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G.R. No.

174938

October 1, 2014

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


vs.
BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C. RAMOS,
RUFO B. COLAYCO, MAXIMO G. LICAUCO III, AND BENJAMIN C.
RAMOS, Respondents.
DECISION
LEONEN, J.:
Corporate representatives may be compelled to submit to arbitration proceedings
pursuant to a contract entered into by the corporation they represent if there are
allegations of bad faith or malice in their acts representing the corporation.
This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision and
October 5, 2006 resolution. The Court of Appeals affirmed the trial court's decision
holding that petitioners, as director, should submit themselves as parties tothe
arbitration proceedings between BF Corporation and Shangri-La Properties, Inc.
(Shangri-La).
In 1993, BF Corporation filed a collection complaint with the Regional Trial Court
against Shangri-Laand the members of its board of directors: Alfredo C. Ramos,
Rufo B.Colayco, Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III, and
Benjamin C. Ramos.1
BF Corporation alleged in its complaint that on December 11, 1989 and May 30,
1991, it entered into agreements with Shangri-La wherein it undertook to construct
for Shangri-La a mall and a multilevel parking structure along EDSA. 2
Shangri-La had been consistent in paying BF Corporation in accordance with its
progress billing statements.3However, by October 1991, Shangri-La started
defaulting in payment.4
BF Corporation alleged that Shangri-La induced BF Corporation to continue with the
construction of the buildings using its own funds and credit despite Shangri-Las
default.5 According to BF Corporation, ShangriLa misrepresented that it had funds to
pay for its obligations with BF Corporation, and the delay in payment was simply a
matter of delayed processing of BF Corporations progress billing statements. 6

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


allegedly took possession of the buildings while still owing BF Corporation an
outstanding balance.8
BF Corporation alleged that despite repeated demands, Shangri-La refused to pay
the balance owed to it. 9 It also alleged that the Shangri-Las directors were in bad
faith in directing Shangri-Las affairs. Therefore, they should be held jointly and
severally liable with Shangri-La for its obligations as well as for the damages that BF
Corporation incurred as a result of Shangri-Las default. 10
On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G.
Licauco III, and Benjamin C. Ramos filed a motion to suspend the proceedings in
view of BF Corporations failure to submit its dispute to arbitration, in accordance
with the arbitration clauseprovided in its contract, quoted in the motion as follows: 11
35. Arbitration
(1) Provided always that in case any dispute or difference shall arise between the
Owner or the Project Manager on his behalf and the Contractor, either during the
progress or after the completion or abandonment of the Works as to the construction
of this Contract or as to any matter or thing of whatsoever nature arising there under
or inconnection therewith (including any matter or thing left by this Contract to the
discretion of the Project Manager or the withholding by the Project Manager of any
certificate to which the Contractor may claim to be entitled or the measurement and
valuation mentioned in clause 30(5)(a) of these Conditions or the rights and liabilities
of the parties under clauses 25, 26, 32 or 33 of these Conditions), the owner and the
Contractor hereby agree to exert all efforts to settle their differences or dispute
amicably. Failing these efforts then such dispute or difference shall be referred to
arbitration in accordance with the rules and procedures of the Philippine Arbitration
Law.
xxx

xxx

xxx

(6) The award of such Arbitrators shall be final and binding on the parties. The
decision of the Arbitrators shall be a condition precedent to any right of legal action
that either party may have against the other. . . . 12 (Underscoring in the original)
On August 19, 1993, BF Corporation opposed the motion to suspend proceedings. 13
In the November 18, 1993 order, the Regional Trial Court denied the motion to
suspend proceedings.14

On December 8, 1993, petitioners filed an answer to BF Corporations complaint,


with compulsory counter claim against BF Corporation and crossclaim against
Shangri-La.15 They alleged that they had resigned as members of Shangri-Las
board of directors as of July 15, 1991.16
After the Regional Trial Court denied on February 11, 1994 the motion for
reconsideration of its November 18, 1993 order, Shangri-La, Alfredo C. Ramos, Rufo
B. Colayco,Maximo G. Licauco III, and Benjamin Ramos filed a petition for certiorari
with the Court of Appeals.17
On April 28, 1995, the Court of Appeals granted the petition for certiorari and
ordered the submission of the dispute to arbitration. 18
Aggrieved by the Court of Appeals decision, BF Corporation filed a petition for
review on certiorari with this court. 19 On March 27, 1998, this court affirmed the
Court of Appeals decision, directing that the dispute be submitted for arbitration. 20
Another issue arose after BF Corporation had initiated arbitration proceedings. BF
Corporation and Shangri-La failed to agree as to the law that should govern the
arbitration proceedings.21 On October 27, 1998, the trial court issued the order
directing the parties to conduct the proceedings in accordance with Republic Act No.
876.22

proceedings despite being third parties to the contract between Shangri-La and BF
Corporation.28
In its May 11, 2006 decision, 29 the Court of Appeals dismissed petitioners petition for
certiorari. The Court of Appeals ruled that ShangriLas directors were necessary
parties in the arbitration proceedings.30 According to the Court of Appeals:
[They were] deemed not third-parties tothe contract as they [were] sued for their acts
in representation of the party to the contract pursuant to Art. 31 of the Corporation
Code, and that as directors of the defendant corporation, [they], in accordance with
Art. 1217 of the Civil Code, stand to be benefited or injured by the result of the
arbitration proceedings, hence, being necessary parties, they must be joined in
order to have complete adjudication of the controversy. Consequently, if [they were]
excluded as parties in the arbitration proceedings and an arbitral award is rendered,
holding [Shangri-La] and its board of directors jointly and solidarily liable to private
respondent BF Corporation, a problem will arise, i.e., whether petitioners will be
bound bysuch arbitral award, and this will prevent complete determination of the
issues and resolution of the controversy.31
The Court of Appeals further ruled that "excluding petitioners in the arbitration
proceedings . . . would be contrary to the policy against multiplicity of suits." 32
The dispositive portion of the Court of Appeals decision reads:

Shangri-La filed an omnibus motion and BF Corporation an urgent motion for


clarification, both seeking to clarify the term, "parties," and whether Shangri-Las
directors should be included in the arbitration proceedings and served with separate
demands for arbitration.23
Petitioners filed their comment on Shangri-Las and BF Corporations motions,
praying that they be excluded from the arbitration proceedings for being non-parties
to Shangri-Las and BF Corporations agreement.24
On July 28, 2003, the trial court issued the order directing service of demands for
arbitration upon all defendants in BF Corporations complaint. 25 According to the trial
court, Shangri-Las directors were interested parties who "must also be served with
a demand for arbitration to give them the opportunity to ventilate their side of the
controversy, safeguard their interest and fend off their respective
positions."26 Petitioners motion for reconsideration ofthis order was denied by the
trial court on January 19, 2005.27
Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave
abuse of discretion in the issuance of orders compelling them to submit to arbitration

WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28, 2003
and January 19, 2005 of public respondent RTC, Branch 157, Pasig City, in Civil
Case No. 63400, are AFFIRMED.33
The Court of Appeals denied petitioners motion for reconsideration in the October 5,
2006 resolution.34
On November 24, 2006, petitioners filed a petition for review of the May 11, 2006
Court of Appeals decision and the October 5, 2006 Court of Appeals resolution. 35
The issue in this case is whether petitioners should be made parties to the
arbitration proceedings, pursuant to the arbitration clause provided in the contract
between BF Corporation and Shangri-La.
Petitioners argue that they cannot be held personally liable for corporate acts or
obligations.36 The corporation is a separate being, and nothing justifies BF
Corporations allegation that they are solidarily liable with Shangri-La. 37Neither did
they bind themselves personally nor did they undertake to shoulder Shangri-Las

obligations should it fail in its obligations.38 BF Corporation also failed to establish


fraud or bad faith on their part.39
Petitioners also argue that they are third parties to the contract between BF
Corporation and Shangri-La.40Provisions including arbitration stipulations should
bind only the parties.41 Based on our arbitration laws, parties who are strangers to an
agreement cannot be compelled to arbitrate.42
Petitioners point out thatour arbitration laws were enacted to promote the autonomy
of parties in resolving their disputes.43 Compelling them to submit to arbitration is
against this purpose and may be tantamount to stipulating for the parties. 44
Separate comments on the petition werefiled by BF Corporation, and Maximo G.
Licauco III, Alfredo C.Ramos and Benjamin C. Ramos.45
Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with
petitioners that Shangri-Lasdirectors, being non-parties to the contract, should not
be made personally liable for Shangri-Las acts.46Since the contract was executed
only by BF Corporation and Shangri-La, only they should be affected by the
contracts stipulation.47 BF Corporation also failed to specifically allege the unlawful
acts of the directors that should make them solidarily liable with Shangri-La for its
obligations.48
Meanwhile, in its comment, BF Corporation argued that the courts ruling that the
parties should undergo arbitration "clearly contemplated the inclusion of the directors
of the corporation[.]"49 BF Corporation also argued that while petitioners were not
parties to the agreement, they were still impleaded under Section 31 of the
Corporation Code.50 Section 31 makes directors solidarily liable for fraud, gross
negligence, and bad faith.51Petitioners are not really third parties to the agreement
because they are being sued as Shangri-Las representatives, under Section 31 of
the Corporation Code.52

cautela, as manifested therein on several occasions." 58 Petitioners informed the


court that they already manifested with the trial court that "any action taken on [the
Arbitral Tribunals decision] should be without prejudice to the resolution of [this]
case."59
Upon the courts order, petitioners and Shangri-La filed their respective memoranda.
Petitioners and Maximo G. Licauco III, Alfredo C. Ramos, and Benjamin C. Ramos
reiterated their arguments that they should not be held liable for Shangri-Las default
and made parties to the arbitration proceedings because only BF Corporation and
Shangri-La were parties to the contract.
In its memorandum, Shangri-La argued that petitioners were impleaded for their
solidary liability under Section 31 of the Corporation Code. Shangri-La added that
their exclusion from the arbitration proceedings will result in multiplicity of suits,
which "is not favored in this jurisdiction." 60 It pointed out that the case had already
been mooted by the termination of the arbitration proceedings, which petitioners
actively participated in.61 Moreover, BF Corporation assailed only the correctness of
the Arbitral Tribunals award and not the part absolving Shangri-Las directors from
liability.62
BF Corporation filed a counter-manifestation with motion to dismiss 63 in lieu of the
required memorandum.
In its counter-manifestation, BF Corporation pointed out that since "petitioners
counterclaims were already dismissed with finality, and the claims against them
were likewise dismissed with finality, they no longer have any interest orpersonality
in the arbitration case. Thus, there is no longer any need to resolve the present
Petition, which mainly questions the inclusion of petitioners in the arbitration
proceedings."64 The courts decision in this case will no longer have any effect on the
issue of petitioners inclusion in the arbitration proceedings. 65
The petition must fail.

BF Corporation further argued that because petitioners were impleaded for their
solidary liability, they are necessary parties to the arbitration proceedings. 53 The full
resolution of all disputes in the arbitration proceedings should also be done in the
interest of justice.54
In the manifestation dated September 6, 2007, petitioners informed the court that the
Arbitral Tribunal had already promulgated its decision on July 31, 2007. 55 The
Arbitral Tribunal denied BF Corporations claims against them. 56 Petitioners stated
that "[they] were included by the Arbitral Tribunal in the proceedings conducted . . .
notwithstanding [their] continuing objection thereto. . . ." 57 They also stated that
"[their] unwilling participation in the arbitration case was done ex abundante ad

The Arbitral Tribunals decision, absolving petitioners from liability, and its binding
effect on BF Corporation, have rendered this case moot and academic.
The mootness of the case, however, had not precluded us from resolving issues so
that principles may be established for the guidance of the bench, bar, and the public.
In De la Camara v. Hon. Enage, 66 this court disregarded the fact that petitioner in
that case already escaped from prison and ruled on the issue of excessive bails:
While under the circumstances a ruling on the merits of the petition for certiorari is
notwarranted, still, as set forth at the opening of this opinion, the fact that this case is

moot and academic should not preclude this Tribunal from setting forth in language
clear and unmistakable, the obligation of fidelity on the part of lower court judges to
the unequivocal command of the Constitution that excessive bail shall not be
required.67
This principle was repeated in subsequent cases when this court deemed it proper
to clarify important matters for guidance.68
Thus, we rule that petitioners may be compelled to submit to the arbitration
proceedings in accordance with Shangri-Laand BF Corporations agreement, in
order to determine if the distinction between Shangri-Las personality and their
personalities should be disregarded.
This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties to
avoid litigation and settle disputes amicably and more expeditiously by themselves
and through their choice of arbitrators.
The policy in favor of arbitration has been affirmed in our Civil Code, 69 which was
approved as early as 1949. It was later institutionalized by the approval of Republic
Act No. 876,70 which expressly authorized, made valid, enforceable, and irrevocable
parties decision to submit their controversies, including incidental issues, to
arbitration. This court recognized this policy in Eastboard Navigation, Ltd. v. Ysmael
and Company, Inc.:71
As a corollary to the question regarding the existence of an arbitration agreement,
defendant raises the issue that, even if it be granted that it agreed to submit its
dispute with plaintiff to arbitration, said agreement is void and without effect for it
amounts to removing said dispute from the jurisdiction of the courts in which the
parties are domiciled or where the dispute occurred. It is true that there are
authorities which hold that "a clause in a contract providing that all matters in dispute
between the parties shall be referred to arbitrators and to them alone, is contrary to
public policy and cannot oust the courts of jurisdiction" (Manila Electric Co. vs.
Pasay Transportation Co., 57 Phil., 600, 603), however, there are authorities which
favor "the more intelligent view that arbitration, as an inexpensive, speedy and
amicable method of settling disputes, and as a means of avoiding litigation, should
receive every encouragement from the courts which may be extended without
contravening sound public policy or settled law" (3 Am. Jur., p. 835). Congress has
officially adopted the modern view when it reproduced in the new Civil Code the
provisions of the old Code on Arbitration. And only recently it approved Republic Act
No. 876 expressly authorizing arbitration of future disputes. 72 (Emphasis supplied)
In view of our policy to adopt arbitration as a manner of settling disputes, arbitration
clauses are liberally construed to favor arbitration. Thus, in LM Power Engineering
Corporation v. Capitol Industrial Construction Groups, Inc., 73 this court said:

Being an inexpensive, speedy and amicable method of settling disputes, arbitration


along with mediation, conciliation and negotiation is encouraged by the
Supreme Court. Aside from unclogging judicial dockets, arbitration also hastens the
resolution of disputes, especially of the commercial kind. It is thus regarded as the
"wave of the future" in international civil and commercial disputes. Brushing aside a
contractual agreement calling for arbitration between the parties would be a step
backward.
Consistent with the above-mentioned policy of encouraging alternative dispute
resolution methods, courts should liberally construe arbitration clauses. Provided
such clause is susceptible of an interpretation that covers the asserted dispute, an
order to arbitrate should be granted. Any doubt should be resolved in favor of
arbitration.74(Emphasis supplied)
A more clear-cut statement of the state policy to encourage arbitration and to favor
interpretations that would render effective an arbitration clause was later expressed
in Republic Act No. 9285:75
SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to actively
promote party autonomy in the resolution of disputes or the freedom of the party to
make their own arrangements to resolve their disputes. Towards this end, the State
shall encourage and actively promote the use of Alternative Dispute Resolution
(ADR) as an important means to achieve speedy and impartial justice and declog
court dockets. As such, the State shall provide means for the use of ADR as an
efficient tool and an alternative procedure for the resolution of appropriate cases.
Likewise, the State shall enlist active private sector participation in the settlement of
disputes through ADR. This Act shall be without prejudice to the adoption by the
Supreme Court of any ADR system, such as mediation, conciliation, arbitration, or
any combination thereof as a means of achieving speedy and efficient means of
resolving cases pending before all courts in the Philippines which shall be governed
by such rules as the Supreme Court may approve from time to time.
....
SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall have due
regard to the policy of the law in favor of arbitration.Where action is commenced by
or against multiple parties, one or more of whomare parties who are bound by the
arbitration agreement although the civil action may continue as to those who are not
bound by such arbitration agreement. (Emphasis supplied)
Thus, if there is an interpretation that would render effective an arbitration clause for
purposes ofavoiding litigation and expediting resolution of the dispute, that
interpretation shall be adopted. Petitioners main argument arises from the separate
personality given to juridical persons vis--vis their directors, officers, stockholders,

and agents. Since they did not sign the arbitration agreement in any capacity, they
cannot be forced to submit to the jurisdiction of the Arbitration Tribunal in
accordance with the arbitration agreement. Moreover, they had already resigned as
directors of Shangri-Laat the time of the alleged default.
Indeed, as petitioners point out, their personalities as directors of Shangri-La are
separate and distinct from Shangri-La.

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


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

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

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

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

A consequence of a corporations separate personality is that consent by a


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

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


2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate ofincorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this
Code;

11. To exercise such other powers asmay be essential or necessary to carry out its
purpose or purposes as stated in its articles of incorporation. (13a)
Because a corporations existence is only by fiction of law, it can only exercise its
rights and powers through itsdirectors, officers, or agents, who are all natural
persons. A corporation cannot sue or enter into contracts without them.

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

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

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

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


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

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


stipulation on arbitration, binds the parties thereto, as well as their assigns and heirs.
But only they.80 (Citations omitted)

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

Similarly, in Del Monte Corporation-USA v. Court of Appeals,81 this court ruled:


The provision to submit to arbitration any dispute arising therefrom and the
relationship of the parties is part of that contract and is itself a contract. As a rule,
contracts are respected as the law between the contracting parties and produce

effect as between them, their assigns and heirs. Clearly, only parties to the
Agreement . . . are bound by the Agreement and its arbitration clause as they are
the only signatories thereto.82 (Citation omitted)
This court incorporated these rulings in Agan, Jr. v. Philippine International Air
Terminals Co., Inc.83 and Stanfilco Employees v. DOLE Philippines, Inc., et al. 84
As a general rule, therefore, a corporations representative who did not personally
bind himself or herself to an arbitration agreement cannot be forced to participate in
arbitration proceedings made pursuant to an agreement entered into by the
corporation. He or she is generally not considered a party to that agreement.
However, there are instances when the distinction between personalities of
directors, officers,and representatives, and of the corporation, are disregarded. We
call this piercing the veil of corporate fiction.

When a director, trustee or officer attempts to acquire or acquires, in violation of his


duty, any interest adverse to the corporation in respect of any matter which has been
reposed inhim in confidence, as to which equity imposes a disability upon him to
deal in his own behalf, he shall be liable as a trustee for the corporation and must
account for the profits which otherwise would have accrued to the corporation. (n)
Based on the above provision, a director, trustee, or officer of a corporation may be
made solidarily liable with it for all damages suffered by the corporation, its
stockholders or members, and other persons in any of the following cases:
a) The director or trustee willfully and knowingly voted for or assented to a patently
unlawful corporate act;
b) The director or trustee was guilty of gross negligence or bad faith in directing
corporate affairs; and

Piercing the corporate veil is warranted when "[the separate personality of a


corporation] is used as a means to perpetrate fraud or an illegal act, or as a vehicle
for the evasion of an existing obligation, the circumvention of statutes, or to confuse
legitimate issues."85 It is also warranted in alter ego cases "where a corporation is
merely a farce since it is a mere alter ego or business conduit of a person, or where
the corporation is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of another
corporation."86

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

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

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


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

Among the persons who may be treatedas the corporation itself under certain
circumstances are its directors and officers. Section 31 of the Corporation Code
provides the instances when directors, trustees, or officers may become liable for
corporate acts:
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who
are guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as such directors
or trustees shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.

Solidary liability with the corporation will also attach in the following instances:
a) "When a director or officer has consented to the issuance of watered stocks or
who, having knowledge thereof, did not forthwith file with the corporate secretary his
written objection thereto";87

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


personally liable for his corporate action."89
When there are allegations of bad faith or malice against corporate directors or
representatives, it becomes the duty of courts or tribunals to determine if these
persons and the corporation should be treated as one. Without a trial, courts and
tribunals have no basis for determining whether the veil of corporate fiction should
be pierced. Courts or tribunals do not have such prior knowledge. Thus, the courts
or tribunals must first determine whether circumstances exist towarrant the courts or
tribunals to disregard the distinction between the corporation and the persons
representing it. The determination of these circumstances must be made by one
tribunal or court in a proceeding participated in by all parties involved, including
current representatives of the corporation, and those persons whose personalities
are impliedly the sameas the corporation. This is because when the court or tribunal
finds that circumstances exist warranting the piercing of the corporate veil, the

corporate representatives are treated as the corporation itself and should be held
liable for corporate acts. The corporations distinct personality is disregarded, and
the corporation is seen as a mere aggregation of persons undertaking a business
under the collective name of the corporation.
Hence, when the directors, as in this case, are impleaded in a case against a
corporation, alleging malice orbad faith on their part in directing the affairs of the
corporation, complainants are effectively alleging that the directors and the
corporation are not acting as separate entities. They are alleging that the acts or
omissions by the corporation that violated their rights are also the directors acts or
omissions.90 They are alleging that contracts executed by the corporation are
contracts executed by the directors. Complainants effectively pray that the corporate
veilbe pierced because the cause of action between the corporation and the
directors is the same.
In that case, complainants have no choice but to institute only one proceeding
against the parties.1wphi1 Under the Rules of Court, filing of multiple suits for a
single cause of action is prohibited. Institution of more than one suit for the same
cause of action constitutes splitting the cause of action, which is a ground for the
dismissal ofthe others. Thus, in Rule 2:
Section 3. One suit for a single cause of action. A party may not institute more
than one suit for a single cause of action. (3a)
Section 4. Splitting a single cause of action;effect of. If two or more suits are
instituted on the basis of the same cause of action, the filing of one or a judgment
upon the merits in any one is available as a ground for the dismissal of the others.
(4a)
It is because the personalities of petitioners and the corporation may later be found
to be indistinct that we rule that petitioners may be compelled to submit to
arbitration.
However, in ruling that petitioners may be compelled to submit to the arbitration
proceedings, we are not overturning Heirs of Augusto Salas wherein this court
affirmed the basic arbitration principle that only parties to an arbitration agreement
may be compelled to submit to arbitration. In that case, this court recognizedthat
persons other than the main party may be compelled to submit to arbitration, e.g.,
assignees and heirs. Assignees and heirs may be considered parties to an
arbitration agreement entered into by their assignor because the assignors rights
and obligations are transferred to them upon assignment. In other words, the
assignors rights and obligations become their own rights and obligations. In the
same way, the corporations obligations are treated as the representatives
obligations when the corporate veil is pierced. Moreover, in Heirs of Augusto Salas,

this court affirmed its policy against multiplicity of suits and unnecessary delay. This
court said that "to splitthe proceeding into arbitration for some parties and trial for
other parties would "result in multiplicity of suits, duplicitous procedure and
unnecessary delay."91 This court also intimated that the interest of justice would be
best observed if it adjudicated rights in a single proceeding. 92 While the facts of that
case prompted this court to direct the trial court to proceed to determine the issues
of thatcase, it did not prohibit courts from allowing the case to proceed to arbitration,
when circumstances warrant.
Hence, the issue of whether the corporations acts in violation of complainants
rights, and the incidental issue of whether piercing of the corporate veil is warranted,
should be determined in a single proceeding. Such finding would determine if the
corporation is merely an aggregation of persons whose liabilities must be treated as
one with the corporation.
However, when the courts disregard the corporations distinct and separate
personality from its directors or officers, the courts do not say that the corporation, in
all instances and for all purposes, is the same as its directors, stockholders, officers,
and agents. It does not result in an absolute confusion of personalities of the
corporation and the persons composing or representing it. Courts merely discount
the distinction and treat them as one, in relation to a specific act, in order to extend
the terms of the contract and the liabilities for all damages to erring corporate
officials who participated in the corporations illegal acts. This is done so that the
legal fiction cannot be used to perpetrate illegalities and injustices.
Thus, in cases alleging solidary liability with the corporation or praying for the
piercing of the corporate veil, parties who are normally treated as distinct individuals
should be made to participate in the arbitration proceedings in order to determine
ifsuch distinction should indeed be disregarded and, if so, to determine the extent of
their liabilities.
In this case, the Arbitral Tribunal rendered a decision, finding that BF Corporation
failed to prove the existence of circumstances that render petitioners and the other
directors solidarily liable. It ruled that petitioners and Shangri-Las other directors
were not liable for the contractual obligations of Shangri-La to BF Corporation. The
Arbitral Tribunals decision was made with the participation of petitioners, albeit with
their continuing objection. In view of our discussion above, we rule that petitioners
are bound by such decision.
WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May 11,
2006 and resolution of October 5, 2006 are AFFIRMED.
SO ORDERED.

G.R. No. 198967

March 7, 2016

JOSE EMMANUEL P. GUILLERMO, Petitioner


vs.
CRISANTO P. USON, Respondent
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court seeking to annul and set aside the Court of Appeals Decision 1 dated June 8,
2011 and Resolution2 dated October 7, 2011 in CAG.R. SP No. 115485, which
affirmed in toto the decision of the National Labor Relations Commission (NLRC).
The facts of the case follow.
On March 11, 1 996, respondent Crisan to P. Uson (Uson) began his employment
with Royal Class Venture Phils., Inc. (Royal Class Venture) as an accounting clerk. 3
Eventually, he was promoted to the position of accounting supervisor, with a salary
of Phpl3, 000.00 a month, until he was allegedly dismissed from employment on
December 20, 2000. 4
On March 2, 2001, Uson filed with the Sub-Regional Arbitration Branch No. 1,
Dagupan City, of the NLRC a Complaint for Illegal Dismissal, with prayers for
backwages, reinstatement, salaries and 13111 month pay, moral and exemplary
damages and attorney's fees against Royal Class Venture. 5
Royal Class Venture did not make an appearance in the case despite its . f 6 receipt
o summons.
On May 15, 2001, Uson filed his Position Paper7 as complainant.
On October 22, 2001, Labor Arbiter Jose G. De Vera rendered a Decision8 in favor
of the complainant Uson and ordering therein respondent Royal Class Venture to
reinstate him to his former position and pay his backwages, 13 111 month pay as
well as moral and exemplary damages and attorney's fees.

Respondent Liable for Satisfaction of the Decision. 13 The motion quoted from a
portion of the Sheriffs Return, which states:
On September 12, 2002, the undersigned proceeded at the stated present business
office address of the respondent which is at Minien East, Sta. Barbara~ Pangasinan
to serve the writ of execution. Upon arrival, I found out that the establishment
erected thereat is not [in] the respondent's name but JOEL and SONS
CORPORATION, a family corporation owned by the Guillermos of which, Jose
Emmanuel F. Guillermo the General Manager of the respondent, is one of the
stockholders who received the writ using his nickname "Joey," [and who] concealed
his real identity and pretended that he [was] the brother of Jose, which [was]
contrary to the statement of the guard-on-duty that Jose and Joey ]were] one and
the same person. The former also informed the undersigned that the respondent's
(sic) corporation has been dissolved.
On the succeeding day, as per [advice] by the [complainant's] counsel that the
respondent has an account at the Bank of Philippine Islands Magsaysay Branch,
A.B. Fernandez Ave., Dagupan City, the undersigned immediately served a notice of
garnishment, thus, the bank replied on the same day stating that the respondent
[does] not have an account with the branch. 14
On December 26, 2002, Labor Arbiter Irenarco R. Rimando issued an Order15
granting the motion filed by Uson. The order held that officers of a corporation are
jointly and severally liable for the obligations of the corporation to the employees and
there is no denial of due process in holding them so even if the said officers were
not parties to the case when the judgment in favor of the employees was rendered.
16 Thus, the Labor Arbiter pierced the veil of corporate fiction of Royal Class
Venture and held herein petitioner Jose Emmanuel Guillermo (Guillermo), in his
personal capacity, jointly and severally liable with the corporation for the
enforcement of the claims ofUson. 17

Royal Class Venture, as the losing party, did not file an appeal of the decision. 9
Consequently, upon Uson's motion, a Writ of Execution 10 datecl February 15, 2002
was issued to implement the Labor Arbiter's decision.

Guillermo filed, by way of special appearance, a Motion for Reconsideration/To Set


Aside the Order of December 26, 2002. 18 The same, however, was not granted as,
this time, in an Order dated November 24, 2003, Labor Arbiter Nifia Fe S. LazagaRafols sustained the findings of the labor arbiters before her and even castigated
Guillermo for his unexplained absence in the prior proceedings despite notice,
effectively putting responsibility on Guillermo for the case's outcome against him. 19

On May 17, 2002, an Alias Writ of Execution 11 was issued. But with the judgment
still unsatisfied, a Second Alias Writ of Execution 12 was issued on September 11,
2002.

On January 5, 2004, Guillermo filed a Motion for Reconsideration of the above


Order, 20 but the same was promptly denied by the Labor Arbiter in an Order dated
January 7, 2004. 21

Again, it was reported in the Sheriffs Return that the Second Alias Writ of Execution
dated September 11, 2002 remained "unsatisfied." Thus, on November 14, 2002,
Uson filed a Motion for Alias Writ of Execution and to Hold Directors and Officers of

On January 26, 2004, Uson filed a Motion for Alias Writ of Execution,22 to which
Guillermo filed a Comment and Opposition on April 2, 2004. 23

On May 18, 2004, the Labor Arbiter issued an Order24 granting Uson's Motion for
the Issuance of an Alias Writ of Execution and rejecting Guillermo's arguments
posed in his Comment and Opposition.

that the Labor Arbiter has no jurisdiction because the case is one of an intracorporate controversy, with the complainant Uson also claiming to be a stockholder
and director of Royal Class Venture. 41

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

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

In a Decision26 dated May 11, 20 I 0, the NLRC dismissed Guillermo's appeal and
denied his prayers for injunction.
On August 20, 2010, Guillermo filed a Petition for Certiorari27 before the Court of
Appeals, assailing the NLRC decision.
On June 8, 2011, the Court of Appeals rendered its assailed Decision28 which
denied Guillermo's petition and upheld all the findings of the NLRC.
The appellate court found that summons was in fact served on Guillermo as
President and General Manager of Royal Class Venture, which was how the Labor
Arbiter acquired jurisdiction over the company. 29 But Guillermo subsequently
refused to receive all notices of hearings and conferences as well as the order to file
Royal Class Venture's position paper. 30 Then, it was learned during execution that
Royal Class Venture had been disso]ved. 31 However, the Court of Appeals held
that although the judgment had become final and executory, it may be modified or
altered "as when its execution becomes impossible or unjust."32 It also noted that
the motion to hold officers and directors like Guillermo personally liable, as well as
the notices to hear the same, was sent to them by registered mail, but no pleadings
were submitted and no appearances were made by anyone of them during the said
motion's pendency. 33 Thus, the court held Guillermo liable, citing jurisprudence that
hold the president of the corporation liable for the latter's obligation to illegally
dismissed employees.34 Finally, the court dismissed Guillermo's allegation that the
case is an intra-corporate controversy, stating that jurisdiction is determined by the
allegations in the complaint and the character of the relief sought. 35
From the above decision of the appellate court, Guillermo filed a Motion for
Reconsideration36 but the same was again denied by the said court in the assailed
Resolution37 dated October 7, 2011.
Hence, the instant petition.
Guillermo asserts that he was impleaded in the case only more than a year after its
Decision had become final and executory, an act which he claims to be unsupported
in law and jurisprudence. 38 He contends that the decision had become final,
immutable and unalterable and that any amendment thereto is null and void.39
Guillenno assails the so-called "piercing the veil" of corporate fiction which allegedly
discriminated against him when he alone was belatedly impleaded despite the
existence of other directors and officers in Royal Class Venture. 40 He also claims

To resolve the case, the Court must confront the issue of whether an officer of a
corporation may be included as judgment obligor in a labor case for the first time
only after the decision of the Labor Arbiter had become final and executory, and
whether the twin doctrines of "piercing the veil of corporate fiction" and personal
liability of company officers in labor cases apply.
The petition is denied.
In the earlier labor cases of Claparols v. Court of Industrial Relations43 and A.C.
Ransom Labor Union-CCLU v. NLRC, 44 persons who were not originally impleaded
in the case were, even during execution, held to be solidarily liable with the
employer corporation for the latter's unpaid obligations to complainant-employees.
These included a newly-formed corporation which was considered a mere conduit or
alter ego of the originally impleaded corporation, and/or the officers or stockholders
of the latter corporation.45 Liability attached, especially to the responsible officers,
even after final judgment and during execution, when there was a failure to collect
from the employer corporation the judgment debt awarded to its workers.46 In
Naguiat v. NLRC, 47 the president of the corporation was found, for the first time on
appeal, to be solidarily liable to the dismissed employees. Then, in Reynoso v. Court
of Appeals, 48 the veil of corporate fiction was pierced at the stage of execution,
against a corporation not previously impleaded, when it was established that such
corporation had dominant control of the original party corporation, which was a
smaller company, in such a manner that the latter's closure was done by the former
in order to defraud its creditors, including a former worker.
The rulings of this Court in A. C. Ransom, Naguiat, and Reynoso, however, have
since been tempered, at least in the aspects of the lifting of the corporate veil and
the assignment of personal liability to directors, trustees and officers in labor cases.
The subsequent cases of McLeod v. NLRC, 49 Spouses Santos v. NLRC50 and
Carag v. NLRC, 51 have all established, save for certain exceptions, the primacy of
Section 31 52 of the Corporation Code in the matter of assigning such liability for a
corporation's debts, including judgment obligations in labor cases. According to
these cases, a corporation is still an artificial being invested by law with a personality
separate and distinct from that of its stockholders and from that of other corporations
to which it may be connected. 53 It is not in every instance of inability to collect from
a corporation that the veil of corporate fiction is pierced, and the responsible officials
are made liable. Personal liability attaches only when, as enumerated by the said

Section 31 of the Corporation Code, there is a wilfull and knowing assent to patently
unlawful acts of the corporation, there is gross negligence or bad faith in directing
the affairs of the corporation, or there is a conflict of interest resulting in damages to
the corporation. 54 Further, in another labor case, Pantranco Employees
AssoCiation (PEA-PTGWO), et al. v. NLRC, et al. , 55 the doctrine of piercing the
corporate veil is held to apply only in three (3) basic areas, namely: ( 1) defeat of
public convenience as when the corporate fiction is used as a vehicle for the evasion
of an existing obligation; (2) fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime; or (3) alter ego cases, where a
corporation is merely a farce since it is a mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation. In the absence of malice, bad faith, or a specific provision of
law making ei corporate officer liable, such corporate officer cannot be made
personally liable for corporate liabilities. 56 Indeed, in Reahs Corporation v. NLRC,
57 the conferment of liability on officers for a corporation's obligations to labor is held
to be an exception to the general doctrine of separate personality of a corporation.
It also bears emphasis that in cases where personal liability attaches, not even all
officers are made accountable. Rather, only the "responsible officer," i.e., the person
directly responsible for and who "acted in bad faith" in committing the illegal
dismissal or any act violative of the Labor Code, is held solidarily liable, in cases
wherein the corporate veil is pierced. 58 In other instances, such as cases of socalled corporate tort of a close corporation, it is the person "actively engaged" in the
management of the corporation who is held liable. 59 In the absence of a clearly
identifiable officer(s) directly responsible for the legal infraction, the Court considers
the president of the corporation as such officer. 60
The common thread running among the aforementioned cases, however, is that the
veil of corporate fiction can be pierced, and responsible corporate directors and
officers or even a separate but related corporation, may be impleaded and held
answerable solidarily in a labor case, even after final judgment and on execution, so
long as it is established that such persons have deliberately used the corporate
vehicle to unjustly evade the judgment obligation, or have resorted to fraud, bad faith
or malice in doing so. When the shield of a separate corporate identity is used to
commit wrongdoing and opprobriously elude responsibility, the courts and the legal
authorities in a labor case have not hesitated to step in and shatter the said shield
and deny the usual protections to the offending party, even after final judgment. The
key element is the presence of fraud, malice or bad faith. Bad faith, in this instance,
does not connote bad judgment or negligence but impo1is a dishonest purpose or
some moral obliquity and conscious doing of wrong; it means breach of a known
duty through some motive or interest or ill will; it partakes of the nature of fraud. 61
As the foregoing implies, there is no hard and fast rule on when corporate fiction
may be disregarded; instead, each case must be evaluated according to its peculiar

circumstances.62 For the case at bar, applying the above criteria, a finding of
personal and solidary liability against a corporate officer like Guillermo must be
rooted on a satisfactory showing of fraud, bad faith or malice, or the presence of any
of the justifications for disregarding the corporate fiction. As stated in McLeod, 63
bad faith is a question of fact and is evidentiary, so that the records must first bear
evidence of malice before a finding of such may be made.
It is our finding that such evidence exists in the record. Like the A. C. Ransom, and
Naguiat cases, the case at bar involves an apparent family corporation. As in those
two cases, the records of the present case bear allegations and evidence that
Guillermo, the officer being held liable, is the person responsible in the actual
running of the company and for the malicious and illegal dismissal of the
complainant; he, likewise, was shown to have a role in dissolving the original obligor
company in an obvious "scheme to avoid liability" which jurisprudence has always
looked upon with a suspicious eye in order to protect the rights of labor.64
Part of the evidence on record is the second page of the verified Position Paper of
complainant (herein respondent) Crisanto P. Uson, where it was clearly alleged that
Uson was "illegally dismissed by the President/General Manager of respondent
corporation (herein petitioner) Jose Emmanuel P. Guillermo when Uson exposed the
practice of the said President/General Manager of dictating and undervaluing the
shares of stock of the corporation."65 The statement is proof that Guillermo was the
responsible officer in charge of running the company as well as the one who
dismissed Uson from employment. As this sworn allegation is uncontroverted - as
neither the company nor Guillermo appeared before the Labor Arbiter despite the
service of summons and notices - such stands as a fact of the case, and now
functions as clear evidence of Guillermo's bad faith in his dismissal of Uson from
employment, with the motive apparently being anger at the latter's reporting of
unlawful activities.
Then, it is also clearly reflected in the records that it was Guillermo himself, as
President and General Manager of the company, who received the summons to the
case, and who also subsequently and without justifiable cause refused to receive all
notices and orders of the Labor Arbiter that followed. 66 This makes Guillermo
responsible for his and his company's failure to participate in the entire proceedings
before the said office. The fact is clearly narrated in the Decision and Orders of the
Labor Arbiter, Uson's Motions for the Issuance of Alias Writs of Execution, as well as
in the Decision of the NLRC and the assailed Decision of the Court of Appeals,67
which Guillermo did not dispute in any of his belated motions or pleadings, including
in his petition for certiorari before the Court of Appeals and even in the petition
currently before this Court. 68 Thus, again, the same now stands as a finding of fact
of the said lower tribunals which binds this Court and which it has no power to alter
or revisit. 69 Guillermo's knowledge of the case's filing and existence and his
unexplained refusal to participate in it as the responsible official of his company,

again is an indicia of his bad faith and malicious intent to evade the judgment of the
labor tribunals.
Finally, the records likewise bear that Guillermo dissolved Royal Class Venture and
helped incorporate a new firm, located in the same address as the former, wherein
he is again a stockholder. This is borne by the Sheriffs Return which reported: that at
Royal Class Venture's business address at Minien East, Sta. Barbara, Pangasinan,
there is a new establishment named "Joel and Sons Corporation," a family
corporation owned by the Guillermos in which Jose Emmanuel F. Guillermo is again
one of the stockholders; that Guillermo received the writ of execution but used the
nickname "Joey" and denied being Jose Emmanuel F. Guillermo and, instead,
pretended to be Jose's brother; that the guard on duty confirmed that Jose and Joey
are one and the same person; and that the respondent corporation Royal Class
Venture had been dissolved. 70 Again, the facts contained in the Sheriffs Return
were not disputed nor controverted by Guillermo, either in the hearings of Uson's
Motions for Issuance of Alias Writs of Execution, in subsequent motions or
pleadings, or even in the petition before this Court. Essentially, then, the facts form
part of the records and now stand as further proof of Guillermo's bad faith and
malicious intent to evade the judgment obligation.
The foregoing clearly indicate a pattern or scheme to avoid the obligations to Uson
and frustrate the execution of the judgment award, which this Court, in the interest of
justice, will not countenance.
As for Guillermo's assertion that the case is an intra-corporate controversy, the Court
sustains the finding of the appellate court that the nature of an action and the
jurisdiction of a tribunal are determined by the allegations of the complaint at the
time of its filing, irrespective of whether or not the plaintiff is entitled to recover upon
all or some of the claims asserted therein. 71 Although Uson is also a stockholder
and director of Royal Class Venture, it is settled in jurisprudence that not all conflicts
between a stockholder and the corporation are intra-corporate; an examination of
the complaint must be made on whether the complainant is involved in his capacity
as a stockholder or director, or as an employee. 72 If the latter is found and the
dispute does not meet the test of what qualifies as an intracorporate controversy,
then the case is a labor case cognizable by the NLRC and is not within the
jurisdiction of any other tribunal. 73 In the case at bar, Uson's allegation was that he
was maliciously and illegally dismissed as an Accounting Supervisor by Guillermo,
the Company President and General Manager, an allegation that was not even
disputed by the latter nor by RoyalClass Venture. It raised no intra-corporate
relationship issues between him and the corporation or Guillermo; neither did it raise
any issue regarding the regulation of the corporation. As correctly found by the
appellate court, Uson's complaint and redress sought were centered alone on his
dismissal as an employee, and not upon any other relationship he had with the
company or with Guillermo. Thus, the matter is clearly a labor dispute cognizable by
the labor tribunals.

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

G.R. No. 161759

July 2, 2014

On April 16, 1998, Brillo made another demand letter to URC for the payment of the
reduced sum of P289,287,486.60 for the Value-Added Taxes (VAT), special duties
and excisetaxes for the years 1991-1995.

COMMISSIONER OF CUSTOMS, Petitioner,


vs.
OILINK INTERNATIONAL CORPORATION, Respondent.

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

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

On September 15, 1966, Union Refinery Corporation (URC) was established under
the Corporation Code of the Philippines. In the course of its business undertakings,
particularly in the period from 1991 to 1994, URC imported oil products into the
country.
On January 11, 1996, Oilink was incorporated for the primary purpose of
manufacturing, importing, exporting, buying, selling or dealing in oil and gas, and
their refinements and by-products at wholesale and retail of petroleum. URC and
Oilink had interlocking directors when Oilink started its business.
In applying for and in expediting the transfer of the operators name for the Customs
Bonded Warehouse thenoperated by URC, Esther Magleo, the Vice-President and
General Manager of URC, sent a letter dated January 15, 1996 to manifest that
URC and Oilink had the same Board of Directors and that Oilink was 100% owned
by URC.
On March 4, 1998, Oscar Brillo, the District Collector of the Port of Manila, formally
demanded that URC pay the taxes and duties on its oil imports that had arrived
between January 6, 1991 and November 7, 1995 at the Port of Lucanin in Mariveles,
Bataan.

On November 25, 1998, then Customs Commissioner Pedro C. Mendoza formally


directed that URC pay the amount of P119,223,541.71 representing URCs special
duties, VAT,and Excise Taxes that it had failed to pay at the time of the release of its
17 oil shipments that had arrived in the Sub-port of Mariveles from January 1, 1991
to September 7, 1995.
On December 21, 1998, Commissioner Mendoza wrote again to require URC to pay
deficiency taxes but in the reduced sum of P99,216,580.10.
On December 23, 1998, upon his assumption of office, Customs Commissioner
Nelson Tan transmitted another demand letter to URC affirming the assessment
of P99,216,580.10 by Commissioner Mendoza.
On January 18, 1999, Magleo, in behalf of URC, replied by letter to Commissioner
Tans affirmance by denying liability, insisting instead that only P28,933,079.20
should be paid by way of compromise.
On March 26, 1999, Commissioner Tan responded by rejecting Magleos proposal,
and directed URC to pay P99,216,580.10.
On May 24, 1999, Manuel Co, URCs President, conveyed to Commissioner Tan
URCs willingness to pay only P94,216,580.10, of which the initial amount
of P28,264,974.00 would be taken from the collectibles of Oilink from the National
Power Corporation, and the balance to be paid in monthly installments over a period
ofthree years to be secured with corresponding post-dated checks and its future
available tax credits.
On July 2, 1999, Commissioner Tan made a final demand for the total liability
of P138,060,200.49 upon URC and Oilink.
On July 8, 1999, Co requested from Commissioner Tan a complete finding of the
facts and law in support ofthe assessment made in the latters July 2, 1999 final
demand.

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

letters sent by the petitioner. Hence, the Court of Tax Appeals did noterr in taking
cognizance of the petition for review filed by the respondent.

On July 12, 1999, after receiving the July 8, 1999 letter from Co, Commissioner Tan
communicated in writing the detailed computation of the tax liability, stressing that
the Bureau of Customs (BoC) would not issue any clearance to Oilink unless the
amount of P138,060,200.49 demanded as Oilinks tax liability befirst paid, and a
performance bond be posted by URC/Oilink to secure the payment of any
adjustments that would result from the BIRs review of the liabilities for VAT, excise
tax, special duties, penalties, etc.

xxxx

Thus, on July 30, 1999, Oilink appealed to the CTA, seeking the nullification of the
assessment for having been issued without authority and with grave abuse of
discretion tantamount to lack of jurisdiction because the Government was thereby
shifting the imposition from URC to Oilink.
Decision of the CTA
On July 9, 2001, the CTA rendered its decision declaring as null and void the
assessment of the Commissioner of Customs, to wit:
IN THE LIGHT OF ALL THE FOREGOING, the petition is hereby GRANTED. The
assailed assessment issued by Respondent against herein Petitioner OILINK
INTERNATIONAL CORPORATION is hereby declared NULL and VOID.
SO ORDERED.3
The Commissioner of Customs seasonably filed a motion for reconsideration, 4 but
the CTA denied the motion for lack of merit.5
Judgment of the CA
Aggrieved, the Commissioner of Customs brought a petition for review in the CA
upon the following issues, namely: (a) the CTA gravely erred in holding that it had
jurisdiction over the subject matter; (b) the CTA gravely erred in holding that Oilink
had a cause of action; and (c) the CTA gravely erred in holding that the
Commissioner of Customs could not pierce the veil of corporate fiction.

We find the petitioners submission untenable. The principle of non-exhaustion of


administrative remedy is not an iron-clad rule for there are instances that immediate
resort to judicial action may be proper. Verily, a cursory examination of the factual
milieu of the instant case indeed reveals that exhaustion ofadministrative remedy
would be unavailing because it was the Commissioner of Customs himself who was
demanding from the respondent payment of tax liability. In addition, it may be
recalled that a crucial issue inthe petition for review filed by the respondent before
the CTA is whether or not the doctrine of piercing the veil of corporate fiction validly
applies. Indubitably, this is purely a question of law where judicial recourse may
certainly be resorted to.6
As to whether or not the Commissioner of Customs could lawfully pierce the veil of
corporate fiction in order to treat Oilink as the mere alter ego of URC, the CA
concurred with the CTA, quoting the latters following findings:
In the case at bar, the said wrongdoing was not clearly and convincingly established
by Respondent. He did not submit any evidence to support his allegations but
merely submitted the case for decision based on the pleadings and evidence
presented by petitioner. Stated otherwise, should the Respondent sufficiently
provethat OILINK was merely set up in order to avoid the payment of taxes or for
some other purpose which will defeat public convenience, justify wrong, protect
fraud or defend crime, this Court will not hesitate to pierce the veil of corporate
fiction by URC and OILINK.7
Issues
Hence, this appeal, whereby the Commissioner of Customs reiterates the issues
raised in the CA.
Ruling of the Court
We affirm the judgment of the CA.

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

1.

x x x the case at bar is very much within the purview of the jurisdiction of the Court
ofTax Appeals since it is undisputed that what is involved herein is the respondents
liability for payment of money to the Government as evidenced by the demand

The CTA had jurisdiction over the controversy

There is no question that the CTA had the jurisdiction over the case. Republic Act
No. 1125, the law creating the CTA, defined the appellate jurisdiction of the CTA as
follows:
Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate
jurisdiction to review by appeal, as herein provided:

that was final in nature, not merely an interlocutory one; that Oilink did notexhaust its
administrative remedies under Section 2308 of the Tariff and Customs Code by
paying the assessment under protest; that only when the ensuing decision of the
Collector and then the adverse decision of the Commissioner of Customs would it be
proper for Oilink to seek judicial relief from the CTA; and that, accordingly, the CTA
should have dismissed the petition for lack of cause of action.

xxxx

The position of the Commissioner of Customs lacks merit.

2. Decisions of the Commissioner ofCustoms in cases involving liability for Customs


duties, fees or other money charges; seizure, detention or release of property
affected; fines, forfeitures or other penalties imposed in relation thereto;or other
matters arising under the Customs Law or other law or part of law administered by
the Bureau of Customs;

The CA correctly held that the principle of non-exhaustion of administrative remedies


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

xxxx
Nonetheless, the Commissioner of Customs contends that the CTA should not take
cognizance of the casebecause of the lapse of the 30-day period within which to
appeal, arguing that on November 25, 1998 URC had already received the BoCs
final assessment demanding payment of the amount due within 10 days, but filed
the petition only on July 30, 1999.8
We rule against the Commissioner of Customs. The CTA correctly ruled that the
reckoning date for Oilinks appeal was July 12, 1999, not July 2, 1999, because it
was on the former date that the Commissioner of Customs denied the protest of
Oilink.Clearly, the filing of the petition on July 30, 1999 by Oilink was well within its
reglementary period to appeal. The insistence by the Commissioner of Customs on
reckoning the reglementary period to appeal from November 25, 1998, the date
when URC received the final demand letter, is unwarranted. We note that the
November 25, 1998 final demand letter of the BoC was addressed to URC, not to
Oilink. As such, the final demand sentto URC did not bind Oilink unless the separate
identities of the corporations were disregarded in order to consider them as one.
2.
Oilink had a valid cause of action
The Commissioner of Customs positsthat the final demand letter dated July 2, 1999
from which Oilink appealed was not the final "action" or "ruling" from which an
appeal could be taken as contemplated by Section 2402 of the Tariff and Customs
Code; that what Section 7 of RA No. 1125 referred to as a decision that was
appealable to the CTA was a judgment or order of the Commissioner of Customs

3.
There was no ground to pierce
the veil of corporate existence
A corporation, upon coming into existence, is invested by law with a personality
separate and distinct from those of the persons composing it as well as from any
other legal entity to which it may be related. For this reason, a stockholder is
generally not made to answer for the acts or liabilities of the corporation, and
viceversa. The separate and distinct personality of the corporation is, however, a
mere fiction established by law for convenience and to promote the ends of justice. It
may not be used or invoked for ends that subvert the policy and purpose behind its
establishment, or intended by law to which the corporation owes its being. This is
true particularly when the fiction is used to defeat public convenience, to justify
wrong, to protectfraud, to defend crime, to confuse legitimate legal or judicial issues,
to perpetrate deception or otherwise to circumvent the law. This is likewise true
where the corporate entity is being used as an alter ego, adjunct, or business
conduit for the sole benefit of the stockholders or of another corporate entity. In such
instances, the veil of corporate entity will be pierced or disregarded with reference to
the particular transaction involved.9

In Philippine National Bank v. Ritratto Group, Inc., 10 the Court has outlined the
following circumstances thatare useful in the determination of whether a subsidiary
is a mere instrumentality of the parent-corporation, viz:
1. Control, not mere majority or complete control, but complete domination, not only
of finances butof policy and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at the time no separatemind,
will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetrate the violation of a statutory or other positive legal duty, or dishonest and,
unjust act incontravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.
In applying the "instrumentality" or"alter ego" doctrine, the courts are concerned with
reality, not form, and with how the corporation operated and the individual
defendant's relationship to the operation. 11 Consequently, the absence of any one of
the foregoing elements disauthorizes the piercing of the corporate veil.
Indeed, the doctrine of piercing the corporate veil has no application here because
the Commissioner of Customs did not establish that Oilink had been set up to avoid
the payment of taxes or duties, or for purposes that would defeat public
convenience, justify wrong, protect fraud, defend crime, confuse legitimate legal or
judicial issues, perpetrate deception or otherwise circumvent the law. It is also
noteworthy that from the outset the Commissioner of Customs sought to collect the
deficiency taxes and duties from URC, and that it was only on July 2, 1999 when the
Commissioner of Customs sent the demand letter to both URC and Oilink. That was
revealing, because the failure of the Commissioner of Customs to pursue the
remedies against Oilink from the outset manifested that its belated pursuit of Oilink
was only an afterthought. WHEREFORE, the Court AFFIRMS the decision
promulgated by the Court of Appeals on September 29, 2003.
No pronouncement on costs of suit.
SO ORDERED.

G.R. No. 211535

July 22, 2015

BANK OF COMMERCE, Petitioner,


vs.
MARILYN P. NITE, Respondent.
DECISION
CARPIO, Acting C.J.:
The Case
Before the Court is a petition for review on certiorari assailing the 22 November
2013 Decision1 and 28 February 2004 Resolution2 of the Court of Appeals in CAG.R. CV No. 81500. The Court of Appeals affirmed in toto the Order dated 4 April
20033 and the Omnibus Order dated 5 January 2004 4 of the Regional Trial Court of
Makati, Branch 150 (trial court) in Criminal Case Nos. 94-5267 and 94-5268.
The Antecedent Facts
Respondent Marilyn Nite (Nite) was charged, together with Nunelon Bradley
(Bradley) and Victoria Magalona-Escalambre (Escalambre), with violation of Section
19 of Batas Pambansa Bilang 1785 (BP Blg. 178) in an Information that reads:
That on or about April 25, 1994, in the Municipality of Makati, Metro Manila, and
within the jurisdiction of the Honorable Court, the above-named accused, doing
business under the name and style of Bancapital Development Corporation
(Bancap) did then and there, willfully and feloniously engage in the business of
selling securities, particularly treasury bills (T-bills) with Bank of Commerce
(Bancom) in the amount of P250 Million without having been registered as a broker,
dealer or salesman with the Securities and Exchange Commission, in violation of
said law.
CONTRARY TO LAW.6
The case docketed as Criminal Case No. 94-5267.
Nite was also charged, together with Bradley, Escalambre, and Eugene Yang
(Yang), with Estafa in an Information that reads:
That on or about April 25, 1994, in Makati, Metro Manila, and within the jurisdiction
of this Honorable Court, the above-named accused, confederating together and

mutually helping each other, by means of deceit, with unfaithfulness or abuse of


confidence on the part of accused Eugene Yang and taking advantage of his
position as senior manager of the Bank of Commerce (Bancom), did then and there
willfully, unlawfully and feloniously defraud Bancom as follows: That Bancapital
Development Corporation (Bancap) thru accused Nite, Bradley and Escalambre by
means of fraudulent misreoresentations; offered and confirmed for sale Php250
Million worth of Treasury bills at a discounted price of Php243,215,972.52 to
Bancom which was actually purchased and fully paid by Bancom, when in truth and
in fact Bancap which was not authorized to trade security did not actually have such
Treasury bills worth Php250 Million as only Php88 Million worth of Treasury bills was
delivered to Bancom upon receipt by Bancap of the full payment thereof; that
accused Eugene Yang, senior manager of Bancom, willfully, unlawfully and
feloniously caused the preparation, issuance and signing of the managers check in
payment of the treasury bills in question on the basis of the trading order he himself
approved and Bancaps confirmation of sale signed by accused Nite and
Escalambre, and, once in possession of the full payment thereof, the above-named
accused misappropriated, misapplied and converted the same to their own personal
use and benefit and despite repeated demands failed to deliver the remaining
Treasury bills worth Php162 Million, to the damage and prejudice of Bancom, its
creditors and stockholders, in the amount of Php162 Million Pesos.
CONTRARY TO LAW.7
The case was docketed as Criminal Case No. 94-5268. The two cases were tried
jointly.
Since Bradley was still at large during the trial, and the proceedings against
Escalambre and Yang were suspended pending their petition for certiorari and
mandamus before the Court of Appeals in connection with the denial of their
demurrer to evidence, as separate trial was conducted against Nite after she was
arrested in the United States of America for overstaying and brought back to the
Philippines.
In Criminal Case No. 94-5267, the thrust of the prosecutions argument was that
Nite, as President of Bancapital Development Corporation (Bancap), violated
Section 19 of BP Blg. 178 when Bancap sold P250 million worth of treasury bills to
Bank of Commerce (Bancom) without being registered as broker, dealer, or
salesman of securities. In Criminal Case No. 94-5268, the prosecution alleged that
Nite defrauded Bancom by falsely pretending to posses and own P250 million worth
of treasury bills that Bancap supposedly sold to Bancom when none of the treasury
bills described in the Confirmation of Sale and Letter of Undertaking issued by
Bancap were ever delivered to Bancom. The prosecution alleged that Bancom paid
Bancap the amount of P243,215,972.52 as payment for the treasury bills but
Bancap only delivered substitute bills in the amount of P88 million.

The Ruling of the Trial Court


In a Decision dated 6 December 2002,8 the trial court ruled as follows:
WHEREFORE, the foregoing considered, accused MARILYN NITE is hereby
ACQUITTED of the charge of violating Sec. 19 of Batas Pambansa Bilang 178
under Criminal Case No. 94-5267 and likewise acquitted of the charge of Estafa
under Criminal Case No. 94-5268.

WHEREFORE, premises considered, the Motion for Partial Reconsideration is


hereby GRANTED. The DECISION dated December 6, 2002 insofar as the civil
aspect of the case is concerned finding accused Nite civilly liable to BANCOM in the
amount of Php162 million, representing the treasury bills BANCAP failed to deliver
to BANCOM is hereby set aside. Accordingly, the dispositive portion of the said
decision shall now read as follows:

She, however, is hereby ordered to pay BANK OF COMMERCE the amount of


Php162 million, representing the civil obligation of BANCAPITAL.

"WHEREFORE, the foregoing considered, accused MARILYN NITE is hereby


acquitted of the charge of violating Sec. 19 of Batas Pambansa Bilang 178 under
Criminal Case No. 9405267 and likewise acquitted of the charge of Estafa under
Criminal Case No. 94-5268.

Let, therefore, the cash bond of accused Nite be released to her by the Office of the
Clerk of Court RTC, Makati City, upon surrender of the original official receipt.

Let, therefore, the cash bond of accused Nite be release to her by the Office of the
Clerk of Court, RTC, Makati,upon surrender of the original official receipt.

SO ORDERED.9

SO ORDERED."

The trial court ruled that in Criminal Case No. 94-5267, the prosecution was not able
to establish that Bancap acted as a primary dealer that needed to be accredited.
According to the trial court, Bancap acted as a secondary dealer and did not buy the
treasury bills directly from the Central Bank. In Criminal Case No. 9405268, the trial
court ruled that the element of deceit was non-existent and that at the time of the
transaction, Bancom was aware that Bancap was not in physical possession of the
treasury bills subject of the sale.

SO ORDERED.10
It was the prosecutions turn to file a motion for reconsideration, alleging that the trial
court erred in absolving Nite of her civil liability to Bancom. The prosecution alleged
that the trial court erred in not piercing the corporate veil of Bancap when it was
adequately shown that Nite used the company to perpetuate fraud and to evade an
existing obligation.

However, the trial court ruled that Nite, being a responsible officer of Bancap, was
civilly liable to Bancom in the amount of P162 million which represented the treasury
bills that Bancap undertook to deliver to Bancom since only P88 million worth
substitute treasury bills had been delivered to and accepted by Bancom.

In its Omnibus Order dated 5 January 2004, the trial court denied the motion for lack
or merit.

Nite filed a partial motion for reconsideration.

The Ruling of the Court of Appeals

In the assailed 4 April 2003 Order, the trial court granted the partial motion for
reconsideration, in resolving the motion, the trial court ruled that Bancaps charter
allowed it to engage in the buying and selling of government securities as part of its
secondary purpose. The trial court added that even if the buying and selling of
securities were outside the scope of Bancaps primary purpose, the acts could only
be considered as ultra vires and not illegal. The trial court could not disregard the
rule on separate corporate identity absent any evidence that Bancap was used as a
tool to commit fraud, injustice, or crime against Bancom. The dispositive portion of
the Order reads:

In its 22 November 2013 Decision, the Court of Appeals affirmed the trial courts
Order dated 4 April 2003 and Omnibus Order dated 5 January 2004.

Bancom sought relief from the Court of Appeals in CA-G.R. CV No. 81500.

The Court of Appeals ruled that Bancom wanted to impose the civil liability of
Bancap on Nite when the claim for the contractual obligation should have been
against Bancap itself. The Court of Appeals agreed with the trial court that Bancap
was only a secondary dealer and as such, there was no need for it to secure the
license required for primary dealers under BP Blg. 178. The Courth of Appeals
further ruled that the transaction between Bancom and Bancap was not patently
unlawful. The Court of Appeals ruled that Bancom was aware of the risks it was

taking when it entered into a contract with Bancap and agreed for the delivery of the
treasury bills at a future particular time.
The Court of Appeals ruled that it could not automatically make Bancaps contractual
obligation as the contractual obligation of Nite. Further, the doctrine of piercing the
veil of corporate fiction imposed the burden of the corporatios obligations on its
erring officers and shareholders. In this case, none of Bancaps offer officers, and
not even the corporation itself, were impleaded, and thus, the Court of Appeals could
not make a complete determination of the corporations liability. According to the
Court of Appeals, the remedy of Bancom was to file a civil action impleading all the
parties to the contract.
The dispositive portion of the Decision reads:

Bancom asserts that the Court of Appeals erred in ruling that the civil liability it is
claiming pertains to Bancaps and not to Nites. Bancom cited Section 31 of the
Corporation Code which provides:
Section 31. Liability of directors, trustees or officers. Directors or trustees who
willfully and knowingly vote for or assent to patently unlawful acts of the corporation
or who are guilty of gross negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary interest in conflict with their duty as
such directors or trustees shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders or members and
other persons.

WHEREFORE, premises considered, the assailed Order of the Regional Trial Court
of Makati City, Branch 150 dated 4 April 2003, and its subsequent Omnibus dated 5
January 2004 are hereby AFFIRMED IN TOTO.

Bancom insists that while the question raised is one of fact, the factual findings of
the lower court, sustained by the Court of Appeals, are based on a misapprehension
of facts. Bancom alleges that since Nite actively participated in the commission of a
patently unlawful act, she is personally liable to Bancom for the amount of treasury
bills undelivered by Bancap.

SO ORDERED.11

We do not agree.

Bancom filed a motion for reconsideration. In its Resolution promulgated on 28


February 2014, the Court of Appeals denied the motion for lack of merit.

The general rule is that a corporation is invested by law with a personality separate
and distinct from that of the persons composing it, or from any other legal entity that
it may be related to.12 The obligations of a corporation, acting through its directors,
officers, and employees, are its own sole liabilities. 13 Therefore, the corporations
directors, officers, or employees are generally not personally liable for the
obligations of the corporation.14

Hence, Bancom filed a petition for review before this Court.


The Issues
Bancom raises the following issues before this Court:
I. The Court of Appeals gravely erred in ruling that the civil liability was only
attributable to Bancap and not to respondent Nite despite the latters active
participation in the commission of patently unlawful acts against petitioner Bancom.
II. The Court of Appeals erred in not piercing the corporate veil of Bancap even
though the same was being used to perpetuate fraud.
The Ruling of this Court
We deny the petition.
Nite was acquitted by the trial court of violation of Section 19 of BP Blg. 178 and
estafa. Hence, the only issue here is Nites civil liability after her acquittal.

Bancom alleges that his case falls under the exception to the general rule and that
Nite should be held personally liable for Bancaps obligation. Bancom alleges that
Nite signed the Confirmation of Sale knowing that Bancap did not have the treasury
bills, and thus, sale was illegal.
Bancoms arguments have no merit.
To hold a director or officer personally liable for corporate obligations, two requisites
must concur: (1) complainant must allege in the complaint that the director or officer
assented to patently unlawful acts of the corporation, or that the officer was guilty of
gross negligence or bad faith; and (2) complaint must clearly and convincingly prove
such unlawful acts, negligence or bad faith. 15 To hold a director personally liable for
debts of the corporation, and thus pierce the veil of corporate fiction, the bad faith or
wrongdoing of the director must be established clearly and convincingly.16

It is settled that the transaction between Bancom and Bancap is an ordinary sale.
We give weight to the finding of both the trial court and the Court of Appeals that
Bancaps liability arose from its contractual obligation to Bancom. The trial court and
the Court of Appeals found that Bancom and Bancap had been dealing with each
other as seller and buyer of treasury bills from December 1992 until the transaction
subject of this case on 25 April 1994, which was no different from their previous
transactions. Nite, as Bancaps President, cannot be held personally liable for
Bancaps obligation unless it can be shown that she acted fraudulently. However, the
issue of fraud had been resolved with finality when the trial court acquitted Nite of
estafa on the ground that the element of deceit is non-existent in the case. The
acquittal had long become final and the finding is conclusive on this Court. The
prosecution failed to show that Nite acted in bad faith. It is no longer open for review.
Nites act of signing the Confirmation of Sale, by itself, does not make the corporate
liability her personal liability.
In addition, we consider the testimony of Lagrimas Nuqui, the Legal Officer in
Charge of the Government Securities Department of the Bangko Sentral ng Pilipinas
from 1994 to 1998, who explained that primary issues of treasury bills are supposed

to be issued only to accredited dealers but these accredited banks can sell to
anyone who need not be accredited, and such buyers, who may be corporations or
individuals, are classified as the secondary market. The trial court and the Court of
Appeals found that Bancap sold the treasury bills as a secondary dealer.17 As such,
Bancaps act of selling securities to Bancom is at most ultra vires and not patently
unlawful.
Base on the foregoing, we cannot hold Nite Personally liable for Bancaps corporate
liability.
WHEREFORE, we DENY the petition.
SO ORDERED.