total outstanding
shares of such stocks of SUBIC, they have a substantial and legal interest in
the subject matter of litigation and that they have a legal interest in the
success of the suit with respect to SUBIC.
On July 26, 1979, the court denied the motion for intervention, and ruled that
petitioners have no legal interest whatsoever in the matter in litigation and
their being alleged assignees or transferees of certain shares in SUBIC cannot
legally entitle them to intervene because SUBIC has a personality separate
and distinct from its stockholders.
On appeal, respondent Court of Appeals found no factual or legal
justification to disturb the findings of the lower court. The appellate court
further stated that whatever claims the petitioners have against the late
Senator or against SUBIC for that matter can be ventilated in a separate
proceeding, such that with the denial of the motion for intervention, they are
not left without any remedy or judicial relief under existing law.
Petitioners' motion for reconsideration was denied. Hence, the instant
recourse.
Petitioners anchor their right to intervene on the purported assignment made
by the late Senator of a certain portion of his shareholdings to them as
evidenced by a Deed of Sale dated June 20, 1978. 2 Such transfer, petitioners
posit, clothes them with an interest, protected by law, in the matter of
litigation.
Invoking the principle enunciated in the case of PNB v. Phil. Veg. Oil Co., 49
Phil. 857,862 & 853 (1927), 3 petitioners strongly argue that their ownership
of 41.66% of the entire outstanding capital stock of SUBIC entitles them to a

significant vote in the corporate affairs; that they are affected by the action of
the widow of their late brother for it concerns the only tangible asset of the
corporation and that it appears that they are more vitally interested in the
outcome of the case than SUBIC.
Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this
Court affirms the respondent court's holding that petitioners herein have no
legal interest in the subject matter in litigation so as to entitle them to
intervene in the proceedings below. In the case of Batama Farmers'
Cooperative Marketing Association, Inc. v. Rosal, 4 we held: "As clearly
stated in Section 2 of Rule 12 of the Rules of Court, to be permitted to
intervene in a pending action, the party must have a legal interest in the
matter in litigation, or in the success of either of the parties or an interest
against both, or he must be so situated as to be adversely affected by a
distribution or other disposition of the property in the custody of the court or
an officer thereof ."
To allow intervention, [a] it must be shown that the movant has legal interest
in the matter in litigation, or otherwise qualified; and [b] consideration must
be given as to whether the adjudication of the rights of the original parties
may be delayed or prejudiced, or whether the intervenor's rights may be
protected in a separate proceeding or not. Both requirements must concur as
the first is not more important than the second. 5
The interest which entitles a person to intervene in a suit between other
parties must be in the matter in litigation and of such direct and immediate
character that the intervenor will either gain or lose by the direct legal
operation and effect of the judgment. Otherwise, if persons not parties of the
action could be allowed to intervene, proceedings will become unnecessarily
complicated, expensive and interminable. And this is not the policy of the
law. 6
The words "an interest in the subject" mean a direct interest in the cause of
action as pleaded, and which would put the intervenor in a legal position to
litigate a fact alleged in the complaint, without the establishment of which
plaintiff could not recover. 7
Here, the interest, if it exists at all, of petitioners-movants is indirect,
contingent, remote, conjectural, consequential and collateral. At the very
least, their interest is purely inchoate, or in sheer expectancy of a right in the
management of the corporation and to share in the profits thereof and in the

properties and assets thereof on dissolution, after payment of the corporate

debts and obligations.
While a share of stock represents a proportionate or aliquot interest in the
property of the corporation, it does not vest the owner thereof with any legal
right or title to any of the property, his interest in the corporate property
being equitable or beneficial in nature. Shareholders are in no legal sense the
owners of corporate property, which is owned by the corporation as a distinct
legal person. 8
Petitioners further contend that the availability of other remedies, as declared
by the Court of appeals, is totally immaterial to the availability of the remedy
of intervention.
We cannot give credit to such averment. As earlier stated, that the movant's
interest may be protected in a separate proceeding is a factor to be considered
in allowing or disallowing a motion for intervention. It is significant to note
at this juncture that as per records, there are four pending cases involving the
parties herein, enumerated as follows: [1] Special Proceedings No. 122122
before the CFI of Manila, Branch XXII, entitled "Concepcion MagsaysayLabrador, et al. v. Subic Land Corp., et al.", involving the validity of the
transfer by the late Genaro Magsaysay of one-half of his shareholdings in
Subic Land Corporation; [2] Civil Case No. 2577-0 before the CFI of
Zambales, Branch III, "Adelaida Rodriguez-Magsaysay v. Panganiban, etc.;
Concepcion Labrador, et al. Intervenors", seeking to annul the purported
Deed of Assignment in favor of SUBIC and its annotation at the back of TCT
No. 3258 in the name of respondent's deceased husband; [3] SEC Case No.
001770, filed by respondent praying, among other things that she be declared
in her capacity as the surviving spouse and administratrix of the estate of
Genaro Magsaysay as the sole subscriber and stockholder of SUBIC. There,
petitioners, by motion, sought to intervene. Their motion to reconsider the
denial of their motion to intervene was granted; [4] SP No. Q-26739 before
the CFI of Rizal, Branch IV, petitioners herein filing a contingent claim
pursuant to Section 5, Rule 86, Revised Rules of Court. 9 Petitioners' interests
are no doubt amply protected in these cases.
Neither do we lend credence to petitioners' argument that they are more
interested in the outcome of the case than the corporation-assignee, owing to
the fact that the latter is willing to compromise with widow-respondent and
since a compromise involves the giving of reciprocal concessions, the only
conceivable concession the corporation may give is a total or partial
relinquishment of the corporate assets. 10

Such claim all the more bolsters the contingent nature of petitioners' interest
in the subject of litigation.
The factual findings of the trial court are clear on this point. The petitioners
cannot claim the right to intervene on the strength of the transfer of shares
allegedly executed by the late Senator. The corporation did not keep books
and records. 11 Perforce, no transfer was ever recorded, much less effected as
to prejudice third parties. The transfer must be registered in the books of the
corporation to affect third persons. The law on corporations is explicit.
Section 63 of the Corporation Code provides, thus: "No transfer, however,
shall be valid, except as between the parties, until the transfer is recorded in
the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or
certificates and the number of shares transferred."
And even assuming arguendo that there was a valid transfer, petitioners are
nonetheless barred from intervening inasmuch as their rights can be
ventilated and amply protected in another proceeding.
WHEREFORE, the instant petition is hereby DENIED. Costs against
petitioners.
SO ORDERED.
Gutierrez, Jr., Bidin and Corte's, JJ., concur.
Feliciano, J., is on leave.

G.R. No. L-31061 August 17, 1976

SULO NG BAYAN INC., plaintiff-appellant,
vs.
GREGORIO ARANETA, INC., defendants-appellees.
ANTONIO, J.:
The issue posed in this appeal is whether or not plaintiff corporation (nonstock may institute an action in behalf of its individual members for the
recovery of certain parcels of land allegedly owned by said members; for the
nullification of the transfer certificates of title issued in favor of defendants
appellees covering the aforesaid parcels of land; for a declaration of
"plaintiff's members as absolute owners of the property" and the issuance of
the corresponding certificate of title; and for damages.
On April 26, 1966, plaintiff-appellant Sulo ng Bayan, Inc. filed an accion de
revindicacion with the Court of First Instance of Bulacan, Fifth Judicial
District, Valenzuela, Bulacan, against defendants-appellees to recover the
ownership and possession of a large tract of land in San Jose del Monte,
Bulacan, containing an area of 27,982,250 square meters, more or less,
registered under the Torrens System in the name of defendants-appellees'
predecessors-in-interest. 1 The complaint, as amended on June 13, 1966,
specifically alleged that plaintiff is a corporation organized and existing
under the laws of the Philippines, with its principal office and place of
business at San Jose del Monte, Bulacan; that its membership is composed of
natural persons residing at San Jose del Monte, Bulacan; that the members of
the plaintiff corporation, through themselves and their predecessors-ininterest, had pioneered in the clearing of the fore-mentioned tract of land,
cultivated the same since the Spanish regime and continuously possessed the
said property openly and public under concept of ownership adverse against
the whole world; that defendant-appellee Gregorio Araneta, Inc., sometime in
the year 1958, through force and intimidation, ejected the members of the
plaintiff corporation fro their possession of the aforementioned vast tract of
land; that upon investigation conducted by the members and officers of
plaintiff corporation, they found out for the first time in the year 1961 that

the land in question "had been either fraudelently or erroneously included, by

direct or constructive fraud, in Original Certificate of Title No. 466 of the
Land of Records of the province of Bulacan", issued on May 11, 1916, which
title is fictitious, non-existent and devoid of legal efficacy due to the fact that
"no original survey nor plan whatsoever" appears to have been submitted as a
basis thereof and that the Court of First Instance of Bulacan which issued the
decree of registration did not acquire jurisdiction over the land registration
case because no notice of such proceeding was given to the members of the
plaintiff corporation who were then in actual possession of said properties;
that as a consequence of the nullity of the original title, all subsequent titles
derived therefrom, such as Transfer Certificate of Title No. 4903 issued in
favor of Gregorio Araneta and Carmen Zaragoza, which was subsequently
cancelled by Transfer Certificate of Title No. 7573 in the name of Gregorio
Araneta, Inc., Transfer Certificate of Title No. 4988 issued in the name of,
the National Waterworks & Sewerage Authority (NWSA), Transfer
Certificate of Title No. 4986 issued in the name of Hacienda Caretas, Inc.,
and another transfer certificate of title in the name of Paradise Farms, Inc.,
are therefore void. Plaintiff-appellant consequently prayed (1) that Original
Certificate of Title No. 466, as well as all transfer certificates of title issued
and derived therefrom, be nullified; (2) that "plaintiff's members" be declared
as absolute owners in common of said property and that the corresponding
certificate of title be issued to plaintiff; and (3) that defendant-appellee
Gregorio Araneta, Inc. be ordered to pay to plaintiff the damages therein
specified.
On September 2, 1966, defendant-appellee Gregorio Araneta, Inc. filed a
motion to dismiss the amended complaint on the grounds that (1) the
complaint states no cause of action; and (2) the cause of action, if any, is
barred by prescription and laches. Paradise Farms, Inc. and Hacienda
Caretas, Inc. filed motions to dismiss based on the same grounds. Appellee
National Waterworks & Sewerage Authority did not file any motion to
dismiss. However, it pleaded in its answer as special and affirmative defenses
lack of cause of action by the plaintiff-appellant and the barring of such
action by prescription and laches.
During the pendency of the motion to dismiss, plaintiff-appellant filed a
motion, dated October 7, 1966, praying that the case be transferred to another
branch of the Court of First Instance sitting at Malolos, Bulacan, According
to defendants-appellees, they were not furnished a copy of said motion,
hence, on October 14, 1966, the lower court issued an Order requiring
plaintiff-appellant to furnish the appellees copy of said motion, hence, on
October 14, 1966, defendant-appellant's motion dated October 7, 1966 and,

consequently, prayed that the said motion be denied for lack of notice and for
failure of the plaintiff-appellant to comply with the Order of October 14,
1966. Similarly, defendant-appellee paradise Farms, Inc. filed, on December
2, 1966, a manifestation information the court that it also did not receive a
copy of the afore-mentioned of appellant. On January 24, 1967, the trial court
issued an Order dismissing the amended complaint.
On February 14, 1967, appellant filed a motion to reconsider the Order of
dismissal on the grounds that the court had no jurisdiction to issue the Order
of dismissal, because its request for the transfer of the case from the
Valenzuela Branch of the Court of First Instance to the Malolos Branch of the
said court has been approved by the Department of Justice; that the
complaint states a sufficient cause of action because the subject matter of the
controversy in one of common interest to the members of the corporation
who are so numerous that the present complaint should be treated as a class
suit; and that the action is not barred by the statute of limitations because (a)
an action for the reconveyance of property registered through fraud does not
prescribe, and (b) an action to impugn a void judgment may be brought any
time. This motion was denied by the trial court in its Order dated February
22, 1967. From the afore-mentioned Order of dismissal and the Order
denying its motion for reconsideration, plaintiff-appellant appealed to the
Court of Appeals.
On September 3, 1969, the Court of Appeals, upon finding that no question
of fact was involved in the appeal but only questions of law and jurisdiction,
certified this case to this Court for resolution of the legal issues involved in
the controversy.
I
Appellant contends, as a first assignment of error, that the trial court acted
without authority and jurisdiction in dismissing the amended complaint when
the Secretary of Justice had already approved the transfer of the case to any
one of the two branches of the Court of First Instance of Malolos, Bulacan.
Appellant confuses the jurisdiction of a court and the venue of cases with the
assignment of cases in the different branches of the same Court of First
Instance. Jurisdiction implies the power of the court to decide a case, while
venue the place of action. There is no question that respondent court has
jurisdiction over the case. The venue of actions in the Court of First Instance
is prescribed in Section 2, Rule 4 of the Revised Rules of Court. The laying
of venue is not left to the caprice of plaintiff, but must be in accordance with

the aforesaid provision of the rules. 2 The mere fact that a request for the
transfer of a case to another branch of the same court has been approved by
the Secretary of Justice does not divest the court originally taking cognizance
thereof of its jurisdiction, much less does it change the venue of the action.
As correctly observed by the trial court, the indorsement of the
Undersecretary of Justice did not order the transfer of the case to the Malolos
Branch of the Bulacan Court of First Instance, but only "authorized" it for the
reason given by plaintiff's counsel that the transfer would be convenient for
the parties. The trial court is not without power to either grant or deny the
motion, especially in the light of a strong opposition thereto filed by the
defendant. We hold that the court a quo acted within its authority in denying
the motion for the transfer the case to Malolos notwithstanding the
authorization" of the same by the Secretary of Justice.
II
Let us now consider the substantive aspect of the Order of dismissal.
In dismissing the amended complaint, the court a quo said:
The issue of lack of cause of action raised in the
motions to dismiss refer to the lack of personality of
plaintiff to file the instant action. Essentially, the
term 'cause of action' is composed of two elements:
(1) the right of the plaintiff and (2) the violation of
such right by the defendant. (Moran, Vol. 1, p. 111).
For these reasons, the rules require that every action
must be prosecuted and defended in the name of the
real party in interest and that all persons having an
interest in the subject of the action and in obtaining
the relief demanded shall be joined as plaintiffs (Sec.
2, Rule 3). In the amended complaint, the people
whose rights were alleged to have been violated by
being deprived and dispossessed of their land are the
members of the corporation and not the corporation
itself. The corporation has a separate. and distinct
personality from its members, and this is not a mere
technicality but a matter of substantive law. There is
no allegation that the members have assigned their
rights to the corporation or any showing that the
corporation has in any way or manner succeeded to
such rights. The corporation evidently did not have

any rights violated by the defendants for which it

could seek redress. Even if the Court should find
against the defendants, therefore, the plaintiff
corporation would not be entitled to the reliefs
prayed for, which are recoveries of ownership and
possession of the land, issuance of the corresponding
title in its name, and payment of damages. Neither
can such reliefs be awarded to the members
allegedly deprived of their land, since they are not
parties to the suit. It appearing clearly that the action
has not been filed in the names of the real parties in
interest, the complaint must be dismissed on the
ground of lack of cause of action. 3
Viewed in the light of existing law and jurisprudence, We find that the trial
court correctly dismissed the amended complaint.
It is a doctrine well-established and obtains both at law and in equity that a
corporation is a distinct legal entity to be considered as separate and apart
from the individual stockholders or members who compose it, and is not
affected by the personal rights, obligations and transactions of its
stockholders or members. 4 The property of the corporation is its property
and not that of the stockholders, as owners, although they have equities in it.
Properties registered in the name of the corporation are owned by it as an
entity separate and distinct from its members. 5 Conversely, a corporation
ordinarily has no interest in the individual property of its stockholders unless
transferred to the corporation, "even in the case of a one-man corporation. 6
The mere fact that one is president of a corporation does not render the
property which he owns or possesses the property of the corporation, since
the president, as individual, and the corporation are separate similarities. 7
Similarly, stockholders in a corporation engaged in buying and dealing in
real estate whose certificates of stock entitled the holder thereof to an
allotment in the distribution of the land of the corporation upon surrender of
their stock certificates were considered not to have such legal or equitable
title or interest in the land, as would support a suit for title, especially against
parties other than the corporation. 8
It must be noted, however, that the juridical personality of the corporation, as
separate and distinct from the persons composing it, is but a legal fiction
introduced for the purpose of convenience and to subserve the ends of
justice. 9 This separate personality of the corporation may be disregarded, or
the veil of corporate fiction pierced, in cases where it is used as a cloak or

cover for fraud or illegality, or to work -an injustice, or where necessary to

achieve equity. 10
Thus, when "the notion of legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, ... the law will regard the
corporation as an association of persons, or in the case of two corporations,
merge them into one, the one being merely regarded as part or
instrumentality of the other. 11 The same is true where a corporation is a
dummy and serves no business purpose and is intended only as a blind, or an
alter ego or business conduit for the sole benefit of the stockholders. 12 This
doctrine of disregarding the distinct personality of the corporation has been
applied by the courts in those cases when the corporate entity is used for the
evasion of taxes 13 or when the veil of corporate fiction is used to confuse
legitimate issue of employer-employee relationship, 14 or when necessary for
the protection of creditors, in which case the veil of corporate fiction may be
pierced and the funds of the corporation may be garnished to satisfy the debts
of a principal stockholder. 15 The aforecited principle is resorted to by the
courts as a measure protection for third parties to prevent fraud, illegality or
injustice. 16
It has not been claimed that the members have assigned or transferred
whatever rights they may have on the land in question to the plaintiff
corporation. Absent any showing of interest, therefore, a corporation, like
plaintiff-appellant herein, has no personality to bring an action for and in
behalf of its stockholders or members for the purpose of recovering property
which belongs to said stockholders or members in their personal capacities.
It is fundamental that there cannot be a cause of action 'without an antecedent
primary legal right conferred' by law upon a person. 17 Evidently, there can be
no wrong without a corresponding right, and no breach of duty by one person
without a corresponding right belonging to some other person. 18 Thus, the
essential elements of a cause of action are legal right of the plaintiff,
correlative obligation of the defendant, an act or omission of the defendant in
violation of the aforesaid legal right. 19 Clearly, no right of action exists in
favor of plaintiff corporation, for as shown heretofore it does not have any
interest in the subject matter of the case which is material and, direct so as to
entitle it to file the suit as a real party in interest.
III
Appellant maintains, however, that the amended complaint may be treated as
a class suit, pursuant to Section 12 of Rule 3 of the Revised Rules of Court.

In order that a class suit may prosper, the following requisites must be
present: (1) that the subject matter of the controversy is one of common or
general interest to many persons; and (2) that the parties are so numerous that
it is impracticable to bring them all before the court. 20
Under the first requisite, the person who sues must have an interest in the
controversy, common with those for whom he sues, and there must be that
unity of interest between him and all such other persons which would entitle
them to maintain the action if suit was brought by them jointly. 21
As to what constitutes common interest in the subject matter of the
controversy, it has been explained in Scott v. Donald 22 thus:

different way for each portion of the land, so that they cannot all be held to
have Identical title through acquisition prescription. 23
Having shown that no cause of action in favor of the plaintiff exists and that
the action in the lower court cannot be considered as a class suit, it would be
unnecessary and an Idle exercise for this Court to resolve the remaining issue
of whether or not the plaintiffs action for reconveyance of real property
based upon constructive or implied trust had already prescribed.
ACCORDINGLY, the instant appeal is hereby DISMISSED with costs
against the plaintiff-appellant.
Fernando, C.J., Barredo, Aquino and Concepcion, Jr., JJ., concur.

The interest that will allow parties to join in a bill of

complaint, or that will enable the court to dispense
with the presence of all the parties, when numerous,
except a determinate number, is not only an interest
in the question, but one in common in the subject
Matter of the suit; ... a community of interest
growing out of the nature and condition of the right
in dispute; for, although there may not be any privity
between the numerous parties, there is a common
title out of which the question arises, and which lies
at the foundation of the proceedings ... [here] the
only matter in common among the plaintiffs, or
between them and the defendants, is an interest in
the Question involved which alone cannot lay a
foundation for the joinder of parties. There is
scarcely a suit at law, or in equity which settles a
Principle or applies a principle to a given state of
facts, or in which a general statute is interpreted, that
does not involved a Question in which other parties
are interested. ... (Emphasis supplied )
Here, there is only one party plaintiff, and the plaintiff corporation does not
even have an interest in the subject matter of the controversy, and cannot,
therefore, represent its members or stockholders who claim to own in their
individual capacities ownership of the said property. Moreover, as correctly
stated by the appellees, a class suit does not lie in actions for the recovery of
property where several persons claim Partnership of their respective portions
of the property, as each one could alleged and prove his respective right in a

1. Bataan Shipyard and Engineering

Co., Inc. (Engineering Island
Shipyard and Mariveles Shipyard)
2. Baseco Quarry
3. Philippine Jai-Alai Corporation
G.R. No. 75885 May 27, 1987
4. Fidelity Management Co., Inc.
BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO),
petitioner,
vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT,
CHAIRMAN JOVITO SALONGA, respondents.

5. Romson Realty, Inc.

6. Trident Management Co.
7. New Trident Management

NARVASA, J.:
Challenged in this special civil action of certiorari and prohibition by a
private corporation known as the Bataan Shipyard and Engineering Co., Inc.
are: (1) Executive Orders Numbered 1 and 2, promulgated by President
Corazon C. Aquino on February 28, 1986 and March 12, 1986, respectively,
and (2) the sequestration, takeover, and other orders issued, and acts done, in
accordance with said executive orders by the Presidential Commission on
Good Government and/or its Commissioners and agents, affecting said
corporation.
1. The Sequestration, Takeover, and Other Orders Complained of
a. The Basic Sequestration Order
The sequestration order which, in the view of the petitioner corporation,
initiated all its misery was issued on April 14, 1986 by Commissioner Mary
Concepcion Bautista. It was addressed to three of the agents of the
Commission, hereafter simply referred to as PCGG. It reads as follows:
RE: SEQUESTRATION ORDER
By virtue of the powers vested in the Presidential
Commission on Good Government, by authority of
the President of the Philippines, you are hereby
directed to sequester the following companies.

8. Bay Transport
9. And all affiliate companies of
Alfredo "Bejo" Romualdez
You are hereby ordered:
1. To implement this sequestration order with a
minimum disruption of these companies' business
activities.
2. To ensure the continuity of these companies as
going concerns, the care and maintenance of these
assets until such time that the Office of the President
through the Commission on Good Government
should decide otherwise.
3. To report to the Commission on Good
Government periodically.
Further, you are authorized to request for
Military/Security Support from the Military/Police
authorities, and such other acts essential to the
achievement of this sequestration order. 1

b. Order for Production of Documents

On the strength of the above sequestration order, Mr. Jose M. Balde, acting
for the PCGG, addressed a letter dated April 18, 1986 to the President and
other officers of petitioner firm, reiterating an earlier request for the
production of certain documents, to wit:
1. Stock Transfer Book
2. Legal documents, such as:
2.1. Articles of Incorporation
2.2. By-Laws
2.3. Minutes of the Annual
Stockholders Meeting from 1973 to
1986
2.4. Minutes of the Regular and
Special Meetings of the Board of
Directors from 1973 to 1986
2.5. Minutes of the Executive
Committee Meetings from 1973 to
1986
2.6. Existing contracts with
suppliers/contractors/others.
3. Yearly list of stockholders with their
corresponding share/stockholdings from 1973 to
1986 duly certified by the Corporate Secretary.
4. Audited Financial Statements such as Balance
Sheet, Profit & Loss and others from 1973 to
December 31, 1985.
5. Monthly Financial Statements for the current year
up to March 31, 1986.

6. Consolidated Cash Position Reports from January

to April 15, 1986.
7. Inventory listings of assets up dated up to March
31, 1986.
8. Updated schedule of Accounts Receivable and
Accounts Payable.
9. Complete list of depository banks for all funds
with the authorized signatories for withdrawals
thereof.
10. Schedule of company investments and
placements. 2
The letter closed with the warning that if the documents were not submitted
within five days, the officers would be cited for "contempt in pursuance with
Presidential Executive Order Nos. 1 and 2."
c. Orders Re Engineer Island
(1) Termination of Contract for
Security Services
A third order assailed by petitioner corporation, hereafter referred to simply
as BASECO, is that issued on April 21, 1986 by a Capt. Flordelino B.
Zabala, a member of the task force assigned to carry out the basic
sequestration order. He sent a letter to BASECO's Vice-President for
Finance, 3 terminating the contract for security services within the Engineer
Island compound between BASECO and "Anchor and FAIRWAYS" and
"other civilian security agencies," CAPCOM military personnel having
already been assigned to the area,
(2) Change of Mode of Payment of
Entry Charges
On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed to
"Truck Owners and Contractors," particularly a "Mr. Buddy Ondivilla
National Marine Corporation," advising of the amendment in part of their
contracts with BASECO in the sense that the stipulated charges for use of the

BASECO road network were made payable "upon entry and not anymore
subject to monthly billing as was originally agreed upon." 4
d. Aborted Contract for Improvement of Wharf at
Engineer Island
On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract
in behalf of BASECO with Deltamarine Integrated Port Services, Inc., in
virtue of which the latter undertook to introduce improvements costing
approximately P210,000.00 on the BASECO wharf at Engineer Island,
allegedly then in poor condition, avowedly to "optimize its utilization and in
return maximize the revenue which would flow into the government coffers,"
in consideration of Deltamarine's being granted "priority in using the
improved portion of the wharf ahead of anybody" and exemption "from the
payment of any charges for the use of wharf including the area where it may
install its bagging equipments" "until the improvement remains in a
condition suitable for port operations." 5 It seems however that this contract
was never consummated. Capt. Jorge B. Siacunco, "Head- (PCGG) BASECO
Management Team," advised Deltamarine by letter dated July 30, 1986 that
"the new management is not in a position to honor the said contract" and thus
"whatever improvements * * (may be introduced) shall be deemed
unauthorized * * and shall be at * * (Deltamarine's) own risk." 6
e. Order for Operation of Sesiman Rock Quarry,
Mariveles, Bataan
By Order dated June 20, 1986, Commissioner Mary Bautista first directed a
PCGG agent, Mayor Melba O. Buenaventura, "to plan and implement
progress towards maximizing the continuous operation of the BASECO
Sesiman Rock Quarry * * by conventional methods;" but afterwards,
Commissioner Bautista, in representation of the PCGG, authorized another
party, A.T. Abesamis, to operate the quarry, located at Mariveles, Bataan, an
agreement to this effect having been executed by them on September 17,
1986. 7
f. Order to Dispose of Scrap, etc.
By another Order of Commissioner Bautista, this time dated June 26, 1986,
Mayor Buenaventura was also "authorized to clean and beautify the
Company's compound," and in this connection, to dispose of or sell "metal
scraps" and other materials, equipment and machineries no longer usable,

subject to specified guidelines and safeguards including audit and

verification. 8
g. The TAKEOVER Order
By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the
provisional takeover by the PCGG of BASECO, "the Philippine Dockyard
Corporation and all their affiliated companies." 9 Diaz invoked the provisions
of Section 3 (c) of Executive Order No. 1, empowering the Commission
* * To provisionally takeover in the public interest
or to prevent its disposal or dissipation, business
enterprises and properties taken over by the
government of the Marcos Administration or by
entities or persons close to former President Marcos,
until the transactions leading to such acquisition by
the latter can be disposed of by the appropriate
authorities.
A management team was designated to implement the order, headed by Capt.
Siacunco, and was given the following powers:
1. Conducts all aspects of operation of the subject
companies;
2. Installs key officers, hires and terminates
personnel as necessary;
3. Enters into contracts related to management and
operation of the companies;
4. Ensures that the assets of the companies are not
dissipated and used effectively and efficiently;
revenues are duly accounted for; and disburses funds
only as may be necessary;
5. Does actions including among others, seeking of
military support as may be necessary, that will
ensure compliance to this order;

6. Holds itself fully accountable to the Presidential

Commission on Good Government on all aspects
related to this take-over order.
h. Termination of Services of
BASECO Officers
Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S.
Mendoza, Moises M. Valdez, Gilberto Pasimanero, and Benito R. Cuesta I,
advising of the termination of their services by the PCGG. 10
2. Petitioner's Plea and Postulates
It is the foregoing specific orders and acts of the PCGG and its members and
agents which, to repeat, petitioner BASECO would have this Court nullify.
More particularly, BASECO prays that this Court1) declare unconstitutional and void Executive Orders Numbered 1 and 2;
2) annul the sequestration order dated April- 14, 1986, and all other orders
subsequently issued and acts done on the basis thereof, inclusive of the
takeover order of July 14, 1986 and the termination of the services of the
BASECO executives. 11
a. Re Executive Orders No. 1 and 2, and the
Sequestration and Takeover Orders
While BASECO concedes that "sequestration without resorting to judicial
action, might be made within the context of Executive Orders Nos. 1 and 2
before March 25, 1986 when the Freedom Constitution was promulgated,
under the principle that the law promulgated by the ruler under a
revolutionary regime is the law of the land, it ceased to be acceptable when
the same ruler opted to promulgate the Freedom Constitution on March 25,
1986 wherein under Section I of the same, Article IV (Bill of Rights) of the
1973 Constitution was adopted providing, among others, that "No person
shall be deprived of life, liberty and property without due process of law."
(Const., Art. I V, Sec. 1)." 12
It declares that its objection to the constitutionality of the Executive Orders
"as well as the Sequestration Order * * and Takeover Order * * issued
purportedly under the authority of said Executive Orders, rests on four

fundamental considerations: First, no notice and hearing was accorded * *

(it) before its properties and business were taken over; Second, the PCGG is
not a court, but a purely investigative agency and therefore not competent to
act as prosecutor and judge in the same cause; Third, there is nothing in the
issuances which envisions any proceeding, process or remedy by which
petitioner may expeditiously challenge the validity of the takeover after the
same has been effected; and Fourthly, being directed against specified
persons, and in disregard of the constitutional presumption of innocence and
general rules and procedures, they constitute a Bill of Attainder." 13
b. Re Order to Produce Documents
It argues that the order to produce corporate records from 1973 to 1986,
which it has apparently already complied with, was issued without court
authority and infringed its constitutional right against self-incrimination, and
unreasonable search and seizure. 14
c. Re PCGG's Exercise of Right of Ownership and
Management
BASECO further contends that the PCGG had unduly interfered with its right
of dominion and management of its business affairs by
1) terminating its contract for security services with Fairways & Anchor,
without the consent and against the will of the contracting parties; and
amending the mode of payment of entry fees stipulated in its Lease Contract
with National Stevedoring & Lighterage Corporation, these acts being in
violation of the non-impairment clause of the constitution; 15
2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous
contract" with Deltamarine Integrated Port Services, Inc., giving the latter
free use of BASECO premises; 16
3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and
operate its rock quarry at Sesiman, Mariveles; 17
4) authorizing the same mayor to sell or dispose of its metal scrap,
equipment, machinery and other materials; 18
5) authorizing the takeover of BASECO, Philippine Dockyard Corporation,
and all their affiliated companies;

6) terminating the services of BASECO executives: President Hilario M.

Ruiz; EVP Manuel S. Mendoza; GM Moises M. Valdez; Finance Mgr.
Gilberto Pasimanero; Legal Dept. Mgr. Benito R. Cuesta I; 19
7) planning to elect its own Board of Directors; 20
8) allowing willingly or unwillingly its personnel to take, steal, carry away
from petitioner's premises at Mariveles * * rolls of cable wires, worth
P600,000.00 on May 11, 1986; 21
9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars
supposed to have been buried therein. 22
3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover
Orders
Many misconceptions and much doubt about the matter of sequestration,
takeover and freeze orders have been engendered by misapprehension, or
incomplete comprehension if not indeed downright ignorance of the law
governing these remedies. It is needful that these misconceptions and doubts
be dispelled so that uninformed and useless debates about them may be
avoided, and arguments tainted b sophistry or intellectual dishonesty be
quickly exposed and discarded. Towards this end, this opinion will essay an
exposition of the law on the matter. In the process many of the objections
raised by BASECO will be dealt with.
4. The Governing Law
a. Proclamation No. 3
The impugned executive orders are avowedly meant to carry out the explicit
command of the Provisional Constitution, ordained by Proclamation No. 3, 23
that the President-in the exercise of legislative power which she was
authorized to continue to wield "(until a legislature is elected and convened
under a new Constitution" "shall give priority to measures to achieve the
mandate of the people," among others to (r)ecover ill-gotten properties
amassed by the leaders and supporters of the previous regime and protect
the interest of the people through orders of sequestration or freezing of assets
or accounts." 24
b. Executive Order No. 1

Executive Order No. 1 stresses the "urgent need to recover all ill-gotten
wealth," and postulates that "vast resources of the government have been
amassed by former President Ferdinand E. Marcos, his immediate family,
relatives, and close associates both here and abroad." 25 Upon these premises,
the Presidential Commission on Good Government was created, 26 "charged
with the task of assisting the President in regard to (certain specified)
matters," among which was precisely* * The recovery of all in-gotten wealth accumulated
by former President Ferdinand E. Marcos, his
immediate family, relatives, subordinates and close
associates, whether located in the Philippines or
abroad, including the takeover or sequestration of
all business enterprises and entities owned or
controlled by them, during his administration,
directly or through nominees, by taking undue
advantage of their public office and/or using their
powers, authority, influence, connections or
relationship. 27
In relation to the takeover or sequestration that it was authorized to
undertake in the fulfillment of its mission, the PCGG was granted "power
and authority" to do the following particular acts, to wit:
1. To sequester or place or cause to be placed under
its control or possession any building or office
wherein any ill-gotten wealth or properties may be
found, and any records pertaining thereto, in order to
prevent their destruction, concealment or
disappearance which would frustrate or hamper the
investigation or otherwise prevent the Commission
from accomplishing its task.
2. To provisionally take over in the public interest or
to prevent the disposal or dissipation, business
enterprises and properties taken over by the
government of the Marcos Administration or by
entities or persons close to former President Marcos,
until the transactions leading to such acquisition by
the latter can be disposed of by the appropriate
authorities.

3. To enjoin or restrain any actual or threatened

commission of acts by any person or entity that may
render moot and academic, or frustrate or otherwise
make ineffectual the efforts of the Commission to
carry out its task under this order. 28
So that it might ascertain the facts germane to its objectives, it was granted
power to conduct investigations; require submission of evidence by
subpoenae ad testificandum and duces tecum; administer oaths; punish for
contempt. 29 It was given power also to promulgate such rules and regulations
as may be necessary to carry out the purposes of * * (its creation). 30
c. Executive Order No. 2
Executive Order No. 2 gives additional and more specific data and directions
respecting "the recovery of ill-gotten properties amassed by the leaders and
supporters of the previous regime." It declares that:
1) * * the Government of the Philippines is in
possession of evidence showing that there are assets
and properties purportedly pertaining to former
Ferdinand E. Marcos, and/or his wife Mrs. Imelda
Romualdez Marcos, their close relatives,
subordinates, business associates, dummies, agents
or nominees which had been or were acquired by
them directly or indirectly, through or as a result of
the improper or illegal use of funds or properties
owned by the government of the Philippines or any
of its branches, instrumentalities, enterprises, banks
or financial institutions, or by taking undue
advantage of their office, authority, influence,
connections or relationship, resulting in their unjust
enrichment and causing grave damage and prejudice
to the Filipino people and the Republic of the
Philippines:" and
2) * * said assets and properties are in the form of
bank accounts, deposits, trust accounts, shares of
stocks, buildings, shopping centers, condominiums,
mansions, residences, estates, and other kinds of real
and personal properties in the Philippines and in
various countries of the world." 31

Upon these premises, the President1) froze "all assets and properties in the Philippines
in which former President Marcos and/or his wife,
Mrs. Imelda Romualdez Marcos, their close
relatives, subordinates, business associates,
dummies, agents, or nominees have any interest or
participation;
2) prohibited former President Ferdinand Marcos
and/or his wife * *, their close relatives,
subordinates, business associates, duties, agents, or
nominees from transferring, conveying,
encumbering, concealing or dissipating said assets
or properties in the Philippines and abroad, pending
the outcome of appropriate proceedings in the
Philippines to determine whether any such assets or
properties were acquired by them through or as a
result of improper or illegal use of or the conversion
of funds belonging to the Government of the
Philippines or any of its branches, instrumentalities,
enterprises, banks or financial institutions, or by
taking undue advantage of their official position,
authority, relationship, connection or influence to
unjustly enrich themselves at the expense and to the
grave damage and prejudice of the Filipino people
and the Republic of the Philippines;
3) prohibited "any person from transferring,
conveying, encumbering or otherwise depleting or
concealing such assets and properties or from
assisting or taking part in their transfer,
encumbrance, concealment or dissipation under pain
of such penalties as are prescribed by law;" and
4) required "all persons in the Philippines holding
such assets or properties, whether located in the
Philippines or abroad, in their names as nominees,
agents or trustees, to make full disclosure of the
same to the Commission on Good Government
within thirty (30) days from publication of * (the)
Executive Order, * *. 32

d. Executive Order No. 14

A third executive order is relevant: Executive Order No. 14, 33 by which the
PCGG is empowered, "with the assistance of the Office of the Solicitor
General and other government agencies, * * to file and prosecute all cases
investigated by it * * as may be warranted by its findings." 34 All such cases,
whether civil or criminal, are to be filed "with the Sandiganbayan which
shall have exclusive and original jurisdiction thereof." 35 Executive Order No.
14 also pertinently provides that civil suits for restitution, reparation of
damages, or indemnification for consequential damages, forfeiture
proceedings provided for under Republic Act No. 1379, or any other civil
actions under the Civil Code or other existing laws, in connection with * *
(said Executive Orders Numbered 1 and 2) may be filed separately from and
proceed independently of any criminal proceedings and may be proved by a
preponderance of evidence;" and that, moreover, the "technical rules of
procedure and evidence shall not be strictly applied to* * (said)civil cases." 36
5. Contemplated Situations
The situations envisaged and sought to be governed are self-evident, these
being:

owned by the Government of the Philippines or any

of its branches, instrumentalities, enterprises, banks
or financial institutions, or by taking undue
advantage of their office, authority, influence,
connections or relationship, resulting in their unjust
enrichment and causing grave damage and prejudice
to the Filipino people and the Republic of the
Philippines"; 39
c) that "said assets and properties are in the form of
bank accounts. deposits, trust. accounts, shares of
stocks, buildings, shopping centers, condominiums,
mansions, residences, estates, and other kinds of real
and personal properties in the Philippines and in
various countries of the world;" 40 and
2) that certain "business enterprises and properties
(were) taken over by the government of the Marcos
Administration or by entities or persons close to
former President Marcos. 41
6. Government's Right and Duty to Recover All Ill-gotten Wealth

1) that "(i)ll-gotten properties (were) amassed by the

leaders and supporters of the previous regime"; 37
a) more particularly, that ill-gotten wealth (was) accumulated by former
President Ferdinand E. Marcos, his immediate family, relatives, subordinates
and close associates, * * located in the Philippines or abroad, * * (and)
business enterprises and entities (came to be) owned or controlled by them,
during * * (the Marcos) administration, directly or through nominees, by
taking undue advantage of their public office and/or using their powers,
authority, influence, Connections or relationship; 38
b) otherwise stated, that "there are assets and
properties purportedly pertaining to former President
Ferdinand E. Marcos, and/or his wife Mrs. Imelda
Romualdez Marcos, their close relatives,
subordinates, business associates, dummies, agents
or nominees which had been or were acquired by
them directly or indirectly, through or as a result of
the improper or illegal use of funds or properties

There can be no debate about the validity and eminent propriety of the
Government's plan "to recover all ill-gotten wealth."
Neither can there be any debate about the proposition that assuming the
above described factual premises of the Executive Orders and Proclamation
No. 3 to be true, to be demonstrable by competent evidence, the recovery
from Marcos, his family and his dominions of the assets and properties
involved, is not only a right but a duty on the part of Government.
But however plain and valid that right and duty may be, still a balance must
be sought with the equally compelling necessity that a proper respect be
accorded and adequate protection assured, the fundamental rights of private
property and free enterprise which are deemed pillars of a free society such
as ours, and to which all members of that society may without exception lay
claim.
* * Democracy, as a way of life enshrined in the
Constitution, embraces as its necessary components

freedom of conscience, freedom of expression, and

freedom in the pursuit of happiness. Along with
these freedoms are included economic freedom and
freedom of enterprise within reasonable bounds and
under proper control. * * Evincing much concern for
the protection of property, the Constitution distinctly
recognizes the preferred position which real estate
has occupied in law for ages. Property is bound up
with every aspect of social life in a democracy as
democracy is conceived in the Constitution. The
Constitution realizes the indispensable role which
property, owned in reasonable quantities and used
legitimately, plays in the stimulation to economic
effort and the formation and growth of a solid social
middle class that is said to be the bulwark of
democracy and the backbone of every progressive
and happy country. 42
a. Need of Evidentiary Substantiation in Proper Suit
Consequently, the factual premises of the Executive Orders cannot simply be
assumed. They will have to be duly established by adequate proof in each
case, in a proper judicial proceeding, so that the recovery of the ill-gotten
wealth may be validly and properly adjudged and consummated; although
there are some who maintain that the fact-that an immense fortune, and "vast
resources of the government have been amassed by former President
Ferdinand E. Marcos, his immediate family, relatives, and close associates
both here and abroad," and they have resorted to all sorts of clever schemes
and manipulations to disguise and hide their illicit acquisitions-is within the
realm of judicial notice, being of so extensive notoriety as to dispense with
proof thereof, Be this as it may, the requirement of evidentiary substantiation
has been expressly acknowledged, and the procedure to be followed
explicitly laid down, in Executive Order No. 14.
b. Need of Provisional Measures to Collect and
Conserve Assets Pending Suits
Nor may it be gainsaid that pending the institution of the suits for the
recovery of such "ill-gotten wealth" as the evidence at hand may reveal, there
is an obvious and imperative need for preliminary, provisional measures to
prevent the concealment, disappearance, destruction, dissipation, or loss of
the assets and properties subject of the suits, or to restrain or foil acts that

may render moot and academic, or effectively hamper, delay, or negate

efforts to recover the same.
7. Provisional Remedies Prescribed by Law
To answer this need, the law has prescribed three (3) provisional remedies.
These are: (1) sequestration; (2) freeze orders; and (3) provisional takeover.
Sequestration and freezing are remedies applicable generally to unearthed
instances of "ill-gotten wealth." The remedy of "provisional takeover" is
peculiar to cases where "business enterprises and properties (were) taken
over by the government of the Marcos Administration or by entities or
persons close to former President Marcos." 43
a. Sequestration
By the clear terms of the law, the power of the PCGG to sequester property
claimed to be "ill-gotten" means to place or cause to be placed under its
possession or control said property, or any building or office wherein any
such property and any records pertaining thereto may be found, including
"business enterprises and entities,"-for the purpose of preventing the
destruction, concealment or dissipation of, and otherwise conserving and
preserving, the same-until it can be determined, through appropriate judicial
proceedings, whether the property was in truth will- gotten," i.e., acquired
through or as a result of improper or illegal use of or the conversion of funds
belonging to the Government or any of its branches, instrumentalities,
enterprises, banks or financial institutions, or by taking undue advantage of
official position, authority relationship, connection or influence, resulting in
unjust enrichment of the ostensible owner and grave damage and prejudice to
the State. 44 And this, too, is the sense in which the term is commonly
understood in other jurisdictions. 45
b. "Freeze Order"
A "freeze order" prohibits the person having possession or control of
property alleged to constitute "ill-gotten wealth" "from transferring,
conveying, encumbering or otherwise depleting or concealing such property,
or from assisting or taking part in its transfer, encumbrance, concealment, or
dissipation." 46 In other words, it commands the possessor to hold the
property and conserve it subject to the orders and disposition of the authority
decreeing such freezing. In this sense, it is akin to a garnishment by which

the possessor or ostensible owner of property is enjoined not to deliver,

transfer, or otherwise dispose of any effects or credits in his possession or
control, and thus becomes in a sense an involuntary depositary thereof. 47
c. Provisional Takeover
In providing for the remedy of "provisional takeover," the law acknowledges
the apparent distinction between "ill gotten" "business enterprises and
entities" (going concerns, businesses in actual operation), generally, as to
which the remedy of sequestration applies, it being necessarily inferred that
the remedy entails no interference, or the least possible interference with the
actual management and operations thereof; and "business enterprises which
were taken over by the government government of the Marcos
Administration or by entities or persons close to him," in particular, as to
which a "provisional takeover" is authorized, "in the public interest or to
prevent disposal or dissipation of the enterprises." 48 Such a "provisional
takeover" imports something more than sequestration or freezing, more than
the placing of the business under physical possession and control, albeit
without or with the least possible interference with the management and
carrying on of the business itself. In a "provisional takeover," what is taken
into custody is not only the physical assets of the business enterprise or
entity, but the business operation as well. It is in fine the assumption of
control not only over things, but over operations or on- going activities. But,
to repeat, such a "provisional takeover" is allowed only as regards "business
enterprises * * taken over by the government of the Marcos Administration
or by entities or persons close to former President Marcos."
d. No Divestment of Title Over Property Seized
It may perhaps be well at this point to stress once again the provisional,
contingent character of the remedies just described. Indeed the law plainly
qualifies the remedy of take-over by the adjective, "provisional." These
remedies may be resorted to only for a particular exigency: to prevent in the
public interest the disappearance or dissipation of property or business, and
conserve it pending adjudgment in appropriate proceedings of the primary
issue of whether or not the acquisition of title or other right thereto by the
apparent owner was attended by some vitiating anomaly. None of the
remedies is meant to deprive the owner or possessor of his title or any right
to the property sequestered, frozen or taken over and vest it in the
sequestering agency, the Government or other person. This can be done only
for the causes and by the processes laid down by law.

That this is the sense in which the power to sequester, freeze or provisionally
take over is to be understood and exercised, the language of the executive
orders in question leaves no doubt. Executive Order No. 1 declares that the
sequestration of property the acquisition of which is suspect shall last "until
the transactions leading to such acquisition * * can be disposed of by the
appropriate authorities." 49 Executive Order No. 2 declares that the assets or
properties therein mentioned shall remain frozen "pending the outcome of
appropriate proceedings in the Philippines to determine whether any such
assets or properties were acquired" by illegal means. Executive Order No. 14
makes clear that judicial proceedings are essential for the resolution of the
basic issue of whether or not particular assets are "ill-gotten," and resultant
recovery thereof by the Government is warranted.
e. State of Seizure Not To Be Indefinitely
Maintained; The Constitutional Command
There is thus no cause for the apprehension voiced by BASECO 50 that
sequestration, freezing or provisional takeover is designed to be an end in
itself, that it is the device through which persons may be deprived of their
property branded as "ill-gotten," that it is intended to bring about a
permanent, rather than a passing, transitional state of affairs. That this is not
so is quite explicitly declared by the governing rules.
Be this as it may, the 1987 Constitution should allay any lingering fears
about the duration of these provisional remedies. Section 26 of its Transitory
Provisions, 51 lays down the relevant rule in plain terms, apart from extending
ratification or confirmation (although not really necessary) to the institution
by presidential fiat of the remedy of sequestration and freeze orders:
SEC. 26. The authority to issue sequestration or
freeze orders under Proclamation No. 3 dated March
25, 1986 in relation to the recovery of ill-gotten
wealth shag remain operative for not more than
eighteen months after the ratification of this
Constitution. However, in the national interest, as
certified by the President, the Congress may extend
said period.
A sequestration or freeze order shall be issued only
upon showing of a prima facie case. The order and
the list of the sequestered or frozen properties shall
forthwith be registered with the proper court. For

orders issued before the ratification of this

Constitution, the corresponding judicial action or
proceeding shall be filed within six months from its
ratification. For those issued after such ratification,
the judicial action or proceeding shall be
commenced within six months from the issuance
thereof.
The sequestration or freeze order is deemed
automatically lifted if no judicial action or
proceeding is commenced as herein provided. 52
f. Kinship to Attachment Receivership
As thus described, sequestration, freezing and provisional takeover are akin
to the provisional remedy of preliminary attachment, or receivership. 53 By
attachment, a sheriff seizes property of a defendant in a civil suit so that it
may stand as security for the satisfaction of any judgment that may be
obtained, and not disposed of, or dissipated, or lost intentionally or
otherwise, pending the action. 54 By receivership, property, real or personal,
which is subject of litigation, is placed in the possession and control of a
receiver appointed by the Court, who shall conserve it pending final
determination of the title or right of possession over it. 55 All these remedies
sequestration, freezing, provisional, takeover, attachment and receivership
are provisional, temporary, designed for-particular exigencies, attended by
no character of permanency or finality, and always subject to the control of
the issuing court or agency.
g. Remedies, Non-Judicial
Parenthetically, that writs of sequestration or freeze or takeover orders are
not issued by a court is of no moment. The Solicitor General draws attention
to the writ of distraint and levy which since 1936 the Commissioner of
Internal Revenue has been by law authorized to issue against property of a
delinquent taxpayer. 56 BASECO itself declares that it has not manifested "a
rigid insistence on sequestration as a purely judicial remedy * * (as it feels)
that the law should not be ossified to a point that makes it insensitive to
change." What it insists on, what it pronounces to be its "unyielding position,
is that any change in procedure, or the institution of a new one, should
conform to due process and the other prescriptions of the Bill of Rights of the
Constitution." 57 It is, to be sure, a proposition on which there can be no
disagreement.

h. Orders May Issue Ex Parte

Like the remedy of preliminary attachment and receivership, as well as
delivery of personal property in replevin suits, sequestration and provisional
takeover writs may issue ex parte. 58 And as in preliminary attachment,
receivership, and delivery of personality, no objection of any significance
may be raised to the ex parte issuance of an order of sequestration, freezing
or takeover, given its fundamental character of temporariness or
conditionality; and taking account specially of the constitutionally expressed
"mandate of the people to recover ill-gotten properties amassed by the
leaders and supporters of the previous regime and protect the interest of the
people;" 59 as well as the obvious need to avoid alerting suspected possessors
of "ill-gotten wealth" and thereby cause that disappearance or loss of
property precisely sought to be prevented, and the fact, just as self-evident,
that "any transfer, disposition, concealment or disappearance of said assets
and properties would frustrate, obstruct or hamper the efforts of the
Government" at the just recovery thereof. 60
8. Requisites for Validity
What is indispensable is that, again as in the case of attachment and
receivership, there exist a prima facie factual foundation, at least, for the
sequestration, freeze or takeover order, and adequate and fair opportunity to
contest it and endeavor to cause its negation or nullification. 61
Both are assured under the executive orders in question and the rules and
regulations promulgated by the PCGG.
a. Prima Facie Evidence as Basis for Orders
Executive Order No. 14 enjoins that there be "due regard to the requirements
of fairness and due process." 62 Executive Order No. 2 declares that with
respect to claims on allegedly "ill-gotten" assets and properties, "it is the
position of the new democratic government that President Marcos * * (and
other parties affected) be afforded fair opportunity to contest these claims
before appropriate Philippine authorities." 63 Section 7 of the Commission's
Rules and Regulations provides that sequestration or freeze (and takeover)
orders issue upon the authority of at least two commissioners, based on the
affirmation or complaint of an interested party, or motu proprio when the
Commission has reasonable grounds to believe that the issuance thereof is
warranted. 64 A similar requirement is now found in Section 26, Art. XVIII of

the 1987 Constitution, which requires that a "sequestration or freeze order

shall be issued only upon showing of a prima facie case." 65
b. Opportunity to Contest
And Sections 5 and 6 of the same Rules and Regulations lay down the
procedure by which a party may seek to set aside a writ of sequestration or
freeze order, viz:
SECTION 5. Who may contend.-The person against
whom a writ of sequestration or freeze or hold order
is directed may request the lifting thereof in writing,
either personally or through counsel within five (5)
days from receipt of the writ or order, or in the case
of a hold order, from date of knowledge thereof.
SECTION 6. Procedure for review of writ or order.After due hearing or motu proprio for good cause
shown, the Commission may lift the writ or order
unconditionally or subject to such conditions as it
may deem necessary, taking into consideration the
evidence and the circumstance of the case. The
resolution of the commission may be appealed by
the party concerned to the Office of the President of
the Philippines within fifteen (15) days from receipt
thereof.
Parenthetically, even if the requirement for a prima facie showing of "illgotten wealth" were not expressly imposed by some rule or regulation as a
condition to warrant the sequestration or freezing of property contemplated
in the executive orders in question, it would nevertheless be exigible in this
jurisdiction in which the Rule of Law prevails and official acts which are
devoid of rational basis in fact or law, or are whimsical and capricious, are
condemned and struck down. 66
9. Constitutional Sanction of Remedies
If any doubt should still persist in the face of the foregoing considerations as
to the validity and propriety of sequestration, freeze and takeover orders, it
should be dispelled by the fact that these particular remedies and the
authority of the PCGG to issue them have received constitutional

approbation and sanction. As already mentioned, the Provisional or

"Freedom" Constitution recognizes the power and duty of the President to
enact "measures to achieve the mandate of the people to * * * (recover illgotten properties amassed by the leaders and supporters of the previous
regime and protect the interest of the people through orders of sequestration
or freezing of assets or accounts." And as also already adverted to, Section
26, Article XVIII of the 1987 Constitution 67 treats of, and ratifies the
"authority to issue sequestration or freeze orders under Proclamation No. 3
dated March 25, 1986."
The institution of these provisional remedies is also premised upon the
State's inherent police power, regarded, as t lie power of promoting the public
welfare by restraining and regulating the use of liberty and property," 68 and
as "the most essential, insistent and illimitable of powers * * in the
promotion of general welfare and the public interest," 69 and said to be coextensive with self-protection and * * not inaptly termed (also) the'law of
overruling necessity." " 70
10. PCGG not a "Judge"; General Functions
It should also by now be reasonably evident from what has thus far been said
that the PCGG is not, and was never intended to act as, a judge. Its general
function is to conduct investigations in order to collect evidence establishing
instances of "ill-gotten wealth;" issue sequestration, and such orders as may
be warranted by the evidence thus collected and as may be necessary to
preserve and conserve the assets of which it takes custody and control and
prevent their disappearance, loss or dissipation; and eventually file and
prosecute in the proper court of competent jurisdiction all cases investigated
by it as may be warranted by its findings. It does not try and decide, or hear
and determine, or adjudicate with any character of finality or compulsion,
cases involving the essential issue of whether or not property should be
forfeited and transferred to the State because "ill-gotten" within the meaning
of the Constitution and the executive orders. This function is reserved to the
designated court, in this case, the Sandiganbayan. 71 There can therefore be
no serious regard accorded to the accusation, leveled by BASECO, 72 that the
PCGG plays the perfidious role of prosecutor and judge at the same time.
11. Facts Preclude Grant of Relief to Petitioner
Upon these premises and reasoned conclusions, and upon the facts disclosed
by the record, hereafter to be discussed, the petition cannot succeed. The
writs of certiorari and prohibition prayed for will not be issued.

The facts show that the corporation known as BASECO was owned or
controlled by President Marcos "during his administration, through
nominees, by taking undue advantage of his public office and/or using his
powers, authority, or influence, " and that it was by and through the same
means, that BASECO had taken over the business and/or assets of the
National Shipyard and Engineering Co., Inc., and other government-owned
or controlled entities.
12. Organization and Stock Distribution of BASECO
BASECO describes itself in its petition as "a shiprepair and shipbuilding
company * * incorporated as a domestic private corporation * * (on Aug. 30,
1972) by a consortium of Filipino shipowners and shipping executives. Its
main office is at Engineer Island, Port Area, Manila, where its Engineer
Island Shipyard is housed, and its main shipyard is located at Mariveles
Bataan." 73 Its Articles of Incorporation disclose that its authorized capital
stock is P60,000,000.00 divided into 60,000 shares, of which 12,000 shares
with a value of P12,000,000.00 have been subscribed, and on said
subscription, the aggregate sum of P3,035,000.00 has been paid by the
incorporators. 74 The same articles Identify the incorporators, numbering
fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony P. Lee, (3) Eduardo T.
Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7)
Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10) Jose
Francisco, (11) Dioscoro Papa, (12) Octavio Posadas, (13) Manuel S.
Mendoza, (14) Magiliw Torres, and (15) Rodolfo Torres.
By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to
be stockholders, namely: (1) Generoso Tanseco, (2) Antonio Ezpeleta, (3)
Zacarias Amante, (4) Octavio Posadas, (5) Magiliw Torres, and (6) Rodolfo
Torres. As of this year, 1986, there were twenty (20) stockholders listed in
BASECO's Stock and Transfer Book. 75 Their names and the number of
shares respectively held by them are as follows:
. Jose
A.
Rojas

1,2
48
sha
res

2.
Severin
o G. de
la Cruz

1,2
48
sha
res

3.
Emilio
T. Yap

2,5
08
sha
res

4. Jose
Fernan
dez

1,2
48
sha
res

5. Jose
Francis
co

12
8
sha
res

6.
Manuel
S.
Mendo
za

96
sha
res

7.
Anthon
y P.
Lee

1,2
48
sha
res

8.
Hilario
M.
Ruiz

32
sha
res

14.
Fidel
Ventura

8
sha
res

9.
Consta
nte L.
Farias

8
sha
res

15.
Metro
Bay
Drydoc
k

13
6,3
70
sha
res

10.
Fidelity
Manag
ement,
Inc.

65,
88
2
sha
res

16.
Manuel
Jacela

1
sha
re

17.
Jonatha
n G. Lu

1
sha
re

18.
Jose J.
Tancha
nco

1
sha
re

19.
Diosco
ro Papa

12
8
sha
res

20.
Edward

4
sha

11.
Trident
Manag
ement

7,4
12
sha
res

12.
United
Phil.
Lines

1,2
40
sha
res

13.
Renato
M.
Tansec
o

8
sha
res

T.
Marcel
o

res

TOTA
L

21
8,8
19
sha
res
.

the Board of Directors, and David R. Ines, as General Manager. 77 This

agreement bore, at the top right corner of the first page, the word
"APPROVED" in the handwriting of President Marcos, followed by his
usual full signature. The document recited that a down payment of
P5,862,310.00 had been made by BASECO, and the balance of
P19,449,240.00 was payable in equal semi-annual installments over nine (9)
years after a grace period of two (2) years, with interest at 7% per annum.
15. Acquisition of 300 Hectares from Export Processing Zone Authority
On October 1, 1974, BASECO acquired three hundred (300) hectares of land
in Mariveles from the Export Processing Zone Authority for the price of
P10,047,940.00 of which, as set out in the document of sale, P2,000.000.00
was paid upon its execution, and the balance stipulated to be payable in
installments. 78

13 Acquisition of NASSCO by BASECO

16. Acquisition of Other Assets of NASSCO; Intervention of Marcos

Barely six months after its incorporation, BASECO acquired from National
Shipyard & Steel Corporation, or NASSCO, a government-owned or
controlled corporation, the latter's shipyard at Mariveles, Bataan, known as
the Bataan National Shipyard (BNS), and except for NASSCO's Engineer
Island Shops and certain equipment of the BNS, consigned for future
negotiation all its structures, buildings, shops, quarters, houses, plants,
equipment and facilities, in stock or in transit. This it did in virtue of a
"Contract of Purchase and Sale with Chattel Mortgage" executed on
February 13, 1973. The price was P52,000,000.00. As partial payment
thereof, BASECO delivered to NASSCO a cash bond of P11,400,000.00,
convertible into cash within twenty-four (24) hours from completion of the
inventory undertaken pursuant to the contract. The balance of
P41,600,000.00, with interest at seven percent (7%) per annum, compounded
semi-annually, was stipulated to be paid in equal semi-annual installments
over a term of nine (9) years, payment to commence after a grace period of
two (2) years from date of turnover of the shipyard to BASECO. 76

Some nine months afterwards, or on July 15, 1975, to be precise, BASECO,

again with the intervention of President Marcos, acquired ownership of the
rest of the assets of NASSCO which had not been included in the first two
(2) purchase documents. This was accomplished by a deed entitled "Contract
of Purchase and Sale," 79 which, like the Memorandum of Agreement dated
October 9, 1973 supra also bore at the upper right-hand corner of its first
page, the handwritten notation of President Marcos reading, "APPROVED,
July 29, 1973," and underneath it, his usual full signature. Transferred to
BASECO were NASSCO's "ownership and all its titles, rights and interests
over all equipment and facilities including structures, buildings, shops,
quarters, houses, plants and expendable or semi-expendable assets, located at
the Engineer Island, known as the Engineer Island Shops, including all the
equipment of the Bataan National Shipyards (BNS) which were excluded
from the sale of NBS to BASECO but retained by BASECO and all other
selected equipment and machineries of NASSCO at J. Panganiban Smelting
Plant." In the same deed, NASSCO committed itself to cooperate with
BASECO for the acquisition from the National Government or other
appropriate Government entity of Engineer Island. Consideration for the sale
was set at P5,000,000.00; a down payment of P1,000,000.00 appears to have
been made, and the balance was stipulated to be paid at 7% interest per
annum in equal semi annual installments over a term of nine (9) years, to
commence after a grace period of two (2) years. Mr. Arturo Pacificador again
signed for NASSCO, together with the general manager, Mr. David R. Ines.

14. Subsequent Reduction of Price; Intervention of Marcos

Unaccountably, the price of P52,000,000.00 was reduced by more than onehalf, to P24,311,550.00, about eight (8) months later. A document to this
effect was executed on October 9, 1973, entitled "Memorandum Agreement,"
and was signed for NASSCO by Arturo Pacificador, as Presiding Officer of

17. Loans Obtained

b. Romualdez' Report

It further appears that on May 27, 1975 BASECO obtained a loan from the
NDC, taken from "the last available Japanese war damage fund of
$19,000,000.00," to pay for "Japanese made heavy equipment (brand new)."
80
On September 3, 1975, it got another loan also from the NDC in the
amount of P30,000,000.00 (id.). And on January 28, 1976, it got still another
loan, this time from the GSIS, in the sum of P12,400,000.00. 81 The claim has
been made that not a single centavo has been paid on these loans. 82
18. Reports to President Marcos
In September, 1977, two (2) reports were submitted to President Marcos
regarding BASECO. The first was contained in a letter dated September 5,
1977 of Hilario M. Ruiz, BASECO president. 83 The second was embodied in
a confidential memorandum dated September 16, 1977 of Capt. A.T.
Romualdez. 84 They further disclose the fine hand of Marcos in the affairs of
BASECO, and that of a Romualdez, a relative by affinity.
a. BASECO President's Report
In his letter of September 5, 1977, BASECO President Ruiz reported to
Marcos that there had been "no orders or demands for ship construction" for
some time and expressed the fear that if that state of affairs persisted,
BASECO would not be able to pay its debts to the Government, which at the
time stood at the not inconsiderable amount of P165,854,000.00. 85 He
suggested that, to "save the situation," there be a "spin-off (of their)
shipbuilding activities which shall be handled exclusively by an entirely new
corporation to be created;" and towards this end, he informed Marcos that
BASECO was
* * inviting NDC and LUSTEVECO to participate
by converting the NDC shipbuilding loan to
BASECO amounting to P341.165M and assuming
and converting a portion of BASECO's shipbuilding
loans from REPACOM amounting to P52.2M or a
total of P83.365M as NDC's equity contribution in
the new corporation. LUSTEVECO will participate
by absorbing and converting a portion of the
REPACOM loan of Bay Shipyard and Drydock, Inc.,
amounting to P32.538M. 86

Capt. A.T. Romualdez' report to the President was submitted eleven (11) days
later. It opened with the following caption:
MEMORANDUM:
FOR : The President
SUBJECT: An Evaluation and Re-assessment of a
Performance of a Mission
FROM: Capt. A.T. Romualdez.
Like Ruiz, Romualdez wrote that BASECO faced great difficulties in
meeting its loan obligations due chiefly to the fact that "orders to build ships
as expected * * did not materialize."
He advised that five stockholders had "waived and/or assigned their
holdings inblank," these being: (1) Jose A. Rojas, (2) Severino de la Cruz, (3)
Rodolfo Torres, (4) Magiliw Torres, and (5) Anthony P. Lee. Pointing out that
"Mr. Magiliw Torres * * is already dead and Mr. Jose A. Rojas had a major
heart attack," he made the following quite revealing, and it may be added,
quite cynical and indurate recommendation, to wit:
* * (that) their replacements (be effected) so we can
register their names in the stock book prior to the
implementation of your instructions to pass a board
resolution to legalize the transfers under SEC
regulations;
2. By getting their replacements, the families cannot
question us later on; and
3. We will owe no further favors from them. 87
He also transmitted to Marcos, together with the report, the following
documents: 88
1. Stock certificates indorsed and assigned in blank
with assignments and waivers; 89

2. The articles of incorporation, the amended

articles, and the by-laws of BASECO;
3. Deed of Sales, wherein NASSCO sold to
BASECO four (4) parcels of land in "Engineer
Island", Port Area, Manila;
4. Transfer Certificate of Title No. 124822 in the
name of BASECO, covering "Engineer Island";
5. Contract dated October 9, 1973, between
NASSCO and BASECO re-structure and equipment
at Mariveles, Bataan;
6. Contract dated July 16, 1975, between NASSCO
and BASECO re-structure and equipment at
Engineer Island, Port Area Manila;
7. Contract dated October 1, 1974, between EPZA
and BASECO re 300 hectares of land at Mariveles,
Bataan;
8. List of BASECO's fixed assets;
9. Loan Agreement dated September 3, 1975,
BASECO's loan from NDC of P30,000,000.00;
10. BASECO-REPACOM Agreement dated May 27,
1975;
11. GSIS loan to BASECO dated January 28, 1976
of P12,400,000.00 for the housing facilities for
BASECO's rank-and-file employees. 90
Capt. Romualdez also recommended that BASECO's loans be restructured
"until such period when BASECO will have enough orders for ships in order
for the company to meet loan obligations," and that
An LOI may be issued to government agencies using
floating equipment, that a linkage scheme be applied
to a certain percent of BASECO's net profit as part

of BASECO's amortization payments to make it

justifiable for you, Sir. 91
It is noteworthy that Capt. A.T. Romualdez does not appear to be a
stockholder or officer of BASECO, yet he has presented a report on
BASECO to President Marcos, and his report demonstrates intimate
familiarity with the firm's affairs and problems.
19. Marcos' Response to Reports
President Marcos lost no time in acting on his subordinates'
recommendations, particularly as regards the "spin-off" and the "linkage
scheme" relative to "BASECO's amortization payments."
a. Instructions re "Spin-Off"
Under date of September 28, 1977, he addressed a Memorandum to Secretary
Geronimo Velasco of the Philippine National Oil Company and Chairman
Constante Farias of the National Development Company, directing them "to
participate in the formation of a new corporation resulting from the spin-off
of the shipbuilding component of BASECO along the following guidelines:
a. Equity participation of government shall be
through LUSTEVECO and NDC in the amount of
P115,903,000 consisting of the following
obligations of BASECO which are hereby authorized
to be converted to equity of the said new
corporation, to wit:
1. NDC P83,865,000 (P31.165M
loan & P52.2M Reparation)
2. LUSTEVECO P32,538,000
(Reparation)
b. Equity participation of government shall be in the
form of non- voting shares.
For immediate compliance. 92

Mr. Marcos' guidelines were promptly complied with by his subordinates.

Twenty-two (22) days after receiving their president's memorandum, Messrs.
Hilario M. Ruiz, Constante L. Farias and Geronimo Z. Velasco, in
representation of their respective corporations, executed a PREINCORPORATION AGREEMENT dated October 20, 1977. 93 In it, they
undertook to form a shipbuilding corporation to be known as "PHIL-ASIA
SHIPBUILDING CORPORATION," to bring to realization their president's
instructions. It would seem that the new corporation ultimately formed was
actually named "Philippine Dockyard Corporation (PDC)." 94
b. Letter of Instructions No. 670
Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of
instructions. On February 14, 1978, he issued Letter of Instructions No. 670
addressed to the Reparations Commission REPACOM the Philippine
National Oil Company (PNOC), the Luzon Stevedoring Company
(LUSTEVECO), and the National Development Company (NDC). What is
commanded therein is summarized by the Solicitor General, with pithy and
not inaccurate observations as to the effects thereof (in italics), as follows:
* * 1) the shipbuilding equipment procured by
BASECO through reparations be transferred to NDC
subject to reimbursement by NDC to BASECO (of)
the amount of s allegedly representing the handling
and incidental expenses incurred by BASECO in the
installation of said equipment (so instead of NDC
getting paid on its loan to BASECO, it was made to
pay BASECO instead the amount of P18.285M); 2)
the shipbuilding equipment procured from
reparations through EPZA, now in the possession of
BASECO and BSDI (Bay Shipyard & Drydocking,
Inc.) be transferred to LUSTEVECO through
PNOC; and 3) the shipbuilding equipment (thus)
transferred be invested by LUSTEVECO, acting
through PNOC and NDC, as the government's equity
participation in a shipbuilding corporation to be
established in partnership with the private sector.
xxx xxx xxx

And so, through a simple letter of instruction and

memorandum, BASECO's loan obligation to NDC
and REPACOM * * in the total amount of P83.365M
and BSD's REPACOM loan of P32.438M were
wiped out and converted into non-voting preferred
shares. 95
20. Evidence of Marcos'
Ownership of BASECO
It cannot therefore be gainsaid that, in the context of the proceedings at bar,
the actuality of the control by President Marcos of BASECO has been
sufficiently shown.
Other evidence submitted to the Court by the Solicitor General proves that
President Marcos not only exercised control over BASECO, but also that he
actually owns well nigh one hundred percent of its outstanding stock.
It will be recalled that according to petitioner- itself, as of April 23, 1986,
there were 218,819 shares of stock outstanding, ostensibly owned by twenty
(20) stockholders. 96 Four of these twenty are juridical persons: (1) Metro
Bay Drydock, recorded as holding 136,370 shares; (2) Fidelity Management,
Inc., 65,882 shares; (3) Trident Management, 7,412 shares; and (4) United
Phil. Lines, 1,240 shares. The first three corporations, among themselves,
own an aggregate of 209,664 shares of BASECO stock, or 95.82% of the
outstanding stock.
Now, the Solicitor General has drawn the Court's attention to the intriguing
circumstance that found in Malacanang shortly after the sudden flight of
President Marcos, were certificates corresponding to more than ninety-five
percent (95%) of all the outstanding shares of stock of BASECO, endorsed in
blank, together with deeds of assignment of practically all the outstanding
shares of stock of the three (3) corporations above mentioned (which hold
95.82% of all BASECO stock), signed by the owners thereof although not
notarized. 97
More specifically, found in Malacanang (and now in the custody of the
PCGG) were:

1) the deeds of assignment of all 600 outstanding

shares of Fidelity Management Inc. which
supposedly owns as aforesaid 65,882 shares of
BASECO stock;
2) the deeds of assignment of 2,499,995 of the
2,500,000 outstanding shares of Metro Bay Drydock
Corporation which allegedly owns 136,370
shares of BASECO stock;
3) the deeds of assignment of 800 outstanding
shares of Trident Management Co., Inc. which
allegedly owns 7,412 shares of BASECO stock,
assigned in blank; 98 and
4) stock certificates corresponding to 207,725 out of
the 218,819 outstanding shares of BASECO stock;
that is, all but 5 % all endorsed in blank. 99
While the petitioner's counsel was quick to dispute this asserted fact, assuring
this Court that the BASECO stockholders were still in possession of their
respective stock certificates and had "never endorsed * * them in blank or to
anyone else," 100 that denial is exposed by his own prior and subsequent
recorded statements as a mere gesture of defiance rather than a verifiable
factual declaration.
By resolution dated September 25, 1986, this Court granted BASECO's
counsel a period of 10 days "to SUBMIT, as undertaken by him, * * the
certificates of stock issued to the stockholders of * * BASECO as of April
23, 1986, as listed in Annex 'P' of the petition.' 101 Counsel thereafter moved
for extension; and in his motion dated October 2, 1986, he declared inter alia
that "said certificates of stock are in the possession of third parties, among
whom being the respondents themselves * * and petitioner is still
endeavoring to secure copies thereof from them." 102 On the same day he
filed another motion praying that he be allowed "to secure copies of the
Certificates of Stock in the name of Metro Bay Drydock, Inc., and of all
other Certificates, of Stock of petitioner's stockholders in possession of
respondents." 103
In a Manifestation dated October 10, 1986,, 104 the Solicitor General not
unreasonably argued that counsel's aforestated motion to secure copies of the
stock certificates "confirms the fact that stockholders of petitioner

corporation are not in possession of * * (their) certificates of stock," and the

reason, according to him, was "that 95% of said shares * * have been
endorsed in blank and found in Malacaang after the former President and
his family fled the country." To this manifestation BASECO's counsel replied
on November 5, 1986, as already mentioned, Stubbornly insisting that the
firm's stockholders had not really assigned their stock. 105
In view of the parties' conflicting declarations, this Court resolved on
November 27, 1986 among other things "to require * * the petitioner * * to
deposit upon proper receipt with Clerk of Court Juanito Ranjo the originals
of the stock certificates alleged to be in its possession or accessible to it,
mentioned and described in Annex 'P' of its petition, (and other pleadings) *
* within ten (10) days from notice." 106 In a motion filed on December 5,
1986, 107 BASECO's counsel made the statement, quite surprising in the
premises, that "it will negotiate with the owners (of the BASECO stock in
question) to allow petitioner to borrow from them, if available, the
certificates referred to" but that "it needs a more sufficient time therefor"
(sic). BASECO's counsel however eventually had to confess inability to
produce the originals of the stock certificates, putting up the feeble excuse
that while he had "requested the stockholders to allow * * (him) to borrow
said certificates, * * some of * * (them) claimed that they had delivered the
certificates to third parties by way of pledge and/or to secure performance of
obligations, while others allegedly have entrusted them to third parties in
view of last national emergency." 108 He has conveniently omitted, nor has
he offered to give the details of the transactions adverted to by him, or to
explain why he had not impressed on the supposed stockholders the
primordial importance of convincing this Court of their present custody of
the originals of the stock, or if he had done so, why the stockholders are
unwilling to agree to some sort of arrangement so that the originals of their
certificates might at the very least be exhibited to the Court. Under the
circumstances, the Court can only conclude that he could not get the originals
from the stockholders for the simple reason that, as the Solicitor General
maintains, said stockholders in truth no longer have them in their possession,
these having already been assigned in blank to then President Marcos.
21. Facts Justify Issuance of Sequestration and Takeover Orders
In the light of the affirmative showing by the Government that, prima facie at
least, the stockholders and directors of BASECO as of April, 1986 109 were
mere "dummies," nominees or alter egos of President Marcos; at any rate,
that they are no longer owners of any shares of stock in the corporation, the
conclusion cannot be avoided that said stockholders and directors have no

basis and no standing whatever to cause the filing and prosecution of the
instant proceeding; and to grant relief to BASECO, as prayed for in the
petition, would in effect be to restore the assets, properties and business
sequestered and taken over by the PCGG to persons who are "dummies,"
nominees or alter egos of the former president.

provisions will immediately make apparent. In no sense, therefore, may the

executive orders be regarded as a bill of attainder.

From the standpoint of the PCGG, the facts herein stated at some length do
indeed show that the private corporation known as BASECO was "owned or
controlled by former President Ferdinand E. Marcos * * during his
administration, * * through nominees, by taking advantage of * * (his) public
office and/or using * * (his) powers, authority, influence * *," and that
NASSCO and other property of the government had been taken over by
BASECO; and the situation justified the sequestration as well as the
provisional takeover of the corporation in the public interest, in accordance
with the terms of Executive Orders No. 1 and 2, pending the filing of the
requisite actions with the Sandiganbayan to cause divestment of title thereto
from Marcos, and its adjudication in favor of the Republic pursuant to
Executive Order No. 14.

BASECO also contends that its right against self incrimination and
unreasonable searches and seizures had been transgressed by the Order of
April 18, 1986 which required it "to produce corporate records from 1973 to
1986 under pain of contempt of the Commission if it fails to do so." The
order was issued upon the authority of Section 3 (e) of Executive Order No.
1, treating of the PCGG's power to "issue subpoenas requiring * * the
production of such books, papers, contracts, records, statements of accounts
and other documents as may be material to the investigation conducted by
the Commission, " and paragraph (3), Executive Order No. 2 dealing with its
power to "require all persons in the Philippines holding * * (alleged "illgotten") assets or properties, whether located in the Philippines or abroad, in
their names as nominees, agents or trustees, to make full disclosure of the
same * *." The contention lacks merit.

As already earlier stated, this Court agrees that this assessment of the facts is
correct; accordingly, it sustains the acts of sequestration and takeover by the
PCGG as being in accord with the law, and, in view of what has thus far been
set out in this opinion, pronounces to be without merit the theory that said
acts, and the executive orders pursuant to which they were done, are fatally
defective in not according to the parties affected prior notice and hearing, or
an adequate remedy to impugn, set aside or otherwise obtain relief therefrom,
or that the PCGG had acted as prosecutor and judge at the same time.
22. Executive Orders Not a Bill of Attainder
Neither will this Court sustain the theory that the executive orders in question
are a bill of attainder. 110 "A bill of attainder is a legislative act which inflicts
punishment without judicial trial." 111 "Its essence is the substitution of a
legislative for a judicial determination of guilt." 112
In the first place, nothing in the executive orders can be reasonably construed
as a determination or declaration of guilt. On the contrary, the executive
orders, inclusive of Executive Order No. 14, make it perfectly clear that any
judgment of guilt in the amassing or acquisition of "ill-gotten wealth" is to be
handed down by a judicial tribunal, in this case, the Sandiganbayan, upon
complaint filed and prosecuted by the PCGG. In the second place, no
punishment is inflicted by the executive orders, as the merest glance at their

23. No Violation of Right against Self-Incrimination and Unreasonable

Searches and Seizures

It is elementary that the right against self-incrimination has no application to

juridical persons.
While an individual may lawfully refuse to answer
incriminating questions unless protected by an
immunity statute, it does not follow that a
corporation, vested with special privileges and
franchises, may refuse to show its hand when
charged with an abuse ofsuchprivileges * * 113
Relevant jurisprudence is also cited by the Solicitor General. 114
* * corporations are not entitled to all of the
constitutional protections which private individuals
have. * * They are not at all within the privilege
against self-incrimination, although this court more
than once has said that the privilege runs very
closely with the 4th Amendment's Search and
Seizure provisions. It is also settled that an officer of
the company cannot refuse to produce its records in
its possession upon the plea that they will either
incriminate him or may incriminate it." (Oklahoma

Press Publishing Co. v. Walling, 327 U.S. 186;

emphasis, the Solicitor General's).
* * The corporation is a creature of the state. It is
presumed to be incorporated for the benefit of the
public. It received certain special privileges and
franchises, and holds them subject to the laws of the
state and the limitations of its charter. Its powers are
limited by law. It can make no contract not
authorized by its charter. Its rights to act as a
corporation are only preserved to it so long as it
obeys the laws of its creation. There is a reserve
right in the legislature to investigate its contracts and
find out whether it has exceeded its powers. It would
be a strange anomaly to hold that a state, having
chartered a corporation to make use of certain
franchises, could not, in the exercise of sovereignty,
inquire how these franchises had been employed,
and whether they had been abused, and demand the
production of the corporate books and papers for
that purpose. The defense amounts to this, that an
officer of the corporation which is charged with a
criminal violation of the statute may plead the
criminality of such corporation as a refusal to
produce its books. To state this proposition is to
answer it. While an individual may lawfully refuse to
answer incriminating questions unless protected by
an immunity statute, it does not follow that a
corporation, vested with special privileges and
franchises may refuse to show its hand when
charged with an abuse of such privileges. (Wilson v.
United States, 55 Law Ed., 771, 780 [emphasis, the
Solicitor General's])
At any rate, Executive Order No. 14-A, amending Section 4 of Executive
Order No. 14 assures protection to individuals required to produce evidence
before the PCGG against any possible violation of his right against selfincrimination. It gives them immunity from prosecution on the basis of
testimony or information he is compelled to present. As amended, said
Section 4 now provides that
xxx xxx xxx

The witness may not refuse to comply with the order

on the basis of his privilege against selfincrimination; but no testimony or other information
compelled under the order (or any information
directly or indirectly derived from such testimony, or
other information) may be used against the witness
in any criminal case, except a prosecution for
perjury, giving a false statement, or otherwise failing
to comply with the order.
The constitutional safeguard against unreasonable searches and seizures finds
no application to the case at bar either. There has been no search undertaken
by any agent or representative of the PCGG, and of course no seizure on the
occasion thereof.
24. Scope and Extent of Powers of the PCGG
One other question remains to be disposed of, that respecting the scope and
extent of the powers that may be wielded by the PCGG with regard to the
properties or businesses placed under sequestration or provisionally taken
over. Obviously, it is not a question to which an answer can be easily given,
much less one which will suffice for every conceivable situation.
a. PCGG May Not Exercise Acts of Ownership
One thing is certain, and should be stated at the outset: the PCGG cannot
exercise acts of dominion over property sequestered, frozen or provisionally
taken over. AS already earlier stressed with no little insistence, the act of
sequestration; freezing or provisional takeover of property does not import or
bring about a divestment of title over said property; does not make the PCGG
the owner thereof. In relation to the property sequestered, frozen or
provisionally taken over, the PCGG is a conservator, not an owner.
Therefore, it can not perform acts of strict ownership; and this is specially
true in the situations contemplated by the sequestration rules where, unlike
cases of receivership, for example, no court exercises effective supervision or
can upon due application and hearing, grant authority for the performance of
acts of dominion.
Equally evident is that the resort to the provisional remedies in question
should entail the least possible interference with business operations or
activities so that, in the event that the accusation of the business enterprise

being "ill gotten" be not proven, it may be returned to its rightful owner as
far as possible in the same condition as it was at the time of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration over the
property or business sequestered or provisionally taken over, much like a
court-appointed receiver, 115 such as to bring and defend actions in its own
name; receive rents; collect debts due; pay outstanding debts; and generally
do such other acts and things as may be necessary to fulfill its mission as
conservator and administrator. In this context, it may in addition enjoin or
restrain any actual or threatened commission of acts by any person or entity
that may render moot and academic, or frustrate or otherwise make
ineffectual its efforts to carry out its task; punish for direct or indirect
contempt in accordance with the Rules of Court; and seek and secure the
assistance of any office, agency or instrumentality of the government. 116 In
the case of sequestered businesses generally (i.e., going concerns, businesses
in current operation), as in the case of sequestered objects, its essential role,
as already discussed, is that of conservator, caretaker, "watchdog" or
overseer. It is not that of manager, or innovator, much less an owner.
c. Powers over Business Enterprises Taken Over by
Marcos or Entities or Persons Close to him;
Limitations Thereon
Now, in the special instance of a business enterprise shown by evidence to
have been "taken over by the government of the Marcos Administration or by
entities or persons close to former President Marcos," 117 the PCGG is given
power and authority, as already adverted to, to "provisionally take (it) over in
the public interest or to prevent * * (its) disposal or dissipation;" and since
the term is obviously employed in reference to going concerns, or business
enterprises in operation, something more than mere physical custody is
connoted; the PCGG may in this case exercise some measure of control in
the operation, running, or management of the business itself. But even in this
special situation, the intrusion into management should be restricted to the
minimum degree necessary to accomplish the legislative will, which is "to
prevent the disposal or dissipation" of the business enterprise. There should
be no hasty, indiscriminate, unreasoned replacement or substitution of
management officials or change of policies, particularly in respect of viable
establishments. In fact, such a replacement or substitution should be avoided
if at all possible, and undertaken only when justified by demonstrably tenable
grounds and in line with the stated objectives of the PCGG. And it goes

without saying that where replacement of management officers may be called

for, the greatest prudence, circumspection, care and attention - should
accompany that undertaking to the end that truly competent, experienced and
honest managers may be recruited. There should be no role to be played in
this area by rank amateurs, no matter how wen meaning. The road to hell, it
has been said, is paved with good intentions. The business is not to be
experimented or played around with, not run into the ground, not driven to
bankruptcy, not fleeced, not ruined. Sight should never be lost sight of the
ultimate objective of the whole exercise, which is to turn over the business to
the Republic, once judicially established to be "ill-gotten." Reason dictates
that it is only under these conditions and circumstances that the supervision,
administration and control of business enterprises provisionally taken over
may legitimately be exercised.
d. Voting of Sequestered Stock; Conditions Therefor
So, too, it is within the parameters of these conditions and circumstances that
the PCGG may properly exercise the prerogative to vote sequestered stock of
corporations, granted to it by the President of the Philippines through a
Memorandum dated June 26, 1986. That Memorandum authorizes the
PCGG, "pending the outcome of proceedings to determine the ownership of
* * (sequestered) shares of stock," "to vote such shares of stock as it may
have sequestered in corporations at all stockholders' meetings called for the
election of directors, declaration of dividends, amendment of the Articles of
Incorporation, etc." The Memorandum should be construed in such a manner
as to be consistent with, and not contradictory of the Executive Orders earlier
promulgated on the same matter. There should be no exercise of the right to
vote simply because the right exists, or because the stocks sequestered
constitute the controlling or a substantial part of the corporate voting power.
The stock is not to be voted to replace directors, or revise the articles or bylaws, or otherwise bring about substantial changes in policy, program or
practice of the corporation except for demonstrably weighty and defensible
grounds, and always in the context of the stated purposes of sequestration or
provisional takeover, i.e., to prevent the dispersion or undue disposal of the
corporate assets. Directors are not to be voted out simply because the power
to do so exists. Substitution of directors is not to be done without reason or
rhyme, should indeed be shunned if at an possible, and undertaken only when
essential to prevent disappearance or wastage of corporate property, and
always under such circumstances as assure that the replacements are truly
possessed of competence, experience and probity.

In the case at bar, there was adequate justification to vote the incumbent
directors out of office and elect others in their stead because the evidence
showed prima facie that the former were just tools of President Marcos and
were no longer owners of any stock in the firm, if they ever were at all. This
is why, in its Resolution of October 28, 1986; 118 this Court declared that
Petitioner has failed to make out a case of grave
abuse or excess of jurisdiction in respondents'
calling and holding of a stockholders' meeting for
the election of directors as authorized by the
Memorandum of the President * * (to the PCGG)
dated June 26, 1986, particularly, where as in this
case, the government can, through its designated
directors, properly exercise control and management
over what appear to be properties and assets owned
and belonging to the government itself and over
which the persons who appear in this case on behalf
of BASECO have failed to show any right or even
any shareholding in said corporation.
It must however be emphasized that the conduct of the PCGG nominees in
the BASECO Board in the management of the company's affairs should
henceforth be guided and governed by the norms herein laid down. They
should never for a moment allow themselves to forget that they are
conservators, not owners of the business; they are fiduciaries, trustees, of
whom the highest degree of diligence and rectitude is, in the premises,
required.
25. No Sufficient Showing of Other Irregularities
As to the other irregularities complained of by BASECO, i.e., the
cancellation or revision, and the execution of certain contracts, inclusive of
the termination of the employment of some of its executives, 119 this Court
cannot, in the present state of the evidence on record, pass upon them. It is
not necessary to do so. The issues arising therefrom may and will be left for
initial determination in the appropriate action. But the Court will state that
absent any showing of any important cause therefor, it will not normally
substitute its judgment for that of the PCGG in these individual transactions.
It is clear however, that as things now stand, the petitioner cannot be said to
have established the correctness of its submission that the acts of the PCGG
in question were done without or in excess of its powers, or with grave abuse
of discretion.

WHEREFORE, the petition is dismissed. The temporary restraining order

issued on October 14, 1986 is lifted.
Yap, Fernan, Paras, Gancayco and Sarmiento, JJ., concur.

subdivision. On May 3, 1989, she authorized private respondent to negotiate

with the squatters to leave the said property. With a written authorization,
respondent Bravo buckled down to work and started negotiations with the
squatters.
Meanwhile, some seven (7) months later, on December 11, 1989,
petitioner Posadas and her two (2) children, through a Deed of Assignment,
assigned the said property to petitioner Luxuria Homes, Inc., purportedly for
organizational and tax avoidance purposes. Respondent Bravo signed as one
of the witnesses to the execution of the Deed of Assignment and the Articles
of Incorporation of petitioner Luxuria Homes, Inc.

[G.R. No. 125986. January 28, 1999]

LUXURIA HOMES, INC., petitioners, vs. HONORABLECOURT OF

APPEALS, respondents.

DECISION

MARTINEZ, J.:
This petition for review assails the decision of the respondent Court of
Appeals dated March 15, 1996,i which affirmed with modification the
judgment of default rendered by the Regional Trial Court of Muntinlupa,
Branch 276, in Civil Case No. 92-2592 granting all the reliefs prayed for in
the complaint of private respondent James Builder Construction and/or Jaime
T. Bravo.
As culled from the record, the facts are as follows:
Petitioner Aida M. Posadas and her two (2) minor children co-owned a
1.6 hectare property in Sucat, Muntinlupa, which was occupied by squatters.
Petitioner Posadas entered into negotiations with private respondent Jaime T.
Bravo regarding the development of the said property into a residential

Then sometime in 1992, the harmonious and congenial relationship of

petitioner Posadas and respondent Bravo turned sour when the former
supposedly could not accept the management contracts to develop the 1.6
hectare property into a residential subdivision, the latter was proposing. In
retaliation, respondent Bravo demanded payment for services rendered in
connection with the development of the land. In his statement of account
dated 21 August 1991ii respondent demanded the payment of P1,708,489.00
for various services rendered, i.e., relocation of squatters, preparation of the
architectural design and site development plan, survey and fencing.
Petitioner Posadas refused to pay the amount demanded. Thus, in
September 1992, private respondents James Builder Construction and Jaime
T. Bravo instituted a complaint for specific performance before the trial court
against petitioners Posadas and Luxuria Homes, Inc. Private respondents
alleged therein that petitioner Posadas asked them to clear the subject parcel
of land of squatters for a fee of P1,100,000.00 for which they were partially
paid the amount of P461,511.50, leaving a balance of P638,488.50. They
were also supposedly asked to prepare a site development plan and an
architectural design for a contract price of P450,000.00 for which they were
partially paid the amount of P25,000.00, leaving a balance of P425,000.00.
And in anticipation of the signing of the land development contract, they had
to construct a bunkhouse and warehouse on the property which amounted to
P300,000.00, and a hollow blocks factory for P60,000.00. Private
respondents also claimed that petitioner Posadas agreed that private
respondents will develop the land into a first class subdivision thru a
management contract and that petitioner Posadas is unjustly refusing to
comply with her obligation to finalize the said management contract.
The prayer in the complaint of the private respondents before the trial
court reads as follows:
WHEREFORE, premises considered, it is respectfully prayed of this

Honorable Court that after hearing/trial judgment be rendered ordering

defendant to:
a) Comply with its obligation to deliver/finalize Management Contract
of its land in Sucat, Muntinlupa, Metro Manila and to pay plaintiff its balance
in the amount of P1,708,489.00;
b) Pay plaintiff moral and exemplary damages in the amount of
P500,000.00;
c) Pay plaintiff actual damages in the amount of P500,000.00
(Bunkhouse/warehouse P300,000.00, Hollow-block factory P60,000.00,
lumber, cement, etc., P120,000.00, guard P20,000.00);
d) Pay plaintiff attorneys fee of P50,000 plus P700 per appearance in
court and 5% of that which may be awarded by the court to plaintiff re its
monetary claims;
e) Pay cost of this suit.iii
On September 27, 1993, the trial court declared petitioner Posadas in
default and allowed the private respondents to present their evidence exparte. On March 8, 1994, it ordered petitioner Posadas, jointly and in
solidum with petitioner Luxuria Homes, Inc., to pay private respondents as
follows:
1. x x x the balance of the payment for the various services performed
by Plaintiff with respect to the land covered by TCT NO. 167895 previously
No. 158290 in the total amount of P1,708,489.00.
2. x x x actual damages incurred for the construction of the
warehouses/bunks, and for the materials used in the total sum of
P1,500,000.00.
3. Moral and exemplary damages of P500,000.00.
4. Attorneys fee of P50,000.00.
5. And cost of this proceedings.
Defendant Aida Posadas as the Representative of the Corporation
Luxuria Homes, Incorporated, is further directed to execute the management
contract she committed to do, also in consideration of the various
undertakings that Plaintiff rendered for her.iv
Aggrieved by the aforecited decision, petitioners appealed to respondent
Court of Appeals, which, as aforestated, affirmed with modification the
decision of the trial court. The appellate court deleted the award of moral

damages on the ground that respondent James Builder Construction is a

corporation and hence could not experience physical suffering and mental
anguish. It also reduced the award of exemplary damages. The dispositive
portion of the decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED with
the modification that the award of moral damages is ordered deleted and the
award of exemplary damages to the plaintiffs-appellee should only be in the
amount of FIFTY THOUSAND (P50,000.00) PESOS.v
Petitioners motion for reconsideration was denied, prompting the filing
of this petition for review before this Court.
On January 15, 1997, the Third Division of this Court denied due course
to this petition for failing to show convincingly any reversible error on the
part of the Court of Appeals. This Court however deleted the grant of
exemplary damages and attorneys fees. The Court also reduced the trial
courts award of actual damages from P1,500,000.00 to P500,000.00
reasoning that the grant should not exceed the amount prayed for in the
complaint. In the prayer in the complaint respondents asked for actual
damages in the amount of P500,000.00 only.
Still feeling aggrieved with the resolution of this Court, petitioners filed
a motion for reconsideration. On March 17, 1997, this Court found merit in
the petitioners motion for reconsideration and reinstated this petition for
review.
From their petition for review and motion for reconsideration before this
Court, we now synthesize the issues as follows:
1. Were private respondents able to present ex-parte sufficient
evidence to substantiate the allegations in their complaint and entitle
them to their prayers?
2. Can petitioner Luxuria Homes, Inc., be held liable to private
respondents for the transactions supposedly entered into between
petitioner Posadas and private respondents?
3. Can petitioners be compelled to enter into a management
contract with private respondents?
Petitioners who were declared in default assert that the private
respondents who presented their evidence ex-parte nonetheless utterly failed
to substantiate the allegations in their complaint and as such cannot be
entitled to the reliefs prayed for.

A perusal of the record shows that petitioner Posadas contracted

respondents Bravo to render various services for the initial development of
the property as shown by vouchers evidencing payments made by petitioner
Posadas to respondents Bravo for squatter relocation, architectural design,
survey and fencing.
Respondents prepared the architectural design, site development plan
and survey in connection with petitioner Posadas application with the
Housing and Land Regulatory Board (HLRUB) for the issuance of the
Development Permit, Preliminary Approval and Locational Clearance. vi
Petitioner benefited from said services as the Development Permit and the
Locational Clearance were eventually issued by the HLURB in her favor.
Petitioner Posadas is therefore liable to pay for these services rendered by
respondents. The contract price for the survey of the land is P140,000.00.
Petitioner made partial payments totaling P130,000.00 leaving a payable
balance of P10,000.00.
In his testimony,vii he alleged that the agreed price for the preparation of
the site development plan is P500,000.00 and that the preparation of the
architectural designs is for P450,000, or a total of P950,000.00 for the two
contracts. In his complaint however, respondent Bravo alleged that he was
asked to prepare the site development plan and the architectural designs x x x
for a contract price of P450,000.00 x x x.viii The discrepancy or inconsistency
was never reconciled and clarified.
We reiterate that we cannot award an amount higher than what was
claimed in the complaint. Consequently for the preparation of both the
architectural design and site development plan, respondent is entitled to the
amount of P450,000.00 less partial payments made in the amount of
P25,000.00. In Policarpio v. RTC of Quezon City,ix it was held that a court is
bereft of jurisdiction to award, in a judgment by default, a relief other than
that specifically prayed for in the complaint.
As regards the contracts for the ejectment of squatters and fencing, we
believe however that respondents failed to show proof that they actually
fulfilled their commitments therein. Aside from the bare testimony of
respondent Bravo, no other evidence was presented to show that all the
squatter were ejected from the property. Respondent Bravo failed to show
how many shanties or structures were actually occupying the property before
he entered the same, to serve as basis for concluding whether the task was
finished or not. His testimony alone that he successfully negotiated for the
ejectment of all the squatters from the property will not suffice.
Likewise, in the case of fencing, there is no proof that it was

accomplished as alleged. Respondent Bravo claims that he finished sixty

percent (60%) of the fencing project but he failed to present evidence
showing the area sought to be fenced and the actual area fenced by him. We
therefore have no basis to determining the veracity respondents allegations.
We cannot assume that the said services rendered for it will be unfair to
require petitioner to pay the full amount claimed in case the respondents
obligations were not completely fulfilled.
For respondents failure to show proof of accomplishment of the
aforesaid services, their claims cannot be granted. In P.T. Cerna Corp. v.
Court of Appeals,x we ruled that in civil cases, the burden of proof rests upon
the party who, as determined by the pleadings or the nature of the case,
asserts the affirmative of an issue. In this case the burden lies on the
complainant, who is duty bound to prove the allegations in the complaint. As
this Court has held, he who alleges a fact has the burden of proving it and A
MERE ALLEGATION IS NOT EVIDENCE.
And the rules do not change even if the defendant is declared in default.
In the leading case of Lopez v. Mendezona,xi this Court ruled that after entry
of judgment in default against a defendant who has neither appeared nor
answered, and before final judgment in favor of the plaintiff, the latter must
establish by competent evidence all the material allegations of his complaint
upon which he bases his prayer for relief. In De los Santos v. De la Cruzxii
this Court declared that a judgment by default against a defendant does not
imply a waiver of rights except that of being heard and of presenting
evidence in his favor. It does not imply admission by the defendant of the
facts and causes of action of the plaintiff, because the codal section requires
the latter to adduce his evidence in support of his allegations as an
indispensable condition before final judgment could be given in his favor.
Nor could it be interpreted as an admission by the defendant that the
plaintiffs causes of action finds support in the law or that the latter is entitled
to the relief prayed for.
We explained the rule in judgments by default in Pascua v. Florendo,xiii
where we said that nowhere is it stated that the complainants are
automatically entitled to the relief prayed for, once the defendants are
declared in default. Favorable relief can be granted only after the court has
ascertained that the evidence offered and the facts proven by the presenting
party warrant the grant of the same. Otherwise it would be meaningless to
require presentation of evidence if everytime the other party is declared in
default, a decision would automatically be rendered in favor of the nondefaulting party and exactly according to the tenor of his prayer. In Lim
Tanhu v. Ramoletexiv we elaborated and said that a defaulted defendant is not

actually thrown out of court. The rules see to it that any judgment against
him must be in accordance with law. The evidence to support the plaintiffs
cause is, of course, presented in his absence, but the court is not supposed to
admit that which is basically incompetent. Although the defendant would not
be in a position to object, elementary justice requires that only legal evidence
should be considered against him. If the evidence presented should not be
sufficient to justify a judgment for the plaintiff, the complaint must be
dismissed. And if an unfavorable judgment should be justifiable, it cannot
exceed the amount or be different in kind from what is prayed for in the
complaint.
The prayer for actual damages in the amount of P500,000.00,
supposedly for the bunkhouse/warehouse, hollow-block factory, lumber,
cement, guard, etc., which the trial court granted and even increased to
P1,500,000.00, and which this Court would have rightly reduced to the
amount prayed for in the complaint, was not established, as shown upon
further review of the record. No receipts or vouchers were presented by
private respondents to show that they actually spent the amount. In Salas v.
Court of Appeals,xv we said that the burden of proof of the damages suffered
is on the party claiming the same. It his duty to present evidence to support
his claim for actual damages. If he failed to do so, he has only himself to
blame if no award for actual damages is handed down.
In fine, as we declared in PNOC Shipping & Transport Corp. v. Court
of Appeals,xvi basic is the rule that to recover actual damages, the amount of
loss must not only be capable of proof but must actually be proven with
reasonable degree of certainty, premised upon competent proof or best
evidence obtainable of the actual amount thereof.
We go to the second issue of whether Luxuria Homes, Inc., was a party
to the transactions entered into by petitioner Posadas and private respondents
and thus could be held jointly and severally with petitioner Posadas. Private
respondents contend that petitioner Posadas surreptitiously formed Luxuria
Homes, Inc., and transferred the subject parcel of land to it to evade payment
and defraud creditors, including private respondents. This allegation does not
find support in the evidence on record.
On the contrary we hold that respondents Court of Appeals committed a
reversible error when it upheld the factual finding of the trial court that
petitioners liability was aggravated by the fact that Luxuria Homes, Inc., was
formed by petitioner Posadas after demand for payment had been made,
evidently for her to evade payment of her obligation, thereby showing that
the transfer of her property to Luxuria Homes, Inc., was in fraud of creditors.

We easily glean from the record that private respondents sent demand
letters on 21 August 1991 and 14 September 1991, or more than a year and a
half after the execution of the Deed of Assignment on 11 December 1989,
and the issuance of the Articles of Incorporation of petitioner Luxuria Homes
on 26 January 1990. And, the transfer was made at the time the relationship
between petitioner Posadas and private respondents was supposedly very
pleasant. In fact the Deed of Assignment dated 11 December 1989 and the
Articles of Incorporation of Luxuria Homes, Inc., issued 26 January 1990
were both signed by respondent Bravo himself as witness. It cannot be said
then that the incorporation of petitioner Luxuria Homes and the eventual
transfer of the subject property to it were in fraud of private respondent as
such were done with the full knowledge of respondent Bravo himself.
Besides petitioner Posadas is not the majority stockholder of petitioner
Luxuria Homes, Inc., as erroneously stated by the lower court. The Articles
of Incorporation of petitioner Luxuria Homes, Inc., clearly show that
petitioner Posadas owns approximately 33% only of the capital stock. Hence
petitioner Posadas cannot be considered as an alter ego of petitioner Luxuria
Homes, Inc.
To disregard the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly established. It cannot be
presumed. This is elementary. Thus in Bayer-Roxas v. Court of Appeals,xvii
we said that the separate personality of the corporation may be disregarded
only when the corporation is used as a cloak or cover for fraud or illegality,
or to work injustice, or where necessary for the protection of the creditors.
Accordingly in Del Rosario v. NLRC,xviii where the Philsa International
Placement and Services Corp. was organized and registered with the POEA
in 1981, several years before the complainant was filed a case in 1985, we
held that this cannot imply fraud.
Obviously in the instant case, private respondents failed to show proof
that petitioner Posadas acted in bad faith. Consequently since private
respondents failed to show that petitioner Luxuria Homes, Inc., was a party
to any of the supposed transactions, not even to the agreement to negotiate
with and relocate the squatters, it cannot be held liable, nay jointly and in
solidum, to pay private respondents. In this case since it was petitioner Aida
M. Posadas who contracted respondent Bravo to render the subject services,
only she is liable to pay the amounts adjudged herein.
We now resolved the third and final issue. Private respondents urge the
court to compel petitioners to execute a management contract with them on
the basis of the authorization letter dated May 3, 1989. The full text of Exh D
reads:

I hereby certify that we have duly authorized the bearer, Engineer Bravo
to negotiate, in our behalf, the ejectment of squatters from our property of 1.6
hectares, more or less, in Sucat, Muntinlupa. This authority is extended to
him as the representatives of the Managers, under our agreement for them to
undertake the development of said area and the construction of housing units
intended to convert the land into a first class subdivision.
The aforecited document is nothing more than a to-whom-it-mayconcern authorization letter to negotiate with the squatters. Although it
appears that there was an agreement for the development of the area, there is
no showing that same was never perfected and finalized. Private respondents
presented in evidence only drafts of a proposed management contract with
petitioners handwritten marginal notes but the management contract was not
put in its final form. The reason why there was no final uncorrected draft was
because the parties could not agree on the stipulations of said contract, which
even the private respondents admitted as found by the trial court. xix As a
consequence the management drafts submitted by the private respondents
should at best be considered as mere unaccepted offers. We find no cogent
reason, considering that the parties no longer are in a harmonious
relationship, for the execution of a contract to develop a subdivision.
It is fundamental that there can be no contract in the true sense in the
absence of the element of agreement, or of mutual assent of the parties. To
compel petitioner Posadas, whether as representatives of petitioners Luxuria
Homes or in her personal capacity, to execute a management contract under

the terms and conditions of private respondents would be to violate the

principle of consensuality of contracts. In Philippine National bank v. Court
of Appeals,xx we held that if the assent is wanting on the part of one who
contracts, his act has no more efficacy than if it had been done under duress
or by a person of unsound mind. In ordering petitioner Posadas to execute a
management contract with private respondents, the trial court in effect is
putting her under duress.
The parties are bound to fulfill the stipulations in a contract only upon
its perfection. At anytime prior to the perfection of a contract, unaccepted
offers and proposals remain as such and cannot be considered as binding
commitments; hence not demandable.
WHEREFORE, the petition is PARTIALLY GRANTED. The assailed
decision dated March 15, 1996, of respondent Honorable Court of Appeals
and its Resolution dated August 12, 1996, are MODIFIED ordering
PETITIONER AIDA M. POSADAS to pay PRIVATE RESPONDENTS the
amount of P435,000.00 as balance for the preparation of the architectural
design, site development plan and survey. All other claims of respondents are
hereby DENIED for lack of merit.
SO ORDERED
Melo, Kapunan, and Pardo, JJ., concur.
Davide, Jr., C.J. (Chairman), no part former counsel of a party.

ii

iii

[G.R. No. 108734. May 29, 1996]

CONCEPT BUILDERS, INC., petitioner, vs. THE NATIONAL LABOR RELATIONS respondents.
DECISION
HERMOSISIMA, JR., J.:
The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the
alter ego of a person or of another corporation. Where badges of fraud exist; where public convenience is
defeated; where a wrong is sought to be justified thereby, the corporate fiction or the notion of legal entity
should come to naught. The law in these instances will regard the corporation as a mere association of persons
and, in case of two corporations, merge them into one.
Thus, where a sister corporation is used as a shield to evade a corporations subsidiary liability for damages,
the corporation may not be heard to say that it has a personality separate and distinct from the other corporation.
The piercing of the corporate veil comes into play.

This special civil action ostensibly raises the question of whether the National Labor Relations Commission
committed grave abuse of discretion when it issued a break-open order to the sheriff to be enforced against
personal property found in the premises of petitioners sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road,
Valenzuela, Metro Manila, is engaged in the construction business. Private respondents were employed by said
company as laborers, carpenters and riggers.
On November, 1981, private respondents were served individual written notices of termination of
employment by petitioner, effective on November 30, 1981. It was stated in the individual notices that their
contracts of employment had expired and the project in which they were hired had been completed.
Public respondent found it to be, the fact, however, that at the time of the termination of private respondents
employment, the project in which they were hired had not yet been finished and completed. Petitioner had to
engage the services of sub-contractors whose workers performed the functions of private respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and nonpayment of their legal holiday pay, overtime pay and thirteenth-month pay against petitioner.
On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering petitioner to reinstate private
respondents and to pay them back wages equivalent to one year or three hundred working days.
On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the motion for
reconsideration filed by petitioner on the ground that the said decision had already become final and executory. 2
On October 16, 1986, the NLRC Research and Information Department made the finding that private
respondents backwages amounted to P199,800.00.3
On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute the
Decision, dated December 19, 1984. The writ was partially satisfied through garnishment of sums from
petitioners debtor, the Metropolitan Waterworks and Sewerage Authority, in the amount of P81,385.34. Said
amount was turned over to the cashier of the NLRC.
On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff to
collect from herein petitioner the sum of P117,414.76, representing the balance of the judgment award, and to
reinstate private respondents to their former positions.
On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of execution on
petitioner through the security guard on duty but the service was refused on the ground that petitioner no longer
occupied the premises.
On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a second alias writ of
execution.
The said writ had not been enforced by the special sheriff because, as stated in his progress report, dated
November 2, 1989:
1. All the employees inside petitioners premises at 355 Maysan Road, Valenzuela, Metro Manila,
claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent;
2. Levy was made upon personal properties he found in the premises;
3. Security guards with high-powered guns prevented him from removing the properties he had
levied upon.4
The said special sheriff recommended that a break-open order be issued to enable him to enter petitioners
premises so that he could proceed with the public auction sale of the aforesaid personal properties on November
7, 1989.

On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter alleging
that the properties sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of which he
is the Vice-President.
On November 23, 1989, private respondents filed a Motion for Issuance of a Break-Open Order, alleging
that HPPI and petitioner corporation were owned by the same incorporator! stockholders. They also alleged that
petitioner temporarily suspended its business operations in order to evade its legal obligations to them and that
private respondents were willing to post an indemnity bond to answer for any damages which petitioner and
HPPI may suffer because of the issuance of the break-open order.
In support of their claim against HPPI, private respondents presented duly certified copies of the General
Informations Sheet, dated May 15, 1987, submitted by petitioner to the Securities and Exchange Commission
(SEC) and the General Information Sheet, dated May 15, 1987, submitted by HPPI to the Securities and
Exchange Commission.
The General Information Sheet submitted by the petitioner1 revealed the following:
1.Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
HPPI

P6,999,500.00

Antonio W. Lim

2,900,000.00

Dennis S. Cuyegkeng 300.00

Elisa C. Lim

100,000.00

Teodulo R. Dino

100.00

Virgilio O. Casino

100.00

2.

Board of Directors

Antonio W. Lim

Chairman

Dennis S. Cuyegkeng Member

Elisa C. Lim

Member

Teodulo R. Dino

Member

Virgilio O. Casino

Member

3.

Corporate Officers

Antonio W. Lim

President

Dennis S. Cuyegkeng Assistant to the President

Elisa 0. Lim

Treasurer

Virgilio O. Casino

Corporate Secretary

4.

Principal Office

355 Maysan Road

Valenzuela, Metro Manila.5
On the other hand, the General Information Sheet of HPPI revealed the following:
1.

Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

Antonio W. Lim

P400,000.00

Elisa C. Lim

57,700.00

AWL Trading

455,000.00

Dennis S. Cuyegkeng 40,100.00

Teodulo R. Dino

100.00

Virgilio O. Casino

100.00

2.

Board of Directors

Antonio W. Lim

Chairman

Elisa C. Lim

Member

Dennis S. Cuyegkeng Member

Virgilio O. Casino

Member

Teodulo R. Dino

Member

3. Corporate Officers
Antonio W. Lim

President

Dennis S. Cuyegkeng Assistant to the President

Elisa O. Lim

Treasurer

Virgilio O. Casino

Corporate Secretary

4. Principal Office
355 Maysan Road, Valenzuela, Metro Manila.6
On February 1, 1990, HPPI filed an Opposition to private respondents motion for issuance of a break-open
order, contending that HPPI is a corporation which is separate and distinct from petitioner. HPPI also alleged that
the two corporations are engaged in two different kinds of businesses, i.e., HPPI is a manufacturing firm while
petitioner was then engaged in construction.
On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents motion for breakopen order.
Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the order of the
Labor Arbiter, issued a break-open order and directed private respondents to file a bond. Thereafter, it directed
the sheriff to proceed with the auction sale of the properties already levied upon. It dismissed the third-party
claim for lack of merit.
Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution, dated
December 3, 1992.
Hence, the resort to the present petition.
Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the execution of its
decision despite a third-party claim on the levied property. Petitioner further contends, that the doctrine of
piercing the corporate veil should not have been applied, in this case, in the absence of any showing that it
created HPPI in order to evade its liability to private respondents. It also contends that HPPI is engaged in the
manufacture and sale of steel, concrete and iron pipes, a business which is distinct and separate from petitioners

construction business. Hence, it is of no consequence that petitioner and HPPI shared the same premises, the
same President and the same set of officers and subscribers. 7
We find petitioners contention to be unmeritorious.
It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its
stockholders and from other corporations to which it may be connected. 8 But, this separate and distinct
personality of a corporation is merely a fiction created by law for convenience and to promote justice. 9 So, when
the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or
defend crime, or is used as a device to defeat the labor laws, 10 this separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced. 11 This is true likewise when the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation. 12
The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and
circumstances of each case. No hard and fast rule can be accurately laid down, but certainly, there are some
probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, to wit:
1.

Stock ownership by one or common ownership of both corporations.

2.

Identity of directors and officers.

3.

The manner of keeping corporate books and records.

4.

Methods of conducting the business.13

The SEC en banc explained the instrumentality rule which the courts have applied in disregarding the
separate juridical personality of corporations as follows:
Where one corporation is so organized and controlled and its affairs are conducted so that it is, in
fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the
instrumentality may be disregarded. The control necessary to invoke the rule is not majority or even
complete stock control but such domination of finances, policies and practices that the controlled
corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its
principal. It must be kept in mind that the control must be shown to have been exercised at the time the
acts complained of took place. Moreover, the control and breach of duty must proximately cause the
injury or unjust loss for which the complaint is made.
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as
follows:
1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the corporate
entity as to this transaction had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of
plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.
The absence of any one of these elements prevents piercing the corporate veil. in applying the
instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the
corporation operated and the individual defendants relationship to that operation. 14
Thus, the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a sham or
a subterfuge is purely one of fact.15
In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations on April 29,

1986, it filed an Information Sheet with the Securities and Exchange Commission on May 15, 1987, stating that
its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party
claimant, submitted on the same day, a similar information sheet stating that its office address is at 355 Maysan
Road, Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O. Casino as the corporate secretary of
both corporations. It would also not be amiss to note that both corporations had the same president,
the same board of directors, the same corporate officers, and substantially the same subscribers.
From the foregoing, it appears that, among other things, the respondent (herein petitioner) and
the third-party claimant shared the same address and/or premises. Under this circumstances, (sic) it
cannot be said that the property levied upon by the sheriff were not of respondents. 16
Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of
backwages and to bar their reinstatement to their former positions. HPPI is obviously a business conduit of
petitioner corporation and its emergence was skillfully orchestrated to avoid the financial liability that already
attached to petitioner corporation.
The facts in this case are analogous to Claparols v. Court of Industrial Relations17 where we had the
occasion to rule:
Respondent courts findings that indeed the Claparols Steel and Nail Plant, which ceased
operation of June 30, 1957, was SUCCEEDED by the Claparols Steel Corporation effective the next
day, July 1, 1957, up to December 7, 1962, when the latter finally ceased to operate, were not disputed
by petitioner. it is very clear that the latter corporation was a continuation and successor of the first
entity x x x. Both predecessors and successor were owned and controlled by petitioner Eduardo
Claparols and there was no break in the succession and continuity of the same business. This
avoiding-the-liability scheme is very patent, considering that 90% of the subscribed shares of stock of
the Claparols Steel Corporation (the second corporation) was owned by respondent x x x Claparols
himself, and all the assets of the dissolved Claparols Steel and Nail Plant were turned over to the
emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil in
the present case could, and should, be pierced as it was deliberately and maliciously designed to evade its
financial obligation to its employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of the
execution, private respondents had no other recourse but to apply for a break-open order after the third-party
claim of HPPI was dismissed for lack of merit by the NLRC. This is in consonance with Section 3, Rule VII of
the NLRC Manual of Execution of Judgment which provides that:
Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his
representative entry to the place where the property subject of execution is located or kept, the
judgment creditor may apply to the Commission or Labor Arbiter concerned for a break-open order.
Furthermore, our perusal of the records shows that the twin requirements of due notice and hearing were
complied with. Petitioner and the third-party claimant were given the opportunity to submit evidence in support
of their claim.
Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open order
issued by the Labor Arbiter.
Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial agencies
supported by substantial evidence are binding on this Court and are entitled to great respect, in the absence of
showing of grave abuse of a discretion.18

WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April 23,
1992 and December 3, 1992, are AFFIRMED.
SO ORDERED.
Padilla (Chairman), Bellosillo, Vitug, and Kapunan, JJ., concur.

iv

[G.R. No. 100812. June 25, 1999]

FRANCISCO MOTORS CORPORATION, petitioner, vs. COURT OF APPEALS and SPOUSES

GREGORIO and LIBRADA MANUEL, respondents.

DECISION
QUISUMBING, J.:
This petition for review on certiorari, under Rule 45 of the Rules of Court, seeks to annul the decision of
the Court of Appeals in C.A. G.R. CV No. 10014 affirming the decision rendered by Branch 135, Regional Trial
Court of Makati, Metro Manila. The procedural antecedents of this petition are as follows:
On January 23, 1985, petitioner filed a complaint against private respondents to recover three thousand four
hundred twelve and six centavos (P3,412.06), representing the balance of the jeep body purchased by the
Manuels from petitioner; an additional sum of twenty thousand four hundred fifty-four and eighty centavos
(P20,454.80) representing the unpaid balance on the cost of repair of the vehicle; and six thousand pesos
(P6,000.00) for cost of suit and attorneys fees. To the original balance on the price of jeep body were added the
costs of repair. In their answer, private respondents interposed a counterclaim for unpaid legal services by
Gregorio Manuel in the amount of fifty thousand pesos (P50,000) which was not paid by the incorporators,
directors and officers of the petitioner. The trial court decided the case on June 26, 1985, in favor of petitioner in
regard to the petitioners claim for money, but also allowed the counter-claim of private respondents. Both parties
appealed. On April 15, 1991, the Court of Appeals sustained the trial courts decision. Hence, the present petition.
For our review in particular is the propriety of the permissive counterclaim which private respondents filed
together with their answer to petitioners complaint for a sum of money. Private respondent Gregorio Manuel
alleged as an affirmative defense that, while he was petitioners Assistant Legal Officer, he represented members
of the Francisco family in the intestate estate proceedings of the late Benita Trinidad. However, even after the
termination of the proceedings, his services were not paid. Said family members, he said, were also
incorporators, directors and officers of petitioner. Hence to counter petitioners collection suit, he filed a
permissive counterclaim for the unpaid attorneys fees.
For failure of petitioner to answer the counterclaim, the trial court declared petitioner in default on this
score, and evidence ex-parte was presented on the counterclaim. The trial court ruled in favor of private
respondents and found that Gregorio Manuel indeed rendered legal services to the Francisco family in Special
Proceedings Number 7803- In the Matter of Intestate Estate of Benita Trinidad. Said court also found that his
legal services were not compensated despite repeated demands, and thus ordered petitioner to pay him the
amount of fifty thousand (P50,000.00) pesos.
Dissatisfied with the trial courts order, petitioner elevated the matter to the Court of Appeals, posing the
following issues:
I.
WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS NULL AND VOID AS
IT NEVER ACQUIRED JURISDICTION OVER THE PERSON OF THE DEFENDANT.
II.
WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN THE ALLEGED
PERMISSIVE COUNTERCLAIM SHOULD BE HELD LIABLE TO THE CLAIM OF DEFENDANTAPPELLEES.
III.
WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-APPELLANT TO ANSWER
THE ALLEGED PERMISSIVE COUNTERCLAIM.
Petitioner contended that the trial court did not acquire jurisdiction over it because no summons was validly
served on it together with the copy of the answer containing the permissive counterclaim. Further, petitioner
questions the propriety of its being made party to the case because it was not the real party in interest but the

individual members of the Francisco family concerned with the intestate case.
In its assailed decision now before us for review, respondent Court of Appeals held that a counterclaim must
be answered in ten (10) days, pursuant to Section 4, Rule 11, of the Rules of Court; and nowhere does it state in
the Rules that a party still needed to be summoned anew if a counterclaim was set up against him. Failure to
serve summons, said respondent court, did not effectively negate trial courts jurisdiction over petitioner in the
matter of the counterclaim. It likewise pointed out that there was no reason for petitioner to be excused from
answering the counterclaim. Court records showed that its former counsel, Nicanor G. Alvarez, received the
copy of the answer with counterclaim two (2) days prior to his withdrawal as counsel for petitioner. Moreover
when petitioners new counsel, Jose N. Aquino, entered his appearance, three (3) days still remained within the
period to file an answer to the counterclaim. Having failed to answer, petitioner was correctly considered in
default by the trial court. Even assuming that the trial court acquired no jurisdiction over petitioner, respondent
court also said, but having filed a motion for reconsideration seeking relief from the said order of default,
petitioner was estopped from further questioning the trial courts jurisdiction.
On the question of its liability for attorneys fees owing to private respondent Gregorio Manuel, petitioner
argued that being a corporation, it should not be held liable therefor because these fees were owed by the
incorporators, directors and officers of the corporation in their personal capacity as heirs of Benita Trinidad.
Petitioner stressed that the personality of the corporation, vis--vis the individual persons who hired the services
of private respondent, is separate and distinct, hence, the liability of said individuals did not become an
obligation chargeable against petitioner.
Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:
However, this distinct and separate personality is merely a fiction created by law for convenience and to
promote justice. Accordingly, this separate personality of the corporation may be disregarded, or the veil of
corporate fiction pierced, in cases where it is used as a cloak or cover for found (sic) illegality, or to work an
injustice, or where necessary to achieve equity or when necessary for the protection of creditors. (Sulo ng Bayan,
Inc. vs. Araneta, Inc., 72 SCRA 347) Corporations are composed of natural persons and the legal fiction of a
separate corporate personality is not a shield for the commission of injustice and inequity. (Chemplex
Philippines, Inc. vs. Pamatian, 57 SCRA 408)
In the instant case, evidence shows that the plaintiff-appellant Francisco Motors Corporation is composed of
the heirs of the late Benita Trinidad as directors and incorporators for whom defendant Gregorio Manuel
rendered legal services in the intestate estate case of their deceased mother. Considering the aforestated
principles and circumstances established in this case, equity and justice demands plaintiff-appellants veil of
corporate identity should be pierced and the defendant be compensated for legal services rendered to the heirs,
who are directors of the plaintiff-appellant corporation.
Now before us, petitioner assigns the following errors:
I.
THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF PIERCING THE VEIL OF
CORPORATE ENTITY.
II.
THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS JURISDICTION OVER
PETITIONER WITH RESPECT TO THE COUNTERCLAIM.
Petitioner submits that respondent court should not have resorted to piercing the veil of corporate fiction
because the transaction concerned only respondent Gregorio Manuel and the heirs of the late Benita Trinidad.
According to petitioner, there was no cause of action by said respondent against petitioner; personal concerns of
the heirs should be distinguished from those involving corporate affairs. Petitioner further contends that the
present case does not fall among the instances wherein the courts may look beyond the distinct personality of a
corporation. According to petitioner, the services for which respondent Gregorio Manuel seeks to collect fees

from petitioner are personal in nature. Hence, it avers the heirs should have been sued in their personal capacity,
and not involve the corporation.
With regard to the permissive counterclaim, petitioner also insists that there was no proper service of the
answer containing the permissive counterclaim. It claims that the counterclaim is a separate case which can only
be properly served upon the opposing party through summons. Further petitioner states that by nature, a
permissive counterclaim is one which does not arise out of nor is necessarily connected with the subject of the
opposing partys claim. Petitioner avers that since there was no service of summons upon it with regard to the
counterclaim, then the court did not acquire jurisdiction over petitioner. Since a counterclaim is considered an
action independent from the answer, according to petitioner, then in effect there should be two simultaneous
actions between the same parties: each party is at the same time both plaintiff and defendant with respect to the
other, requiring in each case separate summonses.
In their Comment, private respondents focus on the two questions raised by petitioner. They defend the
propriety of piercing the veil of corporate fiction, but deny the necessity of serving separate summonses on
petitioner in regard to their permissive counterclaim contained in the answer.
Private respondents maintain both trial and appellate courts found that respondent Gregorio Manuel was
employed as assistant legal officer of petitioner corporation, and that his services were solicited by the
incorporators, directors and members to handle and represent them in Special Proceedings No. 7803, concerning
the Intestate Estate of the late Benita Trinidad. They assert that the members of petitioner corporation took
advantage of their positions by not compensating respondent Gregorio Manuel after the termination of the estate
proceedings despite his repeated demands for payment of his services. They cite findings of the appellate court
that support piercing the veil of corporate identity in this particular case. They assert that the corporate veil may
be disregarded when it is used to defeat public convenience, justify wrong, protect fraud, and defend crime. It
may also be pierced, according to them, where the corporate entity is being used as an alter ego, adjunct, or
business conduit for the sole benefit of the stockholders or of another corporate entity. In these instances, they
aver, the corporation should be treated merely as an association of individual persons.
Private respondents dispute petitioners claim that its right to due process was violated when respondents
counterclaim was granted due course, although no summons was served upon it. They claim that no provision in
the Rules of Court requires service of summons upon a defendant in a counterclaim. Private respondents argue
that when the petitioner filed its complaint before the trial court it voluntarily submitted itself to the jurisdiction
of the court. As a consequence, the issuance of summons on it was no longer necessary. Private respondents say
they served a copy of their answer with affirmative defenses and counterclaim on petitioners former counsel,
Nicanor G. Alvarez. While petitioner would have the Court believe that respondents served said copy upon
Alvarez after he had withdrawn his appearance as counsel for the petitioner, private respondents assert that this
contention is utterly baseless. Records disclose that the answer was received two (2) days before the former
counsel for petitioner withdrew his appearance, according to private respondents. They maintain that the present
petition is but a form of dilatory appeal, to set off petitioners obligations to the respondents by running up more
interest it could recover from them. Private respondents therefore claim damages against petitioner.
To resolve the issues in this case, we must first determine the propriety of piercing the veil of corporate
fiction.
Basic in corporation law is the principle that a corporation has a separate personality distinct from its
stockholders and from other corporations to which it may be connected. However, under the doctrine of piercing
the veil of corporate entity, the corporations separate juridical personality may be disregarded, for example,
when the corporate identity is used to defeat public convenience, justify wrong, protect fraud, or defend crime.
Also, where the corporation is a mere alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation, then its distinct personality may be ignored. In these circumstances, the courts
will treat the corporation as a mere aggrupation of persons and the liability will directly attach to them. The legal
fiction of a separate corporate personality in those cited instances, for reasons of public policy and in the interest
of justice, will be justifiably set aside.

In our view, however, given the facts and circumstances of this case, the doctrine of piercing the corporate
veil has no relevant application here. Respondent court erred in permitting the trial courts resort to this doctrine.
The rationale behind piercing a corporations identity in a given case is to remove the barrier between the
corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the
corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar, instead
of holding certain individuals or persons responsible for an alleged corporate act, the situation has been reversed.
It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain
individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been
turned upside down because of its erroneous invocation. Note that according to private respondent Gregorio
Manuel his services were solicited as counsel for members of the Francisco family to represent them in the
intestate proceedings over Benita Trinidads estate. These estate proceedings did not involve any business of
petitioner.
Note also that he sought to collect legal fees not just from certain Francisco family members but also from
petitioner corporation on the claims that its management had requested his services and he acceded thereto as an
employee of petitioner from whom it could be deduced he was also receiving a salary. His move to recover
unpaid legal fees through a counterclaim against Francisco Motors Corporation, to offset the unpaid balance of
the purchase and repair of a jeep body could only result from an obvious misapprehension that petitioners
corporate assets could be used to answer for the liabilities of its individual directors, officers, and incorporators.
Such result if permitted could easily prejudice the corporation, its own creditors, and even other stockholders;
hence, clearly inequitous to petitioner.
Furthermore, considering the nature of the legal services involved, whatever obligation said incorporators,
directors and officers of the corporation had incurred, it was incurred in their personal capacity. When directors
and officers of a corporation are unable to compensate a party for a personal obligation, it is far-fetched to allege
that the corporation is perpetuating fraud or promoting injustice, and be thereby held liable therefor by piercing
its corporate veil. While there are no hard and fast rules on disregarding separate corporate identity, we must
always be mindful of its function and purpose. A court should be careful in assessing the milieu where the
doctrine of piercing the corporate veil may be applied. Otherwise an injustice, although unintended, may result
from its erroneous application.
The personality of the corporation and those of its incorporators, directors and officers in their personal
capacities ought to be kept separate in this case. The claim for legal fees against the concerned individual
incorporators, officers and directors could not be properly directed against the corporation without violating
basic principles governing corporations. Moreover, every action including a counterclaim must be prosecuted or
defended in the name of the real party in interest. It is plainly an error to lay the claim for legal fees of private
respondent Gregorio Manuel at the door of petitioner (FMC) rather than individual members of the Francisco
family.
However, with regard to the procedural issue raised by petitioners allegation, that it needed to be summoned
anew in order for the court to acquire jurisdiction over it, we agree with respondent courts view to the contrary.
Section 4, Rule 11 of the Rules of Court provides that a counterclaim or cross-claim must be answered within ten
(10) days from service. Nothing in the Rules of Court says that summons should first be served on the defendant
before an answer to counterclaim must be made. The purpose of a summons is to enable the court to acquire
jurisdiction over the person of the defendant. Although a counterclaim is treated as an entirely distinct and
independent action, the defendant in the counterclaim, being the plaintiff in the original complaint, has already
submitted to the jurisdiction of the court. Following Rule 9, Section 3 of the 1997 Rules of Civil Procedure, if a
defendant (herein petitioner) fails to answer the counterclaim, then upon motion of plaintiff, the defendant may
be declared in default. This is what happened to petitioner in this case, and this Court finds no procedural error in
the disposition of the appellate court on this particular issue. Moreover, as noted by the respondent court, when
petitioner filed its motion seeking to set aside the order of default, in effect it submitted itself to the jurisdiction
of the court. As well said by respondent court:
Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he records show that upon its request,

plaintiff-appellant was granted time to file a motion for reconsideration of the disputed decision. Plaintiffappellant did file its motion for reconsideration to set aside the order of default and the judgment rendered on the
counterclaim.
Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the counterclaim, as it vigorously
insists, plaintiff-appellant is considered to have submitted to the courts jurisdiction when it filed the motion for
reconsideration seeking relief from the court. (Soriano vs. Palacio, 12 SCRA 447). A party is estopped from
assailing the jurisdiction of a court after voluntarily submitting himself to its jurisdiction. (Tejones vs. Gironella,
159 SCRA 100). Estoppel is a bar against any claims of lack of jurisdiction. (Balais vs. Balais, 159 SCRA 37).
WHEREFORE, the petition is hereby GRANTED and the assailed decision is hereby REVERSED insofar
only as it held Francisco Motors Corporation liable for the legal obligation owing to private respondent Gregorio
Manuel; but this decision is without prejudice to his filing the proper suit against the concerned members of the
Francisco family in their personal capacity. No pronouncement as to costs.
SO ORDERED.
Bellosillo, (Chairman), Puno, Mendoza, and Buena, JJ., concur.

[G.R. No. 163786. February 16, 2005]

TIMES TRANSPORTATION COMPANY, INC., petitioner, vs. SANTOS SOTELO, , respondents.

DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari assails the decision of the Court of Appeals dated January 30, 2004 in
CA-G.R. SP No. 75291,[1] which set aside the decision and resolution of the National Labor Relations
Commission, and its resolution dated May 24, 2004[2] denying reconsideration thereof.
Petitioner Times Transportation Company, Inc. (Times) is a corporation engaged in the business of land
transportation. Prior to its closure in 1997, the Times Employees Union (TEU) was formed and issued a
certificate of union registration. Times challenged the legitimacy of TEU by filing a petition for the cancellation
of its union registration.
On March 3, 1997, TEU held a strike in response to Times alleged attempt to form a rival union and its
dismissal of the employees identified to be active union members. Upon petition by Times, then Labor Secretary,
and now Associate Justice of this Court, Leonardo A. Quisumbing, assumed jurisdiction over the case and
referred the matter to the NLRC for compulsory arbitration. The case was docketed as NLRC NCR CC-00013497. A return-to-work order was likewise issued on March 10, 1997.
In a certification election held on July 1, 1997, TEU was certified as the sole and exclusive collective
bargaining agent in Times. Consequently, TEUs president wrote the management of Times and requested for
collective bargaining. Times refused on the ground that the decision of the Med-Arbiter upholding the validity of
the certification election was not yet final and executory.
TEU filed a Notice of Strike on August 8, 1997. Another conciliation/mediation proceeding was conducted
for the purpose of settling the brewing dispute. In the meantime, Times management implemented a

retrenchment program and notices of retrenchment dated September 16, 1997 were sent to some of its
employees, including the respondents herein, informing them of their retrenchment effective 30 days thereafter.
On October 17, 1997, TEU held a strike vote on grounds of unfair labor practice on the part of Times. For
alleged participation in what it deemed was an illegal strike, Times terminated all the 123 striking employees by
virtue of two notices dated October 26, 1997 and November 24, 1997. [3] On November 17, 1997, then DOLE
Secretary Quisumbing issued the second return-to-work order certifying the dispute to the NLRC. While the
strike was ended, the employees were no longer admitted back to work.
In the meantime, by December 12, 1997, Mencorp Transport Systems, Inc. (Mencorp) had acquired
ownership over Times Certificates of Public Convenience and a number of its bus units by virtue of several
deeds of sale.[4] Mencorp is controlled and operated by Mrs. Virginia Mendoza, daughter of Santiago Rondaris,
the majority stockholder of Times.
On May 21, 1998, the NLRC rendered a decision [5] in the cases certified to it by the DOLE, the dispositive
portion of which read:
WHEREFORE, the respondents first strike, conducted from March 3, 1997 to March 12, 1997, is hereby
declared LEGAL; its second strike, which commenced on October 17, 1997, is hereby declared ILLEGAL.
Consequently, those 23 persons who participated in the illegal strike are deemed to have lost their employment
status and were therefore validly dismissed from employment:
The respondents Motion to Implead Mencorp Transport Systems, Inc. and/or Virginia Mendoza and/or Santiago
Rondaris is hereby DENIED for lack of merit.
SO ORDERED.[6]
Times and TEU both appealed the decision of the NLRC, which the Court of Appeals affirmed on
November 17, 2000.[7] Upon denial of its motion for reconsideration, Times filed a petition for review on
certiorari,[8] docketed as G.R. Nos. 148500-01, now pending with the Third Division of this Court. TEU likewise
appealed but its petition was denied due course.
In 1998, and after the closure of Times, the retrenched employees, including practically all the respondents
herein, filed cases for illegal dismissal, money claims and unfair labor practices against Times before the
Regional Arbitration Branch in San Fernando City, La Union. Times filed a Motion to Dismiss but on October
30, 1998, the arbitration branch ordered the archiving of the cases pending resolution of G.R. Nos. 148500-01. [9]
The dismissed employees did not interpose an appeal from said Order. Instead, they withdrew their
complaints with leave of court and filed a new set of cases before the National Capital Region Arbitration
Branch. This time, they impleaded Mencorp and the Spouses Reynaldo and Virginia Mendoza. Times sought the
dismissal of these cases on the ground of litis pendencia and forum shopping. On January 31, 2002, Labor
Arbiter Renaldo O. Hernandez rendered a decision stating:
WHEREFORE, premises considered, judgment is hereby entered FINDING that the dismissals of complainants,
excluding the expunged ones, by respondent Times Transit (sic) Company, Inc. effected, participated in,
authorized or ratified by respondent Santiago Rondaris constituted the prohibited act of unfair labor practice
under Article 248(a) and (e) of the Labor Code, as amended and hence, illegal and that the sale of said
respondent company to respondents Mencorp Transport Systems Company (sic), Inc. and/or Virginia Mendoza
and Reynaldo Mendoza was simulated and/or effected in bad faith, ORDERING:
1. respondents Times Transit (sic) Company, Inc. and Santiago Rondaris as the officer administratively held
liable of the unfair labor practice herein to CEASE AND DESIST therefore (sic);
2. respondents Times Transit (sic) Company, Inc. and/or Santiago Rondaris and Mencorp Transport Systems
Company, Inc. and/or Virginia Mendoza and Reynaldo Mendoza to cause the reinstatement therein of
complainants to their former positions without loss of seniority rights and benefits and to pay jointly and
severally said complainants full back wages reckoned from their respective dates of illegal dismissal as above-

indicated, until actually reinstated or in lieu of such reinstatement, at the option of said complainants, payment
of their separation pay of one (1) month pay per year of service, reckoned from their date of hire as aboveindicated, until actual payment and/or finality of this decision;
3. and finally for respondents Times Transit (sic) Company, Inc. and/or Santiago Rondaris to pay jointly and
severally said complainants as moral and exemplary damages the combined amount of P75,000.00 and 5% of
the total award as attorneys fees.
All other claims of complainants are dismissed for lack of merit.
.
SO ORDERED.[10]
The monetary award amounted to P43,347,341.69. On March 4, 2002, Times, Mencorp and the Spouses
Mendoza submitted their respective memorandum of appeal to the NLRC with motions to reduce the bond.
Mencorp posted a P5 million bond issued by Security Pacific Assurance Corp. (SPAC). On April 30, 2002, the
NLRC issued an order disposing of the said motion, thus:
WHEREFORE, premises considered, the Urgent Motion for Reduction of Bond is denied for lack of merit.
Respondents are hereby ordered to complete the bond equivalent to the monetary award in the Labor Arbiters
Decision, within an unextendible period of ten (10) days from receipt hereof, otherwise, the appeal shall be
dismissed for non-perfection thereof.
SO ORDERED.[11]
On May 18, 2002, Times moved to reconsider said order arguing mainly that it did not have sufficient funds
to put up the required bond. On July 26, 2002, Mencorp and the Spouses Mendoza posted an additional P10
million appeal bond. Thus far, the total amount of bond posted was P15 million. On August 7, 2002, the NLRC
granted the Motion for Reduction of Bond and approved the P10 million additional appeal bond. [12]
On September 17, 2002, the NLRC rendered its decision, stating:
WHEREFORE, the foregoing premises duly considered, the decision appealed from is hereby VACATED. The
records of these consolidated cases are hereby ordered REMANDED to the Arbitration Branch of origin for
disposition and for the conduct of appropriate proceedings for a decision to be rendered with dispatch.
SO ORDERED.[13]
Reconsideration thereof was denied by the NLRC on October 30, 2002. Thus, the respondents appealed to
the Court of Appeals by way of a petition for certiorari, attributing grave abuse of discretion on the NLRC for:
(1) not dismissing the appeals of Times, Mencorp and the Spouses Mendoza despite their failure to post the
required bond; (2) remanding the case for further proceedings despite the sufficiency of the evidence presented
by the parties; (3) not sustaining the labor arbiters ruling that they were illegally dismissed; (4) not affirming the
labor arbiters ruling that there was no litis pendencia; and (5) not ruling that Times and Mencorp are one and the
same entity.
On January 30, 2004, the Court of Appeals rendered the decision now assailed in this petition, the decretal
portion of which states:
WHEREFORE, based on the foregoing, the instant petition is hereby GRANTED. The assailed Decision and
Resolution of the NLRC are hereby SET ASIDE. The Decision of the Labor Arbiter dated January 31, 2002 is
hereby REINSTATED.
SO ORDERED.[14]
Times, Mencorp and the Spouses Mendoza filed Motions for Reconsideration, which were denied in a
resolution promulgated on May 24, 2004. Hence, this petition for review based on the following grounds:

I. Petitioner respectfully maintains that the Honorable Court a quo, in not dismissing the complaints
against the petitioner on the ground of lis pendens, decided the matter in a way not in accord with
existing laws and applicable decisions of this Honorable Court.
II. Petitioner, further, respectfully maintains that the Honorable Court a quo, in determining that herein
petitioners hitherto lost their right to appeal to the NLRC on account of their purported failure to
post an adequate appeal bond, radically departed from the accepted and usual course of judicial
proceedings, not to mention resolved said issue in a manner and fashion antithetical to existing
jurisprudence.
III. Petitioner, furthermore, respectfully maintains that the Honorable Court a quo, in applying
wholesale the doctrine of piercing the veil of corporate fiction and finding Times co-petitioners
liable for the formers obligations, resolved the matter in a manner contradictory to existing
applicable laws and dispositions of this Honorable Court, and departed from the accepted and usual
course of judicial proceedings with regard to admitting evidence to sustain the application of such
principle.[15]
The petition lacks merit.
As to the first issue, Times argues that there exists an identity of issues, rights asserted, relief sought and
causes of action between the present case and the one concerning the legality of the second strike, which is now
pending with the Third Division of this Court. As such, the Court of Appeals erred in not dismissing the case at
bar on the ground of litis pendencia.
Litis pendencia as a ground for dismissal of an action refers to that situation wherein another action is
pending between the same parties for the same cause of action and the second action becomes unnecessary and
vexatious.[16] We agree with the findings of the Court of Appeals that there is no litis pendencia as the two cases
involve dissimilar causes of action. The first case, now pending with the Third Division, pertains to the alleged
error of the NLRC in not upholding the dismissal of all the striking employees (not only of the 23 strikers so
declared to have lost their employment) in spite of the latters ruling that the second strike was illegal. None of
the respondents herein were among those deemed terminated by virtue of the NLRC decision.
In the instant case, the issue is the validity of the retrenchment implemented by Times prior to the second
strike and the subsequent dismissal of the striking employees. As such, there can be no question that respondents
were still employees of Times when they were retrenched. In short, the outcome of this case does not hinge on
the legality of the second strike or the validity of the dismissal of the striking employees, which issues are yet to
be resolved in G.R. Nos. 148500-01. Consequently, litis pendencia does not arise.
Anent the issue on whether Times perfected its appeal to the NLRC, the right to appeal is a statutory right
and one who seeks to avail of the right must comply with the statute or rules. The rules for perfecting an appeal
must be strictly followed as they are considered indispensable interdictions against needless delays and for
orderly discharge of judicial business.[17] Section 3(a), Rule VI of the NLRC Rules of Procedure outlines the
requisites for perfecting an appeal, to wit:
SECTION 3. Requisites for Perfection of Appeal. a) The Appeal shall be filed within the reglementary period as
provided in Section 1 of this Rule and shall be under oath with proof of payment of the required appeal fee and
the posting of a cash or surety bond as provided in Section 6 of this Rule; shall be accompanied by
memorandum of appeal which shall state the grounds relied upon and the arguments in support thereof; the
relief prayed for and a statement of the date when the appellant received the appealed decision, order or award
and proof of service on the other party of such appeal.
A mere notice of appeal without complying with the other requisites aforestated shall not stop the running of the
period for perfecting an appeal. (Emphasis supplied)
Article 223 of the Labor Code provides that in case of a judgment involving a monetary award, an appeal
by the employer may be perfected only upon the posting of a cash or surety bond issued by a reputable bonding

company duly accredited by the NLRC in the amount equivalent to the monetary award in the judgment
appealed from. The perfection of an appeal in the manner and within the period prescribed by law is not only
mandatory but also jurisdictional, and failure to perfect an appeal has the effect of making the judgment final and
executory.[18] However, in several cases, we have relaxed the rules regarding the appeal bond especially where it
must necessarily yield to the broader interest of substantial justice. [19] The Rules of Procedure of the NLRC
allows for the reduction of the appeal bond upon motion of the appellant and on meritorious grounds. [20] It is
required however that such motion is filed within the reglementary period to appeal.
The records reveal that Times, Mencorp and the Spouses Mendozas motion to reduce the bond was denied
and the NLRC ordered them to post the required amount within an unextendible period of ten (10) days.[21]
However, instead of complying with the directive, Times filed another motion for reconsideration of the order of
denial. Several weeks later, Mencorp posted an additional bond, which was still less than the required amount.
Three (3) months after the filing of the motion for reconsideration, the NLRC reversed its previous order and
granted the motion for reduction of bond.
We agree with the Court of Appeals that the foregoing constitutes grave abuse of discretion on the part of
the NLRC. By delaying the resolution of Times motion for reconsideration, it has unnecessarily prolonged the
period of appeal. We have held that to extend the period of appeal is to prolong the resolution of the case, a
circumstance which would give the employer the opportunity to wear out the energy and meager resources of the
workers to the point that they would be constrained to give up for less than what they deserve in law. [22] The
NLRC is well to take notice of our pronouncement in Santos v. Velarde:[23]
The Court is aware that the NLRC is not bound by the technical rules of procedure and is allowed to be liberal
in the interpretation of rules in deciding labor cases. However, such liberality should not be applied in the
instant case as it would render futile the very purpose for which the principle of liberality is adopted . From the
decision of the Labor Arbiter, it took the NLRC four months to rule on the motion for exemption to pay bond
and another four months to decide the merits of the case. This Court has repeatedly ruled that delay in the
settlement of labor cases cannot be countenanced. Not only does it involve the survival of an employee and his
loved ones who are dependent on him, it also wears down the meager resources of the workers... [24] (Emphasis
supplied)
The NLRCs reversal of its previous order of denial lacks basis. In the first motion, Mencorp and Spouses
Mendoza moved for the reduction of the appeal bond on the ground that the computation of the monetary award
was highly suspicious and anomalous. In their motion for reconsideration of the NLRCs denial, Mencorp and the
Spouses Mendoza cited financial difficulties in completing the appeal bond. Neither ground is well-taken.
Times and Mencorp failed to substantiate their allegations of errors in the computation of the monetary
award. They merely asserted inaccuracies without specifying which aspect of the computation was inaccurate. If
Times and Mencorp truly believed that there were errors in the computation, they could have presented their own
computation for comparison. As to the claim of financial difficulties, suffice it to say that the law does not
require outright payment of the total monetary award, but only the posting of a bond to ensure that the award
will be eventually paid should the appeal fail. What Times has to pay is a moderate and reasonable sum for the
premium for such bond.[25] The impression thus created was that Times, Mencorp and the Spouses Mendoza were
clearly circumventing, if not altogether dodging, the rules on the posting of appeal bonds.
On the propriety of the piercing of the corporate veil, Times claims that to drag Mencorp, [Spouses]
Mendoza and Rondaris into the picture on the purported ground that a fictitious sale of Times assets in their
favor was consummated with the end in view of frustrating the ends of justice and for purposes of evading
compliance with the judgment is the height of judicial arrogance. [26] The Court of Appeals believes otherwise and
reckons that Times and Mencorp failed to adduce evidence to refute allegations of collusion between them.
We have held that piercing the corporate veil is warranted only in cases when the separate legal entity is
used to defeat public convenience, justify wrong, protect fraud, or defend crime, such that in the case of two
corporations, the law will regard the corporations as merged into one. [27] It may be allowed only if the following
elements concur: (1) controlnot mere stock control, but complete dominationnot only of finances, but of policy

and business practice in respect to the transaction attacked; (2) such control must have been used to commit a
fraud or a wrong to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an
unjust act in contravention of a legal right; and (3) the said control and breach of duty must have proximately
caused the injury or unjust loss complained of. [28]
The following findings of the Labor Arbiter, which were cited and affirmed by the Court of Appeals, have
not been refuted by Times, to wit:
1. The sale was transferred to a corporation controlled by V. Mendoza, the daughter of respondent S.
Rondaris of [Times] where she is/was also a director, as proven by the articles of incorporation of
[Mencorp];
2. All of the stockholders/incorporators of [Mencorp]: Reynaldo M. Mendoza, Virginia R. Mendoza,
Vernon Gerard R. Mendoza, Vivian Charity R. Mendoza, Vevey Rosario R. Mendoza are all
relatives of respondent S. Rondaris;
3. The timing of the sale evidently was to negate the employees/complainants/members right to
organization as it was effected when their union (TEU) was just organized/requesting [Times] to
bargain;
5. [Mencorp] never obtained a franchise since its supposed incorporation in 10 May 1994 but at
present, all the buses of [Times] are already being run/operated by respondent [Mencorp], the
franchise of [Times] having been transferred to it.[29]
We uphold the findings of the labor arbiter and the Court of Appeals. The sale of Times franchise as well as
most of its bus units to a company owned by Rondaris daughter and family members, right in the middle of a
labor dispute, is highly suspicious. It is evident that the transaction was made in order to remove Times
remaining assets from the reach of any judgment that may be rendered in the unfair labor practice cases filed
against it.
WHEREFORE, premises considered, the petition is DENIED. The decision of the Court of Appeals in
CA-G.R. SP No. 75291 dated January 30, 2004 and its resolution dated May 24, 2004, are hereby AFFIRMED
in toto.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Carpio, and Azcuna, JJ., concur.
Quisumbing, J., no part, due prior action in DOLE.

G.R. No. 168306

June 19, 2007

WILLIAM C. YAO, SRpetitioners,

vs.

THE PEOPLE OF THE PHILIPPINES, PETRON CORPORATION., respondents.

DECISION
CHICO-NAZARIO, J.:
In this Petition for Review on Certiorari 1 under Rule 45 of the Rules of Court, petitioners William C. Yao, Sr.,
Luisa C. Yao, Richard C. Yao, William C. Yao, Jr., and Roger C. Yao pray for the reversal of the Decision dated
30 September 2004,2 and Resolution dated 1 June 2005, of the Court of Appeals in CA G.R. SP No. 79256, 3
affirming the two Orders, both dated 5 June 2003, of the Regional Trial Court (RTC), Branch 17, Cavite City,
relative to Search Warrants No. 2-2003 and No. 3-2003. 4 In the said Orders, the RTC denied the petitioners
Motion to Quash Search Warrant 5 and Motion for the Return of the Motor Compressor and Liquified Petroleum
Gas (LPG) Refilling Machine.6
The following are the facts:
Petitioners are incorporators and officers of MASAGANA GAS CORPORATION (MASAGANA), an entity
engaged in the refilling, sale and distribution of LPG products. Private respondents Petron Corporation (Petron)
and Pilipinas Shell Petroleum Corporation (Pilipinas Shell) are two of the largest bulk suppliers and producers of
LPG in the Philippines. Their LPG products are sold under the marks "GASUL" and "SHELLANE,"
respectively. Petron is the registered owner in the Philippines of the trademarks GASUL and GASUL cylinders
used for its LPG products. It is the sole entity in the Philippines authorized to allow refillers and distributors to
refill, use, sell, and distribute GASUL LPG containers, products and its trademarks. Pilipinas Shell, on the other
hand, is the authorized user in the Philippines of the tradename, trademarks, symbols, or designs of its principal,
Shell International Petroleum Company Limited (Shell International), including the marks SHELLANE and
SHELL device in connection with the production, sale and distribution of SHELLANE LPGs. It is the only
corporation in the Philippines authorized to allow refillers and distributors to refill, use, sell and distribute
SHELLANE LPG containers and products.7
On 3 April 2003, National Bureau of Investigation (NBI) agent Ritche N. Oblanca (Oblanca) filed two
applications for search warrant with the RTC, Branch 17, Cavite City, against petitioners and other occupants of
the MASAGANA compound located at Governors Drive, Barangay Lapidario, Trece Martires, Cavite City, for
alleged violation of Section 155, in relation to Section 170 of Republic Act No. 8293, otherwise known as "The
Intellectual Property Code of the Philippines." 8 The two applications for search warrant uniformly alleged that
per information, belief, and personal verification of Oblanca, the petitioners are actually producing, selling,
offering for sale and/or distributing LPG products using steel cylinders owned by, and bearing the tradenames,
trademarks, and devices of Petron and Pilipinas Shell, without authority and in violation of the rights of the said
entities.
In his two separate affidavits9 attached to the two applications for search warrant, Oblanca alleged:
1. [That] on 11 February 2003, the National Bureau of Investigation ("NBI") received a letter-complaint from
Atty. Bienvenido I. Somera Jr. of Villaraza and Angangco, on behalf of among others, [Petron Corporation
(PETRON)] and Pilipinas Shell Petroleum Corporation (PSPC), the authorized representative of Shell
International Petroleum Company Limited ("Shell International"), requesting assistance in the investigation and,
if warranted, apprehension and prosecution of certain persons and/or establishments suspected of violating the
intellectual property rights [of PETRON] and of PSPC and Shell International.

2. [That] on the basis of the letter-complaint, I, together with Agent Angelo Zarzoso, was assigned as the NBI
agent on the case.
3. [That] prior to conducting the investigation on the reported illegal activities, he reviewed the certificates of
trademark registrations issued in favor of [PETRON], PSPC and Shell International as well as other documents
and other evidence obtained by the investigative agency authorized by [PETRON], PSPC and Shell International
to investigate and cause the investigation of persons and establishments violating the rights of [PETRON], PSPC
and Shell International, represented by Mr. Bernabe C. Alajar. Certified copies of the foregoing trademark
registrations are attached hereto as Annexes "A" to ":E".
4. [That] among the establishments alleged to be unlawfully refilling and unlawfully selling and distributing
[Gasul LPG and] Shellane products is Masagana Gas Corporation ("MASAGANA"). Based on Securities and
Exchange Commission Records, MASAGANA has its principal office address at 9775 Kamagong Street, San
Antonio Village, Makati, Metro Manila. The incorporators and directors of MASAGANA are William C. Yao,
Sr., Luisa C. Yao, Richard C. Yao, William C. Yao, Jr., and Roger C. Yao. x x x.
5. I confirmed that MASAGANA is not authorized to use [PETRON and] Shellane LPG cylinders and its
trademarks and tradenames or to be refillers or distributors of [PETRON and] Shellane LPGs.
6. I went to MASAGANAs refilling station located at Governors Drive, Barangay Lapidario, Trece Martires
City (sic), Cavite to investigate its activities. I confirmed that MASAGANA is indeed engaged in the
unauthorized refilling, sale and/or distribution of [Gasul and] Shellane LPG cylinders. I found out that
MASAGANA delivery trucks with Plate Nos. UMN-971, PEZ-612, WTE-527, XAM-970 and WFC-603 coming
in and out of the refilling plant located at the aforementioned address contained multi-brand LPG cylinders
including [Gasul and] Shellane. x x x.
7. [That] on 13 February 2003, I conducted a test-buy accompanied by Mr. Bernabe C. Alajar. After asking the
purpose of our visit, MASAGANAs guard allowed us to enter the MASAGANA refilling plant to purchase
GASUL and SHELLANE LPGs. x x x. We were issued an order slip which we presented to the cashiers office
located near the refilling station. After paying the amount x x x covering the cost of the cylinders and their
contents, they were issued Cash Invoice No. 56210 dated February 13, 2003. We were, thereafter, assisted by the
plant attendant in choosing empty GASUL and SHELLANE 11 kg. cylinders, x x x were brought to the refilling
station [and filled in their presence.] I noticed that no valve seals were placed on the cylinders.
[That] while inside the refilling plant doing the test-buy, I noticed that stockpiles of multi-branded cylinders
including GASUL and SHELLANE cylinders were stored near the refilling station. I also noticed that the total
land area of the refilling plant is about 7,000 to 10,000 square meters. At the corner right side of the compound
immediately upon entering the gate is a covered area where the maintenance of the cylinders is taking place.
Located at the back right corner of the compound are two storage tanks while at the left side also at the corner
portion is another storage tank. Several meters and fronting the said storage tank is where the refilling station
and the office are located. It is also in this storage tank where the elevated blue water tank depicting
MASAGANA CORP. is located. About eleven (11) refilling pumps and stock piles of multi-branded cylinders
including Shellane and GASUL are stored in the refilling station. At the left side of the entrance gate is the guard
house with small door for the pedestrians and at the right is a blue steel gate used for incoming and outgoing
vehicles.
8. [That] on 27 February 2003, I conducted another test-buy accompanied by Mr. Bernabe C. Alajar. x x x After
choosing the cylinders, we were issued an order slip which we presented to the cashier. Upon payment, Cash
Invoice No. 56398 was issued covering the cost of both GASUL and SHELLANE LPG cylinders and their

contents. x x x Both cylinders were refilled in our presence and no valve seals were placed on the cylinders.
Copies of the photographs of the delivery trucks, LPG cylinders and registration papers were also attached to the
aforementioned affidavits.10
Bernabe C. Alajar (Alajar), owner of Able Research and Consulting Services Inc., was hired by Petron and
Pilipinas Shell to assist them in carrying out their Brand Protection Program. Alajar accompanied Oblanca
during the surveillance of and test-buys at the refilling plant of MASAGANA. He also executed two separate
affidavits corroborating the statements of Oblanca. These were annexed to the two applications for search
warrant.11
After conducting the preliminary examination on Oblanca and Alajar, and upon reviewing their sworn affidavits
and other attached documents, Judge Melchor Q.C. Sadang (Judge Sadang), Presiding Judge of the RTC, Branch
17, Cavite City, found probable cause and correspondingly issued Search Warrants No. 2-2003 and No. 3-2003. 12
The search warrants commanded any peace officer to make an immediate search of the MASAGANA compound
and to seize the following items:
Under Search Warrant No. 2-2003:
a. Empty/filled LPG cylinder tanks/containers, bearing the tradename "SHELLANE", "SHELL" (Device) of
Pilipinas Shell Petroleum Corporation and the trademarks and other devices owned by Shell International
Petroleum Company, Ltd.;
b. Machinery and/or equipment being used or intended to be used for the purpose of illegally refilling LPG
cylinders belonging to Pilipinas Shell Petroleum Corporation bearing the latters tradename as well as the marks
belonging to Shell International Petroleum Company, Ltd., enumerated hereunder:
1. Bulk/Bullet LPG storage tanks;
2. Compressor/s (for pneumatic refilling system);
3. LPG hydraulic pump/s;
4. LPG refilling heads/hoses and appurtenances or LPG filling assembly;
5. LPG pipeline gate valve or ball valve and handles and levers;
6. LPG weighing scales; and
7. Seals simulating the shell trademark.
c. Sales invoices, ledgers, journals, official receipts, purchase orders, and all other books of accounts, inventories
and documents pertaining to the production, sale and/or distribution of the aforesaid goods/products.
d. Delivery truck bearing Plate Nos. WTE-527, XAM-970 and WFC-603, hauling trucks, and/or other delivery
trucks or vehicles or conveyances being used or intended to be used for the purpose of selling and/or distributing
the above-mentioned counterfeit products.

Under Search Warrant No. 3-2003:

a. Empty/filled LPG cylinder tanks/containers, bearing Petron Corporations (Petron) tradename and its
tradename "GASUL" and other devices owned and/or used exclusively by Petron;
b. Machinery and/or equipment being used or intended to be used for the purpose of illegally refilling LPG
cylinders belonging to Petron enumerated hereunder;
1. Bulk/Bullet LPG storage tanks;
2. Compressor/s (for pneumatic filling system);
3. LPG hydraulic pump/s;
4. LPG filling heads/hoses and appurtenances or LPG filling assembly;
5. LPG pipeline gate valve or ball valve and handles levers;
6. LPG weighing scales; and
7. Seals bearing the Petron mark;
c. Sales invoices, ledgers, journals, official receipts, purchase orders, and all other books of accounts, inventories
and documents pertaining to the production, sale and/or distribution of the aforesaid goods/products; and
d. Delivery trucks bearing Plate Nos. UMN-971, PEZ-612 and WFC-603, hauling trucks, and/or other delivery
trucks or vehicles or conveyances being used for the purpose of selling and/or distributing the above-mentioned
counterfeit products.
Upon the issuance of the said search warrants, Oblanca and several NBI operatives immediately proceeded to the
MASAGANA compound and served the search warrants on petitioners. 13 After searching the premises of
MASAGANA, the following articles described in Search Warrant No. 2-2003 were seized:
a. Thirty-eight (38) filled 11 kg. LPG cylinders, bearing the tradename of Pilipinas Shell Petroleum Corporation
and the trademarks and other devices owned by Shell International Petroleum Company, Ltd.;
b. Thirty-nine (39) empty 11 kg. LPG cylinders, bearing the tradename of Pilipinas Shell Petroleum Corporation
and the trademarks and other devices owned by Shell International Petroleum Company, Ltd.;
c. Eight (8) filled 50 kg. LPG cylinders, bearing the tradename of Pilipinas Shell Petroleum Corporation and the
trademarks and other devices owned by Shell International Petroleum Company, Ltd.;
d. Three (3) empty 50 kg. LPG cylinders, bearing the tradename of Pilipinas Shell Petroleum Corporation and
the trademarks and other devices owned by Shell International Petroleum Company, Ltd.;
e. One (1) set of motor compressor for filling system.
Pursuant to Search Warrant No. 3-2003, the following articles were also seized:

a. Six (6) filled 11 kg. LPG cylinders without seal, bearing Petrons tradename and its trademark "GASUL" and
other devices owned and/or used exclusively by Petron;
b. Sixty-three (63) empty 11 kg. LPG cylinders, bearing Petrons tradename and its trademark "GASUL" and
other devices owned and/or used exclusively by Petron;
c. Seven (7) tampered 11 kg. LPG cylinders, bearing Petrons tradename and its trademark "GASUL" and other
devices owned and/or used exclusively by Petron;
d. Five (5) tampered 50 kg. LPG cylinders, bearing Petrons tradename and its trademark "GASUL" and other
devices owned and/or used exclusively by Petron with tampered "GASUL" logo;
e. One (1) set of motor compressor for filling system; and
f. One (1) set of LPG refilling machine.
On 22 April 2003, petitioners filed with the RTC a Motion to Quash Search Warrants No. 2-2003 and No. 3200314 on the following grounds:
1. There is no probable cause for the issuance of the search warrant and the conditions for the issuance of a
search warrant were not complied with;
2. Applicant NBI Agent Ritchie N. Oblanca and his witness Bernabe C. Alajar do not have any authority to apply
for a search warrant. Furthermore, they committed perjury when they alleged in their sworn statements that they
conducted a test-buy on two occasions;
3. The place to be searched was not specified in the Search Warrant as the place has an area of 10,000 square
meters (one hectare) more or less, for which reason the place to be searched must be indicated with particularity;
4. The search warrant is characterized as a general warrant as the items to be seized as mentioned in the
search warrant are being used in the conduct of the lawful business of respondents and the same are not being
used in refilling Shellane and Gasul LPGs.
On 30 April 2003, MASAGANA, as third party claimant, filed with the RTC a Motion for the Return of Motor
Compressor and LPG Refilling Machine. 15 It claimed that it is the owner of the said motor compressor and LPG
refilling machine; that these items were used in the operation of its legitimate business; and that their seizure will
jeopardize its business interests.
On 5 June 2003, the RTC issued two Orders, one of which denied the petitioners Motion to Quash Search
Warrants No. 2-2003 and No. 3-2003, and the other one also denied the Motion for the Return of Motor
Compressor and LPG Refilling Machine of MASAGANA, for lack of merit. 16
With respect to the Order denying the petitioners motion to quash Search Warrants No. 2-2003 and No. 3-2003,
the RTC held that based on the testimonies of Oblanca and Alajar, as well as the documentary evidence
consisting of receipts, photographs, intellectual property and corporate registration papers, there is probable
cause to believe that petitioners are engaged in the business of refilling or using cylinders which bear the
trademarks or devices of Petron and Pilipinas Shell in the place sought to be searched and that such activity is
probably in violation of Section 155 in relation to Section 170 of Republic Act No. 8293.

It also ruled that Oblanca and Alajar had personal knowledge of the acts complained of since they were the ones
who monitored the activities of and conducted test-buys on MASAGANA; that the search warrants in question
are not general warrants because the compound searched are solely used and occupied by MASAGANA, and as
such, there was no need to particularize the areas within the compound that would be searched; and that the
items to be seized in the subject search warrants were sufficiently described with particularity as the same was
limited to cylinder tanks bearing the trademarks GASUL and SHELLANE.
As regards the Order denying the motion of MASAGANA for the return of its motor compressor and LPG
refilling machine, the RTC resolved that MASAGANA cannot be considered a third party claimant whose rights
were violated as a result of the seizure since the evidence disclosed that petitioners are stockholders of
MASAGANA and that they conduct their business through the same juridical entity. It maintained that to rule
otherwise would result in the misapplication and debasement of the veil of corporate fiction. It also stated that
the veil of corporate fiction cannot be used as a refuge from liability.
Further, the RTC ratiocinated that ownership by another person or entity of the seized items is not a ground to
order its return; that in seizures pursuant to a search warrant, what is important is that the seized items were used
or intended to be used as means of committing the offense complained of; that by its very nature, the properties
sought to be returned in the instant case appear to be related to and intended for the illegal activity for which the
search warrants were applied for; and that the items seized are instruments of an offense.
Petitioners filed Motions for Reconsideration of the assailed Orders, 17 but these were denied by the RTC in its
Order dated 21 July 2003 for lack of compelling reasons. 18
Subsequently, petitioners appealed the two Orders of the RTC to the Court of Appeals via a special civil action
for certiorari under Rule 65 of the Rules of Court. 19 On 30 September 2004, the Court of Appeals promulgated its
Decision affirming the Orders of the RTC. 20 It adopted in essence the bases and reasons of the RTC in its two
Orders. The decretal portion thereof reads:
Based on the foregoing, this Court finds no reason to disturb the assailed Orders of the respondent judge. Grave
abuse of discretion has not been proven to exist in this case.
WHEREFORE, the petition is hereby DISMISSED for lack of merit. The assailed orders both dated June 5, 2003
are hereby AFFIRMED.
Petitioners filed a Motion for Reconsideration 21 of the Decision of the Court of Appeals, but this was denied in
its Resolution dated 1 June 2005 for lack of merit. 22
Petitioners filed the instant petition on the following grounds:
I.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PRESIDING JUDGE OF RTC
CAVITE CITY HAD SUFFICIENT BASIS IN DECLARING THE EXISTENCE OF PROBABLE CAUSE;
II.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT NBI AGENT (RITCHIE OBLANCA)
CAN APPLY FOR THE SEARCH WARRANTS NOTHWITHSTANDING HIS LACK OF AUTHORITY;

III.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE REQUIREMENT OF GIVING
A PARTICULAR DESCRIPTION OF THE PLACE TO BE SEARCHED WAS COMPLIED WITH;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE APPLICATIONS AND THE
SEARCH WARRANTS THEMSELVES SHOW NO AMBIGUITY OF THE ITEMS TO BE SEIZED;
V.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE COMPLAINT IS DIRECTED
AGAINST MASAGANA GAS CORPORATION, ACTING THROUGH ITS OFFICERS AND DIRECTORS,
HENCE MASAGANA GAS CORPORATION MAY NOT BE CONSIDERED AS THIRD PARTY CLAIMANT
WHOSE RIGHTS WERE VIOLATED AS A RESULT OF THE SEIZURE.23
Apropos the first issue, petitioners allege that Oblanca and Alajar had no personal knowledge of the matters on
which they testified; that Oblanca and Alajar lied to Judge Sadang when they stated under oath that they were the
ones who conducted the test-buys on two different occasions; that the truth of the matter is that Oblanca and
Alajar never made the purchases personally; that the transactions were undertaken by other persons namely,
Nikko Javier and G. Villanueva as shown in the Entry/Exit Slips of MASAGANA; and that even if it were true
that Oblanca and Alajar asked Nikko Javier and G. Villanueva to conduct the test-buys, the information relayed
by the latter two to the former was mere hearsay.24
Petitioners also contend that if Oblanca and Alajar had indeed used different names in purchasing the LPG
cylinders, they should have mentioned it in their applications for search warrants and in their testimonies during
the preliminary examination; that it was only after the petitioners had submitted to the RTC the entry/exit slips
showing different personalities who made the purchases that Oblanca and Alajar explained that they had to use
different names in order to avoid detection; that Alajar is not connected with either of the private respondents;
that Alajar was not in a position to inform the RTC as to the distinguishing trademarks of SHELLANE and
GASUL; that Oblanca was not also competent to testify on the marks allegedly infringed by petitioners; that
Judge Sadang failed to ask probing questions on the distinguishing marks of SHELLANE and GASUL; that the
findings of the Brand Protection Committee of Pilipinas Shell were not submitted nor presented to the RTC; that
although Judge Sadang examined Oblanca and Alajar, the former did not ask exhaustive questions; and that the
questions Judge Sadang asked were merely rehash of the contents of the affidavits of Oblanca and Alajar.25
These contentions are devoid of merit.
Article III, Section 2, of the present Constitution states the requirements before a search warrant may be validly
issued, to wit:
Section 2. The right of the people to be secure in their persons, houses, papers, and effects against unreasonable
searches and seizures of whatever nature and for any purpose shall be inviolable, and no search warrant or
warrant of arrest shall issue except upon probable cause to be determined personally by the judge after
examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly
describing the place to be searched and the persons or things to be seized. (emphasis supplied).

Section 4 of Rule 126 of the Revised Rules on Criminal Procedure, provides with more particularity the
requisites in issuing a search warrant, viz:
SEC. 4. Requisites for issuing search warrant. A search warrant shall not issue except upon probable cause in
connection with one specific offense to be determined personally by the judge after examination under oath or
affirmation of the complainant and the witnesses he may produce, and particularly describing the place to be
searched and the things to be seized which may be anywhere in the Philippines.
According to the foregoing provisions, a search warrant can be issued only upon a finding of probable cause.
Probable cause for search warrant means such facts and circumstances which would lead a reasonably discreet
and prudent man to believe that an offense has been committed and that the objects sought in connection with
the offense are in the place to be searched. 26
The facts and circumstances being referred thereto pertain to facts, data or information personally known to the
applicant and the witnesses he may present. 27 The applicant or his witnesses must have personal knowledge of
the circumstances surrounding the commission of the offense being complained of. "Reliable information" is
insufficient. Mere affidavits are not enough, and the judge must depose in writing the complainant and his
witnesses.28
Section 155 of Republic Act No. 8293 identifies the acts constituting trademark infringement, thus:
SEC. 155. Remedies; Infringement. Any person who shall, without the consent of the owner of the registered
mark:
155.1. Use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark or the
same container or a dominant feature thereof in connection with the sale, offering for sale, distribution,
advertising of any goods or services including other preparatory steps necessary to carry out the sale of any
goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to
deceive; or
155.2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature thereof and
apply such reproduction, counterfeit, copy or colorable imitation to labels, signs, prints, packages, wrappers,
receptacles or advertisements intended to be used in commerce upon or in connection with the sale, offering for
sale, distribution, or advertising of goods or services on or in connection with which such use is likely to cause
confusion, or to cause mistake, or to deceive, shall be liable in a civil action for infringement by the registrant for
the remedies hereinafter set forth: Provided, That the infringement takes place at the moment any of the acts
stated in Subsection 155.1 or this subsection are committed regardless of whether there is actual sale of goods or
services using the infringing material.
As can be gleaned in Section 155.1, mere unauthorized use of a container bearing a registered trademark in
connection with the sale, distribution or advertising of goods or services which is likely to cause confusion,
mistake or deception among the buyers/consumers can be considered as trademark infringement.
In his sworn affidavits,29 Oblanca stated that before conducting an investigation on the alleged illegal activities
of MASAGANA, he reviewed the certificates of trademark registrations issued by the Philippine Intellectual
Property Office in favor of Petron and Pilipinas Shell; that he confirmed from Petron and Pilipinas Shell that
MASAGANA is not authorized to sell, use, refill or distribute GASUL and SHELLANE LPG cylinder
containers; that he and Alajar monitored the activities of MASAGANA in its refilling plant station located within

its compound at Governors Drive, Barangay Lapidario, Trece Martires, Cavite City; that, using different names,
they conducted two test-buys therein where they purchased LPG cylinders bearing the trademarks GASUL and
SHELLANE; that the said GASUL and SHELLANE LPG cylinders were refilled in their presence by the
MASAGANA employees; that while they were inside the MASAGANA compound, he noticed stock piles of
multi-branded cylinders including GASUL and SHELLANE LPG cylinders; and that they observed delivery
trucks loaded with GASUL and SHELLANE LPG cylinders coming in and out of the MASAGANA compound
and making deliveries to various retail outlets. These allegations were corroborated by Alajar in his separate
affidavits.
In support of the foregoing statements, Oblanca also submitted the following documentary and object evidence:
1. Certified true copy of the Certificate of Registration No. 44046 for "SHELL (DEVICE)" in the name of Shell
International;
2. Certified true copy of the Certificate of Registration No. 41789 for "SHELL (DEVICE) in the name of Shell
International;
3. Certified true copy of the Certificate of Registration No. 37525 for "SHELL (DEVICE) in the name of Shell
International;
4. Certified true copy of the Certificate of Registration No. R-2813 for "SHELL" in the name of Shell
International;
5. Certified true copy of the Certificate of Registration No. 31443 for "SHELLANE" in the name of Shell
International;
6. Certified true copy of the Certificate of Registration No. 57945 for the mark "GASUL" in the name of Petron;
7. Certified true copy of the Certificate of Registration No. C-147 for "GASUL CYLINDER CONTAINING
LIQUEFIED PETROLEUM GAS" in the name of Petron;
8. Certified true copy of the Certificate of Registration No. 61920 for the mark "GASUL AND DEVICE" in the
name of Petron;
9. Certified true copy of the Articles of Incorporation of Masagana;
10. Certified true copy of the By-laws of Masagana;
11. Certified true copy of the latest General Information Sheet of Masagana on file with the Securities and
Exchange Commission;
12. Pictures of delivery trucks coming in and out of Masagana while it delivered Gasul and Shellane LPG;
13. Cash Invoice No. 56210 dated 13 February 2003 issued by Masagana for the Gasul and Shellane LPG
purchased by Agent Oblanca and witness Alajar;
14. Pictures of the Shellane and Gasul LPGs covered by Cash Invoice No. 56210 purchased from Masagana by
Agent Oblanca and witness Alajar;

15. Cash Invoice No. 56398 dated 27 February 2003 issued by Masagana for the Gasul and Shellane LPG
purchased by Agent Oblanca and witness Alajar; and
16. Pictures of the Shellane and Gasul LPGs covered by Cash Invoice No. 56398 purchased from
Masagana by Agent Oblanca and witness Alajar.30
Extant from the foregoing testimonial, documentary and object evidence is that Oblanca and Alajar have
personal knowledge of the fact that petitioners, through MASAGANA, have been using the LPG cylinders
bearing the marks GASUL and SHELLANE without permission from Petron and Pilipinas Shell, a probable
cause for trademark infringement. Both Oblanca and Alajar were clear and insistent that they were the very same
persons who monitored the activities of MASAGANA; that they conducted test-buys thereon; and that in order
to avoid suspicion, they used different names during the test-buys. They also personally witnessed the refilling of
LPG cylinders bearing the marks GASUL and SHELLANE inside the MASAGANA refilling plant station and
the deliveries of these refilled containers to some outlets using mini-trucks.
Indeed, the aforesaid facts and circumstances are sufficient to establish probable cause. It should be borne in
mind that the determination of probable cause does not call for the application of the rules and standards of proof
that a judgment of conviction requires after trial on the merits. As the term implies, "probable cause" is
concerned with probability, not absolute or even moral certainty. The standards of judgment are those of a
reasonably prudent man, not the exacting calibrations of a judge after a full blown trial. 31
The fact that Oblanca and Alajar used different names in the purchase receipts do not negate personal knowledge
on their part. It is a common practice of the law enforcers such as NBI agents during covert investigations to use
different names in order to conceal their true identities. This is reasonable and understandable so as not to
endanger the life of the undercover agents and to facilitate the lawful arrest or apprehension of suspected
violators of the law.
Petitioners contention that Oblanca and Alajar should have mentioned the fact that they used different names in
their respective affidavits and during the preliminary examination is puerile. The argument is too vacuous to
merit serious consideration. There is nothing in the provisions of law concerning the issuance of a search warrant
which directly or indirectly mandates that the applicant of the search warrant or his witnesses should state in
their affidavits the fact that they used different names while conducting undercover investigations, or to divulge
such fact during the preliminary examination. In the light of other more material facts which needed to be
established for a finding of probable cause, it is not difficult to believe that Oblanca and Alajar failed to mention
that they used aliases in entering the MASAGANA compound due to mere oversight.
It cannot be gainfully said that Oblanca and Alajar are not competent to testify on the trademarks infringed by
the petitioners. As earlier discussed, Oblanca declared under oath that before conducting an investigation on the
alleged illegal activities of MASAGANA, he reviewed the certificates of trademark registrations issued by the
Philippine Intellectual Property Office in favor of Petron and Pilipinas Shell. These certifications of trademark
registrations were attached by Oblanca in his applications for the search warrants. Alajar, on the other hand,
works as a private investigator and, in fact, owns a private investigation and research/consultation firm. His firm
was hired and authorized, pursuant to the Brand Protection Program of Petron and Pilipinas Shell, to verify
reports that MASAGANA is involved in the illegal sale and refill of GASUL and SHELLANE LPG cylinders. 32
As part of the job, he studied and familiarized himself with the registered trademarks of GASUL and
SHELLANE, and the distinct features of the LPG cylinders bearing the same trademarks before conducting
surveillance and test-buys on MASAGANA. 33 He also submitted to Oblanca several copies of the same
registered trademark registrations and accompanied Oblanca during the surveillance and test-buys.

As to whether the form and manner of questioning made by Judge Sadang complies with the requirements of
law, Section 5 of Rule 126 of the Revised Rules on Criminal Procedure, prescribes the rules in the examination
of the complainant and his witnesses when applying for search warrant, to wit:
SEC. 5. Examination of complainant; record.- The judge must, before issuing the warrant, personally examine in
the form of searching questions and answers, in writing under oath, the complainant and the witnesses he may
produce on facts personally known to them and attach to the record their sworn statements, together with the
affidavits submitted.
The searching questions propounded to the applicant and the witnesses depend largely on the discretion of the
judge. Although there is no hard-andfast rule governing how a judge should conduct his investigation, it is
axiomatic that the examination must be probing and exhaustive, not merely routinary, general, peripheral,
perfunctory or pro forma. The judge must not simply rehash the contents of the affidavit but must make his own
inquiry on the intent and justification of the application. 34
After perusing the Transcript of Stenographic Notes of the preliminary examination, we found the questions of
Judge Sadang to be sufficiently probing, not at all superficial and perfunctory. 35 The testimonies of Oblanca and
Alajar were consistent with each other and their narration of facts was credible. As correctly found by the Court
of Appeals:
This Court is likewise not convinced that respondent Judge failed to ask probing questions in his determination
of the existence of probable cause. This Court has thoroughly examined the Transcript of Stenographic Notes
taken during the investigation conducted by the respondent Judge and found that respondent Judge lengthily
inquired into the circumstances of the case. For instance, he required the NBI agent to confirm the contents of
his affidavit, inquired as to where the "test-buys" were conducted and by whom, verified whether PSPC and
PETRON have registered trademarks or tradenames, required the NBI witness to explain how the "test-buys"
were conducted and to describe the LPG cylinders purchased from Masagana Gas Corporation, inquired why the
applications for Search Warrant were filed in Cavite City considering that Masagana Gas Corporation was
located in Trece Martires, Cavite, inquired whether the NBI Agent has a sketch of the place and if there was any
distinguishing sign to identify the place to be searched, and inquired about their alleged tailing and monitoring of
the delivery trucks. x x x.36
Since probable cause is dependent largely on the opinion and findings of the judge who conducted the
examination and who had the opportunity to question the applicant and his witnesses, the findings of the judge
deserves great weight. The reviewing court can overturn such findings only upon proof that the judge
disregarded the facts before him or ignored the clear dictates of reason. 37 We find no compelling reason to
disturb Judge Sadangs findings herein.
Anent the second issue, petitioners argue that Judge Sadang failed to require Oblanca to show his authority to
apply for search warrants; that Oblanca is a member of the Anti-Organized Crime and not that of the Intellectual
Property Division of the NBI; that all complaints for infringement should be investigated by the Intellectual
Property Division of the NBI; that it is highly irregular that an agent not assigned to the Intellectual Property
Division would apply for a search warrant and without authority from the NBI Director; that the alleged lettercomplaint of Atty. Bienvenido Somera, Jr. of Villaraza and Angangco Law Office was not produced in court; that
Judge Sadang did not require Oblanca to produce the alleged letter-complaint which is material and relevant to
the determination of the existence of probable cause; and that Petron and Pilipinas Shell, being two different
corporations, should have issued a board resolution authorizing the Villaraza and Angangco Law Office to apply
for search warrant in their behalf.38

We reject these protestations.

The authority of Oblanca to apply for the search warrants in question is clearly discussed and explained in his
affidavit, viz:
[That] on 11 February 2003, the National Bureau of Investigation (NBI) received a letter-complaint from Atty.
Bienvenido I. Somera, Jr. of Villaraza and Angangco, on behalf of among others, Petron Corporation (PETRON)
[and Pilipinas Shell Petroleum Corporation (PSPC), the authorized representative of Shell International
Petroleum Company Limited (SHELL INTERNATIONAL)] requesting assistance in the investigation and, if
warranted, apprehension and prosecution of certain persons and/or establishments suspected of violating the
intellectual property rights of PETRON [and of PSPC and Shell International.]
11. [That] on the basis of the letter-complaint, I, together with Agent Angelo Zarzoso, was assigned as the NBI
agent on the case.39
The fact that Oblanca is a member of the Anti-Organized Crime Division and not that of the Intellectual Property
Division does not abrogate his authority to apply for search warrant. As aptly stated by the RTC and the Court of
Appeals, there is nothing in the provisions on search warrant under Rule 126 of the Revised Rules on Criminal
Procedure, which specifically commands that the applicant law enforcer must be a member of a division that is
assigned or related to the subject crime or offense before the application for search warrant may be acted upon.
The petitioners did not also cite any law, rule or regulation mandating such requirement. At most, petitioners
may only be referring to the administrative organization and/or internal rule or practice of the NBI. However, not
only did petitioners failed to establish the existence thereof, but they also did not prove that such administrative
organization and/or internal rule or practice are inviolable.
Neither is the presentation of the letter-complaint of Atty. Somera and board resolutions from Petron and
Pilipinas Shell required or necessary in determining probable cause. As heretofore discussed, the affidavits of
Oblanca and Alajar, coupled with the object and documentary evidence they presented, are sufficient to establish
probable cause. It can also be presumed that Oblanca, as an NBI agent, is a public officer who had regularly
performed his official duty.40 He would not have initiated an investigation on MASAGANA without a proper
complaint. Furthermore, Atty. Somera did not step up to deny his letter-complaint.
Regarding the third issue, petitioners posit that the applications for search warrants of Oblanca did not specify
the particular area to be searched, hence, giving the raiding team wide latitude in determining what areas they
can search. They aver that the search warrants were general warrants, and are therefore violative of the
Constitution. Petitioners also assert that since the MASAGANA compound is about 10,000.00 square meters
with several structures erected on the lot, the search warrants should have defined the areas to be searched.
The long standing rule is that a description of the place to be searched is sufficient if the officer with the warrant
can, with reasonable effort, ascertain and identify the place intended and distinguish it from other places in the
community. Any designation or description known to the locality that points out the place to the exclusion of all
others, and on inquiry leads the officers unerringly to it, satisfies the constitutional requirement. 41
Moreover, in the determination of whether a search warrant describes the premises to be searched with sufficient
particularity, it has been held that the executing officers prior knowledge as to the place intended in the warrant
is relevant. This would seem to be especially true where the executing officer is the affiant on whose affidavit the
warrant had been issued, and when he knows that the judge who issued the warrant intended the compound
described in the affidavit.42

The search warrants in question commanded any peace officer to make an immediate search on MASAGANA
compound located at Governors Drive, Barangay Lapidario, Trece Martires, Cavite City. It appears that the
raiding team had ascertained and reached MASAGANA compound without difficulty since MASAGANA does
not have any other offices/plants in Trece Martires, Cavite City. Moreover, Oblanca, who was with the raiding
team, was already familiar with the MASAGANA compound as he and Alajar had monitored and conducted testbuys thereat.
Even if there are several structures inside the MASAGANA compound, there was no need to particularize the
areas to be searched because, as correctly stated by Petron and Pilipinas Shell, these structures constitute the
essential and necessary components of the petitioners business and cannot be treated separately as they form
part of one entire compound. The compound is owned and used solely by MASAGANA. What the case law
merely requires is that, the place to be searched can be distinguished in relation to the other places in the
community. Indubitably, this requisite was complied with in the instant case.
As to the fourth issue, petitioners asseverate that the search warrants did not indicate with particularity the items
to be seized since the search warrants merely described the items to be seized as LPG cylinders bearing the
trademarks GASUL and SHELLANE without specifying their sizes.
A search warrant may be said to particularly describe the things to be seized when the description therein is as
specific as the circumstances will ordinarily allow; or when the description expresses a conclusion of fact not of
law by which the warrant officer may be guided in making the search and seizure; or when the things described
are limited to those which bear direct relation to the offense for which the warrant is being issued. 43
While it is true that the property to be seized under a warrant must be particularly described therein and no other
property can be taken thereunder, yet the description is required to be specific only in so far as the circumstances
will ordinarily allow. The law does not require that the things to be seized must be described in precise and
minute details as to leave no room for doubt on the part of the searching authorities; otherwise it would be
virtually impossible for the applicants to obtain a search warrant as they would not know exactly what kind of
things they are looking for. Once described, however, the articles subject of the search and seizure need not be so
invariant as to require absolute concordance, in our view, between those seized and those described in the
warrant. Substantial similarity of those articles described as a class or specie would suffice. 44
Measured against this standard, we find that the items to be seized under the search warrants in question were
sufficiently described with particularity. The articles to be confiscated were restricted to the following: (1) LPG
cylinders bearing the trademarks GASUL and SHELLANE; (2) Machines and equipments used or intended to be
used in the illegal refilling of GASUL and SHELLANE cylinders. These machines were also specifically
enumerated and listed in the search warrants; (3) Documents which pertain only to the production, sale and
distribution of the GASUL and SHELLANE LPG cylinders; and (4) Delivery trucks bearing Plate Nos. WTE527, XAM-970 and WFC-603, hauling trucks, and/or other delivery trucks or vehicles or conveyances being
used or intended to be used for the purpose of selling and/or distributing GASUL and SHELLANE LPG
cylinders.45
Additionally, since the described items are clearly limited only to those which bear direct relation to the offense,
i.e., violation of section 155 of Republic Act No. 8293, for which the warrant was issued, the requirement of
particularity of description is satisfied.
Given the foregoing, the indication of the accurate sizes of the GASUL and SHELLANE LPG cylinders or tanks
would be unnecessary.

Finally, petitioners claim that MASAGANA has the right to intervene and to move for the return of the seized
items; that the items seized by the raiding team were being used in the legitimate business of MASAGANA; that
the raiding team had no right to seize them under the guise that the same were being used in refilling GASUL
and SHELLANE LPG cylinders; and that there being no action for infringement filed against them and/or
MASAGANA from the seizure of the items up to the present, it is only fair that the seized articles be returned to
the lawful owner in accordance with Section 20 of A.M. No. 02-1-06-SC.
It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and
distinct from its stockholders, directors or officers. However, when the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an
association of persons, or in the case of two corporations merge them into one. 46 In other words, the law will not
recognize the separate corporate existence if the corporation is being used pursuant to the foregoing unlawful
objectives. This non-recognition is sometimes referred to as the doctrine of piercing the veil of corporate entity
or disregarding the fiction of corporate entity. Where the separate corporate entity is disregarded, the corporation
will be treated merely as an association of persons and the stockholders or members will be considered as the
corporation, that is, liability will attach personally or directly to the officers and stockholders. 47
As we now find, the petitioners, as directors/officers of MASAGANA, are utilizing the latter in violating the
intellectual property rights of Petron and Pilipinas Shell. Thus, petitioners collectively and MASAGANA should
be considered as one and the same person for liability purposes. Consequently, MASAGANAs third party claim
serves no refuge for petitioners.
Even if we were to sustain the separate personality of MASAGANA from that of the petitioners, the effect will
be the same. The law does not require that the property to be seized should be owned by the person against
whom the search warrants is directed. Ownership, therefore, is of no consequence, and it is sufficient that the
person against whom the warrant is directed has control or possession of the property sought to be seized. 48
Hence, even if, as petitioners claimed, the properties seized belong to MASAGANA as a separate entity, their
seizure pursuant to the search warrants is still valid.
Further, it is apparent that the motor compressor, LPG refilling machine and the GASUL and SHELL LPG
cylinders seized were the corpus delicti, the body or substance of the crime, or the evidence of the commission
of trademark infringement. These were the very instruments used or intended to be used by the petitioners in
trademark infringement. It is possible that, if returned to MASAGANA, these items will be used again in
violating the intellectual property rights of Petron and Pilipinas Shell. 49 Thus, the RTC was justified in denying
the petitioners motion for their return so as to prevent the petitioners and/or MASAGANA from using them
again in trademark infringement.
Petitioners reliance on Section 20 of A.M. No. 02-1-06-SC, 50 is not tenable. As correctly observed by the
Solicitor General, A.M. 02-1-06-SC is not applicable in the present case because it governs only searches and
seizures in civil actions for infringement of intellectual property rights. 51 The offense complained of herein is for
criminal violation of Section 155 in relation to Section 17052 of Republic Act No. 8293.
WHEREFORE, the petition is DENIED. The Decision and Resolution of the Court of Appeals in CA-G.R. SP
No. 79256, dated 30 September 2004 and 1 June 2005, respectively, are hereby AFFIRMED. Costs against
petitioners.
SO ORDERED.

MINITA
Associate Justice

V.

CHICO-NAZARIO

WE CONCUR:

G.R. No. 150416

July 21, 2006

SEVENTH DAY ADVENTIST CONFERENCE CHURCH OF SOUTHERN PHILIPPINES, INC., ,

petitioners,
vs.
NORTHEASTERN MINDANAO MISSION OF SEVENTH DAY ADVENTIST, INC.,Respondents.
DECISION

CORONA, J.:
This petition for review on certiorari assails the Court of Appeals (CA) decision 1 and resolution2 in CA-G.R. CV
No. 41966 affirming, with modification, the decision of the Regional Trial Court (RTC) of Bayugan, Agusan del
Sur, Branch 7 in Civil Case No. 63.
This case involves a 1,069 sq. m. lot covered by Transfer Certificate of Title (TCT) No. 4468 in Bayugan,
Agusan del Sur originally owned by Felix Cosio and his wife, Felisa Cuysona.
On April 21, 1959, the spouses Cosio donated the land to the South Philippine Union Mission of Seventh Day
Adventist Church of Bayugan Esperanza, Agusan (SPUM-SDA Bayugan). 3 Part of the deed of donation read:
KNOW ALL MEN BY THESE PRESENTS:
That we Felix Cosio[,] 49 years of age[,] and Felisa Cuysona[,] 40 years of age, [h]usband and wife, both are
citizen[s] of the Philippines, and resident[s] with post office address in the Barrio of Bayugan, Municipality of
Esperanza, Province of Agusan, Philippines, do hereby grant, convey and forever quit claim by way of Donation
or gift unto the South Philippine [Union] Mission of Seventh Day Adventist Church of Bayugan, Esperanza,
Agusan, all the rights, title, interest, claim and demand both at law and as well in possession as in expectancy of
in and to all the place of land and portion situated in the Barrio of Bayugan, Municipality of Esperanza, Province
of Agusan, Philippines, more particularly and bounded as follows, to wit:
1. a parcel of land for Church Site purposes only.
2. situated [in Barrio Bayugan, Esperanza].
3. Area: 30 meters wide and 30 meters length or 900 square meters.
4. Lot No. 822-Pls-225. Homestead Application No. V-36704, Title No. P-285.
5. Bounded Areas
North by National High Way; East by Bricio Gerona; South by Serapio Abijaron and West by Feliz Cosio xxx. 4
The donation was allegedly accepted by one Liberato Rayos, an elder of the Seventh Day Adventist Church, on
behalf of the donee.
Twenty-one years later, however, on February 28, 1980, the same parcel of land was sold by the spouses Cosio to
the Seventh Day Adventist Church of Northeastern Mindanao Mission (SDA-NEMM). 5 TCT No. 4468 was
thereafter issued in the name of SDA-NEMM.6
Claiming to be the alleged donees successors-in-interest, petitioners asserted ownership over the property. This
was opposed by respondents who argued that at the time of the donation, SPUM-SDA Bayugan could not legally
be a donee
because, not having been incorporated yet, it had no juridical personality. Neither were petitioners members of
the local church then, hence, the donation could not have been made particularly to them.

On September 28, 1987, petitioners filed a case, docketed as Civil Case No. 63 (a suit for cancellation of title,
quieting of ownership and possession, declaratory relief and reconveyance with prayer for preliminary injunction
and damages), in the RTC of Bayugan, Agusan del Sur. After trial, the trial court rendered a decision 7 on
November 20, 1992 upholding the sale in favor of respondents.
On appeal, the CA affirmed the RTC decision but deleted the award of moral damages and attorneys fees. 8
Petitioners motion for reconsideration was likewise denied. Thus, this petition.
The issue in this petition is simple: should SDA-NEMMs ownership of the lot covered by TCT No. 4468 be
upheld?9 We answer in the affirmative.
The controversy between petitioners and respondents involves two supposed transfers of the lot previously
owned by the spouses Cosio: (1) a donation to petitioners alleged predecessors-in-interest in 1959 and (2) a sale
to respondents in 1980.
Donation is undeniably one of the modes of acquiring ownership of real property. Likewise, ownership of a
property may be transferred by tradition as a consequence of a sale.
Petitioners contend that the appellate court should not have ruled on the validity of the donation since it was not
among the issues raised on appeal. This is not correct because an appeal generally opens the entire case for
review.
We agree with the appellate court that the alleged donation to petitioners was void.
Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another
person who accepts it. The donation could not have been made in favor of an entity yet inexistent at the time it
was made. Nor could it have been accepted as there was yet no one to accept it.
The deed of donation was not in favor of any informal group of SDA members but a supposed SPUM-SDA
Bayugan (the local church) which, at the time, had neither juridical personality nor capacity to accept such gift.
Declaring themselves a de facto corporation, petitioners allege that they should benefit from the donation.
But there are stringent requirements before one can qualify as a de facto corporation:
(a) the existence of a valid law under which it may be incorporated;
(b) an attempt in good faith to incorporate; and
(c) assumption of corporate powers.10
While there existed the old Corporation Law (Act 1459), 11 a law under which SPUM-SDA Bayugan could have
been organized, there is no proof that there was an attempt to incorporate at that time.
The filing of articles of incorporation and the issuance of the certificate of incorporation are essential for the
existence of a de facto corporation.12 We have held that an organization not registered with the Securities and
Exchange Commission (SEC) cannot be considered a corporation in any concept, not even as a corporation de
facto.13 Petitioners themselves admitted that at the time of the donation, they were not registered with the SEC,

nor did they even attempt to organize14 to comply with legal requirements.
Corporate existence begins only from the moment a certificate of incorporation is issued. No such certificate was
ever issued to petitioners or their supposed predecessor-in-interest at the time of the donation. Petitioners
obviously could not have claimed succession to an entity that never came to exist. Neither could the principle of
separate juridical personality apply since there was never any corporation 15 to speak of. And, as already stated,
some of the representatives of petitioner Seventh Day Adventist Conference Church of Southern Philippines,
Inc. were not even members of the local church then, thus, they could not even claim that the donation was
particularly for them.16
"The de facto doctrine thus effects a compromise between two conflicting public interest[s]the one opposed to
an unauthorized assumption of corporate privileges; the other in favor of doing justice to the parties and of
establishing a general assurance of security in business dealing with corporations." 17
Generally, the doctrine exists to protect the public dealing with supposed corporate entities, not to favor the
defective or non-existent corporation.18
In view of the foregoing, petitioners arguments anchored on their supposed de facto status hold no water. We are
convinced that there was no donation to petitioners or their supposed predecessor-in-interest.
On the other hand, there is sufficient basis to affirm the title of SDA-NEMM. The factual findings of the trial
court in this regard were not convincingly disputed. This Court is not a trier of facts. Only questions of law are
the proper subject of a petition for review on certiorari. 19
Sustaining the validity of respondents title as well as their right of ownership over the property, the trial court
stated:
[W]hen Felix Cosio was shown the Absolute Deed of Sale during the hearing xxx he acknowledged that the
same was his xxx but that it was not his intention to sell the controverted property because he had previously
donated the same lot to the South Philippine Union Mission of SDA Church of Bayugan-Esperanza. Cosio
avouched that had it been his intendment to sell, he would not have disposed of it for a mere P2,000.00 in two
installments but for P50,000.00 or P60,000.00. According to him, the P2,000.00 was not a consideration of the
sale but only a form of help extended.
A thorough analysis and perusal, nonetheless, of the Deed of Absolute Sale disclosed that it has the
essential requisites of contracts pursuant to xxx Article 1318 of the Civil Code, except that the consideration
of P2,000.00 is somewhat insufficient for a [1,069-square meter] land. Would then this inadequacy of the
consideration render the contract invalid?
Article 1355 of the Civil Code provides:
Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has
been fraud, mistake or undue influence.
No evidence [of fraud, mistake or undue influence] was adduced by [petitioners].
xxx

Well-entrenched is the rule that a Certificate of Title is generally a conclusive evidence of [ownership] of the
land. There is that strong and solid presumption that titles were legally issued and that they are valid. It is
irrevocable and indefeasible and the duty of the Court is to see to it that the title is maintained and respected
unless challenged in a direct proceeding. xxx The title shall be received as evidence in all the Courts and shall be
conclusive as to all matters contained therein.
[This action was instituted almost seven years after the certificate of title in respondents name was issued in
1980.]20
According to Art. 1477 of the Civil Code, the ownership of the thing sold shall be transferred to the vendee upon
the actual or constructive delivery thereof. On this, the noted author Arturo Tolentino had this to say:
The execution of [a] public instrument xxx transfers the ownership from the vendor to the vendee who may
thereafter exercise the rights of an owner over the same 21
Here, transfer of ownership from the spouses Cosio to SDA-NEMM was made upon constructive delivery of the
property on February 28, 1980 when the sale was made through a public instrument. 22 TCT No. 4468 was
thereafter issued and it remains in the name of SDA-NEMM.
WHEREFORE, the petition is hereby DENIED.
Costs against petitioners.
SO ORDERED.
Puno, Chairperson, Sandoval-Gutierrez, Azcuna, Garcia, J.J., concur

vi

vii

viii

ix

G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,
vs.

PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

PANGANIBAN, J.:
A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to
divide the profits or losses that may arise therefrom, even if it is shown that they have not contributed any capital
of their own to a "common fund." Their contribution may be in the form of credit or industry, not necessarily
cash or fixed assets. Being partner, they are all liable for debts incurred by or on behalf of the partnership. The
liability for a contract entered into on behalf of an unincorporated association or ostensible corporation may lie
in a person who may not have directly transacted on its behalf, but reaped benefits from that contract.
The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision of the
Court of Appeals in CA-GR CV
41477, 1 which disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed decision, the same is
hereby affirmed. 2
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the CA,
reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on
September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following amounts, subject to the
modifications as hereinafter made by reason of the special and unique facts and
circumstances and the proceedings that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the fishing
nets covered by the Agreement plus P68,000.00 representing the unpaid
price of the floats not covered by said Agreement;
b. 12% interest per annum counted from date of plaintiff's invoices and
computed on their respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407
for P385,377.80 dated February 9, 1990;
ii. Accrued interest for P27,904.02 on Invoice No.
14413 for P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No.
14426 for P68,000.00 dated February 19, 1990;
c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing
P500.00 per appearance in court;

d. P65,000.00 representing P5,000.00 monthly rental for storage

charges on the nets counted from September 20, 1990 (date of
attachment) to September 12, 1991 (date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal obligation or for
the unpaid price of nets and floats in the amount of P532,045.00 and
P68,000.00, respectively, or for the total amount P600,045.00, this Court noted
that these items were attached to guarantee any judgment that may be rendered
in favor of the plaintiff but, upon agreement of the parties, and, to avoid further
deterioration of the nets during the pendency of this case, it was ordered sold at
public auction for not less than P900,000.00 for which the plaintiff was the sole
and winning bidder. The proceeds of the sale paid for by plaintiff was deposited
in court. In effect, the amount of P900,000.00 replaced the attached property as
a guaranty for any judgment that plaintiff may be able to secure in this case with
the ownership and possession of the nets and floats awarded and delivered by
the sheriff to plaintiff as the highest bidder in the public auction sale. It has also
been noted that ownership of the nets [was] retained by the plaintiff until full
payment [was] made as stipulated in the invoices; hence, in effect, the plaintiff
attached its own properties. It [was] for this reason also that this Court earlier
ordered the attachment bond filed by plaintiff to guaranty damages to
defendants to be cancelled and for the P900,000.00 cash bidded and paid for by
plaintiff to serve as its bond in favor of defendants.
From the foregoing, it would appear therefore that whatever judgment the
plaintiff may be entitled to in this case will have to be satisfied from the amount
of P900,000.00 as this amount replaced the attached nets and floats.
Considering, however, that the total judgment obligation as computed above
would amount to only P840,216.92, it would be inequitable, unfair and unjust to
award the excess to the defendants who are not entitled to damages and who did
not put up a single centavo to raise the amount of P900,000.00 aside from the
fact that they are not the owners of the nets and floats. For this reason, the
defendants are hereby relieved from any and all liabilities arising from the
monetary judgment obligation enumerated above and for plaintiff to retain
possession and ownership of the nets and floats and for the reimbursement of
the P900,000.00 deposited by it with the Clerk of Court.
SO ORDERED. 3
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated
February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries,
Inc. (herein respondent). They claimed that they were engaged in a business venture with Petitioner Lim Tong
Lim, who however was not a signatory to the agreement. The total price of the nets amounted to P532,045. Four
hundred pieces of floats worth P68,000 were also sold to the Corporation. 4
The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondents filed a
collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary
attachment. The suit was brought against the three in their capacities as general partners, on the allegation that

"Ocean Quest Fishing Corporation" was a nonexistent corporation as shown by a Certification from the
Securities and Exchange Commission. 5 On September 20, 1990, the lower court issued a Writ of Preliminary
Attachment, which the sheriff enforced by attaching the fishing nets on board F/B Lourdes which was then
docked at the Fisheries Port, Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a
reasonable time within which to pay. He also turned over to respondent some of the nets which were in his
possession. Peter Yao filed an Answer, after which he was deemed to have waived his right to cross-examine
witnesses and to present evidence on his behalf, because of his failure to appear in subsequent hearings. Lim
Tong Lim, on the other hand, filed an Answer with Counterclaim and Crossclaim and moved for the lifting of the
Writ of Attachment. 6 The trial court maintained the Writ, and upon motion of private respondent, ordered the
sale of the fishing nets at a public auction. Philippine Fishing Gear Industries won the bidding and deposited
with the said court the sales proceeds of P900,000. 7
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear Industries was
entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay
respondent. 8
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies of the
witnesses presented and (2) on a Compromise Agreement executed by the three 9 in Civil Case No. 1492-MN
which Chua and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity
of commercial documents; (b) a reformation of contracts; (c) a declaration of ownership of fishing boats; (d) an
injunction and (e) damages. 10 The Compromise Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4)
vessels sold in the amount of P5,750,000.00 including the fishing net.
This P5,750,000.00 shall be applied as full payment for P3,250,000.00
in favor of JL Holdings Corporation and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at a higher
price than P5,750,000.00 whatever will be the excess will be divided
into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00
whatever the deficiency shall be shouldered and paid to JL Holding
Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao. 11
The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that
joint liability could be presumed from the equal distribution of the profit and loss. 21
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing business and
may thus be held liable as a such for the fishing nets and floats purchased by and for the use of the partnership.
The appellate court ruled:
The evidence establishes that all the defendants including herein appellant Lim Tong
Lim undertook a partnership for a specific undertaking, that is for commercial

fishing . . . . Oviously, the ultimate undertaking of the defendants was to divide the
profits among themselves which is what a partnership essentially is . . . . By a contract
of partnership, two or more persons bind themselves to contribute money, property or
industry to a common fund with the intention of dividing the profits among themselves
(Article 1767, New Civil Code). 13
Hence, petitioner brought this recourse before this Court. 14
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE
AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A
SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG
THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING
FOR OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS
FROM PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN
IMPUTING LIABILITY TO PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND
ATTACHMENT OF PETITIONER LIM'S GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats from respondent, the Court
must resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to have entered into a
partnership.
This Court's Ruling
The Petition is devoid of merit.
First and Second Issues:
Existence of a Partnership
and Petitioner's Liability
In arguing that he should not be held liable for the equipment purchased from respondent, petitioner controverts
the CA finding that a partnership existed between him, Peter Yao and Antonio Chua. He asserts that the CA
based its finding on the Compromise Agreement alone. Furthermore, he disclaims any direct participation in the
purchase of the nets, alleging that the negotiations were conducted by Chua and Yao only, and that he has not
even met the representatives of the respondent company. Petitioner further argues that he was a lessor, not a
partner, of Chua and Yao, for the "Contract of Lease " dated February 1, 1990, showed that he had merely leased
to the two the main asset of the purported partnership the fishing boat F/B Lourdes. The lease was for six
months, with a monthly rental of P37,500 plus 25 percent of the gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts clearly showed
that there existed a partnership among Chua, Yao and him, pursuant to Article 1767 of the Civil Code which

provides:
Art. 1767 By the contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing
the profits among themselves.
Specifically, both lower courts ruled that a partnership among the three existed based on the following factual
findings: 15
(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial
fishing to join him, while Antonio Chua was already Yao's partner;
(2) That after convening for a few times, Lim, Chua, and Yao verbally agreed to acquire
two fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong
Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed
of Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as
security for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping, repairing, dry
docking and other expenses for the boats would be shouldered by Chua and Yao;
(6) That because of the "unavailability of funds," Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured by a check, because of which, Yao and
Chua entrusted the ownership papers of two other boats, Chua's FB Lady Anne Mel and
Yao's FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought
nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing
Corporation," their purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch
72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity
of commercial documents; (b) reformation of contracts; (c) declaration of ownership of
fishing boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement executed
between the parties-litigants the terms of which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in a
fishing business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus
Lim who was petitioner's brother. In their Compromise Agreement, they subsequently revealed their intention to
pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess or loss.
These boats, the purchase and the repair of which were financed with borrowed money, fell under the term
"common fund" under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an
intangible like credit or industry. That the parties agreed that any loss or profit from the sale and operation of the
boats would be divided equally among them also shows that they had indeed formed a partnership.

Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets
and the floats. The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance of
their business. It would have been inconceivable for Lim to involve himself so much in buying the boat but not
in the acquisition of the aforesaid equipment, without which the business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership engaged in
the fishing business. They purchased the boats, which constituted the main assets of the partnership, and they
agreed that the proceeds from the sales and operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present case should involve only questions of law.
Thus, the foregoing factual findings of the RTC and the CA are binding on this Court, absent any cogent proof
that the present action is embraced by one of the exceptions to the rule. 16 In assailing the factual findings of the
two lower courts, petitioner effectively goes beyond the bounds of a petition for review under Rule 45.
Compromise Agreement
Not the Sole Basis of Partnership
Petitioner argues that the appellate court's sole basis for assuming the existence of a partnership was the
Compromise Agreement. He also claims that the settlement was entered into only to end the dispute among
them, but not to adjudicate their preexisting rights and obligations. His arguments are baseless. The Agreement
was but an embodiment of the relationship extant among the parties prior to its execution.
A proper adjudication of claimants' rights mandates that courts must review and thoroughly appraise all relevant
facts. Both lower courts have done so and have found, correctly, a preexisting partnership among the parties. In
implying that the lower courts have decided on the basis of one piece of document alone, petitioner fails to
appreciate that the CA and the RTC delved into the history of the document and explored all the possible
consequential combinations in harmony with law, logic and fairness. Verily, the two lower courts' factual
findings mentioned above nullified petitioner's argument that the existence of a partnership was based only on
the Compromise Agreement.
Petitioner Was a Partner,
Not a Lessor
We are not convinced by petitioner's argument that he was merely the lessor of the boats to Chua and Yao, not a
partner in the fishing venture. His argument allegedly finds support in the Contract of Lease and the registration
papers showing that he was the owner of the boats, including F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale of his own
boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the three of them. No
lessor would do what petitioner did. Indeed, his consent to the sale proved that there was a preexisting
partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao, in which
debts were undertaken in order to finance the acquisition and the upgrading of the vessels which would be used
in their fishing business. The sale of the boats, as well as the division among the three of the balance remaining
after the payment of their loans, proves beyond cavil that F/B Lourdes, though registered in his name, was not
his own property but an asset of the partnership. It is not uncommon to register the properties acquired from a
loan in the name of the person the lender trusts, who in this case is the petitioner himself. After all, he is the

brother of the creditor, Jesus Lim.

We stress that it is unreasonable indeed, it is absurd for petitioner to sell his property to pay a debt he did
not incur, if the relationship among the three of them was merely that of lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua and
Yao, and not to him. Again, we disagree.
Sec. 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof: Provided however,
That when any such ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from
denying its corporate existence. "The reason behind this doctrine is obvious an unincorporated association has
no personality and would be incompetent to act and appropriate for itself the power and attributes of a
corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus,
those who act or purport to act as its representatives or agents do so without authority and at their own risk. And
as it is an elementary principle of law that a person who acts as an agent without authority or without a principal
is himself regarded as the principal, possessed of all the right and subject to all the liabilities of a principal, a
person acting or purporting to act on behalf of a corporation which has no valid existence assumes such
privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as
such agent. 17
The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the first
instance, an unincorporated association, which represented itself to be a corporation, will be estopped from
denying its corporate capacity in a suit against it by a third person who relied in good faith on such
representation. It cannot allege lack of personality to be sued to evade its responsibility for a contract it entered
into and by virtue of which it received advantages and benefits.
On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it as a
corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought
against the alleged corporation. In such case, all those who benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or
took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the nets it
sold. The only question here is whether petitioner should be held jointly 18 liable with Chua and Yao. Petitioner
contests such liability, insisting that only those who dealt in the name of the ostensible corporation should be
held liable. Since his name does not appear on any of the contracts and since he never directly transacted with
the respondent corporation, ergo, he cannot be held liable.

Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which has
earlier been proven to be an asset of the partnership. He in fact questions the attachment of the nets, because the
Writ has effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a corporation.
Although it was never legally formed for unknown reasons, this fact alone does not preclude the liabilities of the
three as contracting parties in representation of it. Clearly, under the law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to be without valid existence, are held liable as general
partners.
Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped the
benefits of the contract entered into by persons with whom he previously had an existing relationship, he is
deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel. We
reiterate the ruling of the Court in Alonso v. Villamor: 19
A litigation is not a game of technicalities in which one, more deeply schooled and
skilled in the subtle art of movement and position, entraps and destroys the other. It is,
rather, a contest in which each contending party fully and fairly lays before the court the
facts in issue and then, brushing aside as wholly trivial and indecisive all imperfections
of form and technicalities of procedure, asks that justice be done upon the merits.
Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality, when it
deserts its proper office as an aid to justice and becomes its great hindrance and chief
enemy, deserves scant consideration from courts. There should be no vested rights in
technicalities.
Third Issue:
Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We agree with the
Court of Appeals that this issue is now moot and academic. As previously discussed, F/B Lourdes was an asset
of the partnership and that it was placed in the name of petitioner, only to assure payment of the debt he and his
partners owed. The nets and the floats were specifically manufactured and tailor-made according to their own
design, and were bought and used in the fishing venture they agreed upon. Hence, the issuance of the Writ to
assure the payment of the price stipulated in the invoices is proper. Besides, by specific agreement, ownership of
the nets remained with Respondent Philippine Fishing Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
Melo, Purisima and Gonzaga-Reyes, JJ., concur.
Vitug, J., pls. see concurring opinion.
Separate Opinions

[G.R. No. 119002. October 19, 2000]

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner, vs. HON. COURT OF
APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION, respondents.
DECISION
KAPUNAN, J.:
On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its managing
director, wrote a letter to the Philippine Football Federation (Federation), through its president private
respondent Henri Kahn, wherein the former offered its services as a travel agency to the latter. The offer was
accepted.
Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to the South
East Asian Games in Kuala Lumpur as well as various other trips to the People's Republic of China and
Brisbane. The total cost of the tickets amounted to P449,654.83. For the tickets received, the Federation made
two partial payments, both in September of 1989, in the total amount of P176,467.50.
On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand letter
requesting for the amount of P265,894.33. On 30 October 1989, the Federation, through the Project Gintong
Alay, paid the amount of P31,603.00.
On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial payment for
the outstanding balance of the Federation. Thereafter, no further payments were made despite repeated demands.
This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner sued Henri
Kahn in his personal capacity and as President of the Federation and impleaded the Federation as an alternative
defendant. Petitioner sought to hold Henri Kahn liable for the unpaid balance for the tickets purchased by the
Federation on the ground that Henri Kahn allegedly guaranteed the said obligation.
Henri Kahn filed his answer with counterclaim. While not denying the allegation that the Federation owed
the amount P207,524.20, representing the unpaid balance for the plane tickets, he averred that the petitioner has
no cause of action against him either in his personal capacity or in his official capacity as president of the
Federation. He maintained that he did not guarantee payment but merely acted as an agent of the Federation
which has a separate and distinct juridical personality.
On the other hand, the Federation failed to file its answer, hence, was declared in default by the trial court.
In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared Henri Kahn
personally liable for the unpaid obligation of the Federation. In arriving at the said ruling, the trial court
rationalized:
Defendant Henri Kahn would have been correct in his contentions had it been duly established that
defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor the defendant Henri

Kahn has adduced any evidence proving the corporate existence of the defendant Federation. In paragraph 2 of
its complaint, plaintiff asserted that "Defendant Philippine Football Federation is a sports association xxx." This
has not been denied by defendant Henri Kahn in his Answer. Being the President of defendant Federation, its
corporate existence is within the personal knowledge of defendant Henri Kahn. He could have easily denied
specifically the assertion of the plaintiff that it is a mere sports association, if it were a domestic corporation. But
he did not.
xxx
A voluntary unincorporated association, like defendant Federation has no power to enter into, or to ratify, a
contract. The contract entered into by its officers or agents on behalf of such association is not binding on, or
enforceable against it. The officers or agents are themselves personally liable.
xxx
The dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the principal sum
of P207,524.20, plus the interest thereon at the legal rate computed from July 5, 1990, the date the complaint
was filed, until the principal obligation is fully liquidated; and another sum of P15,000.00 for attorney's fees.
The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of the
defendant Henri Kahn are hereby dismissed.
With the costs against defendant Henri Kahn.
Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994, the
respondent court rendered a decision reversing the trial court, the decretal portion of said decision reads:
WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET ASIDE
and another one is rendered dismissing the complaint against defendant Henri S. Kahn.
In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the Federation. It
rationalized that since petitioner failed to prove that Henri Kahn guaranteed the obligation of the Federation, he
should not be held liable for the same as said entity has a separate and distinct personality from its officers.
Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the Federation be held
liable for the unpaid obligation. The same was denied by the appellate court in its resolution of 8 February 1995,
where it stated that:
As to the alternative prayer for the Modification of the Decision by expressly declaring in the dispositive
portion thereof the Philippine Football Federation (PFF) as liable for the unpaid obligation, it should be
remembered that the trial court dismissed the complaint against the Philippine Football Federation, and the
plaintiff did not appeal from this decision. Hence, the Philippine Football Federation is not a party to this appeal
and consequently, no judgment may be pronounced by this Court against the PFF without violating the due
process clause, let alone the fact that the judgment dismissing the complaint against it, had already become final
by virtue of the plaintiff's failure to appeal therefrom. The alternative prayer is therefore similarly DENIED.
Petitioner now seeks recourse to this Court and alleges that the respondent court committed the following
assigned errors:
A.THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD
DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE
ENTITY AND IN NOT HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE
ONE WHO REPRESENTED THE PFF AS HAVING A CORPORATE PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE
RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE

UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND CONTRACTED

THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL PAYMENT AND ASSURED
PETITIONER OF FULLY SETTLING THE OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY
LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY
DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE FOR THE
OBLIGATION.
The resolution of the case at bar hinges on the determination of the existence of the Philippine Football
Federation as a juridical person. In the assailed decision, the appellate court recognized the existence of the
Federation. In support of this, the CA cited Republic Act 3135, otherwise known as the Revised Charter of the
Philippine Amateur Athletic Federation, and Presidential Decree No. 604 as the laws from which said Federation
derives its existence.
As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the juridical
existence of national sports associations. This may be gleaned from the powers and functions granted to these
associations. Section 14 of R.A. 3135 provides:
SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall have the
following functions, powers and duties:
1.

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

2.

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

3.
To purchase, sell, lease or otherwise encumber property both real and personal, for the
accomplishment of their purpose;
4.
To affiliate with international or regional sports' Associations after due consultation with
the executive committee;
xxx
13. To perform such other acts as may be necessary for the proper accomplishment of their
purposes and not inconsistent with this Act.
Section 8 of P.D. 604, grants similar functions to these sports associations:
SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports associations
shall have the following functions, powers, and duties:
1. Adopt a Constitution and By-Laws for their internal organization and government which shall
be submitted to the Department and any amendment thereto shall take effect upon approval by the
Department: Provided, however, That no team, school, club, organization, or entity shall be admitted as
a voting member of an association unless 60 per cent of the athletes composing said team, school, club,
organization, or entity are Filipino citizens;
2. Raise funds by donations, benefits, and other means for their purpose subject to the approval of
the Department;
3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the
accomplishment of their purpose;
4. Conduct local, interport, and international competitions, other than the Olympic and Asian
Games, for the promotion of their sport;
5. Affiliate with international or regional sports associations after due consultation with the
Department;

xxx
13. Perform such other functions as may be provided by law.
The above powers and functions granted to national sports associations clearly indicate that these entities
may acquire a juridical personality. The power to purchase, sell, lease and encumber property are acts which may
only be done by persons, whether natural or artificial, with juridical capacity. However, while we agree with the
appellate court that national sports associations may be accorded corporate status, such does not automatically
take place by the mere passage of these laws.
It is a basic postulate that before a corporation may acquire juridical personality, the State must give its
consent either in the form of a special law or a general enabling act. We cannot agree with the view of the
appellate court and the private respondent that the Philippine Football Federation came into existence upon the
passage of these laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision creating the Philippine
Football Federation. These laws merely recognized the existence of national sports associations and provided the
manner by which these entities may acquire juridical personality. Section 11 of R.A. 3135 provides:
SEC. 11. National Sports' Association; organization and recognition. - A National Association shall be
organized for each individual sports in the Philippines in the manner hereinafter provided to constitute the
Philippine Amateur Athletic Federation. Applications for recognition as a National Sports' Association shall be
filed with the executive committee together with, among others, a copy of the constitution and by-laws and a list
of the members of the proposed association, and a filing fee of ten pesos.
The Executive Committee shall give the recognition applied for if it is satisfied that said association will
promote the purposes of this Act and particularly section three thereof. No application shall be held pending for
more than three months after the filing thereof without any action having been taken thereon by the executive
committee. Should the application be rejected, the reasons for such rejection shall be clearly stated in a written
communication to the applicant. Failure to specify the reasons for the rejection shall not affect the application
which shall be considered as unacted upon: Provided, however, That until the executive committee herein
provided shall have been formed, applications for recognition shall be passed upon by the duly elected members
of the present executive committee of the Philippine Amateur Athletic Federation. The said executive committee
shall be dissolved upon the organization of the executive committee herein provided: Provided, further, That the
functioning executive committee is charged with the responsibility of seeing to it that the National Sports'
Associations are formed and organized within six months from and after the passage of this Act.
Section 7 of P.D. 604, similarly provides:
SEC. 7. National Sports Associations. - Application for accreditation or recognition as a national sports
association for each individual sport in the Philippines shall be filed with the Department together with, among
others, a copy of the Constitution and By-Laws and a list of the members of the proposed association.
The Department shall give the recognition applied for if it is satisfied that the national sports association to
be organized will promote the objectives of this Decree and has substantially complied with the rules and
regulations of the Department: Provided, That the Department may withdraw accreditation or recognition for
violation of this Decree and such rules and regulations formulated by it.
The Department shall supervise the national sports association: Provided, That the latter shall have
exclusive technical control over the development and promotion of the particular sport for which they are
organized.
Clearly the above cited provisions require that before an entity may be considered as a national sports
association, such entity must be recognized by the accrediting organization, the Philippine Amateur Athletic
Federation under R.A. 3135, and the Department of Youth and Sports Development under P.D. 604. This fact of
recognition, however, Henri Kahn failed to substantiate. In attempting to prove the juridical existence of the
Federation, Henri Kahn attached to his motion for reconsideration before the trial court a copy of the constitution
and by-laws of the Philippine Football Federation. Unfortunately, the same does not prove that said Federation

has indeed been recognized and accredited by either the Philippine Amateur Athletic Federation or the
Department of Youth and Sports Development. Accordingly, we rule that the Philippine Football Federation is
not a national sports association within the purview of the aforementioned laws and does not have corporate
existence of its own.
Thus being said, it follows that private respondent Henry Kahn should be held liable for the unpaid
obligations of the unincorporated Philippine Football Federation. It is a settled principal in corporation law that
any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such
privileges and becomes personally liable for contract entered into or for other acts performed as such agent. As
president of the Federation, Henri Kahn is presumed to have known about the corporate existence or nonexistence of the Federation. We cannot subscribe to the position taken by the appellate court that even assuming
that the Federation was defectively incorporated, the petitioner cannot deny the corporate existence of the
Federation because it had contracted and dealt with the Federation in such a manner as to recognize and in effect
admit its existence. The doctrine of corporation by estoppel is mistakenly applied by the respondent court to the
petitioner. The application of the doctrine applies to a third party only when he tries to escape liability on a
contract from which he has benefited on the irrelevant ground of defective incorporation. In the case at bar, the
petitioner is not trying to escape liability from the contract but rather is the one claiming from the contract.
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the Regional
Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ., concur.

[G.R. No. 141994. January 17, 2005]

FILIPINAS BROADCASTING NETWORK, INC., petitioner, vs. AGO MEDICAL AND EDUCATIONAL
CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE, (AMEC-BCCM) and ANGELITA F.
AGO, respondents.
DECISION
CARPIO, J.:
The Case
This petition for review[1] assails the 4 January 1999 Decision[2] and 26 January 2000 Resolution of the
Court of Appeals in CA-G.R. CV No. 40151. The Court of Appeals affirmed with modification the 14 December
1992 Decision[3] of the Regional Trial Court of Legazpi City, Branch 10, in Civil Case No. 8236. The Court of
Appeals held Filipinas Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima
liable for libel and ordered them to solidarily pay Ago Medical and Educational Center-Bicol Christian College
of Medicine moral damages, attorneys fees and costs of suit.
The Antecedents
Expos is a radio documentary[4] program hosted by Carmelo Mel Rima (Rima) and Hermogenes Jun Alegre
(Alegre).[5] Expos is aired every morning over DZRC-AM which is owned by Filipinas Broadcasting Network,
Inc. (FBNI). Expos is heard over Legazpi City, the Albay municipalities and other Bicol areas. [6]
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 AMECs College of Medicine, filed a complaint for damages [7] against FBNI, Rima and Alegre on 27
February 1990. Quoted are portions of the allegedly libelous broadcasts:
JUN ALEGRE:
Let us begin with the less burdensome: if you have children taking medical course at AMECBCCM, advise them to pass all subjects because if they fail in any subject they will repeat their
year level, taking up all subjects including those they have passed already. Several students had
approached me stating that they had consulted with the DECS which told them that there is no such
regulation. If [there] is no such regulation why is AMEC doing the same?

xxx
Second: Earlier AMEC students in Physical Therapy had complained that the course is not
recognized by DECS. xxx
Third: Students are required to take and pay for the subject even if the subject does not have an
instructor - such greed for money on the part of AMECs administration. Take the subject
Anatomy: students would pay for the subject upon enrolment because it is offered by the school.
However there would be no instructor for such subject. Students would be informed that course would
be moved to a later date because the school is still searching for the appropriate instructor.
xxx
It is a public knowledge that the Ago Medical and Educational Center has survived and has been
surviving for the past few years since its inception because of funds support from foreign foundations.
If you will take a look at the AMEC premises youll find out that the names of the buildings there are
foreign soundings. There is a McDonald Hall. Why not Jose Rizal or Bonifacio Hall? That is a very
concrete and undeniable evidence that the support of foreign foundations for AMEC is substantial, isnt
it? With the report which is the basis of the expose in DZRC today, it would be very easy for detractors
and enemies of the Ago family to stop the flow of support of foreign foundations who assist the
medical school on the basis of the latters purpose. But if the purpose of the institution (AMEC) is to
deceive students at cross purpose with its reason for being it is possible for these foreign foundations to
lift or suspend their donations temporarily.[8]
xxx
On the other hand, the administrators of AMEC-BCCM, AMEC Science High School and the
AMEC-Institute of Mass Communication in their effort to minimize expenses in terms of salary
are absorbing or continues to accept rejects. For example how many teachers in AMEC are former
teachers of Aquinas University but were removed because of immorality? Does it mean that the present
administration of AMEC have the total definite moral foundation from catholic administrator of
Aquinas University. I will prove to you my friends, that AMEC is a dumping ground, garbage, not
merely of moral and physical misfits. Probably they only qualify in terms of intellect. The Dean of
Student Affairs of AMEC is Justita Lola, as the family name implies. She is too old to work, being an
old woman. Is the AMEC administration exploiting the very [e]nterprising or compromising and
undemanding Lola? Could it be that AMEC is just patiently making use of Dean Justita Lola were if
she is very old. As in atmospheric situation zero visibility the plane cannot land, meaning she is very
old, low pay follows. By the way, Dean Justita Lola is also the chairman of the committee on
scholarship in AMEC. She had retired from Bicol University a long time ago but AMEC has patiently
made use of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground for moral and physically misfit
people. What does this mean? Immoral and physically misfits as teachers.
May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that your are no longer
fit to teach. You are too old. As an aviation, your case is zero visibility. Dont insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship committee at
that. The reason is practical cost saving in salaries, because an old person is not fastidious, so long as
she has money to buy the ingredient of beetle juice. The elderly can get by thats why she (Lola) was
taken in as Dean.
xxx

xxx On our end our task is to attend to the interests of students. It is likely that the students would be
influenced by evil. When they become members of society outside of campus will be liabilities
rather than assets. What do you expect from a doctor who while studying at AMEC is so much
burdened with unreasonable imposition? What do you expect from a student who aside from peculiar
problems because not all students are rich in their struggle to improve their social status are even more
burdened with false regulations. xxx[9] (Emphasis supplied)
The complaint further alleged that AMEC is a reputable learning institution. With the supposed exposs,
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 [10] 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 [11] on FBNIs behalf. The trial court denied the
motion to dismiss. Consequently, FBNI filed a separate Answer claiming that it exercised due diligence in 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 [12] 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 Rimas only participation was when he agreed
with Alegres expos. The trial court found Rimas statement within the bounds of freedom of speech, expression,
and of the press. The dispositive portion of the decision reads:
WHEREFORE, premises considered, this court finds for the plaintiff. Considering the degree of
damages caused by the controversial utterances, which are not found by this court to be really
very serious and damaging, and there being no showing that indeed the enrollment of plaintiff
school dropped, defendants Hermogenes Jun Alegre, Jr. and Filipinas Broadcasting Network (owner
of the radio station DZRC), are hereby jointly and severally ordered to pay plaintiff Ago Medical and
Educational Center-Bicol Christian College of Medicine (AMEC-BCCM) the amount of P300,000.00
moral damages, plus P30,000.00 reimbursement of attorneys fees, and to pay the costs of suit.
SO ORDERED. [13] (Emphasis supplied)
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 courts judgment with modification. The
appellate court made Rima solidarily liable with FBNI and Alegre. The appellate court denied Agos claim for
damages and attorneys fees because the broadcasts were directed against AMEC, and not against her. The
dispositive portion of the Court of Appeals decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the modification
that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes
Alegre.

SO ORDERED.[14]
FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals denied in its 26
January 2000 Resolution.
Hence, FBNI filed this petition.[15]
The Ruling of the Court of Appeals
The Court of Appeals upheld the trial courts ruling that the questioned broadcasts are libelous per se and
that FBNI, Rima and Alegre failed to overcome the legal presumption of malice. The Court of Appeals found
Rima and Alegres claim that they were actuated by their moral and social duty to inform the public of the
students gripes as insufficient to justify the utterance of the defamatory remarks.
Finding no factual basis for the imputations against AMECs administrators, the Court of Appeals ruled that
the broadcasts were made with reckless disregard as to whether they were true or false. The appellate court
pointed out that FBNI, Rima and Alegre failed to present in court any of the students who allegedly complained
against AMEC. Rima and Alegre merely gave a single name when asked to identify the students. According to
the Court of Appeals, these circumstances cast doubt on the veracity of the broadcasters claim that they were
impelled by their moral and social duty to inform the public about the students gripes.
The Court of Appeals found Rima also liable for libel since he remarked that (1) AMEC-BCCM is a
dumping ground for morally and physically misfit teachers; (2) AMEC obtained the services of Dean Justita
Lola to minimize expenses on its employees salaries; and (3) AMEC burdened the students with unreasonable
imposition and false regulations.[16]
The Court of Appeals held that FBNI failed to exercise due diligence in the selection and supervision of its
employees for allowing Rima and Alegre to make the radio broadcasts without the proper KBP accreditation.
The Court of Appeals denied Agos claim for damages and attorneys fees because the libelous remarks were
directed against AMEC, and not against her. The Court of Appeals adjudged FBNI, Rima and Alegre solidarily
liable to pay AMEC moral damages, attorneys fees and costs of suit.
Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and
IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR PAYMENT OF
MORAL DAMAGES, ATTORNEYS FEES AND COSTS OF SUIT.
The Courts Ruling
We deny the petition.
This is a civil action for damages as a result of the allegedly defamatory remarks of Rima and Alegre
against AMEC.[17] While AMEC did not point out clearly the legal basis for its complaint, a reading of the
complaint reveals that AMECs cause of action is based on Articles 30 and 33 of the Civil Code. Article 30 [18]

authorizes a separate civil action to recover civil liability arising from a criminal offense. On the other hand,
Article 33[19] particularly provides that the injured party may bring a separate civil action for damages in cases of
defamation, fraud, and physical injuries. AMEC also invokes Article 19 [20] of the Civil Code to justify its claim
for damages. AMEC cites Articles 2176 [21] and 2180[22] of the Civil Code to hold FBNI solidarily liable with
Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel[23] is a public and malicious imputation of a crime, or of a vice or defect, real or imaginary, or any act
or omission, condition, status, or circumstance tending to cause the dishonor, discredit, or contempt of a natural
or juridical person, or to blacken the memory of one who is dead. [24]
There is no question that the broadcasts were made public and imputed to AMEC defects or circumstances
tending to cause it dishonor, discredit and contempt. Rima and Alegres remarks such as greed for money on the
part of AMECs administrators; AMEC is a dumping ground, garbage of xxx moral and physical misfits; and
AMEC students who graduate will be liabilities rather than assets of the society are libelous per se. Taken as a
whole, the broadcasts suggest that AMEC is a money-making institution where physically and morally unfit
teachers abound.
However, FBNI contends that the broadcasts are not malicious. FBNI claims that Rima and Alegre were
plainly impelled by their civic duty to air the students gripes. FBNI alleges that there is no evidence that ill will
or spite motivated Rima and Alegre in making the broadcasts. FBNI further points out that Rima and Alegre
exerted efforts to obtain AMECs side and gave Ago the opportunity to defend AMEC and its administrators.
FBNI concludes that since there is no malice, there is no libel.
FBNIs contentions are untenable.
Every defamatory imputation is presumed malicious. [25] Rima and Alegre failed to show adequately their
good intention and justifiable motive in airing the supposed gripes of the students. As hosts of a documentary or
public affairs program, Rima and Alegre should have presented the public issues free from inaccurate and
misleading information.[26] Hearing the students alleged complaints a month before the expos, [27] they had
sufficient time to verify their sources and information. However, Rima and Alegre hardly made a thorough
investigation of the students alleged gripes. Neither did they inquire about nor confirm the purported
irregularities in AMEC from the Department of Education, Culture and Sports. Alegre testified that he merely
went to AMEC to verify his report from an alleged AMEC official who refused to disclose any information.
Alegre simply relied on the words of the students because they were many and not because there is proof that
what they are saying is true. [28] This plainly shows Rima and Alegres reckless disregard of whether their report
was true or not.
Contrary to FBNIs claim, the broadcasts were not the result of straight reporting. Significantly, some courts
in the United States apply the privilege of neutral reportage in libel cases involving matters of public interest or
public figures. Under this privilege, a republisher who accurately and disinterestedly reports certain defamatory
statements made against public figures is shielded from liability, regardless of the republishers subjective
awareness of the truth or falsity of the accusation. [29] Rima and Alegre cannot invoke the privilege of neutral
reportage because unfounded comments abound in the broadcasts. Moreover, there is no existing controversy
involving AMEC when the broadcasts were made. The privilege of neutral reportage applies where the defamed
person is a public figure who is involved in an existing controversy, and a party to that controversy makes the
defamatory statement.[30]
However, FBNI argues vigorously that malice in law does not apply to this case. Citing Borjal v. Court of
Appeals,[31] FBNI contends that the broadcasts fall within the coverage of qualifiedly privileged communications
for being commentaries on matters of public interest. Such being the case, AMEC should prove malice in fact or

actual malice. Since AMEC allegedly failed to prove actual malice, there is no libel.
FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the doctrine of fair comment,
thus:
[F]air commentaries on matters of public interest are privileged and constitute a valid defense in an
action for libel or slander. The doctrine of fair comment means that while in general every discreditable
imputation publicly made is deemed false, because every man is presumed innocent until his guilt is
judicially proved, and every false imputation is deemed malicious, nevertheless, when the discreditable
imputation is directed against a public person in his public capacity, it is not necessarily actionable. In
order that such discreditable imputation to a public official may be actionable, it must either be a
false allegation of fact or a comment based on a false supposition. If the comment is an
expression of opinion, based on established facts, then it is immaterial that the opinion happens to be
mistaken, as long as it might reasonably be inferred from the facts. [32] (Emphasis supplied)
True, AMEC is a private learning institution whose business of educating students is genuinely imbued with
public interest. The welfare of the youth in general and AMECs students in particular is a matter which the
public has the right to know. Thus, similar to the newspaper articles in Borjal, the subject broadcasts dealt with
matters of public interest. However, unlike in Borjal, the questioned broadcasts are not based on established
facts. The record supports the following findings of the trial court:
xxx Although defendants claim that they were motivated by consistent reports of students and parents
against plaintiff, yet, defendants have not presented in court, nor even gave name of a single student
who made the complaint to them, much less present written complaint or petition to that effect. To
accept this defense of defendants is too dangerous because it could easily give license to the media to
malign people and establishments based on flimsy excuses that there were reports to them although
they could not satisfactorily establish it. Such laxity would encourage careless and irresponsible
broadcasting which is inimical to public interests.
Secondly, there is reason to believe that defendant radio broadcasters, contrary to the mandates of
their duties, did not verify and analyze the truth of the reports before they aired it, in order to prove that
they are in good faith.
Alegre contended that plaintiff school had no permit and is not accredited to offer Physical
Therapy courses. Yet, plaintiff produced a certificate coming from DECS that as of Sept. 22, 1987 or
more than 2 years before the controversial broadcast, accreditation to offer Physical Therapy course
had already been given the plaintiff, which certificate is signed by no less than the Secretary of
Education and Culture herself, Lourdes R. Quisumbing (Exh. C-rebuttal). Defendants could have
easily known this were they careful enough to verify. And yet, defendants were very categorical and
sounded too positive when they made the erroneous report that plaintiff had no permit to offer Physical
Therapy courses which they were offering.
The allegation that plaintiff was getting tremendous aids from foreign foundations like Mcdonald
Foundation prove not to be true also. The truth is there is no Mcdonald Foundation existing. Although
a big building of plaintiff school was given the name Mcdonald building, that was only in order to
honor the first missionary in Bicol of plaintiffs religion, as explained by Dr. Lita Ago. Contrary to the
claim of defendants over the air, not a single centavo appears to be received by plaintiff school from
the aforementioned McDonald Foundation which does not exist.
Defendants did not even also bother to prove their claim, though denied by Dra. Ago, that when
medical students fail in one subject, they are made to repeat all the other subject[s], even those they
have already passed, nor their claim that the school charges laboratory fees even if there are no
laboratories in the school. No evidence was presented to prove the bases for these claims, at least in
order to give semblance of good faith.

As for the allegation that plaintiff is the dumping ground for misfits, and immoral teachers,
defendant[s] singled out Dean Justita Lola who is said to be so old, with zero visibility already. Dean
Lola testified in court last Jan. 21, 1991, and was found to be 75 years old. xxx Even older people
prove to be effective teachers like Supreme Court Justices who are still very much in demand as law
professors in their late years. Counsel for defendants is past 75 but is found by this court to be still very
sharp and effective. So is plaintiffs counsel.
Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally infirmed, but is
still alert and docile.
The contention that plaintiffs graduates become liabilities rather than assets of our society is a
mere conclusion. Being from the place himself, this court is aware that majority of the medical
graduates of plaintiffs pass the board examination easily and become prosperous and responsible
professionals.[33]
Had the comments been an expression of opinion based on established facts, it is immaterial that the
opinion happens to be mistaken, as long as it might reasonably be inferred from the facts. [34] However, the
comments of Rima and Alegre were not backed up by facts. Therefore, the broadcasts are not privileged and
remain libelous per se.
The broadcasts also violate the Radio Code [35] of the Kapisanan ng mga Brodkaster sa Pilipinas, Ink. (Radio
Code). Item I(B) of the Radio Code provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES
1. x x x
4. Public affairs program shall present public issues free from personal bias, prejudice and
inaccurate and misleading information. x x x Furthermore, the station shall strive to
present balanced discussion of issues. x x x.
xxx
7. The station shall be responsible at all times in the supervision of public affairs, public issues and
commentary programs so that they conform to the provisions and standards of this code.
8. It shall be the responsibility of the newscaster, commentator, host and announcer to protect public
interest, general welfare and good order in the presentation of public affairs and public issues.
[36]
(Emphasis supplied)
The broadcasts fail to meet the standards prescribed in the Radio Code, which lays down the code of ethical
conduct governing practitioners in the radio broadcast industry. The Radio Code is a voluntary code of conduct
imposed by the radio broadcast industry on its own members. The Radio Code is a public warranty by the radio
broadcast industry that radio broadcast practitioners are subject to a code by which their conduct are measured
for lapses, liability and sanctions.
The public has a right to expect and demand that radio broadcast practitioners live up to the code of conduct
of their profession, just like other professionals. A professional code of conduct provides the standards for
determining whether a person has acted justly, honestly and with good faith in the exercise of his rights and
performance of his duties as required by Article 19 [37] of the Civil Code. A professional code of conduct also
provides the standards for determining whether a person who willfully causes loss or injury to another has acted
in a manner contrary to morals or good customs under Article 21 [38] of the Civil Code.
II.
Whether AMEC is entitled to moral damages
FBNI contends that AMEC is not entitled to moral damages because it is a corporation. [39]

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.[40] The Court of Appeals cites Mambulao Lumber Co. v. PNB, et al.[41] to justify the award of moral
damages. However, the Courts 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.[42]
Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219 [43] 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.[44]
Moreover, where the broadcast is libelous per se, the law implies damages.[45] 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. [46]
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. [47] In this case, the broadcasts are libelous per se. Thus, AMEC is entitled to
moral damages.
However, we find 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, we reduce the award of moral damages from P300,000 to P150,000.

III.
Whether the award of attorneys fees is proper
FBNI contends that since AMEC is not entitled to moral damages, there is no basis for the award of
attorneys fees. FBNI adds that the instant case does not fall under the enumeration in Article 2208 [48] of the Civil
Code.
The award of attorneys fees is not proper because AMEC failed to justify satisfactorily its claim for
attorneys fees. AMEC did not adduce evidence to warrant the award of attorneys fees. Moreover, both the trial
and appellate courts failed to explicitly state in their respective decisions the rationale for the award of attorneys
fees.[49] In Inter-Asia Investment Industries, Inc. v. Court of Appeals,[50] we held that:
[I]t is an accepted doctrine that the award thereof as an item of damages is the exception rather than the
rule, and counsels fees are not to be awarded every time a party wins a suit. The power of the court to
award attorneys fees under Article 2208 of the Civil Code demands factual, legal and equitable
justification, without which the award is a conclusion without a premise, its basis being
improperly left to speculation and conjecture. In all events, the court must explicitly state in the text
of the decision, and not only in the decretal portion thereof, the legal reason for the award of attorneys
fees.[51] (Emphasis supplied)
While it mentioned about the award of attorneys fees by stating that it lies within the discretion of the court
and depends upon the circumstances of each case, the Court of Appeals failed to point out any circumstance to
justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre
for moral damages, attorneys fees
and costs of suit

FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of damages and
attorneys fees because it exercised due diligence in the selection and supervision of its employees, particularly
Rima and Alegre. FBNI maintains that its broadcasters, including Rima and Alegre, undergo a very regimented
process before they are allowed to go on air. Those who apply for broadcaster are subjected to interviews,
examinations and an apprenticeship program.
FBNI further argues that Alegres age and lack of training are irrelevant to his competence as a broadcaster.
FBNI points out that the minor deficiencies in the KBP accreditation of Rima and Alegre do not in any way
prove that FBNI did not exercise the diligence of a good father of a family in selecting and supervising them.
Rimas accreditation lapsed due to his non-payment of the KBP annual fees while Alegres accreditation card was
delayed allegedly for reasons attributable to the KBP Manila Office. FBNI claims that membership in the KBP is
merely voluntary and not required by any law or government regulation.
FBNIs arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are jointly and severally liable for the tort which
they commit.[52] Joint tort feasors are all the persons who command, instigate, promote, encourage, advise,
countenance, cooperate in, aid or abet the commission of a tort, or who approve of it after it is done, if done for
their benefit.[53] Thus, AMEC correctly anchored its cause of action against FBNI on Articles 2176 and 2180 of
the Civil Code.
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to pay for damages
arising from the libelous broadcasts. As stated by the Court of Appeals, recovery for defamatory statements
published by radio or television may be had from the owner of the station, a licensee, the operator of the
station, or a person who procures, or participates in, the making of the defamatory statements. [54] An employer
and employee are solidarily liable for a defamatory statement by the employee within the course and scope of his
or her employment, at least when the employer authorizes or ratifies the defamation. [55] In this case, Rima and
Alegre were clearly performing their official duties as hosts of FBNIs radio program Expos when they aired the
broadcasts. FBNI neither alleged nor proved that Rima and Alegre went beyond the scope of their work at that
time. There was likewise no showing that FBNI did not authorize and ratify the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due diligence in the selection and
supervision of its employees, particularly Rima and Alegre. FBNI merely showed that it exercised diligence in
the selection of its broadcasters without introducing any evidence to prove that it observed the same diligence in
the supervision of Rima and Alegre. FBNI did not show how it exercised diligence in supervising its
broadcasters. FBNIs alleged constant reminder to its broadcasters to observe truth, fairness and objectivity and to
refrain from using libelous and indecent language is not enough to prove due diligence in the supervision of its
broadcasters. Adequate training of the broadcasters on the industrys code of conduct, sufficient information on
libel laws, and continuous evaluation of the broadcasters performance are but a few of the many ways of
showing diligence in the supervision of broadcasters.
FBNI claims that it has taken all the precaution in the selection of Rima and Alegre as broadcasters, bearing
in mind their qualifications. However, no clear and convincing evidence shows that Rima and Alegre underwent
FBNIs regimented process of application. Furthermore, FBNI admits that Rima and Alegre had deficiencies in
their KBP accreditation,[56] which is one of FBNIs requirements before it hires a broadcaster. Significantly,
membership in the KBP, while voluntary, indicates the broadcasters strong commitment to observe the broadcast
industrys rules and regulations. Clearly, these circumstances show FBNIs lack of diligence in selecting and
supervising Rima and Alegre. Hence, FBNI is solidarily liable to pay damages together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January 1999 and
Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No. 40151 with the MODIFICATION
that the award of moral damages is reduced from P300,000 to P150,000 and the award of attorneys fees is
deleted. Costs against petitioner.
SO ORDERED.

Davide, Jr., C.J., (Chairman), Quisumbing, Ynares-Santiago, and Azcuna, JJ., concur.

G.R. No. 118692

July 28, 2006

COASTAL
PACIFIC
TRADING,
INC.,
petitioner,
vs.
SOUTHERN ROLLING MILLS, CO., INC. (now known as Visayan Integrated Steel Corporation),
respondents.
DECISION
PANGANIBAN, C.J.:
Directors owe loyalty and fidelity to the corporation they serve and to its creditors. When these directors sit on
the board as representatives of shareholders who are also major creditors, they cannot be allowed to use their
offices to secure undue advantage for those shareholders, in fraud of other creditors who do not have a similar
representation in the board of directors.
The Case
Before us is a Petition for Review3 under Rule 45 of the Rules of Court, assailing the September 27, 1994
Decision4 and the January 5, 1995 Resolution 5 of the Court of Appeals (CA) in CA-GR CV No. 39385. The
challenged Decision disposed as follows:
"WHEREFORE, the decision of the Regional Trial Court is hereby AFFIRMED in toto." 6
The challenged Resolution denied reconsideration.
The Facts
Respondent Southern Rolling Mills Co., Inc. was organized in 1959 for the purpose of engaging in a steel
processing business. It was later renamed Visayan Integrated Steel Corporation (VISCO). 7

On December 11, 1961, VISCO obtained a loan from the Development Bank of the Philippines (DBP) in the
amount of P836,000. This loan was secured by a duly recorded Real Estate Mortgage over VISCO's three (3)
parcels of land, including all the machineries and equipment found there. 8
On August 15, 1963, VISCO entered into a Loan Agreement 9 with respondent banks (later referred to as
"Consortium"10) for the amount of US$5,776,186.71 or P21,745,707.36 (at the then prevailing exchange rate) to
finance its importation of various raw materials. To secure the full and faithful performance of its obligation,
VISCO executed on August 3, 1965, a second mortgage 11 over the same land, machineries and equipment in
favor of respondent banks. This second mortgage remained unrecorded. 12
VISCO eventually defaulted in the performance of its obligation to respondent banks. This prompted the
Consortium to file on January 26, 1966, Civil Case No. 1841, which was a Petition for Foreclosure of Mortgage
with Petition for Receivership.13 This case was eventually dismissed for failure to prosecute. 14
Afterwards, negotiations were conducted between VISCO and respondent banks for the conversion of the unpaid
loan into equity in the corporation.15 Vicente Garcia, vice-president of VISCO and of Far East Bank and Trust
Company (FEBTC),16 testified that sometime in 1966, the creditor banks were given management of and control
over VISCO.17 In time,18 in order to reorganize it, its principal creditors agreed to group themselves into a
creditors' consortium.19 As a result of the reorganized corporate structure of VISCO, respondent banks acquired
more than 90 percent of its equity. Notwithstanding this conversion, it remained indebted to the Consortium in
the amount of P16,123,918.02.20
Meanwhile from 1964 to 1965, VISCO also entered into a processing agreement with Petitioner Coastal Pacific
Trading, Inc. ("Coastal"). Pursuant to that agreement, petitioner delivered 3,000 metric tons of hot rolled steel
coils to VISCO for processing into block iron sheets. Contrary to their agreement, the latter was able to process
and deliver to petitioner only 1,600 metric tons of those sheets. Hence, a total of 1,400 metric tons of hot rolled
steel coils remained unaccounted for.21 The fact that petitioner was among the major creditors of VISCO was
recognized by the latter's vice-president, Vicente Garcia. 22 Indeed, on October 9, 1970, it forwarded to petitioner
a proposal for a Compromise Agreement.23 Subsequent developments indicate, however, that the parties did not
arrive at a compromise.
Two years later, on October 20, 1972, Garcia wrote Arturo P. Samonte, representative of FEBTC 24 and director
of VISCO,25 a letter that reads as follows:
"In the light of recent development on IISMI and Elirol which were taken over by the government, I
suggest that we take certain precautionary measures to protect the interests of the Consortium of Banks.
One such step may be to insure the safety of the unexpended funds of VISCO from any contingencies in
the future. As of now VISCO's account with the Far East Bank is in the name of BOARD OF
TRUSTEES VISCO CONSORTIUM OF BANKS. It may be better to eliminate the term VISCO and
just call the account BOARD OF TRUSTEES CONSORTIUM OF BANKS."26
According to a notation on this letter, an FEBTC assistant cashier named Silverio duly complied with the above
request.27 Indeed, events would later reveal that the bank held a deposit account in the name of the "Board of
Trustees-Consortium of Banks."28
On September 20, 1974, respondent banks held a luncheon meeting 29 in the FEBTC Boardroom to discuss how
they would address the insistent demands of the DBP for VISCO to settle its obligations. Jose B. Fernandez, Jr.,
VISCO's then chairman and concurrent FEBTC President, 30 expressed his apprehension that either the DBP or

the government would soon pursue extra-judicial foreclosure against VISCO.

In this regard, Fernandez informed the members of the Consortium that he had received letter-offers from two
corporations that were interested in purchasing VISCO's generator sets. 31 After deliberating on the matter, the
members decided to approve the sale of these two generator sets to Filmag (Phil.), Inc. It was also agreed that the
proceeds of the sale would be used to pay VISCO's indebtedness to DBP and to secure the release of the first
mortgage.32 The Consortium agreed with Filmag on the following payment procedure:
"The payment procedure will be as follows: Filmag pays to VISCO; VISCO pays the Consortium; and then
the Consortium pays the DBP with the arrangement that the Consortium subrogates to the rights of the DBP as
first mortgagee to the VISCO plant. The Consortium further agreed to call a meeting of the VISCO board of
directors for the purpose of considering and formally approving the proposed sale of the 2 generators to
Filmag."33
Accordingly, on October 4, 1974, the VISCO board of directors had a meeting in the FEBTC Boardroom. 34 The
board was asked to decide how VISCO would settle its debt to DBP: whether by asking the Consortium to put up
the necessary amount or by accepting Filmag's offer to purchase VISCO's generator sets. 35 The latter option was
unanimously chosen36 in a Resolution worded as follows:
"RESOLVED, That the offer of Filmag (Philippines) Inc. in their letters of December 14, 1973 and
March 19, 1974 to purchase two (2) units of generator sets, including standard accessories, of VISCO is
hereby accepted under the following terms and conditions:
xxx

xxx

xxx

"2. The price for the two (2) generator sets is PESOS: ONE MILLION FIVE HUNDRED FIFTY
THOUSAND FIVE HUNDRED SEVENTY TWO ONLY (P1,550,572) x x x and shall be payable upon
signing of a letter-agreement and which shall be later formalized into a Deed of Sale. The amount,
however, shall be held by the depositary bank of VISCO, Far East Bank and Trust Company, in escrow
and shall be at VISCO's disposal upon the signing of Filmag of the receipt/s of delivery of the said two
(2) generator sets.
xxx

xxx

xxx

"FURTHER RESOLVED, That the sales proceeds of PESOS: ONE MILLION FIVE HUNDRED
FIFTY THOUSAND FIVE HUNDRED SEVENTY TWO ONLY (P1,550,572) shall be utilized to pay
the liability of VISCO with the Development Bank of the Philippines." 37
The sale of the generator sets to Filmag took place and, according to the testimony of Garcia, the proceeds were
deposited with FEBTC in a special account held in trust for the Consortium. 38
A year after, on May 22, 1975, petitioner filed with the Pasig Regional Trial Court (RTC) a Complaint 39 for
Recovery of Property and Damages with Preliminary Injunction and Attachment. 40 Petitioner's allegation was
that VISCO had fraudulently misapplied or converted the finished steel sheets entrusted to it. 41 On June 3, 1975,
Judge Pedro A. Revilla issued a Writ of Preliminary Attachment over its properties that were not exempt from
execution.42
In compliance with the Writ, Sheriff Andres R. Bonifacio attempted to garnish the account of VISCO in
FEBTC,43 which denied holding that account. Instead, the bank admitted that what it had was a deposit account

in the name of the Board of Trustees-Consortium of Banks, particularly Account No. 2479-1. 44 FEBTC reported
to Sheriff Bonifacio that it had instructed its accounting department to hold the account, "subject to the prior
liens or rights in favor of [FEBTC] and other entities." 45
While petitioner's case was pending, VISCO's vice-president (Garcia) and director (Arturo Samonte) requested
from FEBTC a cash advance of P1,342,656.88 for the full settlement of VISCO's account with DBP.46 On June
29, 1976, FEBTC complied by issuing Check No. FE239249 for P1,342,656.88, payable to "[DBP] for [the]
account of VISCO."47 On even date, DBP executed a Deed of Assignment of Mortgage Rights Interest and
Participation48 in favor of Respondent Consortium of Banks. The deed stated that, in consideration of the
payment made, all of DBP's rights under the mortgage agreement with VISCO were being transferred and
conveyed to the Consortium. 49 Thus did the latter obtain DBP's recorded primary lien over the real and chattel
properties of VISCO.
On September 23, 1980, the Consortium filed a Petition for Extra-Judicial Foreclosure with the Office of the
Provincial Sheriff of Bohol.50 The Notice of Extrajudicial Foreclosure of Mortgage, published in the Bohol
Newsweek on October 10, 1980, announced that the auction sale was scheduled for November 11, 1980. 51
On November 3, 1980, Southern Industrial Projects, Inc. (SIP), which was a judgment creditor 52 of VISCO, filed
Civil Case No. 3383. It was a Complaint 53 for Declaration of Nullity of the Mortgage and Injunction to Restrain
the Consortium from Proceeding with the Auction Sale. SIP argued that DBP had actually been paid by VISCO
with the proceeds from the sale of the generator sets. Hence, the mortgage in favor of that bank had been
extinguished by the payment and could not have been assigned to the Consortium. 54 A temporary restraining
order against the latter was thus successfully obtained; the provincial sheriff could not proceed with the auction
sale of the mortgaged assets. 55 But SIP's victory was short-lived. On March 2, 1984, Civil Case No. 3383 was
decided in favor of the Consortium. 56 Judge Andrew S. Namocatcat ruled thus:
"The evidence of the plaintiff is only anchored on the fact that the deed of assignment executed by the
DBP in favor of the defendant banks is an act which would defraud creditors. It is the thinking of the
court that the payment of defendant banks to DBP of VISCO's loan and the execution of the DBP of the
deed of assignment of credit and rights to the defendant banks is in accordance with Article 1302 and
1303 of the New Civil Code, and said transaction is not to defraud creditors because the defendant banks
are also creditors of VISCO."57
On June 14, 1985, this Decision was affirmed by the Intermediate Appellate Court in CA-GR No. 03719.

58

The auction sale of VISCO's mortgaged properties took place on March 19, 1985 and the Consortium emerged
as the highest bidder.59 The Certificate of Sale60 in its favor was registered on May 22, 1985.61
On June 27, 1985, VISCO executed through Vicente Garcia, a Deed of Assignment of Right of Redemption 62 in
favor of the National Steel Corporation (NSC), in consideration of P100,000. 63 On the same day, the Consortium
sold the foreclosed real and personal properties of VISCO to the NSC. 64
On August 16, 1985, petitioner filed against respondents Civil Case No. 3929, which was a Complaint for
Annulment or Rescission of Sale, Damages with Preliminary Injunction. 65 Coastal alleged that, despite the Writ
of Attachment issued in its favor in the still pending Civil Case No. 21272, the Consortium had sold the
properties to NSC. Further, despite the attachment of the properties, the Consortium was allegedly able to sell
and place them beyond the reach of VISCO's other creditors. 66 Thus imputing bad faith to respondent banks'
actions, petitioner said that the sale was intended to defraud VISCO's other creditors.

Petitioner further contended that the assignment in favor of the Consortium was fraudulent, because DBP
had been paid with the proceeds from the sale of the generator sets owned by VISCO, and not with the
Consortium's own funds.67 Petitioner offered as proof the minutes of the meeting 68 in which the transaction was
decided. Respondent Consortium countered that the minutes would in fact readily disclose that the intention of
its members was to apply the proceeds to a partial payment to DBP.69 Respondent insisted that it used its own
funds to pay the bank.70
On August 20, 1985, a temporary restraining order (TRO)71 was issued by Judge Mercedes Gozo-Dadole against
VISCO, enjoining it from proceeding with the removal or disposal of its properties; the execution and/or
consummation of the foreclosure sale; and the sale of the foreclosed properties to NSC. On September 6, 1985,
the trial court issued an Order requiring the Consortium to post a bond of P25 million in favor of Coastal for
damages that petitioner may suffer from the lifting of the TRO. The bond filed was then approved by the RTC in
its Order of September 13, 1985.72
On December 15, 1986, Civil Case No. 21272 was finally decided by Judge Nicolas P. Lapena, Jr., in favor of
Coastal.73 VISCO was ordered to pay petitioner the sum of P851,316.19 with interest at the legal rate, plus
attorney's fees of P50,000.00 and costs.74 Coastal filed a Motion for Execution,75 but the judgment has remained
unsatisfied to date.
On January 5, 1992, a Decision76 on Civil Case No. 3929 was rendered as follows:
"WHEREFORE, this Court hereby renders judgment in favor of the defendants and against the plaintiff
Coastal Pacific Trading, Inc. BY WAY OF THE MAIN COMPLAINT, to wit:
"1. Declaring the extrajudicial foreclosure sale conducted by the sheriff and the corresponding
certificate of sale executed by the defendant sheriffs on March 15, 1985 relative to the real
properties of the defendant SRM/VISCO of Cortes, Bohol, Philippines, which were registered in
the Register of Deeds of Bohol, on May 22, 1985 and the Transfer of Assignment to the
defendant National Steel Corporation of any or part of the foreclosed properties arising from the
extrajudicial foreclosure sale as valid and legal;
"2. Ordering the plaintiff Coastal Pacific Trading Inc. to pay the defendant Consortium of
Banks[,] Southern Rolling Mills, Co., Inc., Far East Bank & Trust Company, Philippine
Commercial Industrial Bank, Equitable Banking Corporation, Prudential Bank, Board of
Trustees-Consortium of Banks- [VISCO], United Coconut Planters Bank, City Trust Banking
Corporation, Associated Bank, Insular Bank of Asia and America, International Corporate Bank,
Commercial Bank of Manila, Bank of the Philippine Islands and the National Steel Corporation
in the instant case the amount of FIVE HUNDRED THOUSAND PESOS (P500,000.00)
representing damages;
"3. Ordering the plaintiff The (sic) Coastal Pacific Trading Inc. to pay the defendants the amount
of FIFTEEN THOUSAND PESOS (P15,000.00) representing attorney's fees;
"4. Dismissing the Amended Complaint of the plaintiff;
"5. Ordering the plaintiff to pay the cost; AND
"BY WAY OF CROSS CLAIM INTERPOSED

"BY THE DEFENDANT National Steel Corporation against the Consortium of Banks and
SRM/VISCO, the same is dismissed for lack of merit, without pronouncement as to cost." 77
Insisting that the trial court erred in holding that it had failed to prove its case by preponderance of evidence,
Coastal filed an appeal with the CA. Allegedly, the purported insufficiency of proof was based on the sole
ground that petitioner did not file an objection when the properties were sold on execution. It contended that the
court a quo had arrived at this erroneous conclusion by relying on inapplicable jurisprudence. 78
Additionally, Coastal argued that the trial court had erred in not annulling the foreclosure proceedings and sale
for being fictitious and done to defraud petitioner as VISCO's creditor. Supposedly, the DBP mortgage had
already been extinguished by payment; thus, the bank could not have assigned the contract to the Consortium. 79
Petitioner also prayed for the annulment of the sale in favor of NSC on the ground that the latter was a party to
the fraudulent foreclosure and, hence, not a buyer in good faith. 80
Ruling of the Court of Appeals
At the outset, the CA stressed that the validity of the Consortium's mortgage, foreclosure, and assignments had
already been upheld in CA-GR CV No. 03719, entitled Southern Industrial Projects v. United Coconut Planters
Bank81 Citing Valencia v. RTC of Quezon City, Br. 9082 and Vda. de Cruzo v. Carriaga,83 the CA explained that
the absolute identity of parties was not necessary for the application of res judicata. All that was required was a
shared identity of interests, as shown by the identity of reliefs sought by one person in a prior case and by
another in a subsequent case.
While Coastal was not a party to Southern Industrial Projects, it should nevertheless be bound by that Decision,
because it had raised substantially the same claim and cause of action as SIP, according to the appellate court.
The CA held that the basic reliefs sought by Coastal and SIP were substantially the same: the nullification of the
Deed of Assignment in favor of the Consortium, the foreclosure sale, and the subsequent sale to NSC. Because
this identity of reliefs sought showed an identity of interests, the CA concluded that it need not rule on those
issues.84
As to the issue that the DBP mortgage had been extinguished by payment, the CA quoted its earlier Decision in
Southern Industrial Projects:
"The evidence shows that the proceeds of the sale of the two generating sets were applied by defendantsappellees in the payment of the outstanding obligation of VISCO. It appears that said proceeds were
deposited in the bank account of the consortium of creditors to avoid it being garnished by the creditors
notwithstanding the set-off, VISCO was still indebted to the defendants-appellees.
"The evidence x x x shows that upon VISCO's request for [cash] advance, the Far East Banks (sic) and
Trust Co., the manager of the consortium of creditors, issued FEBTC check No. 239249 on June 29,
1976 in the amount of P1,342,656.68 payable to the DBP to pay off its loan to the latter.
xxx

xxx

xxx

"x x x. A public document celebrated with all the legal formalities under the safeguard of notarial
certificate is evidence against a party, and a high degree [of] proof is necessary to overcome the legal
presumption that the recital is true. The biased and interested testimony of one of the parties to such

instrument who attempts to vary or repudiate what it purports to be, cannot overcome the evidentiary
force of what is recited in the document."85
The appellate court also rejected petitioner's contention that the Consortium's Petition for Extrajudicial
Foreclosure was already barred by the earlier resort to a judicial foreclosure. The CA clarified that in filing a
Petition for Judicial Foreclosure, the Consortium had pursued its right as junior encumbrancer. On the other
hand, the Consortium filed a Petition for Extrajudicial Foreclosure as a first encumbrancer by virtue of DBP's
assignment in its favor.86
The CA also rejected petitioner's theory of extinguishment of obligation by merger. It observed that the merger
could not have possibly taken place, because respondent banks and VISCO were not creditors and debtors in
their own right.87
Petitioner's Motion for Reconsideration, 88 which was received by the CA on November 15, 1994, 89 was denied
for lack of merit.
Hence, this Petition.90
Issues
Petitioner raises the following issues for our consideration:
"I
"Respondent Court of Appeals, seemingly to avoid the irrefutable evidence of fraud and collusion
practised by [respondents] against [Petitioner] Coastal, erroneously sustained the trial court's holding
that the present case is barred by res judicata because of the previous decision in the case of Southern
Industrial Projects, Inc., vs. United Coconut Planters Bank, CA-G.R. No. 03719, considering that the
elements that call for the application of this rule are not present in the case at bar, and the exceptions
allowed by this Honorable Supreme Court are not applicable here for variance or distinction in facts and
issues, x x x:"91
"II
"Respondent Court of Appeals further erred in not annulling the Deed of Assignment of the DBP
mortgage x x x, the extrajudicial foreclosure proceedings of the two mortgages x x x, and the separate
sale of the land and machineries as real and personal properties by the foreclosing banks to NSC, as well
as the assignment or waiver of SRM/Visco's legal right of redemption over the foreclosed properties, for
being fraudulently executed through collusion among the [respondents] and in fraud of SRM/Visco's
creditor, [Petitioner] Coastal, x x x;"92
Stripped of nonessentials, the two issues may be restated as follows:
1. Whether the present action is barred by res judicata
2. Whether respondents disposed of VISCO's assets in fraud of the creditors
The Court's Ruling

The Petition is meritorious.

First
Res judicata

Issue:

The CA cited Valencia v. RTC of Quezon City93 to support the finding that SIP and Coastal were substantially the
same parties. We distinguish.
In Valencia, the plaintiff-intervenor in the first case, Cario, claimed Lot 4 based on an alleged purchase of
Valencia's "squatter's rights" over the property. The trial court dismissed the claim and held that no such purchase
ever took place.94 It also held that, on the assumption that a sale had taken place, the sale was null and void for
being contrary to the pertinent housing law. It also found that all current occupants of Lot 4 were illegal
squatters; thus, it ordered their ejectment.
When this first case attained finality, Carino's daughter, Catbagan, filed another suit against Valencia. Catbagan
challenged the applicability of the ejectment Order issued to her; as an occupant of the lot, she was allegedly not
a party to the first case. Her Petition was denied for lack of merit. 95
The execution of the Decision in the first case was again forestalled when Llanes, Cario's sister-in-law who was
another occupant of Lot 4, filed another suit against the same respondent. Like Cario, Llanes insisted on having
purchased the subject lot from Valencia. 96 This Court ruled that the suit was barred by res judicata. There was a
substantial identity of parties, because the right claimed by both Cario and Llanes were based on each one's
alleged purchase of Valencia's "squatter's rights." 97
In the first case, sales of "squatter's rights" were already categorically declared null and void for being
contrary to law. Thus, Llanes' admission that she had purchased Valencia's "squatter's rights" placed her in the
same category as Cario. The purchase could not be treated differently, because the final and executory Decision
held that all purchases of "squatter's rights" (regardless of who the purchasers were) were null and void.98
Further, the earlier ruling held that "the present occupants are illegal squatters." That ruling included Llanes, who
was admittedly one of the occupants.99 Simply put, she and Valencia were considered identical parties for
purposes of res judicata, because they were obviously litigating under the same void title and capacity as
vendees of "squatter's rights" and as occupants of Lot 4.
Moreover, we held in Valencia that Llanes' suit was merely a clear attempt to prevent or delay the execution of
the judgment in the first case, which had become final by reason of the three affirmances by this Court. The
pattern to obstruct the execution of the first judgment was obvious: after Cario lost the first case, her daughter
filed a second one. When the daughter lost the second, the daughter-in-law filed a third case. It may be observed
that the three successive plaintiffs were all occupants of the same property and belonged to the same family; this
fact was also indicative of their privity.
Given this background, it becomes clear that the finding of a substantial identity of parties in Valencia was based
on its peculiar factual circumstances, which are different from those in the present case.
Unlike Llanes, Coastal is not asserting a right that has been categorically declared null and void in a prior case.
In fact, its right based on the processing agreement was upheld in Civil Case No. 21272. Clearly, Coastal cannot
be treated in the same manner as Llanes.

The CA erred in applying Southern Industrial Projects v. United Coconut Planters Bank100 as a bar by res
judicata with respect to the present case. For this principle to apply, the following elements must concur: a) the
former judgment was final; b) the court that rendered it had jurisdiction over the subject matter and the parties;
c) the judgment was based on the merits; and, d) between the first and the second actions, there is an identity of
parties, subject matters, and causes of action. 101
It is axiomatic that res judicata does not require an absolute, but only a substantial, identity of parties. There is a
substantial identity when there is privity between the two parties or they are successors-in-interest by title
subsequent to the commencement of the action, litigating for the same thing, under the same title, and in the
same capacity.102 Petitioner was not acting in the same capacity as SIP when it filed Civil Case No. 3383, which
eventually became AC-GR CV No. 03719. It brought this latter action as a creditor under a processing
agreement with VISCO; on the other hand, the latter was sued by SIP, based on an alleged breach of their
management contract. Very clearly, their rights were entirely distinct and separate from each other. In no manner
were these two creditors privies of each other.
The causes of action in the two Complaints were also different. Causes of action arise from violations of rights.
A single right may be violated by several acts or omissions, in which case the plaintiff has only one cause of
action. Likewise, a single act or omission may violate several rights at the same time, as when the act constitutes
a violation of separate and distinct legal obligations. 103 The violation of each of these separate rights is a separate
cause of action in itself.104 Hence, although these causes of action arise from the same state of facts, they are
distinct and independent and may be litigated separately; recovery on one is not a bar to subsequent actions on
the others.105
In the present case, the right of SIP (arising from its management contract with VISCO) is totally distinct and
separate from the right of Coastal (arising from its processing contract with VISCO). SIP and Coastal are
asserting distinct rights arising from different legal obligations of the debtor corporation. Thus, VISCO's
violation of those separate rights has given rise to separate causes of action.
The confusion in the resolution of the issue of identity of parties occurred, because the two creditors were
assailing the same transactions of VISCO on the same grounds. Since the two cases they filed presented similar
legal issues, the appellate court held that its ruling in AC-GR CV No. 03719 was also applicable to the instant
case.
Common but palpable is this misconception of the doctrine of res judicata. Persons do not become privies by the
mere fact that they are interested in the same question or in proving the same set of facts, or that one person is
interested in the result of a litigation involving the other. Hence, several creditors of one debtor cannot be
considered as identical parties for the purpose of assailing the acts of the debtor. They have distinct credits,
rights, and interests, such that the failure of one to recover should not preclude the other creditors from also
pursuing their legal remedies.
Further, petitioner, which was not a party to Southern Industrial Projects (their causes of action being separate
and distinct), did not have the opportunity to be heard in that case, much less to present its own evidence. Thus,
to bind petitioner to the Decision in that case would clearly violate its rights to due process. As a separate party,
it has the right to have its arguments and evidence evaluated on their own merits.
Second Issue:
Fraud of Creditors

We now come to the heart of the Petition. Coastal alleges that the assignment of mortgage, the extrajudicial
foreclosure proceedings, and the sale of the properties of VISCO should all be rescinded on the ground that they
were done to defraud the latter's creditors.
The CA found no merit in petitioner's arguments. It ruled that the assignment conformed to the requirements of
law; that the consideration for the assignment had allegedly been given by FEBTC; and that, hence, the
Consortium had a right to foreclose on the mortgaged properties.
By focusing on the innate validity of these Contracts, the CA totally overlooked the issue of fraud as a ground
for rescission. Elementary is the principle that the validity of a contract does not preclude its rescission. Under
Articles 1380 and 1381 (3) of the Civil Code, contracts that are otherwise valid between the contracting parties
may nonetheless be subsequently rescinded by reason of injury to third persons, like creditors. 106 In fact,
rescission implies that there is a contract that, while initially valid, produces a lesion or pecuniary damage to
someone.107 Thus, when the CA confined itself to the issue of the validity of these contracts, it did not at all
address the heart of petitioner's cause of action: whether these transactions had been undertaken by the
Consortium to defraud VISCO's other creditors.
There is more than a preponderance of evidence showing the Consortium's deliberate plan to defraud VISCO's
other creditors.
Consortium Banks as Directors
It will be recalled that Respondent Consortium took over management and control of VISCO by acquiring 90
percent of the latter's equity. Thus, 9 out of the 10 directors of the corporation were all officials of the
Consortium,108 which may thus be said to have effectively occupied and/or controlled the board. Significantly,
nowhere in the records can we find any denial by respondent of this allegation by petitioner.109
As directors of VISCO, the officials of the Consortium were in a position of trust; thus, they owed it a duty of
loyalty. This trust relationship sprang from the fact that they had control and guidance over its corporate affairs
and property.110 Their duty was more stringent when it became insolvent or without sufficient assets to meet its
outstanding obligations that arose. Because they were deemed trustees of the creditors in those instances, they
should have managed the corporation's assets with strict regard for the creditors' interests. When these directors
became corporate creditors in their own right, they should not have permitted themselves to secure any undue
advantage over other creditors.111 In the instant case, the Consortium miserably failed to observe its duty of
fidelity towards VISCO and its creditors.
Duty of the Consortium Banks
to VISCO's Creditors
Recall that as early as 1966, the Consortium, through its directors on the board of VISCO, had already assumed
management and control over the latter. Hence, when VISCO recognized its outstanding liability to petitioner in
1970 and offered a Compromise Agreement,112 respondent banks were already at the helm of the debtor
corporation. The members of the Consortium, therefore, cannot deny that they were aware of those claims
against the corporation. Nonetheless, they did not adopt any measure to protect petitioner's credit.
Quite the opposite, they even took steps to hide VISCO's unexpended funds. Garcia's 1972 letter to Samonte
unmistakably reveals that they kept those funds in an account named "Board of Trustees VISCO Consortium of
Banks." This fact alone shows an effort to hide, with the evident intent to keep, those funds for themselves. The

letter even says that, for the protection of the Consortium, the name "VISCO" should be eliminated entirely, so
that the account name would read "Board of Trustees Consortium of Banks." Clearly, this particular move was
found to be necessary to avoid a takeover by the government, which was also a creditor of VISCO. 113 This
express intent of the latter, under the direction and for the benefit of the Consortium, corroborated petitioner's
contention that respondent banks had defrauded VISCO's creditors.
Assignment of Mortgage
in Favor of the Consortium Banks
The assignment of mortgage in favor of the Consortium also bears the earmarks of fraud. Initially, respondent
banks had agreed that VISCO should sell two of its generator sets, so that the proceeds could be utilized to pay
DBP. This plan was direct, simple, and would extinguish the encumbrance in favor of the bank.
Then, quite surprisingly, the Consortium set down the following payment procedure: Filmag would pay VISCO;
the latter would pay the Consortium, which would pay DBP; and the Consortium would then subrogate DBP to
the latter's rights as first mortgagee. One is then led to ask: if the intention was to pay DBP; from the sales
proceeds of the generator sets, why did the money have to pass through the Consortium?
The answer lies in the nature of respondent's mortgage. It will be recalled that this mortgage remained
unrecorded and not legally binding on the other creditors. 114 Thus, if DBP had been directly paid by VISCO, the
latter could have freed up its properties to the satisfaction of all its other creditors. This procedure would have
been fair to all, but it was not followed by the Consortium.
Instead, the proceeds from the sale of the generator sets were first paid to respondent banks, which used the
money to pay DBP. The last step in the payment procedure explains the reason for this preferred though
roundabout manner of payment. This final step entitled the Consortium to obtain DBP's primary lien through an
assignment by allowing it to pay VISCO's loan to the bank, without incurring additional expenses.
In the end, by collecting the money from VISCO, respondent banks recovered what they had ostensibly remitted
to DBP. Moreover, the primary lien that respondent banks acquired allowed them, as unsecured creditors of
VISCO, to foreclose on the assets of the corporation without regard to its inferior claims. It was a clever ruse
that would have worked, were it not done by creditors who were duty-bound, as directors, not to take clever
advantage of other creditors.
To be sure, there was undue advantage. The payment scheme devised by the Consortium continued the efficacy
of the primary lien, this time in its favor, to the detriment of the other creditors. When one considers its
knowledge that VISCO's assets might not be enough to meet its obligations to several creditors, 115 the intention
to defraud the other creditors is even more striking. Fraud is present when the debtor knows that its actions
would cause injury.116
The assignment in favor of the Consortium was a rescissible contract for having been undertaken in fraud of
creditors.117 Article 1385 of the Civil Code provides for the effect of rescission, as follows:
"Rescission creates the obligation to return the things which were the object of the contract, together
with their fruits, and the price with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore.

"Neither shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.
"In this case, indemnity for damages may be demanded from the person causing the loss."
Indeed, mutual restitution is required in all cases involving rescission. But when it is no longer possible to return
the object of the contract, an indemnity for damages operates as restitution. The important consideration is that
the indemnity for damages should restore to the injured party what was lost.
In the case at bar, it is no longer possible to order the return of VISCO's properties. They have already been sold
to the NSC, which has not been shown to have acted in bad faith. The party alleging bad faith must establish it
by competent proof. Sans that proof, purchasers are deemed to be in good faith, and their interest in the subject
property must not be disturbed. Purchasers in good faith are those who buy the property of another without
notice that some other person has a right to or interest in the property; and who pay the full and fair price for it at
the time of the purchase, or before they get notice of some other persons' claim of interest in the property. 118
In the present case, petitioner failed to discharge its burden of proving bad faith on the part of NSC. There is
insufficient evidence on record that the latter participated in the design to defraud VISCO's creditors. To NSC,
petitioner imputes fraud from the sole fact that the former was allegedly aware that its vendor, the Consortium,
had taken control over VISCO including the corporation's assets. 119 We cannot appreciate how knowledge of the
takeover would necessarily implicate anyone in the Consortium's fraudulent designs. Besides, NSC was not
shown to be privy to the information that VISCO had no other assets to satisfy other creditors' respective claims.
The right of an innocent purchaser for value must be respected and protected, even if its vendors obtained their
title through fraud.120 Pursuant to this principle, the remedy of the defrauded creditor is to sue for damages
against those who caused or employed the fraud. Hence, petitioner is entitled to damages from the Consortium.
Award of Damages
It is essential that for damages to be awarded, a claimant must satisfactorily prove during the trial that they have
a factual basis, and that the defendant's acts have a causal connection to them. 121 Thus, the question of damages
should normally call for a remand of the case to the lower court for further proceedings. Considering, however,
the length of time that petitioner's just claim has been thwarted, we find it in the best interest of substantial
justice to decide the issue of damages now on the basis of the available records. A remand for further
proceedings would only result in a needless delay.
Going over the records of the case, we find that petitioner has a final and executory judgment in its favor in Civil
Case No. 21272. The judgment in that case reads as follows:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs ordering defendant VISCO/SRM
to pay the plaintiffs the sum of P851,316.19 with interest thereon at the legal rate from the filing of this
complaint, plus attorney's fees of P50,000.00 and to pay the costs."122
The foregoing is the judgment credit that petitioner cannot enforce against VISCO because of Respondent
Consortium's fraudulent disposition of the corporation's assets. In other words, the above amounts define the
extent of the actual damage suffered by Coastal and the amount that respondent has to restore pursuant to Article
1385.

On the basis of the finding of fraud, the award of exemplary damages is in order, to serve as a warning to other
creditors not to abuse their rights. Under Article 2229 of the Civil Code, exemplary or corrective damages are
imposed by way of example or correction for the public good. By their nature, exemplary damages should be
imposed in an amount sufficient and effective to deter possible future similar acts by respondent banks. The
court finds the amount of P250,000 sufficient in the instant case.
As a rule, a corporation is not entitled to moral damages because, not being a natural person, it cannot experience
physical suffering or sentiments like wounded feelings, serious anxiety, mental anguish and moral shock. 123 The
only exception to this rule is when the corporation has a good reputation that is debased, resulting in its
humiliation in the business realm.124 In the present case, the records do not show any evidence that the name or
reputation of petitioner has been sullied as a result of the Consortium's fraudulent acts. Accordingly, moral
damages are not warranted.
WHEREFORE, the Petition is GRANTED. The assailed Decision of the Court of Appeals dated September 27,
1994, and its Resolution dated January 5, 1995, are hereby REVERSED and SET ASIDE. Respondent
Consortium of Banks is ordered to PAY Petitioner Coastal Pacific Trading, Inc., the sum adjudged by the
Regional Trial Court of Pasig, Branch 167, in Civil Case No. 21272 entitled Coastal Pacific Trading, Felix de la
Costa, and Aurora del Banco v. Visayan Integrated Corporation, to wit: "x x x the sum of P851,316.19 with
interest thereon at the legal rate from the filing of [the] [C]omplaint, plus attorney's fees of P50,000 and x x x the
costs." Respondent Consortium of Banks is further ordered to pay petitioner exemplary damages in the amount
of P250,000.
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Callejo, Sr., Chico-Nazario, J.J., concur.

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