MERCANTILE LAW

J. BERSAMIN

INSURANCE CODE

CAPITAL INSURANCE and SURETY CO., INC. v. DEL MONTE MOTOR WORKS, INC.*
G.R. No. 159979, DECEMBER 9, 2015, BERSAMIN, J., FIRST DIVISION

The law expressly and clearly states that the security deposit shall be (1) answerable for
all obligations of the depositing insurer under its insurance contracts; (2) at all times free from
any liens or encumbrance; and (3) exempt from levy by any claimant.

Insurance Law; Denying the exemption would potentially pave the way for a single
claimant, like the respondent, to short-circuit the procedure normally undertaken in
adjudicating the claims against an insolvent company under the rules on concurrence and
preference of credits in order to ensure that none could obtain an advantage or preference
over another by virtue of an attachment or execution.The simplistic interpretation of
Section 203 of the Insurance Code by the CA ostensibly ran counter to the intention of the
statute and the Courts pronouncement on the matter. We cannot uphold the CAs
interpretation, therefore, because the holders or beneficiaries of the policies of an insolvent
company would thereby likely end up becoming unpaid claimants. Besides, denying the
exemption would potentially pave the way for a single claimant, like the respondent, to short-
circuit the procedure normally undertaken in adjudicating the claims against an insolvent
company under the rules on concurrence and preference of credits in order to ensure that
none could obtain an advantage or preference over another by virtue of an attachment or
execution. To allow the respondent to proceed independently against the security deposit of
the petitioner would not only prejudice the policy holders and their beneficiaries, but would
also annul the very reason for which the law required the security deposit.

FACTS

Del Monte Motor Works, Inc. (the respondent) sued Vilfran Liner, Inc., Hilaria F.
Villegas and Maura F. Villegas in the RTC in Quezon City to recover the unpaid billings
related to the fabrication and construction of 35 passenger bus bodies. It applied for the
issuance of a writ of preliminary attachment. The RTC issued the writ of preliminary
attachment, which the sheriff served on the defendants, resulting in the levy of 10 buses and
three parcels of land belonging to the defendants. The sheriff also sent notices of garnishment
of the defendants funds in various banks. The levy and garnishment prompted defendant
Maura F. Villegas to file an Extremely Urgent Motion to discharge Upon Filing of a
Counterbond, attaching thereto CISCO Bond. The RTC approved the counterbond and
discharged the writ of preliminary attachment.

The RTC rendered its decision in favor of the respondent. To enforce the decision
against the counterbond, the respondent moved for execution. The RTC granted the motion.
Serving the writ of execution, the sheriff levied against the petitioners personal properties,
and later issued the notice of auction sale. The sheriff also served a notice of garnishment
against the security deposit of the petitioner in the Insurance Commission.

The respondent moved to direct the release by the depositary banks of funds subject to
the notice of garnishment from the accounts of the petitioner, and to transfer or release the
amount of P14,864,219.37 from the petitioners security deposit in the Insurance Commission.
The petitioner opposed the respondents motion.

The RTC granted the respondents motion. Accordingly said Office of the Insurance
Commission is ordered to withdraw from security deposit of Capital Insurance & Surety

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Company, Inc. the amount of P11,835,375.50 to be paid to the sheriff in satisfaction of the
notice of garnishment served. However, the insurance commissioner turned down the request
to release, citing 203 of the Insurance Code, which expressly provided that the security
deposit was exempt from execution.

The RTC, finding no lawful justification for the Insurance Commissioners refusal to
comply with the order of the RTC, declared him guilty of indirect contempt of court. The CA
opined that the security deposit could answer for the depositors liability, and be subject of
levy in accordance with Section 203 of the Insurance Code.

ISSUE

WON the securities deposited by the petitioner insurance company may be the subject
of levy in contravention of Section 2013 of the Insurance Code.

RULING

NO. The security deposit was immune from levy or execution. Anent the security
deposit, Section 203 of the Insurance Code provides, ...Except as otherwise provided in this
Code, no judgment creditor or other claimant shall have the right to levy upon any
securities of the insurer held on deposit under this section or held on deposit
pursuant to the requirement of the Commissioner.

The forthright text of the provision indicates that the security deposit is exempt from
levy by a judgment creditor or any other claimant. x x x As worded, the law expressly and
clearly states that the security deposit shall be (1) answerable for all obligations of the
depositing insurer under its insurance contracts; (2) at all times free from any liens or
encumbrance; and (3) exempt from levy by any claimant.

To be sure, CISCO, though presently under conservatorship, has valid outstanding

policies. Its policy holders have a right under the law to be equally protected by its security
deposit. To allow the garnishment of the deposit would impair the fund by decreasing it to
less than the percentage of paid-up capital that the law requires to be maintained. Further,
this move would create, in favor of respondent, a preference of credit over the other policy
holders and beneficiaries.

Basic is the statutory construction rule that provisions of a statute should be construed
in accordance with the purpose for which it was enacted. That is, the securities are held as
contingency fund to answer for the claims against the insurance company by all its
policy holders and their beneficiaries. This step is taken in the event that the
company becomes insolvent or otherwise unable to satisfy the claims against it. Thus,
a single claimant may not lay stake on the securities to the exclusion of all others. The
other parties may have their own claims against the insurance company under other
insurance contracts it has entered into.

What right, if any, did the respondent have in the petitioners security deposit?

The right to claim against the security deposit is dependent on the solvency of the
insurance company, and is subject to all other obligations of the insurance company arising
from its insurance contracts. Accordingly, the respondents interest in the security deposit
could only be inchoate or a mere expectancy, and thus had no attribute as property.

The Insurance Commissioners refusal to release was legally justified. Under Section 191
and Section 203 of the Insurance Code, the Insurance Commissioner had the specific legal
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duty to hold the security deposits for the benefit of all policy holders.

Under the circumstances, the Insurance Commissioner properly refused the request to
release issued by the sheriff under the notice of garnishment, and was not guilty of contempt
of court for disobedience to the assailed order of the RTC.

TRANSPORTATION LAWS

SULPICIO LINES, INC. vs. NAPOLEON SESANTE, NOW SUBSTITUTED BY MARIBEL

ATILANO, KRISTEN MARIE, CHRISTIAN IONE, KENNETH KERRN AND KARISNA
KATE, ALL SURNAMED SESANTE
G.R. NO. 172682, July 27, 2016, BERSAMIN, J.

Section 1, Rule 87 of the Rules of Court enumerates the following actions that survive the
death of a party, namely: (1) recovery of real or personal property, or an interest from the estate;
(2) enforcement of liens on the estate; and (3) recovery of damages for an injury to person or
property. Sesante's claim against the petitioner involved his personal injury caused by the
breach of the contract of carriage and hence, the complaint survived his death, and could be
continued by his heirs following the rule on substitution.

Clearly, the trial court is not required to make an express finding of the common carrier's
fault or negligence. The presumption of negligence applies so long as there is evidence showing
that: (a) a contract exists between the passenger and the common carrier; and (b) the injury or
death took place during the existence of such contract. In such event, the burden shifts to the
common carrier to prove its observance of extraordinary diligence, and that an unforeseen event
or force majeure had caused the injury. However, for a common carrier to be absolved from
liability in case of force majeure, it is not enough that the accident was caused by a fortuitous
event. The common carrier must still prove that it did not contribute to the occurrence of the
incident due to its own or its employees' negligence.

FACTS:

On September 18, 1998, at around 12:55 p.m., the M/V Princess of the Orient, a passenger
vessel owned and operated by the petitioner, sank near Fortune Island in Batangas. Of the 388
recorded passengers, 150 were lost. Napoleon Sesante, then a member of the Philippine
National Police (PNP) and a lawyer, was one of the passengers who survived the sinking. He
sued the petitioner for breach of contract and damages alleging that Sulpicio Lines committed
bad faith in allowing the vessel to sail despite the storm signal. In its defense, the petitioner
insisted on the seaworthiness of the M/V Princess of the Orient due to its having been cleared
to sail from the Port of Manila by the proper authorities; that the sinking had been due to
force majeure.

RTC rendered its judgment against defendant Sulpicio Lines ordering it to pay Temperate
damages in the amount of P400,000.00 and Moral damages in the amount of P1,000,000.00.
CA promulgated its assailed decision. It lowered the temperate damages to P120,000.00,
which approximated the cost of Sesante's lost personal belongings; and held that despite the
seaworthiness of the vessel, the petitioner remained civilly liable because its officers and crew
had been negligent in performing their duties.

During the pendency of the case, herein petitioner died and was substituted by his heirs.

ISSUES:

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1. Is the complaint for breach of contract and damages a personal action that does not
survive the death of the plaintiff?
2. Is the petitioner liable for damages under Article 1759 of the Civil Code?; and
3. Is there sufficient basis for awarding moral, temperate and exemplary damages?

RULING:

1. An action for breach of contract of carriage survives the death of the plaintiff.

The petitioner urges that Sesante's complaint for damages was purely personal and cannot be
transferred to his heirs upon his death. Hence, the complaint should be dismissed because the
death of the plaintiff abates a personal action.

Section 1, Rule 87 of the Rules of Court enumerates the following actions that survive the
death of a party, namely: (1) recovery of real or personal property, or an interest from the
estate; (2) enforcement of liens on the estate; and (3) recovery of damages for an injury to
person or property. Sesante's claim against the petitioner involved his personal injury caused
by the breach of the contract of carriage and hence, the complaint survived his death, and
could be continued by his heirs following the rule on substitution.

2. The petitioner is liable for breach of contract of carriage.

Article 1759 of the Civil Code does not establish a presumption of negligence because it
explicitly makes the common carrier liable in the event of death or injury to passengers due to
the negligence or fault of the common carrier's employees.

Clearly, the trial court is not required to make an express finding of the common carrier's
fault or negligence. The presumption of negligence applies so long as there is evidence
showing that: (a) a contract exists between the passenger and the common carrier; and (b) the
injury or death took place during the existence of such contract. In such event, the burden
shifts to the common carrier to prove its observance of extraordinary diligence, and that an
unforeseen event or force majeure had caused the injury. However, for a common carrier to be
absolved from liability in case of force majeure, it is not enough that the accident was caused
by a fortuitous event. The common carrier must still prove that it did not contribute to the
occurrence of the incident due to its own or its employees' negligence.

The petitioner has attributed the sinking of the vessel to the storm notwithstanding its
position on the seaworthiness of M/V Princess of the Orient. Yet, the findings of the Board of
Marine Inquiry (BMI) directly contradicted the petitioner's attribution. The BMI found that
the "erroneous maneuvers" during the ill-fated voyage by the captain of the petitioner's vessel
had caused the sinking. After the vessel had cleared Limbones Point while navigating towards
the direction of Fortune Island, the captain already noticed the listing of the vessel by three
degrees to the portside of the vessel, but, according to the BMI, he did not exercise prudence
as required by the situation in which his vessel was suffering the battering on the starboard
side by big waves of seven to eight meters high and strong southwesterly winds of 25 knots.
The BMI pointed out that he should have considerably reduced the speed of the vessel based
on his experience about the vessel - a close-type ship of seven decks, and of a wide and high
superstructure - being vulnerable if exposed to strong winds and high waves. He ought to
have also known that maintaining a high speed under such circumstances would have shifted
the solid and liquid cargo of the vessel to port, worsening the tilted position of the vessel. It
was only after a few minutes thereafter that he finally ordered the speed to go down to 14
knots, and to put ballast water to the starboardheeling tank to arrest the continuous listing at
portside. By then, his moves became an exercise in futility because, according to the BMI, the
vessel was already listing to her portside between 15 to 20 degrees, which was almost the
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maximum angle of the vessel's loll. It then became inevitable for the vessel to lose her
stability.

As borne out by the aforequoted findings of the BMI, the immediate and proximate cause of
the sinking of the vessel had been the gross negligence of its captain in maneuvering the
vessel.

3. The award of moral damages and temperate damages is proper.

Moral damages may be recovered in an action upon breach of contract of carriage only when:
(a) death of a passenger results, or ( b) it is proved that the carrier was guilty of fraud and bad
faith, even if death does not result. The totality of the negligence by the officers and crew of
M/V Princess of the Orient warranted the award of moral damages.

With regard to the temperate damages, the petitioner contends that its liability for the loss of
Sesante' s personal belongings should conform with Art. 1754. The petitioner denies liability
because Sesante' s belongings had remained in his custody all throughout the voyage until the
sinking, and he had not notified the petitioner or its employees about such belongings.
Hence, absent such notice, liability did not attach to the petitioner.

Accordingly, actual notification was not necessary to render the petitioner as the common
carrier liable for the lost personal belongings of Sesante. By allowing him to board the vessel
with his belongings without any protest, the petitioner became sufficiently notified of such
belongings. So long as the belongings were brought inside the premises of the vessel, the
petitioner was thereby effectively notified and consequently duty-bound to observe the
required diligence in ensuring the safety of the belongings during the voyage. Applying
Article 2000 of the Civil Code, the petitioner assumed the liability for loss of the belongings
caused by the negligence of its officers or crew. In view of the Courts finding that the
negligence of the officers and crew of the petitioner was the immediate and proximate cause
of the sinking of the M/V Princess of the Orient, its liability for Sesante's lost personal
belongings was beyond question.

The Court also awarded exemplary damages even if the same was not specifically prayed for in
the complaint. The Court has the discretion to award exemplary damages if the defendant
acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Accordingly, the
Court fix the sum of Pl,000,000.00 in order to serve fully the objective of exemplarity among
those engaged in the business of transporting passengers and cargo by sea.

______________________________________________________________________________

METRO MANILA TRANSIT CORPORATION v. REYNALDO CUEVAS and JUNNEL

CUEVAS, represented by REYNALDO CUEVAS
G.R. No. 167797, 15 June 2015, FIRST DIVISION (Bersamin, J.)

The registered owner of a motor vehicle whose operation causes injury to another is
legally liable to the latter. But it is error not to allow the registered owner to recover
reimbursement from the actual and present owner by way of its cross-claim.

FACTS:

Metro Manila Transit Corporation (MMTC) and Mina's Transit Corporation (Mina's
Transit) entered into an agreement to sell whereby the latter bought several bus units from
the former at a stipulated price. They agreed that MMTC would retain the ownership of the
buses until certain conditions were met, but in the meantime Mina's Transit could operate
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the buses within Metro Manila.

In 1994, one of the buses subject of the agreement to sell hit and damaged a
motorcycle owned by respondent Reynaldo Cuevas and driven by Junnel Cuevas. Reynaldo
and Junnel sued MMTC and Mina's Transit for damages in the Regional Trial Court (RTC). In
its cross-claim, MMTC denied liability and averred that although it retained ownership of the
bus, the actual operator and employer of the bus driver was Minas Transit. Moreover, a
provision in the agreement to sell mandated Mina's Transport to hold MMTC free from
liability arising from the use and operation of the bus units.

Mina's Transit denied liability, contending that it exercised due diligence in the
selection and supervision of its employees; its bus driver exercised due diligence; and Junnel's
negligence was the cause of the accident. The RTC ruled in favor of the respondents, which
was affirmed by the Court of Appeals.

ISSUE:

Whether MMTC was liable for the injuries sustained by the respondents despite the
provision in the agreement to sell that shielded it from liability

RULING:

Petition PARTLY GRANTED. In view of MMTC's admission in its pleadings that it had
remained the registered owner of the bus at the time of the incident, it could not escape
liability for the personal injuries and property damage suffered by the Cuevases. This is
because of the registered-owner rule, whereby the registered owner of the motor vehicle
involved in a vehicular accident could be held liable for the consequences. The registered-
owner rule has remained good law in this jurisdiction considering its impeccable and timeless
rationale, as enunciated in the 1957 ruling in Erezo, et al. v. Jepte, where the Court
pronounced:

Registration is required not to make said registration the operative act by

which ownership in vehicles is transferred, as in land registration cases,
because the administrative proceeding of registration does not bear any
essential relation to the contract of sale between the parties (Chinchilla vs.
Rafael and Verdaguer, 39 Phil. 888), but to permit the use and operation of
the vehicle upon any public highway (section 5 [a], Act No. 3992, as
amended.) The main aim of motor vehicle registration is to identify the
owner so that if any accident happens, or that any damage or injury is caused
by the vehicle on the public highways, responsibility therefor can be fixed on
a definite individual, the registered owner. Instances are numerous where
vehicles running on public highways caused accidents or injuries to
pedestrians or other vehicles without positive identification of the owner or
drivers, or with very scant means of identification. It is to forestall these
circumstances, so inconvenient or prejudicial to the public, that the motor
vehicle registration is primarily ordained, in the interest of the determination
of persons responsible for damages or injuries caused on public highways.

The Court has reiterated the registered-owner rule in other rulings, like in Filcar
Transport Services v. Espinas, to wit:

x x x It is well settled that in case of motor vehicle mishaps, the registered

owner of the motor vehicle is considered as the employer of the tortfeasor-
driver, and is made primarily liable for the tort committed by the latter under
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Article 2176, in relation with Article 2180, of the Civil Code.

In Equitable Leasing Corporation v. Suyom, we ruled that in so far as third persons are
concerned, the registered owner of the motor vehicle is the employer of the negligent driver,
and the actual employer is considered merely as an agent of such owner.

Indeed, MMTC could not evade liability by passing the buck to Mina's Transit. The
stipulation in the agreement to sell did not bind third parties like the Cuevases, who were
expected to simply rely on the data contained in the registration certificate of the erring bus.

Although the registered-owner rule might seem to be unjust towards MMTC, the law
did not leave it without any remedy or recourse. According to Filcar Transport Services v.
Espinas, MMTC could recover from Mina's Transit, the actual employer of the negligent
driver, under the principle of unjust enrichment, by means of a cross-claim seeking
reimbursement of all the amounts that it could be required to pay as damages arising from
the driver's negligence. A cross-claim is a claim by one party against a co-party arising out of
the transaction or occurrence that is the subject matter either of the original action or of a
counterclaim therein, and may include a claim that the party against whom it is asserted is or
may be liable to the cross-claimant for all or part of a claim asserted in the action against the
cross-claimant.

MMTC set up its cross-claim against Mina's Transit precisely to ensure that Mina's
Transit would reimburse whatever liability would be adjudged against MMTC. Yet, it is a
cause of concern for the Court that the RTC ignored to rule on the propriety of MMTC's
cross-claim. Such omission was unwarranted, inasmuch as Mina's Transit did not dispute the
cross-claim, or did not specifically deny the agreement to sell with MMTC, the actionable
document on which the cross-claim was based. Even more telling was the fact that Mina's
Transit did not present controverting evidence to disprove the cross-claim as a matter of
course if it was warranted for it to do so. Under the circumstances, the RTC should have
granted the cross-claim to prevent the possibility of a multiplicity of suits, and to spare not
only the MMTC but also the other parties in the case from further expense and bother.
Compounding the RTC's uncharacteristic omission was the CA's oversight in similarly
ignoring the cross-claim. The trial and the appellate courts should not forget that a cross-
claim is like the complaint and the counterclaim that the court must rule upon.

SPOUSES TEODOROand NANETTE PERENA vs SPOUSES TERESITA

PHILIPPINE NICOLAS and L. ZARATE, NATIONAL RAILWAYS, and the COURT
OF APPEALS G.R. No. 157917 August 29, 2012, J. Bersamin

Despite catering to a limited clientle, the Pereas operated as a common carrier

because they held themselves out as a ready transportation indiscriminately to the students of a
particular school living within or near where they operated the service and for a fee.

FACTS:

Spouses Zarate were the legitimate parents of Aaron John L. Zarate. Spouses Zarate
engaged the services of spouses Perea for the adequate and safe transportation carriage of
the former spouses' son from their residence in Paraaque to his school at the Don Bosco
Technical Institute in Makati City. During the effectivity of the contract of carriage and in the
implementation thereof, Aaron, the minor son of spouses Zarate died in connection with a
vehicular/train collision which occurred while Aaron was riding the contracted carrier Kia
Ceres van of spouses Perea.

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At the time of the vehicular/train collision, the subject site of the vehicular/train
collision was a railroad crossing used by motorists for crossing the railroad tracks. During the
said time of the vehicular/train collision, there were no appropriate and safety warning signs
and railings at the site.

ISSUE:

Whether or not the operator of the school bus service is a common carrier.

RULING:

Yes. A carrier is a person or corporation who undertakes to transport or convey goods

or persons from one place to another, gratuitously or for hire. The carrier is classified either as
a private/special carrier or as a common/public carrier. A private carrier is one who, without
making the activity a vocation, or without holding himself or itself out to the public as ready
to act for all who may desire his or its services, undertakes, by special agreement in a
particular instance only, to transport goods or persons from one place to another either
gratuitously or for hire. The provisions on ordinary contracts of the Civil Code govern the
contract of private carriage. The diligence required of a private carrier is only ordinary, that is,
the diligence of a good father of the family. In contrast, a common carrier is a person,
corporation, firm or association engaged in the business of carrying or transporting
passengers or goods or both, by land, water, or air, for compensation, offering such services to
the public. Contracts of common carriage are governed by the provisions on common carriers
of the Civil Code, the Public Service Act, and other special laws relating to transportation. A
common carrier is required to observe extraordinary diligence, and is presumed to be at fault
or to have acted negligently in case of the loss of the effects of passengers, or the death or
injuries to passengers.

Applying these considerations to the case before us, there is no question that the
Pereas as the operators of a school bus service were: (a) engaged in transporting passengers
generally as a business, not just as a casual occupation; (b) undertaking to carry passengers
over established roads by the method by which the business was conducted; and (c)
transporting students for a fee. Despite catering to a limited clientle, the Pereas operated as
a common carrier because they held themselves out as a ready transportation indiscriminately
to the students of a particular school living within or near where they operated the service
and for a fee.

CORPORATION CODE

ALLEN A. MACASAET, NICOLAS V. QUIJANO, JR., ISAIAS ALBANO, LILY REYES, JANET
BAY, JESUS R. GALANG and RANDY HAGOS vs. FRANCISCO R. CO, JR.
G.R. No. 156759, June 5, 2013
J. Bersamin

Corporation by estoppel results when a corporation represented itself to the reading

public as such despite its not being incorporated. It is founded on principles of equity and is
designed to prevent injustice and unfairness.

Facts:

On July 3, 2000, respondent, a retired police officer sued AbanteTonite, a daily tabloid of
general circulation; its Publisher Allen A. Macasaet; and the other officers of such tabloid
(other petitioners). The suit was raffled to Branch 51 of the RTC, which in due course issued
summons to be served on each defendant, including AbanteTonite, at their business address.
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The Sheriff proceeded to the stated address to effect the personal service of the summons. But
his efforts to personally serve each defendant in the address were futile because the
defendants were then out of the office and unavailable. He returned in the afternoon of that
day to make a second attempt but still failed to serve the summons. He decided to resort to
substituted service.

The petitioners moved for the dismissal of the complaint alleging lack of jurisdiction over
their persons because of the invalid and ineffectual substituted service of summons. They
contended that the sheriff had made no prior attempt to serve the summons personally on
each of them in accordance with Section 6 and Section 7, Rule 14 of the Rules of Court. They
further moved to drop AbanteTonite as a defendant by virtue of its being neither a natural
nor a juridical person that could be impleaded as a party in a civil action.

The RTC denied the motion to dismiss, and directed petitioners to file their answers.
Regarding the impleading of AbanteTonite as defendant, it held that assuming arguendo that
AbanteTonite is not registered with the Securities and Exchange Commission, it is deemed a
corporation by estoppels considering that it possesses attributes of a juridical person,
otherwise it cannot be held liable for damages and injuries it may inflict to other persons. The
CA affirmed the RTC decision in all respects.

Issue:

Whether or not the Court of Appeals committed reversible error in sustaining the inclusion of
Abanate Tonite as a party in the case

Ruling:

The petition for review lacks merit.

The Court held that they cannot sustain petitioner's contention that AbanteTonite could not
be sued as a defendant due to its not being either a natural or a juridical person. In rejecting
their contention, the CA categorized AbanteTonite as a corporation by estoppel as the result
of its having represented itself to the reading public as a corporation despite its not being
incorporated. Thereby, the CA concluded that the RTC did not gravely abuse its discretion in
holding that the non-incorporation of AbanteTonite with the Securities and Exchange
Commission was of no consequence for, otherwise, whoever of the public would suffer any
damage from the publication of the articles in the pages of its tabloids would be left without
recourse. The Court also elucidated that considering that the editorial box of the daily tabloid
disclosed that although Monica Publishing Corporation had published the tabloid on a daily
basis, nothing in the box indicated that Monica Publishing Corporation owned AbanteTonite.

_________________________________________________________________________________

INTERPORT RESOURCES CORPORATION vs. SECURITIES SPECIALIST,

INC., and R.C. LEE SECURITIES INC.
G .R. No. 154069, June 6, 2016, BERSAMIN, J.

Novation extinguished an obligation between two parties. Clearly, the effect of the
assignment of the subscription agreements to SSI was to extinguish the obligation of R.C. Lee to
Oceanic, now Interport, to settle the unpaid balance on the subscription. As a result of the
assignment, Interport was no longer obliged to accept any payment from R.C. Lee because the
latter had ceased to be privy to Subscription Agreements. On the other hand, Interport was
legally bound to accept SSI's tender of payment for the 75% balance on the subscription price
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because SSI had become the new debtor under Subscription Agreements. As such, the issuance
of the stock certificates in the name of R.C. Lee had no legal basis in the absence of a
contractual agreement between R. C. Lee and Interport.

FACTS:

In January 1977, Oceanic Oil & Mineral Resources, Inc. (Oceanic) entered into a subscription
agreement with R.C. Lee, a domestic corporation engaged in the trading of stocks and other
securities, covering 5,000,000 of its shares. Thereupon, R.C. Lee paid 25% of the subscription,
leaving 75% unpaid. Oceanic issued Subscription Agreements Nos. 1805, 1808, 1809, 1810, and
1811 to R.C. Lee.

Oceanic merged with Interport, with the latter as the surviving corporation. Interport was a
publicly-listed domestic corporation whose shares of stocks were traded in the stock
exchange. Under the terms of the merger, each share of Oceanic was exchanged for a share of
Interport.

SSI, a domestic corporation registered as a dealer in securities, received in the ordinary course
of business Oceanic Subscription Agreements Nos. 1805, 1808 to 1811, all outstanding in the
name of R.C. Lee, and Oceanic official receipts showing that 25% of the subscriptions had
been paid. The Oceanic subscription agreements were duly delivered to SSI through stock
assignments indorsed in blank by R.C. Lee.

Later on, R.C. Lee requested Interport for a list of subscription agreements and stock
certificates issued in the name of R.C. Lee and other individuals named in the request. In
response, Interport's Corporate Secretary, provided the requested list of all subscription
agreements of Interport and Oceanic, as well as the requested stock certificates of Interport.
Upon finding no record showing any transfer or assignment of the Oceanic subscription
agreements and stock certificates of Interport as contained in the list, R.C. Lee paid its unpaid
subscriptions and was accordingly issued stock certificates corresponding thereto.

On February 8, 1989, Interport issued a call for the full payment of subscription receivables,
setting March 15, 1989 as the deadline. SSI tendered payment prior to the deadline. However,
the stockbrokers reported to SSI that Interport refused to honor the Oceanic subscriptions.

SSI learned that Interport had issued the 5,000,000 shares to R.C. Lee, relying on the latter's
registration as the owner of the subscription agreements in the books of the former, and on
the affidavit executed by the President of R.C. Lee stating that no transfers or encumbrances
of the shares had ever been made.

SSI made demands upon Interport and R.C. Lee for the cancellation of the shares issued to
R.C. Lee and for the delivery of the shares to SSI. On October 6, 1989, after its demands were
not met, SSI commenced this case in the SEC to compel the respondents to deliver the
5,000,000 shares and to pay damages. It alleged fraud and collusion between Interport and
R.C. Lee in rejecting the tendered payment and the transfer of the shares covered by the
subscription agreements.

SEC ordered the respondent Interport to deliver the corresponding shares previously covered
by Oceanic Oil Mineral Resources Inc. subscription agreements Nos. 1805-1811 to petitioner
SSI, to the extent only of 25% thereof, as duly paid by petitioner SSI; and if the same will not
be possible, to deliver the value thereof at the market price as of the date of judgment. CA
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affirmed the SEC.

ISSUE:

Whether or not Interport was liable to deliver to SSI the Oceanic shares of stock, or the value
thereof, under Subscriptions Agreement.

RULING:

YES, Interport is liable to deliver to SSI the Oceanic shares of stock, or the value thereof,
under Subscriptions Agreement.

The SEC correctly categorized the assignment of the subscription agreements as a form of
novation by substitution of a new debtor and which required the consent of or notice to the
creditor.Under the Civil Code, obligations may be modified by: (l) changing their object or
principal conditions; or (2) substituting the person of the debtor; or (3) subrogating a third
person in the rights of the creditor.

In this case, the change of debtor took place when R.C. Lee assigned the Oceanic shares under
Subscription Agreement Nos. 1805, and 1808 to 1811 to SSI so that the latter became obliged to
settle the 75% unpaid balance on the subscription. Interport was duly notified of the
assignment when SSI tendered its payment for the 75% unpaid balance, and it could not
anymore refuse to recognize the transfer of the subscription that SSI sufficiently established
by documentary evidence.

It should be stressed that novation extinguished an obligation between two parties. Clearly,
the effect of the assignment of the subscription agreements to SSI was to extinguish the
obligation of R.C. Lee to Oceanic, now Interport, to settle the unpaid balance on the
subscription. As a result of the assignment, Interport was no longer obliged to accept any
payment from R.C. Lee because the latter had ceased to be privy to Subscription Agreements
Nos. 1805, and 1808 to 1811 for having been extinguished insofar as it was concerned. On the
other hand, Interport was legally bound to accept SSI's tender of payment for the 75% balance
on the subscription price because SSI had become the new debtor under Subscription
Agreements Nos. 1805, and 1808 to 1811. As such, the issuance of the stock certificates in the
name of R.C. Lee had no legal basis in the absence of a contractual agreement between R. C.
Lee and Interport.

Interport issued the shares without respondent R.C. Lee having anything to show for the
same. On the other hand, respondent Interport refused to recognize complainant SS I's claim
to five (5) millions (sic) shares inspite of the fact that its claim was fully supported by duly
issued subscription agreements, stock assignment and receipts of payment of the initial
subscription.

Subscription Agreements Nos. 1805, and 1808 to 1811 were now binding between Interport and
SSI only, and only such parties were expected to comply with the terms thereof. Hence, the
Court modify the decision of SEC and ordered Interport Resources Corporation: (a) To accept
the tender of payment of Securities Specialist, Inc. corresponding to the 75% unpaid balance
of the total subscription price under Subscription Agreements Nos. 1805, 1808, 1809, 1810 and
1811; (b) To deliver 5,000,000 shares of stock and to issue the corresponding stock certificates
to Securities Specialist, Inc. upon receipt of the payment of the latter; (c) In the alternative, if
the foregoing is no longer possible, Interport Resources Corporation shall pay Securities
Specialist, Inc. the market value of the 5,000,000 shares of stock at the time of promulgation
of this decision.

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_________________________________________________________________________________

ZUELLIG FREIGHT AND CARGO SYSTEMS vs. NATIONAL LABOR RELATIONS

COMMISSION, et al.
G.R. No. 157900. July 22, 2013
J. Bersamin

The mere change in the corporate name is not considered under the law as the creation of a new
corporation; hence, the renamed corporation remains liable for the illegal dismissal of its
employee separated under that guise.

Verily, the amendments of the articles of incorporation of Zeta to change the corporate name to
Zuellig Freight and Cargo Systems, Inc. did not produce the dissolution of the former as a
corporation. For sure, the Corporation Code defined and delineated the different modes of
dissolving a corporation, and amendment of the articles of incorporation was not one of such
modes.

Facts:

Private respondent San Miguel brought a complaint for unfair labor practice, illegal dismissal,
non-payment of salaries and moral damages against petitioner, formerly known as Zeta
Brokerage Corporation (Zeta). He alleged that he and the other employees were informed that
Zeta would cease operations, and that all affected employees, including him, would be
separated.

On its part, petitioner countered that San Miguels termination from Zeta had been for a
cause authorized by the Labor Code; that its non- acceptance of him had not been by any
means irregular or discriminatory; that its predecessor-in-interest had complied with the
requirements for termination due to the cessation of business operations; that it had no
obligation to employ San Miguel in the exercise of its valid management prerogative.

San Miguel however contended that the amendments of the articles of incorporation of Zeta
were for the purpose of changing the corporate name, broadening the primary functions, and
increasing the capital stock; and that such amendments could not mean that Zeta had been
thereby dissolved.

The Labor Arbiter rendered a decision in favor of San Miguel. It held that contrary to herein
petitioner's claim that Zeta ceased operations and closed its business, there was merely a
change of business name and primary purpose and upgrading of stocks of the corporation.
Zuellig and Zeta are therefore legally the same person and entity and this was admitted by
Zuelligs counsel in its letter to the VAT Department of the Bureau of Internal Revenue. As
such, the termination of complainants services allegedly due to cessation of business
operations of Zeta is deemed illegal. Notwithstanding his receipt of separation benefits from
respondents, complainant is not estopped from questioning the legality of his dismissal. The
petitioner filed a motion for reconsideration with the NLRC but was dismissed. The petition
for certiorari filed with the CA was also not given credence.

Issue:

Whether the change of corporate name resulted in the dissolution of the corporation

Ruling:

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The petition is denied.

The amendments of the articles of incorporation of Zeta to change the corporate name to
Zuellig Freight and Cargo Systems, Inc. did not produce the dissolution of the former as a
corporation. For sure, the Corporation Code defined and delineated the different modes of
dissolving a corporation, and amendment of the articles of incorporation was not one of such
modes. The effect of the change of name was not a change of the corporate being, for, as well
stated in Philippine First Insurance Co., Inc. v. Hartigan: "The changing of the name of a
corporation is no more the creation of a corporation than the changing of the name of a
natural person is begetting of a natural person. The act, in both cases, would seem to be what
the language which we use to designate it imports a change of name, and not a change of
being.

The consequences, legal and otherwise, of the change of name were similarly dealt with in
P.C. Javier & Sons, Inc. v. Court of Appeals, the Court holding thusly:

A change in the corporate name does not make a new corporation, whether effected by a special
act or under a general law. It has no effect on the identity of the corporation, or on its property,
rights, or liabilities. The corporation upon such change in its name, is in no sense a new
corporation, nor the successor of the original corporation. It is the same corporation with a
different name, and its character is in no respect changed.

In short, Zeta and petitioner remained one and the same corporation. The change of name
did not give petitioner the license to terminate employees of Zeta like San Miguel without
just or authorized cause. The situation was not similar to that of an enterprise buying the
business of another company where the purchasing company had no obligation to rehire
terminated employees of the latter. Petitioner, despite its new name, was the mere
continuation of Zeta's corporate being, and still held the obligation to honor all of Zeta's
obligations, one of which was to respect San Miguel's security of tenure. The dismissal of San
Miguel from employment on the pretext that petitioner, being a different corporation, had
no obligation to accept him as its employee, was illegal and ineffectual.

_________________________________________________________________________________

TERELAY INVESTMENT AND DEVELOPMENT CORPORATION v.

CECILIA TERESITA J. YULO
G.R. No. 160924, AUGUST 5, 2015, BERSAMIN, J., FIRST DIVISION

Mercantile Law; Corporations; The Corporation Code has granted to all stockholders the
right to inspect the corporate books and records, and in so doing has not required any specific
amount of interest for the exercise of the right to inspect.The petitioners submission that
the respondents insignificant holding of only .001% of the petitioners stockholding did not
justify the granting of her application for inspection of the corporate books and records is
unwarranted. The Corporation Code has granted to all stockholders the right to inspect the
corporate books and records, and in so doing has not required any specific amount of interest
for the exercise of the right to inspect. Ubi lex non distinguit nec nos distinguere debemos.
When the law has made no distinction, we ought not to recognize any distinction. Neither
could the petitioner arbitrarily deny the respondents right to inspect the corporate books and
records on the basis that her inspection would be used for a doubtful or dubious reason.
Under Section 74, third paragraph, of the Corporation Code, the only time when the demand
to examine and copy the corporations records and minutes could be refused is when the
corporation puts up as a defense to any action that the person demanding had improperly
used any information secured through any prior examination of the records or minutes of such
corporation or of any other corporation, or was not acting in good faith or for a legitimate
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purpose in making his demand. The right of the shareholder to inspect the books and records
of the petitioner should not be made subject to the condition of a showing of any particular
dispute or of proving any mismanagement or other occasion rendering an examination
proper, but if the right is to be denied, the burden of proof is upon the corporation to show
that the purpose of the shareholder is improper, by way of defense.

FACTS

Cecilia Teresita Yulo requested Terelay Investment and Development Corporation

(TERELAY) that she be allowed to examine its books and records. TERELAY denied the
request for inspection and instead demanded that she show proof that she was a bona fide
stockholder.

Cecilia Yulo clarified that her request for examination of the corporate records was for
the purpose of inquiring into the financial condition of TERELAY and the conduct of its
affairs by the principal officers.

Cecilia Yulo filed with the SEC a petition for issuance of writ of mandamus with prayer
for damages against TERELAY. Following the enactment of R.A. No. 8799 (The Securities
Regulation Code), the case was transferred from the SEC to the RTC. The RTC granted the
application for inspection of corporate records. CA affirmed the RTC.

ISSUE

WON the application for inspection of corporate records should be granted.

RULING

YES. The petitioners submission that the respondents insignificant holding of only
.001% of the petitioners stockholding did not justify the granting of her application for
inspection of the corporate books and records is unwarranted. The Corporation Code has
granted to all stockholders the right to inspect the corporate books and records, and in so
doing has not required any specific amount of interest for the exercise of the right to inspect.
Ubi lex non distinguit nec nos distinguere debemos. When the law has made no distinction, we
ought not to recognize any distinction.

Neither could the petitioner arbitrarily deny the respondents right to inspect the
corporate books and records on the basis that her inspection would be used for a doubtful or
dubious reason. Under Section 74, third paragraph, of the Corporation Code, the only time
when the demand to examine and copy the corporations records and minutes could be
refused is when the corporation puts up as a defense to any action that the person
demanding had improperly used any information secured through any prior examination of
the records or minutes of such corporation or of any other corporation, or was not acting in
good faith or for a legitimate purpose in making his demand.

The right of the shareholder to inspect the books and records of the petitioner should
not be made subject to the condition of a showing of any particular dispute or of proving any
mismanagement or other occasion rendering an examination proper, but if the right is to be
denied, the burden of proof is upon the corporation to show that the purpose of the
shareholder is improper, by way of defense.

GRACE BORGONA INSIGNE, ET AL. v. ABRA VALLEY COLLEGES, INC. and FRANCIS
BORGONA
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G.R. No. 204089, JULY 29, 2015, BERSAMIN, J., FIRST DIVISION

Mercantile Law; Corporations; Stock Certificates; The certificate is not stock in the
corporation but is merely evidence of the holders interest and status in the corporation, his
ownership of the share represented thereby, but is not in law the equivalent of such
ownership.A stock certificate is prima facie evidence that the holder is a shareholder of the
corporation, but the possession of the certificate is not the sole determining factor of ones
stock ownership. A certificate of stock is merely: x x x the paper representative or tangible
evidence of the stock itself and of the various interests therein. The certificate is not stock
in the corporation but is merely evidence of the holders interest and status in the
corporation, his ownership of the share represented thereby, but is not in law the
equivalent of such ownership. It expresses the contract between the corporation and the
stockholder, but it is not essential to the existence of a share in stock or the creation of the
relation of shareholder to the corporation.

Same; Same; Board of Directors; Estoppel; Considering that Section 23 of the Corporation
Code requires every director to be the holder of at least one (1) share of capital stock of the
corporation of which he is a director, the respondents would not have then allowed any of the
petitioners to be elected to sit in the Board of Directors as members unless they believed that the
petitioners so elected were not disqualified for lack of stock ownership.Considering that
Section 23 of the Corporation Code requires every director to be the holder of at least one
share of capital stock of the corporation of which he is a director, the respondents would not
have then allowed any of the petitioners to be elected to sit in the Board of Directors as
members unless they believed that the petitioners so elected were not disqualified for lack of
stock ownership. Neither did the respondents thereafter assail their acts as Board Directors.
Conformably with the doctrine of estoppel, the respondents could no longer deny the
petitioners status as stockholders of Abra Valley. The application of the doctrine of estoppel,
which is based on public policy, fair dealing, good faith and justice, is only appropriate
because the purpose of the doctrine is to forbid one from speaking against his own act,
representations, or commitments to the injury of another to whom he directed such act,
representations, or commitments, and who reasonably relied thereon. The doctrine springs
from equitable principles and the equities in the case, and is designed to aid the law in the
administration of justice where without its aid injustice might result. The Court has applied
the doctrine wherever and whenever special circumstances of the case so demanded.

Actions; Dismissal of Actions; Dismissal of the action can be grossly oppressive if it is

based on noncompliance with the most trivial order of the court considering that the dismissal
equates to an adjudication upon the merits, unless otherwise declared by the court.The
dismissal of Special Civil Action Case No. 2070 on June 28, 2010 on the basis that the
documents presented are not Stock Certificates as boldly announced by the plaintiffs counsel,
hence, plaintiffs failed to comply with the order of the Court dated March 8, 2010 was
unwarranted and unreasonable. Although Section 3, Rule 17 of the Rules of Court expressly
empowers the trial court to dismiss the complaint motu proprio or upon motion of the
defendant if, for no justifiable cause, the plaintiff fails to comply with any order of the court,
the power to dismiss is not to wield indiscriminately, but only when the noncompliance
constitutes a willful violation of an order of consequence to the action. Dismissal of the action
can be grossly oppressive if it is based on noncompliance with the most trivial order of the
court considering that the dismissal equates to an adjudication upon the merits, unless
otherwise declared by the court. A line of demarcation must be drawn between an order
whose noncompliance impacts on the case, and an order whose noncompliance causes little
effect on the case. For example, the noncompliance of an order to the plaintiff to amend his
complaint to implead an indispensable party as defendant should be sanctioned with
dismissal with prejudice unless the noncompliance was upon justifiable cause, like such party
not within the jurisdiction of the court.
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J. BERSAMIN

Mercantile Law; Corporations; Stockholders; A person becomes a stockholder of a

corporation by acquiring a share through either purchase or subscription.A person becomes
a stockholder of a corporation by acquiring a share through either purchase or subscription.
Here, the petitioners acquired their shares in Abra Valley: (1) by subscribing to 36 shares each
from Abra Valleys authorized and unissued capital stock; and (2) by purchasing the
shareholdings of existing stockholders, as borne out by the latters indorsement on the stock
certificates.

FACTS

Petitioners Grace Borgoa Insigne, Diosdado Borgoa, Osbourne Borgoa, Imelda

Borgoa Rivera, Aristotle Borgoa are siblings of the full blood. Francis Borgona is their half-
blood brother. The petitioners are the children of the late Pedro Borgona by his second wife,
Teresita Valeros, while Francis was Pedros son by his first wife. In his lifetime, Pedro was the
founder, president and majority stockholder of Abra Valley Colleges, Inc. (Abra Valley), a
stock corporation. After Pedros death, Francis succeeded him as the president of Abra Valley.

The petitioners, along with their brother Romulo Borgoa and Elmer Reyes, filed a
complaint (with application for preliminary injunction) and damages in the RTC against Abra
Valley praying, among others, that the RTC direct Abra Valley to allow them to inspect its
corporate books and records, and the minutes of meetings, and to provide them with its
financial statements.

The RTC rendered judgment in favor of the petitioners.Abra Valley appealed to the CA,
which promulgated its decision ordering the RTC to admit Abra Valleys answer despite its
belated filing; and remanding the case for further proceedings. The RTC ordered the
petitioners to present the stock certificates issued by Abra Valley under their names. The
petitioners submitted their Compliance and Manifestation. The petitioners filed a motion for
production/inspection of documents, asking that the RTC direct the respondents to produce
Abra Valleys Stock and Transfer Book (STB); and that petitioners be allowed to inspect the
same. The RTC dismissed the action pursuant to Section 3, Rule 17 of the Rules of Court
holding that the documents presented are not Stock Certificates, hence, plaintiffs failed to
comply with the order of the Court. The CA affirmed the decision of the RTC.

ISSUE

WON the presentation of a stock certificate is a condition sine qua non for proving
ones shareholding in a corporation.

RULING

NO. A stock certificate is prima facie evidence that the holder is a shareholder of the
corporation, but the possession of the certificate is not the sole determining factor of ones
stock ownership. A certificate of stock is merely: x x x the paper representative or tangible
evidence of the stock itself and of the various interests therein. The certificate is not stock in
the corporation but is merely evidence of the holders interest and status in the corporation,
his ownership of the share represented thereby, but is not in law the equivalent of such
ownership. It expresses the contract between the corporation and the stockholder, but it is
not essential to the existence of a share in stock or the creation of the relation of shareholder
to the corporation.

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J. BERSAMIN

Considering that Section 23 of the Corporation Code requires every director to be the
holder of at least one share of capital stock of the corporation of which he is a director, the
respondents would not have then allowed any of the petitioners to be elected to sit in the
Board of Directors as members unless they believed that the petitioners so elected were not
disqualified for lack of stock ownership. Neither did the respondents thereafter assail their
acts as Board Directors. Conformably with the doctrine of estoppel, the respondents could no
longer deny the petitioners status as stockholders of Abra Valley. The application of the
doctrine of estoppel, which is based on public policy, fair dealing, good faith and justice, is
only appropriate because the purpose of the doctrine is to forbid one from speaking against
his own act, representations, or commitments to the injury of another to whom he directed
such act, representations, or commitments, and who reasonably relied thereon. The doctrine
springs from equitable principles and the equities in the case, and is designed to aid the law in
the administration of justice where without its aid injustice might result. The Court has
applied the doctrine wherever and whenever special circumstances of the case so demanded.

The dismissal of Special Civil Action Case No. 2070 on June 28, 2010 on the basis that
the documents presented are not Stock Certificates as boldly announced by the plaintiffs
counsel, hence, plaintiffs failed to comply with the order of the Court dated March 8, 2010
was unwarranted and unreasonable. Although Section 3, Rule 17 of the Rules of Court
expressly empowers the trial court to dismiss the complaint motu proprio or upon motion of
the defendant if, for no justifiable cause, the plaintiff fails to comply with any order of the
court, the power to dismiss is not to wield indiscriminately, but only when the
noncompliance constitutes a willful violation of an order of consequence to the action.
Dismissal of the action can be grossly oppressive if it is based on noncompliance with the
most trivial order of the court considering that the dismissal equates to an adjudication upon
the merits, unless otherwise declared by the court. A line of demarcation must be drawn
between an order whose noncompliance impacts on the case, and an order whose
noncompliance causes little effect on the case. For example, the noncompliance of an order to
the plaintiff to amend his complaint to implead an indispensable party as defendant should
be sanctioned with dismissal with prejudice unless the noncompliance was upon justifiable
cause, like such party not within the jurisdiction of the court.

A person becomes a stockholder of a corporation by acquiring a share through either

purchase or subscription. Here, the petitioners acquired their shares in Abra Valley: (1) by
subscribing to 36 shares each from Abra Valleys authorized and unissued capital stock; and
(2) by purchasing the shareholdings of existing stockholders, as borne out by the latters
indorsement on the stock certificates.

The rules of discovery, including Section 1, Rule 27 of the Rules of Court governing the
production or inspection of any designated documents, papers, books, accounts, letters,
photographs, objects or tangible things not privileged, which contain or constitute evidence
material to any matter involved in the action and which are in the other partys possession,
custody or control, are to be accorded broad and liberal interpretation.

COMMISSIONER OF CUSTOMS vs. OILINK INTERNATIONAL CORPORATION

G.R. No. 161759, 02 July 2014, Bersamin J. (FIRST DIVISION)

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 defendants
relationship to the operation. 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
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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.

FACTS:

On September 15, 1966, Union Refinery Corporation (URC) was established under
the Corporation Code of the Philippines. 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 then operated by URC, Esther Magleo, the Vice-President and General
Manager of URC, sent a letter dated January 15, 1996 to manifest that URC and Oilink had the
same Board of Directors and that Oilink was 100% owned by URC.

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

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

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

directed that URC pay the 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.

On December 23, 1998, upon his assumption of office, Customs Commissioner Nelson
Tan transmitted a 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 of three
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, Oilink formally protested the
assessment on the ground that it was not the party liable for the assessed deficiency taxes.

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
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J. BERSAMIN

tantamount to lack of jurisdiction because the Government was thereby shifting the
imposition from URC to Oilink. The CTA ruled in favor of Oilink which was affirmed by the
Court of Appeals. Hence, the instant petition.

ISSUE:

Whether or not the CTA can pierce the veil of corporate fiction so as to make Oilink
liable for the tax deficiencies of URC

HELD:

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 vice versa. 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 protect fraud, 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.

In Philippine National Bank v. Ritratto Group, Inc., the Court has outlined the following
circumstances that are 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 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
perpetrate the violation of a statutory or other positive legal duty, or dishonest and,
unjust act in contravention of plaintiff's legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.

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 defendants
relationship to the operation. 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
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J. BERSAMIN

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.

STRONGHOLD INSURANCE COMPANY, INC. V. TOMAS CUENCA, MARCELINA

CUENCA, MILAGROS CUENCA, BRAMIE T. TAYACTAC,
AND MANUEL D. MARANON, JR.
G.R. No. 173297, March 6, 2013, Justice Bersamin

There is no question that a litigation should be disallowed immediately if it involves a

person without any interest at stake, for it would be futile and meaningless to still proceed and
render a judgment where there is no actual controversy to be thereby determined. Courts of law
in our judicial system are not allowed to delve on academic issues or to render advisory
opinions. They only resolve actual controversies, for that is what they are authorized to do by
the Fundamental Law itself, which forthrightly ordains that the judicial power is wielded only to
settle actual controversies involving rights that are legally demandable and enforceable.

The personality of a corporation is distinct and separate from the personalities of its
stockholders. Hence, its stockholders are not themselves the real parties in interest to claim and
recover compensation for the damages arising from the wrongful attachment of its assets. Only
the corporation is the real party in interest for that purpose.

FACTS:

On January 19, 1998, Maraon filed a complaint in the RTC against the Cuencas for the
collection of a sum of money and damages. His complaint, docketed as Civil Case No. 98-023,
included an application for the issuance of a writ of preliminary attachment. On January 26,
1998, the RTC granted the application for the issuance of the writ of preliminary attachment
conditioned upon the posting of a bond of P1,000,000.00 executed in favor of the Cuencas.
Less than a month later, Maraon amended the complaint to implead Tayactac as a
defendant.

On February 11, 1998, Maraon posted SICI Bond No. 68427 JCL (4) No. 02370 in the
amount of P1,000,000.00 issued by Stronghold Insurance. Two days later, the RTC issued the
writ of preliminary attachment. The sheriff served the writ, the summons and a copy of the
complaint on the Cuencas on the same day. The service of the writ, summons and copy of the
complaint were made on Tayactac on February 16, 1998. Enforcing the writ of preliminary
attachment on February 16 and February 17, 1998, the sheriff levied upon the equipment,
supplies, materials and various other personal property belonging to Arc Cuisine, Inc. that
were found in the leased corporate office-cum-commissary or kitchen of the corporation. On
February 19, 1998, the sheriff submitted a report on his proceedings, and filed an ex parte
motion seeking the transfer of the levied properties to a safe place. The RTC granted the ex
parte motion on February 23, 1998.

On February 25, 1998, the Cuencas and Tayactac presented in the RTC a Motion to
Dismiss and to Quash Writ of Preliminary Attachment on the grounds that: (1) the action
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involved intra-corporate matters that were within the original and exclusive jurisdiction of
the Securities and Exchange Commission (SEC); and (2) there was another action pending in
the SEC as well as a criminal complaint in the Office of the City Prosecutor of Paraaque City.
On August 10, 1998, the RTC denied the Motion to Dismiss and to Quash Writ of Preliminary
Attachment, stating that the action, being one for the recovery of a sum of money and
damages, was within its jurisdiction.

Thus, on October 14, 1998, the Cuencas and Tayactac went to the CA on certiorari and
prohibition to challenge the August 10, 1998 and September 16, 1998 orders of the RTC on the
basis of being issued with grave abuse of discretion amounting to lack or excess of jurisdiction
(C.A.-G.R. SP No. 49288). On June 16, 1999, the CA promulgated its assailed decision in C.A.-
G.R. SP No. 49288, granting the petition. It annulled and set aside the challenged orders, and
dismissed the amended complaint in Civil Case No. 98-023 for lack of jurisdiction. On
December 27, 1999, the CA remanded to the RTC for hearing and resolution of the Cuencas
and Tayactacs claim for the damages sustained from the enforcement of the writ of
preliminary attachment.

On April 6, 2000, the Cuencas and Tayactac filed a Motion to Require Sheriff to Deliver
Attached Properties and to Set Case for Hearing, praying that: (1) the Branch Sheriff be
ordered to immediately deliver the attached properties to them; (2) Stronghold Insurance be
directed to pay them the damages being sought in accordance with its undertaking under the
surety bond for P1,000,0000.00; (3) Maraon be held personally liable to them considering the
insufficiency of the amount of the surety bond; (4) they be paid the total of P1,721,557.20 as
actual damages representing the value of the lost attached properties because they, being
accountable for the properties, would be turning that amount over to Arc Cuisine, Inc.; and
(5) Maraon be made to pay P200,000.00 as moral damages, P100,000.00 as exemplary
damages, and P100,000.00 as attorneys fees.

After trial, the RTC rendered its judgment on April 28, 2003, holding Maraon and
Stronghold Insurance jointly and solidarily liable for damages to the Cuencas and Tayactac.

RULING:

The Supreme Court granted the Petition. There is no dispute that the properties
subject to the levy on attachment belonged to Arc Cuisine, Inc. alone, not to the Cuencas and
Tayactac in their own right. They were only stockholders of Arc Cuisine, Inc., which had a
personality distinct and separate from that of any or all of them. The damages occasioned to
the properties by the levy on attachment, wrongful or not, prejudiced Arc Cuisine, Inc., not
them. As such, only Arc Cuisine, Inc. had the right under the substantive law to claim and
recover such damages. This right could not also be asserted by the Cuencas and Tayactac
unless they did so in the name of the corporation itself. But that did not happen herein,
because Arc Cuisine, Inc. was not even joined in the action either as an original party or as an
intervenor.

The Cuencas and Tayactac were clearly not vested with any direct interest in the
personal properties coming under the levy on attachment by virtue alone of their being
stockholders in Arc Cuisine, Inc. Their stockholdings represented only their proportionate or
aliquot interest in the properties of the corporation, but did not vest in them any legal right
or title to any specific properties of the corporation. Without doubt, Arc Cuisine, Inc.
remained the owner as a distinct legal person. Given the separate and distinct legal
personality of Arc Cuisine, Inc., the Cuencas and Tayactac lacked the legal personality to
claim the damages sustained from the levy of the formers properties.

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PHILIPPINE OVERSEAS TELECOMMUNICATIONS CORPORATION (POTC), et al. vs.

VICTOR V. AFRICA/ POTC, et al. vs. VICTOR V. AFRICA, PURPORTEDLY
REPRESENTING PHILCOMSAT, et al./ PHILCOMSAT HOLDINGS CORPORATION,
REPRESENTED BY CONCEPCION POBLADOR vs. PHILCOMSTAT, REPRESENTED BY
VICTOR V. AFRICA/ HILCOMSAT HOLDINGS CORPORATION, REPRESENTED BY
ERLINDA T. BILDNER vs. HILCOMSTAT HOLDINGS CORPORATION, REPRESENTED
BY ENRIQUE L. LOCSIN
G.R. Nos. 184622/184712-14/186066/186590. July 3, 2013
J. Bersamin

An intra-corporate dispute involving a corporation under sequestration of the

Presidential Commission on Good Government (PCGG) falls under the jurisdiction of the
Regional Trial Court (RTC), not the Sandiganbayan. Hence, RTC (Branch 138) had jurisdiction
over the election contest between the Ilusorio-Africa Groups and Nieto-Locsin Groups.

Facts:

The case involves a dispute between two groups battling over to control three domestic
corporations namely the POTC, PHILCOMSAT and PHC. The ownership structure of these
corporations implies that whoever had control of POTC necessarily held 100% control of
PHILCOMSAT, and in turn whoever controlled PHILCOMSAT wielded 81% majority control
of PHC.

As prelude, the EDSA People Power Revolution deposed President Marcos from power and
led to the issuance by newly-installed President Corazon C. Aquino of Executive Order No. 1
to create the PCGG whose task was to assist the President in the recovery of all ill-gotten
wealth amassed by President Marcos and his subordinates. Subsequently among the
corporations surrendered were IRC (which, in the books of POTC, held 3,644 POTC shares)
and Mid-Pasig (which, in the books of POTC, owned 1,755 POTC shares). Also turned over
was one POTC share in the name of Ferdinand Marcos, Jr. Hence the above mentioned
corporations were now under sequestration of the PCGG.

Two groups were formed in the corporations, the Ilusorio-Africa group and the Nieto-Locsin
group. In separate dates as revealed by the records, both groups held a Stockholder's Meeting
and elected the set of directors for each corporations. This incident led to the filing of many
petitions in court including writs of preliminary injunction and TRO. The petitioners
postulate that the Sandiganbayan had original and exclusive jurisdiction over sequestered
corporations, sequestration-related cases, and any and over all incidents arising therefrom;
that it was error on the part of the CA to conclude that the Sandiganbayan was automatically
ousted of jurisdiction over the sequestered assets once the complaint alleged an intra-
corporate dispute due to the sequestered assets being in custodia legis. Respondent on the
other hand counters the argument of the petitioner by asserting that that the RTC had ample
authority to rule upon the intra-corporate dispute.

Issue:

Did RTC (Branch 138) have jurisdiction over the intra-corporate controversy (election contest)

Ruling:

The petition is denied.

RTC (Branch 138) had jurisdiction over the election contest between the Ilusorio-Africa
Groups and Nieto-Locsin Groups
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It is settled that there is an intra-corporate controversy when the dispute involves any of the
following relationships, to wit: (a) between the corporation, partnership or association and
the public; (b) between the corporation, partnership or association and the State in so far as
its franchise, permit or license to operate is concerned; (c) between the corporation,
partnership or association and its stockholders, partners, members or officers; and (d) among
the stockholders, partners or associates themselves.

Originally, Section 5 of Presidential Decree (P.D.) No. 902-A vested the original and exclusive
jurisdiction over intracorporate dispute with the SEC. However, upon the enactment of
Republic Act No. 8799 (The Securities Regulation Code), effective on August 8, 2000, the
jurisdiction of the SEC over intra-corporate controversies was transferred to the Regional
Trial. To implement Republic Act No. 8799, the Court promulgated its resolution of
November 21, 2000 in A.M. No. 00-11-03-SC designating certain branches of the RTC to try and
decide the cases enumerated in Section 5 of P.D. No. 902-A. Among the RTCs designated as
special commercial courts was the RTC (Branch 138) in Makati City, the trial court for Civil
Case No. 04-1049.

In the cases now before the Court, what are sought to be determined are the propriety of the
election of a party as a Director, and his authority to act in that capacity. Such issues should
be exclusively determined only by the RTC pursuant to the pertinent law on jurisdiction
because they did not concern the recovery of ill-gotten wealth.

Proper mode of appeal in intra-corporate cases is by petition for review under Rule 43

The rule providing that a petition for review under Rule 43 of the Rules of Court is the proper
mode of appeal in intra-corporate controversies, as embodied in A. M. No. 04-9-07-SC, has
been in effect since October 15, 2004. Hence, the filing by POTC and PHC (Nieto Group) of
the petition for certiorari on March 21, 2007 (C.A.-G.R. SP No. 98399) was inexcusably
improper and ineffectual. By virtue of its being an extraordinary remedy, certiorari could
neither replace nor substitute an adequate remedy in the ordinary course of law, like appeal
in due course. Indeed, the appeal under Rule 43 of the Rules of Court would have been
adequate to review and correct even the grave abuse of discretion imputed to the RTC. As a
consequence of the impropriety and ineffectuality of the remedy chosen by POTC and PHC
(Nieto Group), the TRO and the WPI initially issued by the CA in C.A.-G.R. SP No. 98399 did
not prevent the immediately executory character of the decision in Civil Case No. 04-1049.

_________________________________________________________________________________

GOLD LINE TOURS, INC. vs. HEIRS OF MARIA CONCEPCION LACSA

G.R. No. 159108, FIRST DIVISION, June 18, 2012, BERSAMIN, J.

The veil of corporate existence of a corporation is a fiction of law that should not defeat
the ends of justice.

FACTS:

On August 2, 1993, Ma. Concepcion Lacsa (Concepcion) and her sister, Miriam Lacsa
(Miriam), boarded a Goldline passenger bus owned and operated by Travel & Tours Advisers,
Inc. They were enroute from Sorsogon to Cubao, Quezon City. At the time, Concepcion,
having just obtained her degree of Bachelor of Science in Nursing at the Ago Medical and
Educational Center, was proceeding to Manila to take the nursing licensure board
examination. Upon reaching the highway at Barangay San Agustin in Pili, Camarines Sur, the

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Goldline bus, driven by Rene Abania (Abania), collided with a passenger jeepney coming from
the opposite direction and driven by Alejandro Belbis. As a result, a metal part of the jeepney
was detached and struck Concepcion in the chest, causing her instant death.

On August 23, 1993, Concepcions heirs, represented by Teodoro Lacsa, instituted in the
RTC a suit against Travel & Tours Advisers Inc. and Abania to recover damages arising from
breach of contract of carriage.

Miriam testified that Abania had been occasionally looking up at the video monitor
installed in the front portion of the Goldline bus despite driving his bus at a fast speed; that in
Barangay San Agustin, the Goldline bus had collided with a service jeepney coming from the
opposite direction while in the process of overtaking another bus; and that Concepcion was
pronounced dead upon arrival at the hospital.

To refute the plaintiffs allegations, Travel & Tours Advisers presented SPO1 Pedro
Corporal of the Philippine National Police Station in Pili, Camarines Sur, and William Cheng,
the operator of the Travel & Tours Advisers bus. SPO1 Corporal opined that based on his
investigation report, the driver of the jeepney had been at fault for failing to observe
precautionary measures to avoid the collision. On the other hand, Cheng attested that he had
exercised the required diligence in the selection and supervision of his employees.

Travel & Tours Advisers blamed the death of Concepcion to the recklessness of Bilbes
as the driver of the jeepney, and of its operator, Salvador Romano and t they had
consequently brought a third-party complaint against the latter.

The RTC ruled against Goldline for failure to disprove the presumption of negligence
and that a rigid selection of employees was not sufficient to exempt Goldline from the
obligation of exercising extraordinary diligence to ensure that its passenger was carried safely
to her destination. The CA dismissed the appeal filed by Goldline for failure to pay the docket
and other lawful fees. The RTC issued a writ of execution upon motion by the plaintiff. The
writ of execution had been personally served and a copy of it had been duly tendered to
Travel & Tours Advisers, Inc. or William Cheng, through his secretary, Grace Miranda, and
that Cheng had failed to settle the judgment amount despite promising to do so. Accordingly,
a tourist bus bearing Plate No. NWW-883 was levied pursuant to the writ of execution.

Goldline submitted a so-called verified third party claim, claiming that the
tourist bus bearing Plate No. NWW-883 be returned to them because it was the owner
and they had not been made a party to the case and it was a corporation entirely
different from Travel & Tours Advisers, Inc.

It is notable that Goldline Articles of Incorporation was amended shortly after the
filing of Civil Case against Travel & Tours Advisers, Inc.

The RTC dismissed Goldline verified third-party claim, observing that the identity of
Travel & Tours Adivsers, Inc. could not be divorced from that of Goldline considering that
Cheng had claimed to be the operator as well as the President/Manager/incorporator of both
entities; and that Travel & Tours Advisers, Inc. had been known in Sorsogon as
Goldline. This was affirmed by the CA.

ISSUE:

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Whether the denial of the verified third-party claim by Goldline was proper.

RULING:

Yes. This Court is not persuaded by the proposition of the third party claimant that a
corporation has an existence separate and/or distinct from its members insofar as this case at
bar is concerned, for the reason that whenever necessary for the interest of the public or for
the protection of enforcement of their rights, the notion of legal entity should not and is not
to be used to defeat public convenience, justify wrong, protect fraud or defend crime.

As we see it, the RTC had sufficient factual basis to find that petitioner and Travel and
Tours Advisers, Inc. were one and the same entity, specifically: (a) documents submitted by
petitioner in the RTC showing that William Cheng, who claimed to be the operator of Travel
and Tours Advisers, Inc., was also the President/Manager and an incorporator of the
petitioner; and (b) Travel and Tours Advisers, Inc. had been known in Sorsogon as Goldline.

The RTC thus rightly ruled that petitioner might not be shielded from liability under
the final judgment through the use of the doctrine of separate corporate identity. Truly, this
fiction of law could not be employed to defeat the ends of justice.

DONNINA C. HALLEY v. PRINTWELL, INC.

G.R. No. 157549, 30 May 2011 THIRD DIVISION (Bersamin, J.)

A corporation has a personality separate and distinct from those of its stockholders,
directors, or officers, such separate and distinct personality is merely a fiction created by
law for the sake of convenience and to promote the ends of justice.

Donnina Halley (Halley) was an incorporator and original director of Business

Media Philippines, Inc. (BMPI) while Printwell, Inc. (Printwell) was engaged in
commercial and industrial printing. BMPI commissioned Printwell for the printing of the
magazine Philippines, Inc. that BMPI published and sold. For that purpose, Printwell
extended 30-day credit accommodations to BMPI. BMPI placed with Printwell several
orders on credit totaling P316, 342.76. Considering that BMPI paid only P25,000, Printwell
sued BMPI for the collection of the unpaid balance in RTC and impleaded as defendants
all the original stockholders and incorporators to recover on their unpaid subscriptions.
RTC rendered decision in favor of Printwell, rejecting the allegation of payment in full
of the subscriptions in view of an irregularity in the issuance of the ORs and observing
that Halley and other defendants had used BMPIs corporate personality to evade
payment and create injustice. CA affirmed the RTC decision. Only Halley has come to the
Court to seek a further review.

ISSUES:

1. Whether or not the piercing of the corporate veil has been applied correctly despite
the absence of cogent proof that Halley, as stockholder of BMPI, had any hand in
transacting with Printwell.
2. Whether or not trust fund doctrine was erroneously applied when the grounds therefor
have not been satisfied.

RULING:

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1. YES. Although a corporation has a personality separate and distinct from those of
its stockholders, directors, or officers, such separate and distinct personality is merely a
fiction created by law for the sake of convenience and to promote the ends of justice.
The corporate personality may be disregarded, and the individuals composing the
corporation will be treated as individuals, if the corporate entity is being used as a cloak or
cover for fraud or illegality; as a justification for a wrong; as an alter ego, an adjunct, or a
business conduit for the sole benefit of the stockholders. As a general rule, a corporation
is looked upon as a legal entity, unless and until sufficient reason to the contrary
appears. Although nowhere in Printwells amended complaint or in the testimonies
Printwell offered can it be read or inferred from that the petitioner was instrumental in
persuading BMPI to renege on its obligation to pay; or that she induced Printwell to
extend the credit accommodation by misrepresenting the solvency of BMPI to Printwell,
her personal liability, together with that of her co-defendants, remained because the CA
found her and the other defendant stockholders to be in charge of the operations of
BMPI at the time the unpaid obligation was transacted and incurred.

2. YES. The Court clarify that the trust fund doctrine is not limited to reaching the
stockholders unpaid subscriptions. The scope of the doctrine when the corporation is
insolvent encompasses not only the capital stock, but also other property and assets
generally regarded in equity as a trust fund for the payment of corporate debts. All
assets and property belonging to the corporation held in trust for the benefit of
creditors that were distributed or in the possession of the stockholders, regardless of full
payment of their subscriptions, may be reached by the creditor in satisfaction of its claim.
Under the trust fund doctrine, a corporation has no legal capacity to release an original
subscriber to its capital stock from the obligation of paying for his shares, in whole or
in part, without a valuable consideration, or fraudulently, to the prejudice of creditors.
The creditor is allowed to maintain an action upon any unpaid subscriptions and thereby
steps into the shoes of the corporation for the satisfaction of its debt. To make out a
prima facie case in a suit against stockholders of an insolvent corporation to compel
them to contribute to the payment of its debts by making good unpaid balances upon
their subscriptions, it is only necessary to establish that the stockholders have not in
good faith paid the par value of the stocks of the corporation.

The Court ruled that Halley was liable pursuant to the trust fund doctrine for the
corporate obligation of BMPI by virtue of her subscription being still unpaid. Printwell, as
BMPIs creditor, had a right to reach her unpaid subscription in satisfaction of its claim.

FOREST HILLS GOLF AND COUNTRY CLUB, INC. vs. GARDPRO, INC.

G.R. No. 164686, FIRST DIVISION, October 22, 2014, BERSAMIN, J.

The articles of incorporation and the bylaws of a corporation define and regulate the
relations between the corporation and the stockholders. In interpreting them, the literal
meaning of their provisions shall control, and such provisions should be construed as a whole
and not in isolation.

Golf clubs usually sell shares to individuals and juridical entities in order to raise capital
for the construction of their recreational facilities. In that regard, golf clubs accept juridical
entities to become regular members, and allow such entities to designate corporate nominees
because only natural persons can enjoy the sports facilities. In the context of this
arrangement, Gardpros two nominees held playing rights. But the articles of incorporation of
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Forest Hills and Section 2.2.2 of its bylaws recognized the right of the corporate member to
replace the nominees, subject to the payment of the transfer fee in such amount as the Board
of Directors determined for every change. The replacement could take place for Forest Hills
Golf and Country Club, Inc. vs. Gardpro, Inc. any of the following reasons, namely: (a) if the
nominee should cease to be an officer of the corporate member; or (b) if the corporate
member should request the replacement. In case of a replacement, the playing rights would
also be transferred to the new nominees.

FACTS:

Forest Hills Golf and Country Club, Inc. (interchangeably Forest Hills or Club), a non-
profit stock corporation, was established to promote social, recreational and athletic activities
among its members. It constructed and maintained golf courses, tennis courts, swimming
pools, and other indoor and outdoor sports and recreational facilities. It was an exclusive and
private club organized for the sole benefit of its members.

In 1995, the Club engaged Fil-Estate Marketing Associates Inc., (FEMAI) to market and
offer for sale the shares of stocks of Forest Hills. Leandro de Mesa, the President of FEMAI,
oriented the sales staff on the information that would usually be inquired about by
prospective buyers. He made it clear that membership in the Club was a privilege, such that
purchasers of shares of stock would not automatically become members of the Club, but must
apply for and comply with all the requirements in order to qualify them for membership,
subject to the approval of the Board of Directors.

In 1996, Gardpro, Inc. (Gardpro) bought class C common shares of stock, which were
special corporate shares that entitled the registered owner to designate two nominees or
representatives for membership in the Club.

In October 1997, Ramon Albert, the General Manager of the Club, notified the
shareholders that it was already accepting applications for membership. In that regard,
Gardpro designated Fernando R. Martin and Rolando N. Reyes to be its corporate nominees;
hence, the two applied for membership in the Club.

Forest Hills charged them membership fees of P50,000.00 each, prompting

Martin to immediately call up Albert and complain about being thus charged despite
having been assured that no such fees would be collected from them. With Albert
assuring that the fees were temporary, both nominees of Gardpro paid the fees.

Both nominees of Gardpro were then admitted as members upon approval of their
applications by the Board of Directors. Later, Gardpro decided to change its designated
nominees, and Forest Hills charged Gardpro new membership fees of P75,000.00 per
nominee. When Gardpro refused to pay, the replacement did not take place.

On July 7, 1999, Gardpro filed a complaint in the SEC, which Forest Hills duly
answered. Martin and Reyes testified that when the shares of stock were being marketed,
nothing about payment of membership fees was explained to them; that upon his inquiry, a
certain Ms. Cacho, an agent of FEMAI, had told Martin that if a corporation bought class C
common shares, its nominees would be automatically entitled to become members of the
Club; that all that the corporation would have to do thereafter was to pay the monthly dues;
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that Albert had assured Martin that the membership fees he had paid would be refunded; and
that Martin was not furnished copies of the by-laws of Forest Hills.

The SEC Hearing Officer ruled in favor of Gardpro Inc., and ordered Forest Hills not to
collect membership fees for the two replacement members. It ruled that the membership fees
already paid shall be applied as membership fees for the two replacement members.

This decision was affirmed by the SEC en banc and the Court of Appeals.

ISSUE:

Whether the replacement nominees of Gardpro, Inc., who were applying for
membership in Forest Hills, should pay the required membership fees.

RULING:

No. Forest Hills was not authorized under its articles of incorporation and bylaws to
collect new membership fees for the replacement nominees of Gardpro.

The membership in the Club was a privilege, it being clear that the mere purchase of a
share in the Club did not immediately qualify a juridical entity for membership. Admission
for membership was still upon the favorable action of the Board of Directors of the Club.

Under the Clubs by-laws, membership fees of P45,000.00 must be paid by the
applicant within 30 days from the approval of the application before the share could be
registered in the Stock and Transfer Books of the Club. Pursuant to the Clubs articles of
incorporation and by-laws, the membership fees should be paid by the corporate
member. Based on the procedure set forth in Section 2.2.7 of the by-laws, the
applicant was the juridical entity, not its nominee or nominees. Although the
nominee or nominees also accomplished their application forms for membership in
the Club, it was the corporate member that was obliged to pay the membership fees in
its own capacity because the share was registered in its name in the Stock and
Transfer Book.

As correctly held by the Hearing Officer and the SEC, the applicable provision on the
matter is section 2.2.2 of the By-Laws, the relevant portion of which states:

A juridical entity owning a Class C Common Share may, by resolution of its

board of directors or trustees, designate two (2) nominees for regular
membership to the club for each Class C Share registered in its name; provided,
however, that only one (1) nominee for each Class C Share, as designated in the
aforesaid resolution may vote and hold office as such. The said nominee(s) or
representative(s), upon approval of the Board of Directors, may be admitted as
Regular Member(s). A transfer fee in such amount as may be prescribed by
the Board of Directors, shall be charged for every change in the
designated nominee of juridical entity.

In this case, there is no transfer of share of ownership to be effected in the Book of the
Club. As aptly ruled by the SEC, the transfer fee under the former provision (to be prescribed

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by the BOD) refers to the one imposed on the change in the corporate member's
designated nominee only, while the transfer fee under the latter provision (fixed at 75,000,
which was only 50,000 before) refers to a transfer of the stock itself from one corporate
member to another which necessitates entry in the Club's Books.

The by-laws constituted a binding contract as between Forest Hills and its members,
and as between the members themselves. The by-laws were self-imposed private laws binding
on all members, directors and officers of Forest Hills. The prevailing rule is that the provisions
of the articles of incorporation and the by-laws must be strictly complied with and applied to
the letter.

As held by the Court of Appeals, when respondent Gardpro decided to replace its
designated nominees, it should not be required to pay membership fees again as it has already
paid such fees for the original designated nominees. As the real Club members, Gardpro
should not be assessed membership fees every time it changes its nominees. Nowhere in the
By-Laws of the Forest Hills is it provided that it is authorized to collect membership fees
every time a nominee of a corporate shareholder is to be replaced.

PHILIP TURNER and ELNURNER v. LORENZO SHIPPING CORPORATION

G.R. No. 157479, 24 November 2010, THIRD DIVISION (Bersamin, J.)

In order to give rise to any obligation to pay on the part of the respondent, the
petitioners should first make a valid demand that the respondent refused to pay despite
having unrestricted retained earnings. Otherwise, the respondent could not be said to be
guilty of any actionable omission that could sustain their action to collect.

Philip Turner and Elnora Turner (the Turners) held 1,010,000 shares of stock of
Lorenzo Shipping Corp. (LSC). LSC decided to amend its articles of incorporation to
remove the stockholders pre-emptive rights to newly issued shares of stock. Feeling that
the corporate move would be prejudicial to their interest as stockholders, the Turners
voted against the amendment and demanded payment of their shares. LSC found the
fair value of the shares demanded by the Turners unacceptable. The disagreement on the
valuation of the shares led the parties to constitute an appraisal committee pursuant to
Section 82 of the Corporation Code. Subsequently, the Turners demanded payment based
on the valuation of the appraisal committee, plus 2%/month penalty from the date of
their original demand for payment, as well as the reimbursement of the amounts
advanced as professional fees to the appraisers. LSC however refused the Turners
demand, explaining that pursuant to the Corporation Code, the dissenting
stockholders exercising their appraisal rights could be paid only when the corporation had
unrestricted retained earnings to cover the fair value of the shares, but that it had no
retained earnings at the time of the petitioners demand, as borne out by its Financial
Statements for Fiscal Year 1999 showing a deficit of P72,973,114.00 as of December 31,
1999.

Upon the LSCs refusal to pay, the Turners sued the latter for collection and damages
(Civil Case No. 01-086) in the Regional Trial Court (RTC). Thereafter, the Turners filed their
motion for partial summary judgment which was opposed by LSC.

ISSUE:

Whether or not the Turners cause of action was premature.

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RULING:

YES. That LSC had indisputably no unrestricted retained earnings in its books at the
time the Turners commenced Civil Case No. 01-086 on January 22, 2001 proved that
LSCs legal obligation to pay the value of the Turners shares did not yet arise. Thus, the CA
did not err in holding that the petitioners had no cause of action, and in ruling that the
RTC did not validly render the partial summary judgment.

The RTCs construal of the Corporation Code was unsustainable, because it did not take
into account the petitioners lack of a cause of action against the respondent. In order to give
rise to any obligation to pay on the part of the respondent, the petitioners should first make a
valid demand that the respondent refused to pay despite having unrestricted retained
earnings. Otherwise, the respondent could not be said to be guilty of any actionable omission
that could sustain their action to collect.

Neither did the subsequent existence of unrestricted retained earnings after the filing
of the complaint cure the lack of cause of action in Civil Case No. 01-086. The petitioners
right of action could only spring from an existing cause of action. Verily, a premature
invocation of the courts intervention renders the complaint without a cause of action and
dismissible on such ground. In short, Civil Case No. 01-086, being a groundless suit, should
be dismissed.

Even the fact that the respondent already had unrestricted retained earnings more
than sufficient to cover the Turners claims on June 26, 2002 (when they filed their motion for
partial summary judgment) did not rectify the absence of the cause of action at the time of
the commencement of Civil Case No. 01-086. The motion for partial summary judgment, being
a mere application for relief other than by a pleading, was not the same as the complaint in
Civil Case No. 01-086. Thereby, the Turners did not meet the requirement of the Rules of
Court that a cause of action must exist at the commencement of an action, which is
commenced by the filing of the original complaint in court.

_________________________________________________________________________________

CARANDANG VS. DESIERTO

GR No. 148076, January 12, 2011, J Bersamin

A governmentowned or controlled corporation refers to any agency organized as a

stock or non-stock corporation vested with functions relating to public needs whether
governmental or proprietary in nature and owned by the government through its
instrumentalities either wholly or where applicable as in the case of stock corporation to the
extent of at least 51% of its capital stock. When a stockholder ceded to the government shares
representing 72.4 % of the voting stock of the corporation but subsequently clarified that it
should be reduced to 32.4%, the corporation shall not be considered government owned and
controlled until the quantification of shares is resolved with finality.

Respondent was not a corporate officer of the corporation because his position as General
Manager was not specifically mentioned in the roster of corporate officers in its corporate by-
laws. The enabling clause in the corporations by-laws empowering its Board of Directors to
create additional officers, i.e., General Manager and the subsequent passage of a board
resolution to that effect can not make such position a corporate office. The Board of Directors
has no power to create other corporate offices without first amending the corporate by-laws

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J. BERSAMIN

so as to include therein the newly created corporate office. Though the Board may create
appointive positions other than the positions of corporate officers, the persons occupying
such positions can not be viewed as corporate officers under Section 25 of the Corporation
Code. Therefore, the termination of the respondent was not an intra-corporate controversy
but a labor dispute falling within the jurisdiction of the labor arbiter. March II Marketing vs
Joson, GR No. 171993, December 12, 2011, J. Bersamin

BANKING LAWS

METROPOLITAN BANK & TRUST CO. (METROBANK), represented by ROSELLA A.

SANTIAGO, petitioner, vs. ANTONINO O. TOBIAS III, respondent.
G.R. No. 177780 January 25, 2012, FIRST DIVISION, BERSAMIN J.

Banks and Banking; Negligence; Banks are expected to exercise greater care and
prudence than others in their dealings because their business is impressed with public
interest.We do not lose sight of the fact that METROBANK, a commercial bank dealing in
real property, had the duty to observe due diligence to ascertain the existence and condition
of the realty as well as the validity and integrity of the documents bearing on the realty. Its
duty included the responsibility of dispatching its competent and experience representatives
to the realty to assess its actual location and condition, and of investigating who was its real
owner. Yet, it is evident that METROBANK did not diligently perform a thorough check on
Tobias and the circumstances surrounding the realty he had offered as collateral. As such, it
had no one to blame but itself. Verily, banks are expected to exercise greater care and
prudence than others in their dealings because their business is impressed with public
interest. Their failure to do so constitutes negligence on its part. Metropolitan Bank & Trust
Co.

FACTS:

Tobias, herein respondent, opened a savings/current account for and in the name of
Adam Merchandising, his frozen meat business. Six months later, Tobias applied for a loan
from METROBANK, which in due course conducted trade and credit verification of Tobias
that resulted in negative findings. METROBANK next proceeded to appraise the property
Tobias offered as collateral by asking him for a photocopy of the title and other related
documents. The property consisted of four parcels of land located in Malabon City, Metro
Manila covered by Transfer Certificate of Title (TCT) No. M-16751. Based on the financial
statements submitted by Tobias, METROBANK approved a credit line for P40,000,000.00.
METROBANK proceeded to the Registry of Deeds of Malabon to cause the annotation of the
deed of real estate mortgage on TCT No. M-16751.

Tobias paid the interest on the loan for about a year before defaulting. His loan was
restructured to 5-years upon his request. Yet, after two months, he again defaulted. Thus, the
mortgage was foreclosed, and the property was sold to METROBANK as the lone bidder.
When the certificate of sale was presented for registration to the Registry of Deeds of
Malabon, no corresponding original copy of TCT No. M-16751 was found in the registry vault.
Given such findings, METROBANK requested the Presidential Anti-Organized Crime Task
Force (PAOCTF) to investigate. In its report, PAOCTF concluded that TCT No. M-16751 and
the tax declarations submitted by Tobias were fictitious.

Tobias averred that he had bought the property from one Leonardo Fajardo through
real estate brokers; that the actual inspection of the property as well as the verification made
in the Registry of Deeds of Malabon City had ascertained the veracity of TCT No. 106083
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J. BERSAMIN

under the name of Leonardo Fajardo; that he had applied for the loan from METROBANK to
pay the purchase price by offering the property as collateral; that he had executed a deed of
absolute sale with Fajardo covering the property, and that said instrument had been properly
registered in the Registry of Deeds; that the transfer of the title, being under the account of
the seller, had been processed by seller Fajardo and his brokers; that his title and the property
had been inspected and verified by METROBANKs personnel; and that he did not have any
intention to defraud METROBANK.

Nonetheless, the Office of the City Prosecutor of Malabon ultimately charged Tobias
with estafa through falsification of public documents. However, Acting Secretary of Justice
Ma. Merceditas N. Gutierrez issued a resolution directing the withdrawal of the information
filed against Tobias. Acting Secretary of Justice Gutierrez opined that Tobias had sufficiently
established his good faith in purchasing the property and that he had even used part of the
proceeds of the loan to pay the seller.
CA dismiss the petition for certiorari filed by Metrobank to question the order of Secretary of
Justice to withdraw the information. On appeal to the Supreme Court, METROBANK submits
that the presumption of authorship was sufficient to establish probable cause to hold Tobias
for trial; that the presumption applies when a person is found in possession of the forged
instrument, makes use of it, and benefits from it.

ISSUE:

Whether the dismissal of petition for certiorari by CA is proper.

RULING:

CAs dismissal of the petition for certiorari filed by Metrobank to question the
order of Secretary of Justice to withdraw the information is proper.

METROBANK urges the application of the presumption of authorship against Tobias

based on his having offered the duplicate copy of the spurious title to secure the loan; and
posits that there is no requirement that the presumption shall apply only when there is
absence of a valid explanation from the person found to have possessed, used and benefited
from the forged document.

The presumption that whoever possesses or uses a spurious document is its forger
applies only in the absence of a satisfactory explanation. Accordingly, the Secretary of Justice
did not err in dismissing the information in the face of the controverting explanation by
Tobias showing how he came to possess the spurious document.

METROBANK, a commercial bank dealing in real property, had the duty to observe
due diligence to ascertain the existence and condition of the realty as well as the validity and
integrity of the documents bearing on the realty. Its duty included the responsibility of
dispatching its competent and experience representatives to the realty to assess its actual
location and condition, and of investigating who was its real owner. Yet, it is evident that
METROBANK did not diligently perform a thorough check on Tobias and the circumstances
surrounding the realty he had offered as collateral. As such, it had no one to blame but itself.
Verily, banks are expected to exercise greater care and prudence than others in their dealings
because their business is impressed with public interest. Their failure to do so constitutes
negligence on its part.

_________________________________________________________________________________

Development Bank of the Philippines v. Guaria Agricultural and Realty Devt Corp.
Page 32 of 46
 MERCANTILE LAW
J. BERSAMIN

G.R. No. 160758; January 15, 2014

J. Bersamin

The lender who refuses to release the full amount of the loan cannot foreclose the
mortgage constituted thereon. Foreclosure prior to the mortgagors default is premature and
unenforceable and the mortgagee who has been given possession over the mortgaged property
by virtue of a writ of possession may be ordered to restore the possession of the same to the
mortgagor and to pay reasonable rent for its use during the intervening period

Facts:

In order to finance the development of a resort complex, Guaria Corporation applied for a
loan from DBP in the amount of P3,387,000. Guaria Corporation executed a real estate
mortgage over several real properties in favor of DBP as security for the repayment of the loan
and a chattel mortgage over the personal properties existing at the resort complex and those
yet to be acquired out of the proceeds of the loan.

The loan was released in several instalments and the same was used by Guaria Corporation
to defray the cost of additional improvements in the resort complex. In all, the amount
released totalled P3,003,617.49. Subsequently, Guaria Corporation demanded the release of
the balance of the loan. DPB refused and directly paid some suppliers of Guaria Corporation
instead. Later on, upon inspection, DBP discovered that Guaria Corporation had not
completed the construction works. DBP thus demanded to expedite the completion of the
project and warned that it would initiate foreclosure proceedings shouldGuaria Corporation
not do so.

With the non-action and objection of Guaria Corporation, DBP initiated extrajudicial
foreclosure proceedings. This resulted in Guaria Corporation suing DPB for specific
performance of the latters obligations under the loan agreement and to stop the foreclosure
of the mortgage. Due to the fact that DBP had already sold the mortgaged properties, Guaria
Corporation amended the complaint to seek the nullification of the foreclosure proceedings
and cancellation of the certificate of sale. Thereafter, a writ of possession was issued in favor
of DBP.

RTC rendered judgment declaring the extra-judicial sales of the mortgage properties null and
void and ordered DBP to return to Guaria Corporation the actuall possession and enjoyment
of all the properties foreclosed and possessed by it. On appeal, the CA affirmed the decision of
the trial court. DBP filed a motion for reconsideration, but the CA denied the same. Hence,
the appeal.

Issue:

Whether or not the foreclosure was valid.

Ruling:

By its failure to release the proceeds of the loan in their entirety, DBP had no right yet to
exact on Guaria Corporation the latter's compliance with its own obligation under the loan.
Indeed, if a party in a reciprocal contract like a loan does not perform its obligation, the other
party cannot be obliged to perform what is expected of it while the other's obligation remains
unfulfilled. In other words, the latter party does not incur delay.

Still, DBP called upon Guaria Corporation to make good on the construction works pursuant
to the acceleration clause written in the mortgage contract or else it would foreclose the
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J. BERSAMIN

mortgages.

DBP's actuations were legally unfounded. It is true that loans are often secured by a mortgage
constituted on real or personal property to protect the creditor's interest in case of the default
of the debtor. By its nature, however, a mortgage remains an accessory contract dependent on
the principal obligation, such that enforcement of the mortgage contract will depend on
whether or not there has been a violation of the principal obligation. While a creditor and a
debtor could regulate the order in which they should comply with their reciprocal obligations,
it is presupposed that in a loan the lender should perform its obligation - the release of the
full loan amount - before it could demand that the borrower repay the loaned amount. In
other words, Guaria Corporation would not incur in delay before DBP fully performed its
reciprocal obligation.

Considering that it had yet to release the entire proceeds of the loan, DBP could not yet make
an effective demand for payment upon Guaria Corporation to perform its obligation under
the loan. According to Development Bank of the Philippines v. Licuanan, it would only be when
a demand to pay had been made and was subsequently refused that a borrower could be
considered in default, and the lender could obtain the right to collect the debt or to foreclose
the mortgage. Hence, Guaria Corporation would not be in default without the demand.

Assuming that DBP could already exact from the latter its compliance with the loan
agreement, the letter dated February 27, 1978 that DBP sent would still not be regarded as a
demand to render Guaria Corporation in default under the principal contract because DBP
was only thereby requesting the latter "to put up the deficiency in the value of
improvements."

Under the circumstances, DBP's foreclosure of the mortgage and the sale of the mortgaged
properties at its instance were premature, and, therefore, void and ineffectual. The Court
thereby affirms the order for the restoration of possession to Guaria Corporation and the
payment of reasonable rentals for the use of the resort.

TRUST RECEIPT

The sale of goods by a person in the business of selling goods, for profit, who at the outset of
the transaction, has as against the buyer, general property rights in such goods, or who sells
goods to the buyer on credit, retaining title or other interest as security for the payment of the
purchase price, does not constitute a trust receipt transaction. There is no trust receipt,
notwithstanding the label, if goods offered as security for a loan accommodation are goods
sold to the debtor under a supposed trust receipt transaction. Sps. Dela Cruz vs Dela Cruz,
GR No. 158649, February 18, 2013

INTELLECTUAL PROPERTY CODE

INTELLECTUAL PROPERTY ASSOCIATION OF THE PHILIPPINES vs. HON. PAQUITO

OCHOA, IN HIS CAP A CITY AS EXECUTIVE SECRETARY, HON. ALBERT DEL
ROSARIO, IN HIS CAPACITY AS SECRETARY OF THE DEPARTMENT OF FOREIGN
AFFAIRS, AND HON. RICARDO BLANCAFLOR, IN HIS CAPACITY AS THE DIRECTOR
GENERAL OF THE INTELLECTUAL PROPERTY OFFICE OF THE PHILIPPINES
G .R. No. 204605, July 19, 2016, BERSAMIN, J.

President's ratification is valid and constitutional because the Madrid Protocol, being an
executive agreement as determined by the Department of Foreign Affairs, does not require the
concurrence of the Senate.

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J. BERSAMIN

There is no conflict between the Madrid Protocol and the IP Code. The IPOPHL actually
requires the designation of the resident agent when it refuses the registration of a mark. Local
representation is further required in the submission of the Declaration of Actual Use, as well as
in the submission of the license contract. The Madrid Protocol accords with the intent and spirit
of the IP Code, particularly on the subject of the registration of trademarks. The Madrid
Protocol does not amend or modify the IP Code on the acquisition of trademark rights
considering that the applications under the Madrid Protocol are still examined according to the
relevant national law. In that regard, the IPOPHL will only grant protection to a mark that
meets the local registration requirements.

FACTS:

The Madrid System for the International Registration of Marks (Madrid System), which
is the centralized system providing a one-stop solution for registering and managing marks
worldwide, allows the trademark owner to file one application in one language, and to pay
one set of fees to protect his mark in the territories of up to 97 member-states. The Madrid
System is governed by the Madrid Agreement, concluded in 1891, and the Madrid Protocol,
concluded in 1989.

The Intellectual Property Office of the Philippines (IPOPHL) recommended to the

Department of Foreign Affairs (DFA) that the Philippines should accede to the Madrid
Protocol. After its own review, the DFA endorsed to the President the country's accession to
the Madrid Protocol. Conformably with its express authority under Section 9 of Executive
Order No. 459 (Providing for the Guidelines in the Negotiation of International Agreements and
its Ratification) dated November 25, 1997, the DFA determined that the Madrid Protocol was
an executive agreement. President Benigno C. Aquino III ratified the Madrid Protocol through
an instrument of accession. The Madrid Protocol entered into force in the Philippines on July
25, 2012.

Petitioner IPAP has commenced this special civil action for certiorari and prohibition
to challenge the validity of the President's accession to the Madrid Protocol without the
concurrence of the Senate.

Furthermore, the IPAP has argued that the implementation of the Madrid Protocol in
the Philippines; specifically the processing of foreign trademark applications, conflicts with
the IP Code. The IPAP has insisted that Article 2 of the Madrid Protocol means that foreign
trademark applicants may file their applications through the International Bureau or the
WIPO, and their applications will be automatically granted trademark protection without the
need for designating their resident agents in the country.

ISSUES:

1. Whether or not the President's ratification of the Madrid Protocol is valid and
constitutional.
2. Whether or not the Madrid Protocol is in conflict with the IP Code.

RULING:

1. President's ratification is valid and constitutional because the Madrid Protocol, being an
executive agreement as determined by the Department of Foreign Affairs, does not require the
concurrence of the Senate.

The Court has highlighted the difference between treaties and executive agreements in
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J. BERSAMIN

Commissioner of Customs v. Eastern Sea Trading,thusly:

International agreements involving political issues or changes of national policy

and those involving international arrangements of a permanent character
usually take the form of treaties. But international agreements embodying
adjustments of detail carrying out well-established national policies and
traditions and those involving arrangements of a more or less temporary nature
usually take the form of executive agreements.

The pronouncement in Commissioner of Customs v. Eastern Sea Trading indicates that

the registration of trademarks and copyrights have been the subject of executive agreements
entered into without the concurrence of the Senate.

2. There is no conflict between the Madrid Protocol and the IP Code.

The IPAP also rests its challenge on the supposed conflict between the Madrid Protocol
and the IP Code, contending that the Madrid Protocol does away with the requirement of a
resident agent under Section 125 of the IP Code; and that the Madrid Protocol is
unconstitutional for being in conflict with the local law, which it cannot modify.

The IPAP's contentions stand on a faulty premise. The method of registration through
the IPOPHL, as laid down by the IP Code, is distinct and separate from the method of
registration through the WIPO, as set in the Madrid Protocol. Comparing the two methods of
registration despite their being governed by two separate systems of registration is thus
misplaced.

The IPAP misapprehends the procedure for examination under the Madrid Protocol,
The difficulty, which the IPAP illustrates, is minimal, if not altogether inexistent. The IPOPHL
actually requires the designation of the resident agent when it refuses the registration of a
mark. Local representation is further required in the submission of the Declaration of Actual
Use, as well as in the submission of the license contract. The Madrid Protocol accords with the
intent and spirit of the IP Code, particularly on the subject of the registration of trademarks.
The Madrid Protocol does not amend or modify the IP Code on the acquisition of trademark
rights considering that the applications under the Madrid Protocol are still examined
according to the relevant national law. In that regard, the IPOPHL will only grant protection
to a mark that meets the local registration requirements.

CATERPILLAR, INC., Petitioner, - versus - MANOLO P. SAMSON, Respondent.

G.R. No. 205972 and G.R. No. 164352, November 9, 2016, FIST DIVISION, BERSAMIN J,.

An action for the cancellation of trademark is a remedy available to a person who

believes that he is or will be damaged by the registration of a mark. On the other hand, the
criminal actions for unfair competition involved the determination of whether or not Samson
had given his goods the general appearance of the goods of Caterpillar, with the intent to deceive
the public or defraud Caterpillar as his competitor. In the suit for the cancellation of
trademark, the issue of lawful registration should necessarily be determined, but
registration was not a consideration necessary in unfair competition. Indeed, unfair
competition is committed if the effect of the act is "to pass off to the public the goods of one man
as the goods of another; it is independent of registration. As fittingly put in R.F. & Alexander &
Co. v. Ang,"one may be declared unfair competitor even if his competing trade-mark is
registered."

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 MERCANTILE LAW
J. BERSAMIN

FACTS:
Antecedents
Caterpillar is a foreign corporation engaged in the manufacture and distribution of footwear,
clothing and related items, among others. Its products are known for six core trademarks,
namely, "CATERPILLAR", "CAT" "CATERPILLAR & DESIGN" "CAT AND DESIGN"
"WALKING MACHINES" and "TRACK-TYPE TRACTOR & DESIGN (Core Marks), all of which
are alleged as internationally known. On the other hand, Samson, doing business under the
names and styles of Itti Shoes Corporation, Kolm's Manufacturing Corporation and
Caterpillar Boutique and General Merchandise, is the proprietor of various retail outlets in the
Philippines selling footwear, bags, clothing, and related items under the trademark
"CATERPILLAR", registered in 1997 under Trademark Registration No. 64705 issued by the
Intellectual Property Office (IPO).

G.R. No. 164352

Caterpillar alleged that Samson and his affiliate companies allegedly sell and distribute
products clothed with the general appearance of its own products.

On July 31, 2000, Caterpillar commenced a civil action against Samson and his business
entities, with the IPO as a nominal party - for Unfair Competition, Damages and Cancellation
of Trademark with Application for Temporary Restraining Order (TRO) and/or Writ of
Preliminary Injunction - docketed as Civil Case No. Q-00-41446 of the RTC in Quezon City. In
said civil action, the RTC denied Caterpillar's application for the issuance of the TRO.
Subsequently, six criminal complaints for unfair competition under Section 168.3(a), in
relation to Section 123 .1, Section 131.1 and Section 170 of the IP Code, were filed in the RTC,
Branch 256, in Muntinlupa City, presided by Judge Alberto L. Lerma, docketed as Criminal
Cases Nos. 02-238 to 02-243.

Upon motion filed by Samson, Presiding Judge Lerma found that there exist a prejudicial
question and suspended the arraignment and all other proceedings in Criminal Cases Nos. 02-
240 to 02-243 until Civil Case No. Q-00-41446 was finally resolved. The CA found no grave
abuse of discretion on the part of RTC in suspending the proceeding in the criminal case.

G.R. No. 205972

In the meanwhile, in August 2002, upon receiving the information that Samson and his
affiliate entities continuously sold and distributed products bearing Caterpillar's Core Marks
without Caterpillar's consent, the latter requested the assistance of the Regional Intelligence
and Investigation Division of the National Region Public Police (RIID-NCRPO) for the
conduct of an investigation. Subsequently, after the investigation, the RIIDNCRPO applied for
and was granted 16 search warrants against various outlets owned or operated by Samson. The
warrants were served on August 27, 2002, and as the result products bearing Caterpillar's Core
Marks were seized and confiscated. Consequently, on the basis of the search warrants issued
by the various courts, Caterpillar again instituted criminal complaints in the DOJ for
violation of Section 168.3(a), in relation to Sections 131.3, 123.l (e) and 170 of the IP Code
against Samson. (Note: the criminal complaints describe here is distinct and separate from the
criminal complaints in G.R. No. 164352)

After the conduct of the preliminary investigation, the DOJ, through State Prosecutor Melvin
J. Abad, issued a joint resolution dated August 21, 2003 dismissing the complaint upon finding
that there was no probable cause to charge Samson with unfair competition. The Secretary of
Justice affirmed the dismissal. Caterpillar appealed to the CA through a petition for review
under Rule 43, Rules of Court however, the CA denied due course to Caterpillar's petition for
review.

ISSUES:
Page 37 of 46
 MERCANTILE LAW
J. BERSAMIN

1. In G.R. No. 164352 - whether or not the CA committed a reversible error in ruling that the
trial court a quo did not commit grave abuse of discretion in suspending the criminal
proceedings on account of a prejudicial question; and,
2. In G.R. No. 205972 - whether or not the CA correctly denied the petition for review filed
by Caterpillar.

RULING:

G.R. No. 164352

Civil Case No. Q-00-41446 did not operate as a prejudicial question that justified the
suspension of the proceedings in Criminal Cases Nos. Q-02-108043-44.

Civil Case No. Q-00-41446, the civil case filed by Caterpillar in the RTC in Quezon City, was
for unfair competition, damages and cancellation of trademark, while Criminal Cases Nos. Q-
02-108043-44 were the criminal prosecution of Samson for unfair competition. A common
element of all such cases for unfair competition - civil and criminal - was fraud. Under Article
33 of the Civil Code, a civil action entirely separate and distinct from the criminal action may
be brought by the injured party in cases of fraud, and such civil action shall proceed
independently of the criminal prosecution.

Furthermore, the present case failed to meet the elements of a prejudicial question provided
in Section 7 of Rule 111, Rules of Court, to wit: (a) a previously instituted civil action involves
an issue similar to or intimately related to the issue raised in the subsequent criminal action,
and (b) the resolution of such issue determines whether or not the criminal action may proceed.

An action for the cancellation of trademark like Civil Case No. Q-00- 41446 is a remedy
available to a person who believes that he is or will be damaged by the registration of a mark.
On the other hand, the criminal actions for unfair competition (Criminal Cases Nos. Q-02-
108043-44) involved the determination of whether or not Samson had given his goods the
general appearance of the goods of Caterpillar, with the intent to deceive the public or
defraud Caterpillar as his competitor. In the suit for the cancellation of trademark, the
issue of lawful registration should necessarily be determined, but registration was not
a consideration necessary in unfair competition. Indeed, unfair competition is
committed if the effect of the act is "to pass off to the public the goods of one man as the goods
of another; it is independent of registration. As fittingly put in R.F. & Alexander & Co. v.
Ang,"one may be declared unfair competitor even if his competing trade-mark is registered."

Clearly, the determination of the lawful ownership of the trademark in the civil action was
not determinative of whether or not the criminal actions for unfair competition shall proceed
against Samson.

G.R. No. 205972

CA correctly denied the petition for review filed by Caterpillar.

Firstly, Caterpillar assailed the resolution of the Secretary of Justice by filing a petition for
review under Rule 43 of the Rules of Court. Such resort to the petition for review under Rule
43 was erroneous, and the egregious error warranted the denial of the appeal. The petition for
review under Rule 43 applied to all appeals to the CA from quasi-judicial agencies or bodies,
particularly those listed in Section 1 of Rule 43. However, the Secretary of Justice, in the review
of the findings of probable cause by the investigating public prosecutor, was not exercising a
quasi-judicial function, but performing an executive function.

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J. BERSAMIN

Moreover, the courts could intervene in the determination of probable cause only through the
special civil action for certiorari under Rule 65 of the Rules of Court, not by appeal through
the petition for review under Rule 43. Thus, the CA could not reverse or undo the findings
and conclusions on probable cause by the Secretary of Justice except upon clear
demonstration of grave abuse of discretion amounting to lack or excess of jurisdiction
committed by the Secretary of Justice.

Even discounting the technicalities as to consider Caterpillar's petition for review as one
brought under Rule 65, the recourse must still fail. In not finding probable cause to indict
Samson for unfair competition, State Prosecutor Abad as the investigating public prosecutor
discharged the discretion given to him by the law. Specifically, he resolved as follows:

It appears from the records that respondent (referring to SAMSON) started marketing his
(class 25) products bearing the trademark Caterpillar as early as 1992. In 1994, respondent
caused the registration of the trademark "Caterpillar With A Triangle Device Beneath The
Letter [A]" with the Intellectual Property Office. Sometime on June 16, 1997, the IPO issued
Certificate of Registration No. 64705 which appears to be valid for twenty (20) years, or up to
June 16, 2017. Upon the strength of this registration, respondent continued with his business
of marketing shoes, slippers, sandals, boots and similar Class 25 items bearing his registered
trademark "Caterpillar". Under the law, respondent's operative act of registering his Caterpillar
trademark and the concomitant approval/issuance by the governmental entity concerned,
conferred upon him the exclusive right to use said trademark unless otherwise declared illegal.
There being no evidence to controvert the fact that respondent's Certificate of Registration
No. 64705 covering Caterpillar trademark was fraudulently or illegally obtained, it necessarily
follows that its subsequent use and/or being passed on to the public militates malice or
fraudulent intent on the part of respondent. Otherwise stated and from the facts obtaining,
presumption of regularity lies, both from the standpoint of registration and use/passing on of
the assailed Caterpillar products.

Complainant's argument(referring to CATERPILLAR) that respondent may still be held liable

for unfair competition by reason of his having passed on five (5) other Caterpillar products
like "Cat", "Caterpillar", "Cat and Design", "Walking Machines" and "Track-Type Tractor
Design" is equally difficult to sustain. As may be gleaned from the records, respondent has
been engaged in the sale and distribution of Caterpillar products since 1992 leading to the
establishment of numerous marketing outlets. As such, it would be difficult to assail the
presumption that respondent has already established goodwill insofar as his registered
Caterpillar products are concerned. On the other hand, complainant's registration of the
other Caterpillar products appears to have been caused only in 1995. In this premise,
respondent may be considered as prior user, while the latter, a subsequent one. Jurisprudence
dictates that prior user of the trademark by one, will controvert the claim by a subsequent one.

_________________________________________________________________________________

MICROSOFT CORPORATION v. ROLANDO MANANSALA and/or MEL MANANSALA,

doing business as DATAMAN TRADING COMPANY and/or COMIC ALLEY*
G.R.No. 166391, OCTOBER 21, 2015, BERSAMIN, J., FIRST DIVISION

Criminal Law; Copyright Infringement; The commission of any of the acts mentioned in
Section 5 of Presidential Decree (PD) No. 49 without the copyright owners consent constituted
actionable copyright infringement.Accordingly, the commission of any of the acts
mentioned in Section 5 of Presidential Decree No. 49 without the copyright owners consent
constituted actionable copyright infringement. In Columbia Pictures, Inc. v. Court of
Appeals, 261 SCRA 144 (1996), the Court has emphatically declared: Infringement of a
copyright is a trespass on a private domain owned and occupied by the owner of the
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copyright, and, therefore, protected by law, and infringement of copyright, or piracy, which is
a synonymous term in this connection, consists in the doing by any person, without the
consent of the owner of the copyright, of anything the sole right to do which is conferred by
statute on the owner of the copyright.

Criminal Law; Copyright Infringement; To hold, as the Court of Appeals (CA) incorrectly
did, that the legislative intent was to require that the computer programs be first photographed,
photo-engraved, or pictorially illustrated as a condition for the commission of copyright
infringement invites ridicule.Presidential Decree No. 49 thereby already acknowledged the
existence of computer programs as works or creations protected by copyright. To hold, as the
CA incorrectly did, that the legislative intent was to require that the computer programs be
first photographed, photo-engraved, or pictorially illustrated as a condition for the
commission of copyright infringement invites ridicule. Such interpretation of Section 5(a) of
Presidential Decree No. 49 defied logic and common sense because it focused on terms like
copy, multiply, and sell, but blatantly ignored terms like photographs, photo-
engravings, and pictorial illustrations. Had the CA taken the latter words into proper
account, it would have quickly seen the absurdity of its interpretation.

Same; Same; The mere sale of the illicit copies of the software programs was enough by
itself to show the existence of probable cause for copyright infringement. There was no need for
the petitioner to still prove who copied, replicated or reproduced the software programs.The
mere sale of the illicit copies of the software programs was enough by itself to show the
existence of probable cause for copyright infringement. There was no need for the petitioner
to still prove who copied, replicated or reproduced the software programs. Indeed, the public
prosecutor and the DOJ gravely abused their discretion in dismissing the petitioners charge
for copyright infringement against the respondents for lack of evidence. There was grave
abuse of discretion because the public prosecutor and the DOJ acted whimsically or
arbitrarily in disregarding the settled jurisprudential rules on finding the existence of
probable cause to charge the offender in court. Accordingly, the CA erred in upholding the
dismissal by the DOJ of the petitioners petition for review.

FACTS

Petitioner (Microsoft Corporation) is the copyright and trademark owner of all rights
relating to all versions and editions of Microsoft software (computer programs) such as, but
not limited to, MS-DOS (disk operating system), Microsoft Encarta, Microsoft Windows,
Microsoft Word, Microsoft Excel, Microsoft Access, Microsoft Works, Microsoft Powerpoint,
Microsoft Office, Microsoft Flight Simulator and Microsoft FoxPro, among others, and their
users guide/manuals. Rolando Manansala is doing business under the name of DATAMAN
TRADING COMPANY and/or COMIC ALLEY. Manansala, without authority from petitioner,
was engaged in distributing and selling Microsoft computer software programs.

A private investigator accompanied by an agent from NBI was able to purchase 6 CD-
ROMs containing various computer programs belonging to petitioner. A search warrant was
then issued and was served on Manansalas premises and yielded several illegal copies of
Microsoft programs. Subsequently, petitioner filed an Affidavit-Complaint in the DOJ based
on the results of the search and seizure operation conducted on private respondents
premises.

However, the State Prosecutor dismissed the charge against Manansala for violation of
Section 29 P.D. 49 on the ground that there is no proof that Manansala was the one who
really printed or copied the products of Microsoft for sale in his store. The State Prosecutor
recommended that Manansala be charged for violation of Article 189 of the Revised Penal
Code. The charge for violation of Section 29 of PD No. 49 is recommended dismissed for lack
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of evidence. Petitioner filed a Motion for Partial Reconsideration arguing that printing or
copying is not essential in the crime of copyright infringement under Section 29 of PD No. 49.

ISSUE

WON printing or copying is not essential in the commission of the crime of copyright
infringement under Section 29 of PD No. 49.

RULING

YES. The commission of any of the acts mentioned in Section 5 of PD No. 49 without
the copyright owners consent constituted actionable copyright infringement. Infringement of
a copyright is a trespass on a private domain owned and occupied by the owner of the
copyright, and, therefore, protected by law, and infringement of copyright, or piracy, which is
a synonymous term in this connection, consists in the doing by any person, without the
consent of the owner of the copyright, of anything the sole right to do which is conferred by
statute on the owner of the copyright.

The gravamen of copyright infringement, is not merely the unauthorized

manufacturing of intellectual works but rather the unauthorized performance of any of the
acts covered by Section 5. Hence, any person who performs any of the acts under Section 5
without obtaining the copyright owners prior consent renders himself civilly and criminally
liable for copyright infringement.

The conjunctive and should not be taken in its ordinary acceptation, but should be
construed like the disjunctive or if the literal interpretation of the law would pervert or
obscure the legislative intent. To accept the CAs reading and interpretation is to accept
absurd results because the violations listed in Section 5(a) of PD No, 49 To print, reprint,
publish, copy, distribute, multiply, sell, and make photographs, photo-engravings, and pictorial
illustration of the works cannot be carried out on all of the classes of works enumerated in
Section 2 of PD No. 49.

PD No. 49 thereby already acknowledged the existence of computer programs as works

or creations protected by copyright. To hold that the legislative intent was to require that the
computer programs be first photographed, photo-engraved, or pictorially illustrated as a
condition for the commission of copyright infringement invites ridicule. Such interpretation
of Section 5(a) of PD No. 49 defied logic, and common sense because if focused on terms like
copy, multiply and sell but blatantly ignored terms like photographs, photo-
engravings, and pictorial illustrations. Had the CA taken the latter words into proper
account, it would have quickly seen the absurdity of its interpretation.

The mere sale of the illicit copies of the software programs was enough by itself to
show the existence of probable cause for copyright infringement. There was no need for the
petitioner to still prove who copied, replicated or reproduced the software programs.

JUNO BATISTIS v. PEOPLE OF THE PHILIPPINES

G.R. No. 181571, 16 December 2009, FIRST DIVISION (BERSAMIN, J.)

The act of unauthorized manufacture, sale and distribution of counterfeit products

constitute infringement of trademark.

The Fundador trademark characterized the brandy products manufactured by Pedro

Domecq, S.A. of Cadiz, Spain. It was duly registered in the Principal Register of the
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Philippines Patent Office on July 12, 1968 under Certificate of Registration No. 15987, for a
term of 20 years from November 5, 1970. The registration was renewed for another 20 years
effective November 5, 1990. Allied Domecq Philippines, Inc., a Philippine corporation
exclusively authorized to distribute Fundador brandy products imported from Spain wholly
in finished form, initiated this case against Juno Batistis. Upon its request, agents of the
National Bureau of Investigation (NBI) conducted a test-buy in the premises of Batistis, and
thereby confirmed that he was actively engaged in the manufacture, sale and distribution of
counterfeit Fundador brandy products. Upon application of the NBI agents based on the
positive results of the test-buy, Judge Antonio M. Eugenio, Jr. of the Manila RTC issued a
search warrant authorizing the search of the premises of Batistis. The search yielded 20 empty
Carlos I bottles, 10 empty bottles of Black Label whiskey, two empty bottles of Johnny
Walker Swing, an empty bottle of Remy Martin XO, an empty bottle of Chabot, 241
empty Fundador bottles, 163 boxes of Fundador, a half sack of Fundador plastic caps, two filled
bottles of Fundador brandy, and eight cartons of empty Jose Cuervo bottles.

The Office of the City Prosecutor of Manila then formally charged Batistis in the RTC
with two separate offenses, namely, infringement of trademark and unfair competition to
which he was found guilty beyond reasonable on the two offenses. Batistis appealed to the
CA, which affirmed his conviction for infringement of trademark, but acquitted him of unfair
competition. After the CA denied his motion for reconsideration, Batistis brought this appeal.

ISSUE:

Whether Batistis is guilty of infringement of trademark.

RULING:

YES. Article 155 of the Intellectual Property Code identifies the acts constituting
infringement of trademark, viz:

Section 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.

Harvey Tan, Operations Manager of Pedro Domecq, S.A. whose task involved the
detection of counterfeit products in the Philippines, testified that the seized Fundador
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brandy, when compared with the genuine product, revealed several characteristics of
counterfeiting, namely: (a) the Bureau of Internal Revenue (BIR) seal label attached to the
confiscated products did not reflect the word tunay when he flashed a black light against the
BIR label; (b) the tamper evident ring on the confiscated item did not contain the word
Fundador; and (c) the word Fundador on the label was printed flat with sharper edges,
unlike the raised, actually embossed, and finely printed genuine Fundador trademark.

There is no question, therefore, that Batistis exerted the effort to make the counterfeit
products look genuine to deceive the unwary public into regarding the products as genuine.
The buying public would be easy to fall for the counterfeit products due to their having been
given the appearance of the genuine products, particularly with the difficulty of detecting
whether the products were fake or real if the buyers had no experience and the tools for
detection, like black light. He thereby infringed the registered Fundador trademark by the
colorable imitation of it through applying the dominant features of the trademark on the fake
products, particularly the two bottles filled with Fundador brandy. His acts constituted
infringement of trademark as set forth in Section 155, supra.

_________________________________________________________________________________

SPECIAL LAWS

FINANCIAL REHABILITATION AND INSOLVENCY ACT

PHILIPPINE BANK OF COMMUNICATIONS vs. BASIC POLYPRINTERS AND

PACKAGING CORPORATION
G.R. No. 187581, FIRST DIVISION, October 20, 2014, BERSAMIN, J.

Corporations Corporate Rehabilitation Under the Interim Rules, rehabilitation is the

process of restoring the debtor to a position of successful operation and solvency, if it is shown
that its continuance of operation is economically feasible and its creditors can recover by way of
the present value of payments projected in the plan more if the corporation continues as a going
concern that if it is immediately liquidated. It contemplates a continuance of corporate life
and activities in an effort to restore and reinstate the corporation to its former position of
successful operation and solvency.

Same Same The basic issues in rehabilitation proceedings concern the viability and
desirability of continuing the business operations of the petitioning corporation.
Consequently, the basic issues in rehabilitation proceedings concern the viability and
desirability of continuing the business operations of the petitioning corporation. The
determination of such issues was to be carried out by the court appointed rehabilitation
receiver, who was Cacho in this case. Moreover, Republic Act No. 10142 (Financial
Rehabilitation and Insolvency Act [FRIA] of 2010), a law that is applicable hereto, has defined a
corporate debtor as a corporation duly organized and existing under Philippine laws that has
become insolvent. The term insolvent is defined in Republic Act No. 10142 as the financial
condition of a debtor thatis generally unable to pay its or his liabilities as they fall due in the
ordinary course of business or has liabilities that are greater than its or his assets.

FACTS:

Basic Polyprinters and Packaging Corporation was a domestic corporation engaged in

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the business of printing greeting cards, gift wrappers, gift bags, calendars, posters, labels and
other novelty items.

Basic Polyprinters, along with the eight other corporations belonging to the Limtong
Group of Companies, filed a joint petition for suspension of payments with approval of the
proposed rehabilitation in the RTC. The RTC issued a stay order, and eventually approved the
rehabilitation plan, but the CA reversed the RTC on October 25, 2005, and directed the
petitioning corporations to file their individual petitions for suspension of payments and
rehabilitation in the appropriate courts.

Accordingly, Basic Polyprinters brought its individual petition, averring therein that:

a. its business since incorporation had been very viable and financially profitable;
b. it had obtained loans from various banks, and had owed accounts payable to
various creditors;
c. the Asian currency crisis, devaluation of the Philippine peso, and the current state
of affairs of the Philippine economy, coupled with: (i) high interest rates, penalties
and charges by its creditors; (ii) low demand for gift items and cards due to the
economic recession and the use of cellular phones; (iii) direct competition from
stores like SM, Gaisano, Robinson and other malls; and (iv) the fire of July 19,
2002 that had destroyed its warehouse containing inventories worth
P264,000,000.00, resulting in difficulty of meeting its obligations;
d. its operations would be hampered and would render rehabilitation difficult should
its creditors enforce their claims through legal actions, including foreclosure
proceedings;
e. included in its overall Rehabilitation Program was the full payment of its
outstanding loans in favor of petitioner Philippine Bank of Communications
(PBCOM), RCBC, Land Bank, EPCIBank and AUB via repayment over 15 years with
moratorium of two-years for the interest and five years for the principal at 5%
interest per annum and a dacion en pago of its affiliate property in favor of EPCI
Bank; and
f. its assets worth P15,374,654.00 with net liabilities amounting to P13,031,438.00.

RTC issued the stay order and appointed Manuel N. Cacho III as the rehabilitation
receiver, and required all creditors and interested parties, including the SEC.

After the initial hearing and evaluation of the comments and opposition of the
creditors, including PBCOM, the RTC gave due course to the petition and referred it to the
rehabilitation receiver for evaluation and recommendation.

After the rehabilitation receiver submitted his report recommending the approval of
the rehabilitation plan, the RTC issued an order approving the rehabilitation plan which was
affirmed by the CA agreeing with the finding of the rehabilitation receiver that there were
sufficient evidence, factors and actual opportunities in the rehabilitation plan indicating that
Basic Polyprinters could be successfully rehabilitated in due time.

PBCOM consistently opposed the rehabilitation from RTC to the CA and to the SC
arguing mainly that Basic Polyprinters liquidity was material in proceedings for corporate
rehabilitation and that a petition for rehabilitation presupposed that the petitioning
corporation had sufficient property to cover all its indebtedness, but Basic Polyprinters
did not show so because its assets were much less than its outstanding obligations. Likewise,
it averred that no that the rehabilitation plan did not contain the material financial
commitments required by Section 5, Rule 4 of the Interim Rules of Procedure for Corporate
Rehabilitation.
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ISSUES:

1. Whether liquidity is an issue in a petition for rehabilitation.

2. Whether material financial commitment is required in a rehabilitation plan.

RULING:

LIQUIDITY IS NOT AN ISSUE IN A PETITION FOR REHABILITATION

Rehabilitation is the process of restoring the debtor to a position of successful

operation and solvency, if it is shown that its continuance of operation is economically
feasible ad its creditors can recover by way of the present value of payments projected in the
plan more if the corporation continues as a going concern that if it is immediately liquidated.
It contemplates a continuance of corporate life and activities in an effort to restore
and reinstate the corporation to its former position of successful operation and
solvency.

Rehabilitation proceedings have a two-pronged purpose, namely: (a) to efficiently and

equitably distribute the assets of the insolvent debtor to its creditors; and (b) to provide the
debtor with a fresh start.

The purpose of rehabilitation proceedings is to enable the company to gain a new lease
on life and thereby allow creditors to be paid their claims from its earnings. Consequently,
the basic issues in rehabilitation proceedings concern the viability and desirability of
continuing the business operations of the petitioning corporation. The determination
of such issues was to be carried out by the court-appointed rehabilitation receiver.

Republic Act No. 10142 (FRIA of 2010), a law that is applicable hereto, has defined a
corporate debtor as a corporation duly organized and existing under Philippine laws that has
become insolvent. The term insolvent is defined in said law as the financial condition of a
debtor that is generally unable to pay its or his liabilities as they fall due in the ordinary
course of business or has liabilities that are greater than its or his assets. As such, the
contention that rehabilitation becomes inappropriate because of the perceived insolvency of
Basic Polyprinters was incorrect.

MATERIAL FINANCIAL COMMITMENT IS REQUIRED IN A REHABILITATION PLAN

A material financial commitment becomes significant in gauging the resolve,

determination, earnestness and good faith of the distressed corporation in financing
the proposed rehabilitation plan. This commitment may include the voluntary
undertakings of the stockholders or the would-be investors of the debtor-corporation
indicating their readiness, willingness and ability to contribute funds or property to guarantee
the continued successful operation of the debtor corporation during the period of
rehabilitation.

The financial commitments presented by Basic Polyprinters were insufficient for the
purpose of rehabilitation. The commitment to add P10,000,000.00 working capital appeared
to be doubtful considering that the insurance claim from which said working capital would be
sourced had already been written-off by Basic Polyprinterss affiliate, Wonder Book
Corporation.

The conversion of all deposits for future subscriptions to common stock and the
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treatment of all payables to officers and stockholders as trade payables was hardly
constituting material financial commitments. Such conversion of cash advances to trade
payables was, in fact, a mere re-classification of the liability entry and had no effect on the
shareholders deficit.

Basic Polyprinterss rehabilitation plan likewise failed to offer any proposal on how it
intended to address the low demands for their products and the effect of direct competition
from stores like SM, Gaisano, Robinsons, and other malls.
Basic Polyprinterss proposal to enter into the dacion en pago to create a source of
fresh capital was not feasible because the object thereof would not be its own property but
one belonging to its affiliate, TOL Realty and Development Corporation, a corporation also
undergoing rehabilitation.

Hence, the Court held that the rehabilitation plan for Basic Polyprinters cannot be said
to be genuine and made in good faith, for it was, in fact, unilateral and detrimental to its
creditors and the public.

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