DY, CZARA LORAINE F.

DY

I. SHORT TITLE: GREAT ASIAN vs. CA

II. TOPIC: CORPORATE POWERS

III. FULL TITLE: GREAT ASIAN SALES CENTER CORPORATION and TAN CHONG
LIN, petitioners, vs. THE COURT OF APPEALS and BANCASIA FINANCE AND
INVESTMENT CORPORATION, respondents. G.R. No. 105774, April 25, 2002, CARPIO, J.

IV. STATEMENT OF FACTS:

Great Asian is engaged in the business of buying and selling general merchandise, in particular
household appliances. On March 17, 1981, the board of directors of Great Asian approved a
resolution authorizing its Treasurer and General Manager, Arsenio Lim Piat, Jr. (Arsenio for
brevity) to secure a loan from Bancasia in an amount not to exceed P1.0 million. The board
resolution also authorized Arsenio to sign all papers, documents or promissory notes necessary to
secure the loan. On February 10, 1982, the board of directors of Great Asian approved a second
resolution authorizing Great Asian to secure a discounting line with Bancasia in an amount not
exceeding P2.0 million. The second board resolution also designated Arsenio as the authorized
signatory to sign all instruments, documents and checks necessary to secure the discounting line.

On March 4, 1981, Tan Chong Lin signed a Surety Agreement in favor of Bancasia to
guarantee, solidarily, the debts of Great Asian to Bancasia. On January 29, 1982, Tan Chong Lin
signed a Comprehensive and Continuing Surety Agreement in favor of Bancasia to guarantee,
solidarily, the debts of Great Asian to Bancasia. Thus, Tan Chong Lin signed two surety
agreements (Surety Agreements for brevity) in favor of Bancasia.

Great Asian, through its Treasurer and General Manager Arsenio, signed four (4) Deeds of
Assignment of Receivables (Deeds of Assignment for brevity), assigning to Bancasia fifteen (15)
postdated checks. Nine of the checks were payable to Great Asian, three were payable to New
Asian Emp., and the last three were payable to cash. Various customers of Great Asian issued these
postdated checks in payment for appliances and other merchandise.

Great Asian and Bancasia signed the first Deed of Assignment on January 12, 1982 covering
four postdated checks with a total face value of P244,225.82, with maturity dates not later than
March 17, 1982. Of these four postdated checks, two were dishonored. Great Asian and Bancasia
signed the second Deed of Assignment also on January 12, 1982 covering four postdated checks
with a total face value of P312,819.00, with maturity dates not later than April 1, 1982. All these
four checks were dishonored. Great Asian and Bancasia signed the third Deed of Assignment on
February 11, 1982 covering eight postdated checks with a total face value of P344,475.00,
with maturity dates not later than April 30, 1982. All these eight checks were dishonored. Great
Asian and Bancasia signed the fourth Deed of Assignment on March 5, 1982 covering one
postdated check with a face value of P200,000.00, with maturity date on March 18, 1982. This last
check was also dishonored. Great Asian assigned the postdated checks to Bancasia at a discount
rate of less than 24% of the face value of the checks.
 Arsenio endorsed all the fifteen dishonored checks by signing his name at the back of the
checks. Eight of the dishonored checks bore the endorsement of Arsenio below the stamped name
of Great Asian Sales Center, while the rest of the dishonored checks just bore the signature of
Arsenio. The drawee banks dishonored the fifteen checks on maturity when deposited for
collection by Bancasia, with any of the following as reason for the dishonor: account closed,
payment stopped, account under garnishment, and insufficiency of funds. The total amount of the
fifteen dishonored checks is P1,042,005.00. Below is a table of the fifteen dishonored checks:

Drawee Bank Check No. Amount Maturity Date

1st Deed
Solid Bank C-A097480 P137,500.00 March 16, 1982
Pacific Banking Corp. 23950 P47,211.00 March 17, 1982
2nd Deed
Metrobank 030925 P68,722.00 March 19, 1982
030926 P45,230.00 March 19, 1982
Solidbank C-A097478 P140,000.00 March 23, 1982
Pacific Banking Corp. CC 769910 P58,867.00 April 1, 1982
3rd Deed
Phil. Trust Company 060835 P21,228.00 April 21, 1982
060836 P22,187.00 April 28, 1982
Allied Banking Corp. 11251624 P41,773.00 April 22, 1982
11251625 P38,592.00 April 29, 1982
Pacific Banking Corp. 237984 P37,886.00 April 23, 1982
237988 P47,385.00 April 28, 1982
237985 P46,748.00 April 30, 1982
Security Bank & Trust Co. 22061 P88,676.00 April 30, 1982
4th Deed

Pacific Banking Corp. 860178 P200,000.00 March 18, 1982

After the drawee bank dishonored Check No. 097480 dated March 16, 1982, Bancasia referred
the matter to its lawyer, Atty. Eladia Reyes, who sent by registered mail to Tan Chong Lin a letter
dated March 18, 1982, notifying him of the dishonor and demanding payment from
him. Subsequently, Bancasia sent by personal delivery a letter dated June 16, 1982 to Tan Chong
Lin, notifying him of the dishonor of the fifteen checks and demanding payment from him. Neither
Great Asian nor Tan Chong Lin paid Bancasia the dishonored checks.

On May 21, 1982, Great Asian filed with the then Court of First Instance of Manila a petition
for insolvency, verified under oath by its Corporate Secretary, Mario Tan. Attached to the verified
petition was a Schedule and Inventory of Liabilities and Creditors of Great Asian Sales Center
Corporation, listing Bancasia as one of the creditors of Great Asian in the amount
of P1,243,632.00.

On June 23, 1982, Bancasia filed a complaint for collection of a sum of money against Great
Asian and Tan Chong Lin. Bancasia impleaded Tan Chong Lin because of the Surety Agreements
he signed in favor of Bancasia. In its answer, Great Asian denied the material allegations of the
complaint claiming it was unfounded, malicious, baseless, and unlawfully instituted since there
was already a pending insolvency proceedings, although Great Asian subsequently withdrew its
petition for voluntary insolvency. Great Asian further raised the alleged lack of authority of
Arsenio to sign the Deeds of Assignment as well as the absence of consideration and consent of
all the parties to the Surety Agreements signed by Tan Chong Lin.

V. STATEMENT OF THE CASE:

Ruling of the Trial Court

The trial court finds that the plaintiff has established its causes of action against the
defendants. The Board Resolution (Exh. T), dated March 17, 1981, authorizing Arsenio Lim Piat,
Jr., general manager and treasurer of the defendant Great Asian to apply and negotiate for a loan
accommodation or credit line with the plaintiff Bancasia in an amount not exceeding One Million
Pesos (P1,000,000.00), and the other Board Resolution approved on February 10, 1982,
authorizing Arsenio Lim Piat, Jr., to obtain for defendant Asian Center a discounting line with
Bancasia at prevailing discounting rates in an amount not to exceed Two Million Pesos
(P2,000,000.00), both of which were intended to secure money from the plaintiff financing firm
to finance the business operations of defendant Great Asian, and pursuant to which Arsenio Lim
Piat, Jr. was able to have the aforementioned fifteen (15) checks totaling P1,042,005.00 discounted
with the plaintiff, which transactions were obviously known by the beneficiary thereof, defendant
Great Asian, as in fact, in its aforementioned Schedule and Inventory of Liabilities and Creditors
(Exh. DD, DD-1) attached to its Verified Petition for Insolvency, dated May 12, 1982 (pp. 50-56),
the defendant Great Asian admitted an existing liability to the plaintiff, in the amount
of P1,243,632.00, secured by it, by way of financing accommodation, from the said financing
institution Bancasia Finance and Investment Corporation, plaintiff herein, sufficiently establish
the liability of the defendant Great Asian to the plaintiff for the amount of P1,042,005.00 sought
to be recovered by the latter in this case.[5]

xxx

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the two (2)
defendants ordering the latter, jointly and severally, to pay the former:

(a) The amount of P1,042,005.00, plus interest thereon at the legal rate from the filing of
the complaint until the same is fully paid;

(b) Attorneys fees equivalent to twenty per cent (20%) of the total amount due; and

(c) The costs of suit.

SO ORDERED.[6]

Ruling of the Court of Appeals

On appeal, the Court of Appeals sustained the decision of the lower court, deleting only the
award of attorneys fees, as follows:
As against appellants bare denial of it, the Court is more inclined to accept the appellees version,
to the effect that the subject deeds of assignment are but individual transactions which -- being
collectively evidentiary of the loan accommodation and/or credit line it granted the appellant
corporation -- should not be taken singly and distinct therefrom. In addition to its plausibility, the
proposition is, more importantly, adequately backed by the documentary evidence on
record. Aside from the aforesaid Deeds of Assignment (Exhs. A, D, I, and R) and the Board
Resolutions of the appellant corporations Board of Directors (Exhs. T, U and V), the appellee --
consistent with its theory -- interposed the Surety Agreements the appellant Tan Chong Lin
executed (Exhs. W and X), as well as the demand letters it served upon the latter as surety (Exhs.
Y and Z). It bears emphasis that the second Resolution of the appellant corporations Board of
Directors (Exh. V) even closely coincides with the execution of the February 11, 1982 and March
5, 1982 Deeds of Assignment (Exhs. I and R). Were the appellants posturings true, it seems rather
strange that the appellant Tan Chong Lin did not even protest or, at least, make known to the
appellee what he -- together with the appellant corporation -- represented to be a corporate larceny
to which all of them supposedly fell prey. In the petition for voluntary insolvency it filed, the
appellant corporation, instead, indirectly acknowledged its indebtedness in terms of financing
accommodations to the appellee, in an amount which, while not exactly matching the sum herein
sought to be collected, approximates the same (Exhs. CC, DD and DD-1).[7]

xxx

The appellants contend that the foregoing warranties enlarged or increased the suretys risk, such
that appellant Tan Chong Lin should be released from his liabilities (pp. 37-44, Appellants Brief).
Without saying more, the appellants position is, however, soundly debunked by the undertaking
expressed in the Comprehensive and Continuing Surety Agreements (Exhs. W and X), to the effect
that the xxx surety/ies, jointly and severally among themselves and likewise with the principal,
hereby agree/s and bind/s himself to pay at maturity all the notes, drafts, bills of exchange,
overdrafts and other obligations which the principal may now or may hereafter owe the creditor
xxx. With the possible exception of the fixed ceiling for the amount of loan obtainable, the surety
undertaking in the case at bar is so comprehensive as to contemplate each and every condition,
term or warranty which the principal parties may have or may be minded to agree on. Having
affixed his signature thereto, the appellant Tan Chong Lin is expected to have, at least, read and
understood the same.

xxx

With the foregoing disquisition, the Court sees little or no reason to go into the appellants
remaining assignments of error, save the matter of attorneys fees. For want of a statement of the
rationale therefore in the body of the challenged decision, the trial courts award of attorneys fees
should be deleted and disallowed (Abrogar vs. Intermediate Appellate Court, 157 SCRA 57).

WHEREFORE, the decision appealed from is MODIFIED, to delete the trial courts award of
attorneys fees. The rest is AFFIRMED in toto.

SO ORDERED.[8]

VI. ISSUE/s:
 The petition is anchored on the following assigned errors:

1. The respondent Court erred in not holding that the proper parties against whom this
action for collection should be brought are the drawers and indorser of the checks in
question, being the real parties in interest, and not the herein petitioners.

2. The respondent Court erred in not holding that the petitioner-corporation is discharged
from liability for failure of the private respondent to comply with the provisions of the
Negotiable Instruments Law on the dishonor of the checks.

3. The respondent Court erred in its appreciation and interpretation of the effect and legal
consequences of the signing of the deeds of assignment and the subsequent
indorsement of the checks by Arsenio Lim Piat, Jr. in his individual and personal
capacity and without stating or indicating the name of his supposed principal.

4. The respondent Court erred in holding that the assignment of the checks is a loan
accommodation or credit line accorded by the private respondent to petitioner-
corporation, and not a purchase and sale thereof.

5. The respondent Court erred in not holding that there was a material alteration of the
risk assumed by the petitioner-surety under his surety agreement by the terms,
conditions, warranties and obligations assumed by the assignor Arsenio Lim Piat, Jr.
under the deeds of assignment or receivables.

6. The respondent Court erred in holding that the petitioner-corporation impliedly

admitted its liability to private respondent when the former included the latter as one
of its creditors in its petition for voluntary insolvency, although no claim was filed and
proved by the private respondent in the insolvency court.

7. The respondent Court erred in holding the petitioners liable to private respondent on
the transactions in question.[9]

The issues to be resolved in this petition can be summarized into three:

1. WHETHER ARSENIO HAD AUTHORITY TO EXECUTE THE DEEDS OF

ASSIGNMENT AND THUS BIND GREAT ASIAN;

2. WHETHER GREAT ASIAN IS LIABLE TO BANCASIA UNDER THE DEEDS OF

ASSIGNMENT FOR BREACH OF CONTRACT PURSUANT TO THE CIVIL
CODE, INDEPENDENT OF THE NEGOTIABLE INSTRUMENTS LAW;

3. WHETHER TAN CHONG LIN IS LIABLE TO GREAT ASIAN UNDER THE

SURETY AGREEMENTS.

VII. RULING:

First Issue: Authority of Arsenio to Sign the Deeds of Assignment

 Great Asian asserts that Arsenio signed the Deeds of Assignment and indorsed the checks in
his personal capacity. The primordial question that must be resolved is whether Great Asian
authorized Arsenio to sign the Deeds of Assignment. If Great Asian so authorized Arsenio, then
Great Asian is bound by the Deeds of Assignment and must honor its terms.

The Corporation Code of the Philippines vests in the board of directors the exercise of the
corporate powers of the corporation, save in those instances where the Code requires stockholders
approval for certain specific acts. Section 23 of the Code provides:

SEC. 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors
or trustees x x x.

In the ordinary course of business, a corporation can borrow funds or dispose of assets of the
corporation only on authority of the board of directors. The board of directors normally designates
one or more corporate officers to sign loan documents or deeds of assignment for the corporation.

To secure a credit accommodation from Bancasia, the board of directors of Great Asian
adopted two board resolutions on different dates, the first on March 17, 1981, and the second on
February 10, 1982. These two board resolutions, as certified under oath by Great Asians Corporate
Secretary Mario K. Tan, state:

First Board Resolution

RESOLVED, that the Treasurer of the corporation, Mr. Arsenio Lim Piat, Jr., be authorized
as he is authorized to apply for and negotiate for a loan accommodation or credit line in the
amount not to exceed ONE MILLION PESOS (P1,000,000.00), with Bancasia Finance and
Investment Corporation, and likewise to sign any and all papers, documents, and/or
promissory notes in connection with said loan accommodation or credit line, including the
power to mortgage such properties of the corporation as may be needed to effectuate the
same.[10] (Emphasis supplied)

Second Board Resolution

RESOLVED that Great Asian Sales Center Corp. obtain a discounting line with
BANCASIA FINANCE & INVESTMENT CORPORATION, at prevailing discounting rates,
in an amount not to exceed** TWO MILLION PESOS ONLY (P2,000,000),** Philippine
Currency.

RESOLVED FURTHER, that the corporation secure such other forms of credit lines with
BANCASIA FINANCE & INVESTMENT CORPORATION in an amount not to exceed**
TWO MILLION PESOS ONLY (P2,000,000.00),** PESOS, under such terms and conditions
as the signatories may deem fit and proper.

RESOLVED FURTHER, that the following persons be authorized individually, jointly or

collectively to sign, execute and deliver any and all instruments, documents, checks, sureties,
etc. necessary or incidental to secure any of the foregoing obligation:
 (signed)

Specimen Signature

1. ARSENIO LIM PIAT, JR._

2. _______________________

3. _______________________

4. _______________________

PROVIDED FINALLY that this authority shall be valid, binding and effective until
revoked by the Board of Directors in the manner prescribed by law, and that BANCASIA
FINANCE & INVESTMENT CORPORATION shall not be bound by any such revocation
until such time as it is noticed in writing of such revocation.[11] (Emphasis supplied)

The first board resolution expressly authorizes Arsenio, as Treasurer of Great Asian, to apply
for a loan accommodation or credit line with Bancasia for not more than P1.0 million. Also, the
first resolution explicitly authorizes Arsenio to sign any document, paper or promissory note,
including mortgage deeds over properties of Great Asian, to secure the loan or credit line from
Bancasia.

The second board resolution expressly authorizes Great Asian to secure a discounting
line from Bancasia for not more than P2.0 million. The second board resolution also expressly
empowers Arsenio, as the authorized signatory of Great Asian, to sign, execute and deliver any
and all documents, checks x x x necessary or incidental to secure the discounting line. The
second board resolution specifically authorizes Arsenio to secure the discounting line under such
terms and conditions as (he) x x x may deem fit and proper.

As plain as daylight, the two board resolutions clearly authorize Great Asian to secure a loan
or discounting line from Bancasia. The two board resolutions also categorically designate Arsenio
as the authorized signatory to sign and deliver all the implementing documents, including checks,
for Great Asian. There is no iota of doubt whatsoever about the purpose of the two board
resolutions, and about the authority of Arsenio to act and sign for Great Asian. The second board
resolution even gave Arsenio full authority to agree with Bancasia on the terms and conditions of
the discounting line. Great Asian adopted the correct and proper board resolutions to secure a loan
or discounting line from Bancasia, and Bancasia had a right to rely on the two board resolutions
of Great Asian. Significantly, the two board resolutions specifically refer to Bancasia as the
financing institution from whom Great Asian will secure the loan accommodation or discounting
line.

Armed with the two board resolutions, Arsenio signed the Deeds of Assignment selling, and
endorsing, the fifteen checks of Great Asian to Bancasia. On the face of the Deeds of Assignment,
the contracting parties are indisputably Great Asian and Bancasia as the names of these entities are
expressly mentioned therein as the assignor and assignee, respectively. Great Asian claims that
Arsenio signed the Deeds of Assignment in his personal capacity because Arsenio signed above
his printed name, below which was the word Assignor, thereby making Arsenio the assignor. Great
Asian conveniently omits to state that the first paragraph of the Deeds expressly contains the
following words: the ASSIGNOR, Great Asian Sales Center, a domestic corporation x x x herein
represented by its Treasurer Arsenio Lim Piat, Jr. The assignor is undoubtedly Great Asian,
represented by its Treasurer, Arsenio. The only issue to determine is whether the Deeds of
Assignment are indeed the transactions the board of directors of Great Asian authorized Arsenio
to sign under the two board resolutions.

Under the Deeds of Assignment, Great Asian sold fifteen postdated checks at a discount, over
three months, to Bancasia. The Deeds of Assignment uniformly state that Great Asian,

x x x for valuable consideration received, does hereby SELL, TRANSFER, CONVEY, and
ASSIGN, unto the ASSIGNEE, BANCASIA FINANCE & INVESTMENT CORP., a
domestic corporation x x x, the following ACCOUNTS RECEIVABLES due and payable to
it, having an aggregate face value of x x x.

The Deeds of Assignment enabled Great Asian to generate instant cash from its fifteen checks,
which were still not due and demandable then. In short, instead of waiting for the maturity dates
of the fifteen postdated checks, Great Asian sold the checks to Bancasia at less than the total face
value of the checks. In exchange for receiving an amount less than the face value of the checks,
Great Asian obtained immediately much needed cash. Over three months, Great Asian entered into
four transactions of this nature with Bancasia, showing that Great Asian availed of a discounting
line with Bancasia.

In the financing industry, the term discounting line means a credit facility with a financing
company or bank, which allows a business entity to sell, on a continuing basis, its accounts
receivable at a discount.[12] The term discount means the sale of a receivable at less than its face
value. The purpose of a discounting line is to enable a business entity to generate instant cash out
of its receivables which are still to mature at future dates. The financing company or bank which
buys the receivables makes its profit out of the difference between the face value of the receivable
and the discounted price. Thus, Section 3 (a) of the Financing Company Act of 1998 provides:

Financing companies are corporations x x x primarily organized for the purpose of extending
credit facilities to consumers and to industrial, commercial or agricultural enterprises by
discounting or factoring commercial papers or accounts receivable, or by buying and
selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by
financial leasing of movable as well as immovable property. (Emphasis supplied)

This definition of financing companies is substantially the same definition as in the old Financing
Company Act (R.A. No. 5980).[13]

Moreover, Section 1 (h) of the New Rules and Regulations adopted by the Securities and
Exchange Commission to implement the Financing Company Act of 1998 states:

Discounting is a type of receivables financing whereby evidences of indebtedness of a third

party, such as installment contracts, promissory notes and similar instruments, are purchased
by, or assigned to, a financing company in an amount or for a consideration less than their
face value. (Emphasis supplied)
Likewise, this definition of discounting is an exact reproduction of the definition of discounting in
the implementing rules of the old Finance Company Act.

Clearly, the discounting arrangements entered into by Arsenio under the Deeds of Assignment
were the very transactions envisioned in the two board resolutions of Great Asian to raise funds
for its business. Arsenio acted completely within the limits of his authority under the two board
resolutions. Arsenio did exactly what the board of directors of Great Asian directed and authorized
him to do.

Arsenio had all the proper and necessary authority from the board of directors of Great Asian
to sign the Deeds of Assignment and to endorse the fifteen postdated checks. Arsenio signed the
Deeds of Assignment as agent and authorized signatory of Great Asian under an authority
expressly granted by its board of directors. The signature of Arsenio on the Deeds of Assignment
is effectively also the signature of the board of directors of Great Asian, binding on the board of
directors and on Great Asian itself. Evidently, Great Asian shows its bad faith in disowning the
Deeds of Assignment signed by its own Treasurer, after receiving valuable consideration for the
checks assigned under the Deeds.

Second Issue: Breach of Contract by Great Asian

Bancasias complaint against Great Asian is founded on the latters breach of contract under the
Deeds of Assignment. The Deeds of Assignment uniformly stipulate[14] as follows:

If for any reason the receivables or any part thereof cannot be paid by the obligor/s, the
ASSIGNOR unconditionally and irrevocably agrees to pay the same, assuming the liability to
pay, by way of penalty three per cent (3%) of the total amount unpaid, for the period of delay until
the same is fully paid.

In case of any litigation which the ASSIGNEE may institute to enforce the terms of this agreement,
the ASSIGNOR shall be liable for all the costs, plus attorneys fees equivalent to twenty-five (25%)
per cent of the total amount due. Further thereto, the ASSIGNOR agrees that any and all actions
which may be instituted relative hereto shall be filed before the proper courts of the City of Manila,
all other appropriate venues being hereby waived.

The last Deed of Assignment[15] contains the following added stipulation:

xxx Likewise, it is hereby understood that the warranties which the ASSIGNOR hereby made are
deemed part of the consideration for this transaction, such that any violation of any one, some, or
all of said warranties shall be deemed as deliberate misrepresentation on the part of the
ASSIGNOR. In such event, the monetary obligation herein conveyed unto the ASSIGNEE shall
be conclusively deemed defaulted, giving rise to the immediate responsibility on the part of the
ASSIGNOR to make good said obligation, and making the ASSIGNOR liable to pay the penalty
stipulated hereinabove as if the original obligor/s of the receivables actually defaulted. xxx

Obviously, there is one vital suspensive condition in the Deeds of Assignment. That is, in case
the drawers fail to pay the checks on maturity, Great Asian obligated itself to pay Bancasia the full
face value of the dishonored checks, including penalty and attorneys fees. The failure of the
drawers to pay the checks is a suspensive condition,[16] the happening of which gives rise to
Bancasias right to demand payment from Great Asian. This conditional obligation of Great Asian
arises from its written contracts with Bancasia as embodied in the Deeds of Assignment. Article
1157 of the Civil Code provides that -

Obligations arise from:

(1) Law;

(2) Contracts;

(3) Quasi-contracts;

(4) Acts or omissions punished by law; and

(5) Quasi-delicts.

By express provision in the Deeds of Assignment, Great Asian unconditionally obligated itself
to pay Bancasia the full value of the dishonored checks. In short, Great Asian sold the postdated
checks on with recourse basis against itself. This is an obligation that Great Asian is bound to
faithfully comply because it has the force of law as between Great Asian and Bancasia. Article
1159 of the Civil Code further provides that -

Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith.

Great Asian and Bancasia agreed on this specific with recourse stipulation, despite the fact
that the receivables were negotiable instruments with the endorsement of Arsenio. The contracting
parties had the right to adopt the with recourse stipulation which is separate and distinct from the
warranties of an endorser under the Negotiable Instruments Law. Article 1306 of the Civil Code
provides that

The contracting parties may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good customs, public order, or
public policy.

The explicit with recourse stipulation against Great Asian effectively enlarges, by agreement of
the parties, the liability of Great Asian beyond that of a mere endorser of a negotiable
instrument. Thus, whether or not Bancasia gives notice of dishonor to Great Asian, the latter
remains liable to Bancasia because of the with recourse stipulation which is independent of the
warranties of an endorser under the Negotiable Instruments Law.

There is nothing in the Negotiable Instruments Law or in the Financing Company Act (old or
new), that prohibits Great Asian and Bancasia parties from adopting the with recourse stipulation
uniformly found in the Deeds of Assignment. Instead of being negotiated, a negotiable instrument
may be assigned.[17] Assignment of a negotiable instrument is actually the principal mode of
conveying accounts receivable under the Financing Company Act. Since in discounting of
receivables the assignee is subrogated as creditor of the receivable, the endorsement of the
negotiable instrument becomes necessary to enable the assignee to collect from the drawer. This
is particularly true with checks because collecting banks will not accept checks unless endorsed
by the payee. The purpose of the endorsement is merely to facilitate collection of the proceeds of
the checks.

The purpose of the endorsement is not to make the assignee finance company a holder in due
course because policy considerations militate against according finance companies the rights of a
holder in due course.[18] Otherwise, consumers who purchase appliances on installment, giving
their promissory notes or checks to the seller, will have no defense against the finance company
should the appliances later turn out to be defective. Thus, the endorsement does not operate to
make the finance company a holder in due course. For its own protection, therefore, the finance
company usually requires the assignor, in a separate and distinct contract, to pay the finance
company in the event of dishonor of the notes or checks.

As endorsee of Great Asian, Bancasia had the option to proceed against Great Asian under the
Negotiable Instruments Law. Had it so proceeded, the Negotiable Instruments Law would have
governed Bancasias cause of action. Bancasia, however, did not choose this route. Instead,
Bancasia decided to sue Great Asian for breach of contract under the Civil Code, a right that
Bancasia had under the express with recourse stipulation in the Deeds of Assignment.

The exercise by Bancasia of its option to sue for breach of contract under the Civil Code will
not leave Great Asian holding an empty bag. Great Asian, after paying Bancasia, is subrogated
back as creditor of the receivables. Great Asian can then proceed against the drawers who issued
the checks. Even if Bancasia failed to give timely notice of dishonor, still there would be no
prejudice whatever to Great Asian. Under the Negotiable Instruments Law, notice of dishonor is
not required if the drawer has no right to expect or require the bank to honor the check, or if the
drawer has countermanded payment.[19] In the instant case, all the checks were dishonored for any
of the following reasons: account closed, account under garnishment, insufficiency of funds, or
payment stopped. In the first three instances, the drawers had no right to expect or require the bank
to honor the checks, and in the last instance, the drawers had countermanded payment.

Moreover, under common law, delay in notice of dishonor, where such notice is required,
discharges the drawer only to the extent of the loss caused by the delay.[20] This rule finds
application in this jurisdiction pursuant to Section 196 of the Negotiable Instruments Law which
states, Any case not provided for in this Act shall be governed by the provisions of existing
legislation, or in default thereof, by the rules of the Law Merchant. Under Section 186 of the
Negotiable Instruments Law, delay in the presentment of checks discharges the drawer. However,
Section 186 refers only to delay in presentment of checks but is silent on delay in giving notice of
dishonor. Consequently, the common law or Law Merchant can supply this gap in accordance with
Section 196 of the Negotiable Instruments Law.

One other issue raised by Great Asian, that of lack of consideration for the Deeds of
Assignment, is completely unsubstantiated. The Deeds of Assignment uniformly provide that the
fifteen postdated checks were assigned to Bancasia for valuable consideration. Moreover, Article
1354 of the Civil Code states that, Although the cause is not stated in the contract, it is presumed
that it exists and is lawful, unless the debtor proves the contrary. The record is devoid of any
showing on the part of Great Asian rebutting this presumption. On the other hand, Bancasias Loan
Section Manager, Cynthia Maclan, testified that Bancasia paid Great Asian a consideration at the
discount rate of less than 24% of the face value of the postdated checks.[21] Moreover, in its verified
petition for voluntary insolvency, Great Asian admitted its debt to Bancasia when it listed Bancasia
as one of its creditors, an extra-judicial admission that Bancasia proved when it formally offered
in evidence the verified petition for insolvency.[22]The Insolvency Law requires the petitioner to
submit a schedule of debts that must contain a full and true statement of all his debts and
liabilities.[23] The Insolvency Law even requires the petitioner to state in his verification that the
schedule of debts contains a full, correct and true discovery of all my debts and liabilities x x
x.[24] Great Asian cannot now claim that the listing of Bancasia as a creditor was not an admission
of its debt to Bancasia but merely an acknowledgment that Bancasia had sent a demand letter to
Great Asian.

Great Asian, moreover, claims that the assignment of the checks is not a loan accommodation
but a sale of the checks. With the sale, ownership of the checks passed to Bancasia, which must
now, according to Great Asian, sue the drawers and indorser of the check who are the parties
primarily liable on the checks. Great Asian forgets that under the Deeds of Assignment, Great
Asian expressly undertook to pay the full value of the checks in case of dishonor. Again, we
reiterate that this obligation of Great Asian is separate and distinct from its warranties as indorser
under the Negotiable Instruments Law.

Great Asian is, however, correct in saying that the assignment of the checks is a sale, or more
properly a discounting, of the checks and not a loan accommodation. However, it is precisely
because the transaction is a sale or a discounting of receivables, embodied in separate Deeds of
Assignment, that the relevant provisions of the Civil Code are applicable and not the Negotiable
Instruments Law.

At any rate, there is indeed a fine distinction between a discounting line and a loan
accommodation. If the accounts receivable, like postdated checks, are sold for a consideration less
than their face value, the transaction is one of discounting, and is subject to the provisions of the
Financing Company Act. The assignee is immediately subrogated as creditor of the accounts
receivable. However, if the accounts receivable are merely used as collateral for the loan, the
transaction is only a simple loan, and the lender is not subrogated as creditor until there is a default
and the collateral is foreclosed.

In summary, Great Asians four contracts assigning its fifteen postdated checks to Bancasia
expressly stipulate the suspensive condition that in the event the drawers of the checks fail to pay,
Great Asian itself will pay Bancasia. Since the common condition in the contracts had transpired,
an obligation on the part of Great Asian arose from the four contracts, and that obligation is to pay
Bancasia the full value of the checks, including the stipulated penalty and attorneys fees.

Third Issue: The liability of surety Tan Chong Lin

Tan Chong Lin, the President of Great Asian, is being sued in his personal capacity based on
the Surety Agreements he signed wherein he solidarily held himself liable with Great Asian for
the payment of its debts to Bancasia. The Surety Agreements contain the following common
condition:
Upon failure of the Principal to pay at maturity, with or without demand, any of the obligations
above mentioned, or in case of the Principals failure promptly to respond to any other lawful
demand made by the Creditor, its successors, administrators or assigns, both the Principal and the
Surety/ies shall be considered in default and the Surety/ies agree/s to pay jointly and severally to
the Creditor all outstanding obligations of the Principal, whether due or not due, and whether held
by the Creditor as Principal or agent, and it is agreed that a certified statement by the Creditor as
to the amount due from the Principal shall be accepted by the Surety/ies as correct and final for all
legal intents and purposes.

Indisputably, Tan Chong Lin explicitly and unconditionally bound himself to pay Bancasia,
solidarily with Great Asian, if the drawers of the checks fail to pay on due date. The condition on
which Tan Chong Lins obligation hinged had happened. As surety, Tan Chong Lin automatically
became liable for the entire obligation to the same extent as Great Asian.

Tan Chong Lin, however, contends that the following warranties in the Deeds of Assignment
enlarge or increase his risks under the Surety Agreements:

The ASSIGNOR warrants:

1. the soundness of the receivables herein assigned;

2. that said receivables are duly noted in its books and are supported by appropriate
documents;

3. that said receivables are genuine, valid and subsisting;

4. that said receivables represent bona fide sale of goods, merchandise, and/or services
rendered in the ordinary course of its business transactions;

5. that the obligors of the receivables herein assigned are solvent;

6. that it has valid and genuine title to and indefeasible right to dispose of said accounts;

7. that said receivables are free from all liens and encumbrances;

8. that the said receivables are freely and legally transferable, and that the obligor/s therein
will not interpose any objection to this assignment, and has in fact given his/their
consent hereto.

Tan Chong Lin maintains that these warranties in the Deeds of Assignment materially altered
his obligations under the Surety Agreements, and therefore he is released from any liability to
Bancasia.Under Article 1215 of the Civil Code, what releases a solidary debtor is a novation,
compensation, confusion or remission of the debt made by the creditor with any of the solidary
debtors. These warranties, however, are the usual warranties made by one who discounts
receivables with a financing company or bank. The Surety Agreements, written on the letter head
of Bancasia Finance & Investment Corporation, uniformly state that Great Asian Sales Center x x
x has obtained and/or desires to obtain loans, overdrafts, discounts and/or other forms of
credits from Bancasia. Tan Chong Lin was clearly on notice that he was holding himself as surety
of Great Asian which was discounting postdated checks issued by its buyers of goods and
merchandise. Moreover, Tan Chong Lin, as President of Great Asian, cannot feign ignorance of
Great Asians business activities or discounting transactions with Bancasia. Thus, the warranties
do not increase or enlarge the risks of Tan Chong Lin under the Surety Agreements.There is,
moreover, no novation of the debt of Great Asian that would warrant release of the surety.

In any event, the provisions of the Surety Agreements are broad enough to include the
obligations of Great Asian to Bancasia under the warranties. The first Surety Agreement states
that:

x x x herein Surety/ies, jointly and severally among themselves and likewise with principal,
hereby agree/s and bind/s himself/themselves to pay at maturity all the notes, drafts, bills of
exchange, overdraft and other obligations of every kind which the Principal may now or may
hereafter owe the Creditor, including extensions or renewals thereof in the sum *** ONE
MILLION ONLY*** PESOS (P1,000,000.00), Philippine Currency, plus stipulated interest
thereon at the rate of sixteen percent (16%) per annum, or at such increased rate of interest which
the Creditor may charge on the Principals obligations or renewals or the reduced amount thereof,
plus all the costs and expenses which the Creditor may incur in connection therewith.

xxx

Upon failure of the Principal to pay at maturity, with or without demand, any of the obligations
above mentioned, or in case of the Principals failure promptly to respond to any other lawful
demand made by the Creditor, its successors, administrators or assigns, both the Principal and the
Surety/ies shall be considered in default and the Surety/ies agree/s to pay jointly and severally to
the Creditor all outstanding obligations of the Principal, whether due or not due, and whether
held by the Creditor as Principal or agent, and it is agreed that a certified statement by the Creditor
as to the amount due from the Principal shall be accepted by the Surety/ies as correct and final for
all legal intents and purposes. (Emphasis supplied)

The second Surety Agreement contains the following provisions:

x x x herein Surety/ies, jointly and severally among themselves and likewise with PRINCIPAL,
hereby agree and bind themselves to pay at maturity all the notes, drafts, bills of exchange,
overdraft and other obligations of every kind which the PRINCIPAL may now or may hereafter
owe the Creditor, including extensions and/or renewals thereof in the principal sum not to exceed
TWO MILLION(P2,000,000.00) PESOS, Philippine Currency, plus stipulated interest thereon, or
such increased or decreased rate of interest which the Creditor may charge on the principal sum
outstanding pursuant to the rules and regulations which the Monetary Board may from time to time
promulgate, together with all the cost and expenses which the CREDITOR may incur in connection
therewith.

If for any reason whatsoever, the PRINCIPAL should fail to pay at maturity any of the obligations
or amounts due to the CREDITOR, or if for any reason whatsoever the PRINCIPAL fails to
promptly respond to and comply with any other lawful demand made by the CREDITOR, or if for
any reason whatsoever any obligation of the PRINCIPAL in favor of any person or entity should
be considered as defaulted, then both the PRINCIPAL and the SURETY/IES shall be considered
in default under the terms of this Agreement. Pursuant thereto, the SURETY/IES agree/s to pay
jointly and severally with the PRINCIPAL, all outstanding obligations of the CREDITOR,
whether due or not due, and whether owing to the PRINCIPAL in its personal capacity or as agent
of any person, endorsee, assignee or transferee. x x x. (Emphasis supplied)

Article 1207 of the Civil Code provides, xxx There is a solidary liability only when the
obligation expressly so states, or when the law or nature of the obligation requires solidarity. The
stipulations in the Surety Agreements undeniably mandate the solidary liability of Tan Chong Lin
with Great Asian. Moreover, the stipulations in the Surety Agreements are sufficiently broad,
expressly encompassing all the notes, drafts, bills of exchange, overdraft and other obligations
of every kind which the PRINCIPAL may now or may hereafter owe the Creditor. Consequently,
Tan Chong Lin must be held solidarily liable with Great Asian for the nonpayment of the fifteen
dishonored checks, including penalty and attorneys fees in accordance with the Deeds of
Assignment.

The Deeds of Assignment stipulate that in case of suit Great Asian shall pay attorneys fees
equivalent to 25% of the outstanding debt. The award of attorneys fees in the instant case is
justified,[25] not only because of such stipulation, but also because Great Asian and Tan Chong Lin
acted in gross and evident bad faith in refusing to pay Bancasias plainly valid, just and demandable
claim. We deem it just and equitable that the stipulated attorneys fee should be awarded to
Bancasia.

The Deeds of Assignment also provide for a 3% penalty on the total amount due in case of
failure to pay, but the Deeds are silent on whether this penalty is a running monthly or annual
penalty. Thus, the 3% penalty can only be considered as a one-time penalty. Moreover, the Deeds
of Assignment do not provide for interest if Great Asian fails to pay. We can only award Bancasia
legal interest at 12% interest per annum, and only from the time it filed the complaint because the
records do not show that Bancasia made a written demand on Great Asian prior to filing the
complaint.[26] Bancasia made an extrajudicial demand on Tan Chong Lin, the surety, but not on
the principal debtor, Great Asian.

VIII: DISPOSITIVE PORTION:

WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No. 20167
is AFFIRMED with MODIFICATION. Petitioners are ordered to pay, solidarily, private
respondent the following amounts: (a) P1,042,005.00 plus 3% penalty thereon, (b) interest on the
total outstanding amount in item (a) at the legal rate of 12% per annum from the filing of the
complaint until the same is fully paid, (c) attorneys fees equivalent to 25% of the total amount in
item (a), including interest at 12% per annum on the outstanding amount of the attorneys fees from
the finality of this judgment until the same is fully paid, and (c) costs of suit.

SO ORDERED.
DY, CZARA LORAINE F. DY

I. SHORT TITLE: STEELCASE vs. DESIGN INTERNATIONAL

II. TOPIC:

III. FULL TITLE: STEELCASE, INC., petitioner, vs. DESIGN INTERNATIONAL

SELECTIONS, INC., respondent. G.R. No. 171995, April 18, 2012, MENDOZA, J.

IV. STATEMENT OF FACTS:

V. STATEMENT OF THE CASE:

VI. ISSUE/s:

VII. RULING:

VIII: DISPOSITIVE PORTION:

The Facts

Petitioner Steelcase, Inc. (Steelcase) is a foreign corporation existing under the laws
of Michigan, United States of America (U.S.A.), and engaged in the manufacture of office
furniture with dealers worldwide.[3] Respondent Design International Selections, Inc. (DISI) is a
corporation existing under Philippine Laws and engaged in the furniture business, including the
distribution of furniture.[4]

Sometime in 1986 or 1987, Steelcase and DISI orally entered into a dealership agreement whereby
Steelcase granted DISI the right to market, sell, distribute, install, and service its products to end-
user customers within the Philippines. The business relationship continued smoothly until it was
terminated sometime in January 1999 after the agreement was breached with neither party
admitting any fault.[5]

On January 18, 1999, Steelcase filed a complaint[6] for sum of money against DISI alleging, among
others, that DISI had an unpaid account of US$600,000.00. Steelcase prayed that DISI be ordered
to pay actual or compensatory damages, exemplary damages, attorneys fees, and costs of suit.

In its Answer with Compulsory Counterclaims[7] dated February 4, 1999, DISI sought the
following: (1) the issuance of a temporary restraining order (TRO) and a writ of preliminary
injunction to enjoin Steelcase from selling its products in the Philippines except through DISI; (2)
the dismissal of the complaint for lack of merit; and (3) the payment of actual, moral and exemplary
damages together with attorneys fees and expenses of litigation. DISI alleged that the complaint
failed to state a cause of action and to contain the required allegations on Steelcases capacity to
sue in the Philippines despite the fact that it (Steelcase) was doing business in
the Philippines without the required license to do so. Consequently, it posited that the complaint
should be dismissed because of Steelcases lack of legal capacity to sue in Philippine courts.
 On March 3, 1999, Steelcase filed its Motion to Admit Amended Complaint[8] which was
granted by the RTC, through then Acting Presiding Judge Roberto C. Diokno, in its
Order[9] dated April 26, 1999. However, Steelcase sought to further amend its complaint by filing
a Motion to Admit Second Amended Complaint[10] on March 13, 1999.

In his Order[11] dated November 15, 1999, Acting Presiding Judge Bonifacio Sanz Maceda
dismissed the complaint, granted the TRO prayed for by DISI, set aside the April 26, 1999 Order
of the RTC admitting the Amended Complaint, and denied Steelcases Motion to Admit Second
Amended Complaint. The RTC stated that in requiring DISI to meet the Dealer Performance
Expectation and in terminating the dealership agreement with DISI based on its failure to improve
its performance in the areas of business planning, organizational structure, operational
effectiveness, and efficiency, Steelcase unwittingly revealed that it participated in the operations
of DISI. It then concluded that Steelcase was doing business in the Philippines, as contemplated
by Republic Act (R.A.) No. 7042 (The Foreign Investments Act of 1991), and since it did not have
the license to do business in the country, it was barred from seeking redress from our courts until
it obtained the requisite license to do so. Its determination was further bolstered by the appointment
by Steelcase of a representative in the Philippines. Finally, despite a showing that DISI transacted
with the local customers in its own name and for its own account, it was of the opinion that any
doubt in the factual environment should be resolved in favor of a pronouncement that a foreign
corporation was doing business in the Philippines, considering the twelve-year period that DISI
had been distributing Steelcase products in the Philippines.

Steelcase moved for the reconsideration of the questioned Order but the motion was denied
by the RTC in its May 29, 2000 Order.[12]

Aggrieved, Steelcase elevated the case to the CA by way of appeal, assailing the November
15, 1999 and May 29, 2000 Orders of the RTC. On March 31, 2005, the CA rendered its Decision
affirming the RTC orders, ruling that Steelcase was a foreign corporation doing or transacting
business in the Philippines without a license. The CA stated that the following acts of Steelcase
showed its intention to pursue and continue the conduct of its business in the Philippines: (1)
sending a letter to Phinma, informing the latter that the distribution rights for its products would
be established in the near future and directing other questions about orders for Steelcase products
to Steelcase International; (2) cancelling orders from DISIs customers, particularly Visteon, Phils.,
Inc. (Visteon); (3) continuing to send its products to the Philippines through Modernform Group
Company Limited (Modernform), as evidenced by an Ocean Bill of Lading; and (4) going beyond
the mere appointment of DISI as a dealer by making several impositions on management and
operations of DISI. Thus, the CA ruled that Steelcase was barred from access to our courts for
being a foreign corporation doing business here without the requisite license to do so.

Steelcase filed a motion for reconsideration but it was denied by the CA in its Resolution
dated March 23, 2006.[13]

Hence, this petition.

The Issues
 (1) Whether or not Steelcase is doing business in the Philippines without a license; and

(2) Whether or not DISI is estopped from challenging the Steelcases legal capacity to sue.

The Courts Ruling

The Court rules in favor of the petitioner.

Steelcase is an unlicensed foreign corporation NOT doing business in

the Philippines

Anent the first issue, Steelcase argues that Section 3(d) of R.A. No. 7042 or the Foreign
Investments Act of 1991 (FIA) expressly states that the phrase doing business excludes the
appointment by a foreign corporation of a local distributor domiciled in the Philippines which
transacts business in its own name and for its own account. Steelcase claims that it was not doing
business in the Philippines when it entered into a dealership agreement with DISI where the latter,
acting as the formers appointed local distributor, transacted business in its own name and for its
own account. Specifically, Steelcase contends that it was DISI that sold Steelcases furniture
directly to the end-users or customers who, in turn, directly paid DISI for the furniture they
bought. Steelcase further claims that DISI, as a non-exclusive dealer in the Philippines, had the
right to market, sell, distribute and service Steelcase products in its own name and for its own
account. Hence, DISI was an independent distributor of Steelcase products, and not a mere agent
or conduit of Steelcase.

On the other hand, DISI argues that it was appointed by Steelcase as the latters exclusive distributor
of Steelcase products. DISI likewise asserts that it was not allowed by Steelcase to transact
business in its own name and for its own account as Steelcase dictated the manner by which it was
to conduct its business, including the management and solicitation of orders from customers,
thereby assuming control of its operations. DISI further insists that Steelcase treated and
considered DISI as a mere conduit, as evidenced by the fact that Steelcase itself directly sold its
products to customers located in the Philippines who were classified as part of their global
accounts. DISI cited other established circumstances which prove that Steelcase was doing
business in the Philippines including the following: (1) the sale and delivery by Steelcase of
furniture to Regus, a Philippine client, through Modernform, a Thai corporation allegedly
controlled by Steelcase; (2) the imposition by Steelcase of certain requirements over the
management and operations of DISI; (3) the representations made by Steven Husak as Country
Manager of Steelcase; (4) the cancellation by Steelcase of orders placed by Philippine clients; and
(5) the expression by Steelcase of its desire to maintain its business in the Philippines. Thus,
Steelcase has no legal capacity to sue in Philippine Courts because it was doing business in
the Philippines without a license to do so.

The Court agrees with the petitioner.

The rule that an unlicensed foreign corporations doing business in the Philippine do not have the
capacity to sue before the local courts is well-established. Section 133 of the Corporation Code of
the Philippines explicitly states:

Sec. 133. Doing business without a license. - No foreign corporation transacting

business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.

The phrase doing business is clearly defined in Section 3(d) of R.A. No. 7042 (Foreign Investments
Act of 1991), to wit:

d) The phrase doing business shall include soliciting orders, service contracts,
opening offices, whether called liaison offices or branches; appointing
representatives or distributors domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totalling one hundred eighty (180)
days or more; participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and any other act
or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of some
of the functions normally incident to, and in progressive prosecution of, commercial
gain or of the purpose and object of the business organization: Provided, however,
That the phrase doing business shall not be deemed to include mere investment
as a shareholder by a foreign entity in domestic corporations duly registered to do
business, and/or the exercise of rights as such investor; nor having a nominee
director or officer to represent its interests in such corporation; nor appointing a
representative or distributor domiciled in the Philippines which transacts
business in its own name and for its own account; (Emphases supplied)

This definition is supplemented by its Implementing Rules and Regulations, Rule I, Section 1(f)
which elaborates on the meaning of the same phrase:

f. Doing business shall include soliciting orders, service contracts, opening offices,
whether liaison offices or branches; appointing representatives or distributors, operating
under full control of the foreign corporation, domiciled in the Philippines or who in any
calendar year stay in the country for a period totalling one hundred eighty [180] days or
more; participating in the management, supervision or control of any domestic business,
firm, entity or corporation in the Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions normally incident
to and in progressive prosecution of commercial gain or of the purpose and object of the
business organization.
 The following acts shall not be deemed doing business in the Philippines:

1. Mere investment as a shareholder by a foreign entity in domestic corporations duly

registered to do business, and/or the exercise of rights as such investor;

2. Having a nominee director or officer to represent its interest in such corporation;

3. Appointing a representative or distributor domiciled in the Philippines which

transacts business in the representative's or distributor's own name and account;

4. The publication of a general advertisement through any print or broadcast media;

5. Maintaining a stock of goods in the Philippines solely for the purpose of having the
same processed by another entity in the Philippines;

6. Consignment by a foreign entity of equipment with a local company to be used in the

processing of products for export;

7. Collecting information in the Philippines; and

8. Performing services auxiliary to an existing isolated contract of sale which are not on a
continuing basis, such as installing in the Philippines machinery it has manufactured or
exported to the Philippines, servicing the same, training domestic workers to operate it,
and similar incidental services. (Emphases supplied)

From the preceding citations, the appointment of a distributor in the Philippines is not sufficient
to constitute doing business unless it is under the full control of the foreign corporation. On the
other hand, if the distributor is an independent entity which buys and distributes products, other
than those of the foreign corporation, for its own name and its own account, the latter cannot be
considered to be doing business in the Philippines.[14] It should be kept in mind that the
determination of whether a foreign corporation is doing business in the Philippines must be judged
in light of the attendant circumstances.[15]

In the case at bench, it is undisputed that DISI was founded in 1979 and is independently owned
and managed by the spouses Leandro and Josephine Bantug.[16] In addition to Steelcase products,
DISI also distributed products of other companies including carpet tiles, relocatable walls and
theater settings.[17] The dealership agreement between Steelcase and DISI had been described by
the owner himself as:

xxx basically a buy and sell arrangement whereby we would inform Steelcase of
the volume of the products needed for a particular project and Steelcase would, in
turn, give special quotations or discounts after considering the value of the entire
package. In making the bid of the project, we would then add out profit margin over
Steelcases prices.After the approval of the bid by the client, we would thereafter
place the orders to Steelcase. The latter, upon our payment, would then ship the
 goods to the Philippines, with us shouldering the freight charges and
taxes.[18] [Emphasis supplied]

This clearly belies DISIs assertion that it was a mere conduit through which Steelcase
conducted its business in the country. From the preceding facts, the only reasonable conclusion
that can be reached is that DISI was an independent contractor, distributing various products of
Steelcase and of other companies, acting in its own name and for its own account.
The CA, in finding Steelcase to be unlawfully engaged in business in the Philippines, took into
consideration the delivery by Steelcase of a letter to Phinma informing the latter that the
distribution rights for its products would be established in the near future, and also its cancellation
of orders placed by Visteon. The foregoing acts were apparently misinterpreted by the CA. Instead
of supporting the claim that Steelcase was doing business in the country, the said acts prove
otherwise. It should be pointed out that no sale was concluded as a result of these
communications. Had Steelcase indeed been doing business in the Philippines, it would have
readily accepted and serviced the orders from the abovementioned Philippine companies. Its
decision to voluntarily cease to sell its products in the absence of a local distributor indicates its
refusal to engage in activities which might be construed as doing business.

Another point being raised by DISI is the delivery and sale of Steelcase products to a Philippine
client by Modernform allegedly an agent of Steelcase. Basic is the rule in corporation law that a
corporation has a separate and distinct personality from its stockholders and from other
corporations with which it may be connected.[19] Thus, despite the admission by Steelcase that it
owns 25% of Modernform, with the remaining 75% being owned and controlled by Thai
stockholders,[20] it is grossly insufficient to justify piercing the veil of corporate fiction and declare
that Modernform acted as the alter ego of Steelcase to enable it to improperly conduct business in
the Philippines. The records are bereft of any evidence which might lend even a hint of credence
to DISIs assertions. As such, Steelcase cannot be deemed to have been doing business in
the Philippinesthrough Modernform.

Finally, both the CA and DISI rely heavily on the Dealer Performance Expectation required by
Steelcase of its distributors to prove that DISI was not functioning independently from Steelcase
because the same imposed certain conditions pertaining to business planning, organizational
structure, operational effectiveness and efficiency, and financial stability. It is actually logical to
expect that Steelcase, being one of the major manufacturers of office systems furniture, would
require its dealers to meet several conditions for the grant and continuation of a distributorship
agreement. The imposition of minimum standards concerning sales, marketing, finance and
operations is nothing more than an exercise of sound business practice to increase sales and
maximize profits for the benefit of both Steelcase and its distributors. For as long as these
requirements do not impinge on a distributors independence, then there is nothing wrong with
placing reasonable expectations on them.
All things considered, it has been sufficiently demonstrated that DISI was an independent
contractor which sold Steelcase products in its own name and for its own account. As a result,
Steelcase cannot be considered to be doing business in the Philippines by its act of appointing a
distributor as it falls under one of the exceptions under R.A. No. 7042.
DISI is estopped from challenging Steelcases legal capacity to sue

Regarding the second issue, Steelcase argues that assuming arguendo that it had been doing
business in the Philippines without a license, DISI was nonetheless estopped from challenging
Steelcases capacity to sue in the Philippines. Steelcase claims that since DISI was aware that it
was doing business in the Philippines without a license and had benefited from such business, then
DISI should be estopped from raising the defense that Steelcase lacks the capacity to sue in the
Philippines by reason of its doing business without a license.

On the other hand, DISI argues that the doctrine of estoppel cannot give Steelcase the license to
do business in the Philippines or permission to file suit in the Philippines. DISI claims that when
Steelcase entered into a dealership agreement with DISI in 1986, it was not doing business in
the Philippines. It was after such dealership was put in place that it started to do business without
first obtaining the necessary license. Hence, estoppel cannot work against it. Moreover, DISI
claims that it suffered as a result of Steelcases doing business and that it never benefited from the
dealership and, as such, it cannot be estopped from raising the issue of lack of capacity to sue on
the part of Steelcase.

The argument of Steelcase is meritorious.

If indeed Steelcase had been doing business in the Philippines without a license, DISI
would nonetheless be estopped from challenging the formers legal capacity to sue.

It cannot be denied that DISI entered into a dealership agreement with Steelcase and
profited from it for 12 years from 1987 until 1999. DISI admits that it complied with its obligations
under the dealership agreement by exerting more effort and making substantial investments in the
promotion of Steelcase products. It also claims that it was able to establish a very good reputation
and goodwill for Steelcase and its products, resulting in the establishment and development of a
strong market for Steelcase products in the Philippines. Because of this, DISI was very proud to
be awarded the Steelcase International Performance Award for meeting sales objectives, satisfying
customer needs, managing an effective company and making a profit.[21]

Unquestionably, entering into a dealership agreement with Steelcase charged DISI with the
knowledge that Steelcase was not licensed to engage in business activities in the Philippines. This
Court has carefully combed the records and found no proof that, from the inception of the
dealership agreement in 1986 until September 1998, DISI even brought to Steelcases attention that
it was improperly doing business in the Philippines without a license. It was only towards the latter
part of 1998 that DISI deemed it necessary to inform Steelcase of the impropriety of the conduct
of its business without the requisite Philippine license. It should, however, be noted that DISI only
raised the issue of the absence of a license with Steelcase after it was informed that it owed the
latter US$600,000.00 for the sale and delivery of its products under their special credit
arrangement.

By acknowledging the corporate entity of Steelcase and entering into a dealership

agreement with it and even benefiting from it, DISI is estopped from questioning Steelcases
existence and capacity to sue. This is consistent with the Courts ruling in Communication
Materials and Design, Inc. v. Court of Appeals[22] where it was written:

Notwithstanding such finding that ITEC is doing business in the country,

petitioner is nonetheless estopped from raising this fact to bar ITEC from instituting
this injunction case against it.

A foreign corporation doing business in the Philippines may sue in

Philippine Courts although not authorized to do business here against a
Philippine citizen or entity who had contracted with and benefited by said
corporation. To put it in another way, a party is estopped to challenge the
personality of a corporation after having acknowledged the same by entering
into a contract with it. And the doctrine of estoppel to deny corporate existence
applies to a foreign as well as to domestic corporations. One who has dealt with a
corporation of foreign origin as a corporate entity is estopped to deny its corporate
existence and capacity: The principle will be applied to prevent a person contracting
with a foreign corporation from later taking advantage of its noncompliance with
the statutes chiefly in cases where such person has received the benefits of the
contract.

The rule is deeply rooted in the time-honored axiom of Commodum ex

injuria sua non habere debet no person ought to derive any advantage of his
own wrong. This is as it should be for as mandated by law, every person must
in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.

Concededly, corporations act through agents, like directors and officers.

Corporate dealings must be characterized by utmost good faith and fairness.
Corporations cannot just feign ignorance of the legal rules as in most cases, they
are manned by sophisticated officers with tried management skills and legal experts
with practiced eye on legal problems. Each party to a corporate transaction is
expected to act with utmost candor and fairness and, thereby allow a reasonable
proportion between benefits and expected burdens. This is a norm which should be
observed where one or the other is a foreign entity venturing in a global market.

xxx

By entering into the "Representative Agreement" with ITEC, petitioner is

charged with knowledge that ITEC was not licensed to engage in business activities
in the country, and is thus estopped from raising in defense such incapacity of
ITEC, having chosen to ignore or even presumptively take advantage of the
same.[23] (Emphases supplied)

The case of Rimbunan Hijau Group of Companies v. Oriental Wood Processing

Corporation[24] is likewise instructive:
 Respondents unequivocal admission of the transaction which gave rise to
the complaint establishes the applicability of estoppel against it. Rule 129, Section
4 of the Rules on Evidence provides that a written admission made by a party in the
course of the proceedings in the same case does not require proof. We held in the
case of Elayda v. Court of Appeals, that an admission made in the pleadings cannot
be controverted by the party making such admission and are conclusive as to him.
Thus, our consistent pronouncement, as held in cases such as Merril Lynch Futures
v. Court of Appeals, is apropos:

The rule is that a party is estopped to challenge the personality of a

corporation after having acknowledged the same by entering into a
contract with it. And the doctrine of estoppel to deny corporate
existence applies to foreign as well as to domestic corporations; one who
has dealt with a corporation of foreign origin as a corporate entity is
estopped to deny its existence and capacity. The principle will be
applied to prevent a person contracting with a foreign corporation
from later taking advantage of its noncompliance with the statutes,
chiefly in cases where such person has received the benefits of the
contract . . .

All things considered, respondent can no longer invoke petitioners lack of

capacity to sue in this jurisdiction. Considerations of fair play dictate that after
having contracted and benefitted from its business transaction with Rimbunan,
respondent should be barred from questioning the latters lack of license to transact
business in the Philippines.

In the case of Antam Consolidated, Inc. v. CA, this Court noted that it is a
common ploy of defaulting local companies which are sued by unlicensed foreign
corporations not engaged in business in the Philippines to invoke the latters lack of
capacity to sue. This practice of domestic corporations is particularly reprehensible
considering that in requiring a license, the law never intended to prevent foreign
corporations from performing single or isolated acts in this country, or to favor
domestic corporations who renege on their obligations to foreign firms unwary
enough to engage in solitary transactions with them. Rather, the law was intended
to bar foreign corporations from acquiring a domicile for the purpose of business
without first taking the steps necessary to render them amenable to suits in the local
courts. It was to prevent the foreign companies from enjoying the good while
disregarding the bad.

As a matter of principle, this Court will not step in to shield defaulting

local companies from the repercussions of their business dealings. While the
doctrine of lack of capacity to sue based on failure to first acquire a local
license may be resorted to in meritorious cases, it is not a magic incantation. It
cannot be called upon when no evidence exists to support its invocation or the
facts do not warrant its application. In this case, that the respondent is estopped
from challenging the petitioners capacity to sue has been conclusively established,
 and the forthcoming trial before the lower court should weigh instead on the other
defenses raised by the respondent.[25] (Emphases supplied)

As shown in the previously cited cases, this Court has time and again upheld the principle
that a foreign corporation doing business in the Philippines without a license may still sue before
the Philippine courts a Filipino or a Philippine entity that had derived some benefit from their
contractual arrangement because the latter is considered to be estopped from challenging the
personality of a corporation after it had acknowledged the said corporation by entering into a
contract with it.[26]

In Antam Consolidated, Inc. v. Court of Appeals,[27] this Court had the occasion to draw
attention to the common ploy of invoking the incapacity to sue of an unlicensed foreign corporation
utilized by defaulting domestic companies which seek to avoid the suit by the former. The Court
cannot allow this to continue by always ruling in favor of local companies, despite the injustice to
the overseas corporation which is left with no available remedy.

During this period of financial difficulty, our nation greatly needs to attract more foreign
investments and encourage trade between the Philippines and other countries in order to rebuild
and strengthen our economy. While it is essential to uphold the sound public policy behind the
rule that denies unlicensed foreign corporations doing business in the Philippines access to our
courts, it must never be used to frustrate the ends of justice by becoming an all-encompassing
shield to protect unscrupulous domestic enterprises from foreign entities seeking redress in our
country. To do otherwise could seriously jeopardize the desirability of the Philippines as an
investment site and would possibly have the deleterious effect of hindering trade between
Philippine companies and international corporations.

WHEREFORE, the March 31, 2005 Decision of the Court of Appeals and its March 23,
2006 Resolution are hereby REVERSED and SET ASIDE. The dismissal order of the Regional
Trial Court dated November 15, 1999 is hereby set aside. Steelcases Amended Complaint is
hereby ordered REINSTATED and the case is REMANDED to the RTC for appropriate action.

SO ORDERED.
MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs. CITY OF PASAY,
SANGGUNIANG PANGLUNGSOD NG PASAY, CITY MAYOR OF PASAY, CITY
TREASURER OF PASAY, and CITY ASSESSOR OF PASAY, respondents.
G.R. No. 163072, April 2, 2009, CARPIO, J.

The Facts

Petitioner Manila International Airport Authority (MIAA) operates and administers the Ninoy
Aquino International Airport (NAIA) Complex under Executive Order No. 903 (EO
903),3 otherwise known as the Revised Charter of the Manila International Airport Authority. EO
903 was issued on 21 July 1983 by then President Ferdinand E. Marcos. Under Sections 3 4 and
225 of EO 903, approximately 600 hectares of land, including the runways, the airport tower, and
other airport buildings, were transferred to MIAA. The NAIA Complex is located along the border
between Pasay City and Parañaque City.

On 28 August 2001, MIAA received Final Notices of Real Property Tax Delinquency from the
City of Pasay for the taxable years 1992 to 2001. MIAA’s real property tax delinquency for its real
properties located in NAIA Complex, Ninoy Aquino Avenue, Pasay City (NAIA Pasay properties)
is tabulated as follows:
TAX DECLA- TAXABLE
TAX DUE PENALTY TOTAL
RATION YEAR
A7-183-08346 1997-2001 243,522,855.00 123,351,728.18 366,874,583.18
A7-183-05224 1992-2001 113,582,466.00 71,159,414.98 184,741,880.98
A7-191-00843 1992-2001 54,454,800.00 34,115,932.20 88,570,732.20
A7-191-00140 1992-2001 1,632,960.00 1,023,049.44 2,656,009.44
A7-191-00139 1992-2001 6,068,448.00 3,801,882.85 9,870,330.85
A7-183-05409 1992-2001 59,129,520.00 37,044,644.28 96,174,164.28
A7-183-05410 1992-2001 20,619,720.00 12,918,254.58 33,537,974.58
A7-183-05413 1992-2001 7,908,240.00 4,954,512.36 12,862,752.36
A7-183-05412 1992-2001 18,441,981.20 11,553,901.13 29,995,882.33
A7-183-05411 1992-2001 109,946,736.00 68,881,630.13 178,828,366.13
A7-183-05245 1992-2001 7,440,000.00 4,661,160.00 12,101,160.00
GRAND TOTAL ₱642,747,726.20 ₱373,466,110.13 ₱1,016,213,836.33

On 24 August 2001, the City of Pasay, through its City Treasurer, issued notices of levy and
warrants of levy for the NAIA Pasay properties. MIAA received the notices and warrants of levy
on 28 August 2001. Thereafter, the City Mayor of Pasay threatened to sell at public auction the
NAIA Pasay properties if the delinquent real property taxes remain unpaid.
On 29 October 2001, MIAA filed with the Court of Appeals a petition for prohibition and
injunction with prayer for preliminary injunction or temporary restraining order. The petition
sought to enjoin the City of Pasay from imposing real property taxes on, levying against, and
auctioning for public sale the NAIA Pasay properties.

On 30 October 2002, the Court of Appeals dismissed the petition and upheld the power of the City
of Pasay to impose and collect realty taxes on the NAIA Pasay properties. MIAA filed a motion
for reconsideration, which the Court of Appeals denied. Hence, this petition.

The Court of Appeals’ Ruling

The Court of Appeals held that Sections 193 and 234 of Republic Act No. 7160 or the Local
Government Code, which took effect on 1 January 1992, withdrew the exemption from payment
of real property taxes granted to natural or juridical persons, including government-owned or
controlled corporations, except local water districts, cooperatives duly registered under Republic
Act No. 6938, non-stock and non-profit hospitals and educational institutions. Since MIAA is a
government-owned corporation, it follows that its tax exemption under Section 21 of EO 903 has
been withdrawn upon the effectivity of the Local Government Code.

The Issue

The issue raised in this petition is whether the NAIA Pasay properties of MIAA are exempt from
real property tax.

The Court’s Ruling

The petition is meritorious.

In ruling that MIAA is not exempt from paying real property tax, the Court of Appeals cited
Sections 193 and 234 of the Local Government Code which read:

SECTION 193. Withdrawal of Tax Exemption Privileges. – Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural
or juridical, including government-owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code.

SECTION 234. Exemptions from Real Property Tax. – The following are exempted from payment
of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration or
otherwise to a taxable person;

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques,

non-profit or religious cemeteries and all lands, buildings and improvements actually,
directly, and exclusively used for religious, charitable or educational purposes;
 (c) All machineries and equipment that are actually, directly and exclusively used by local
water districts and government owned or controlled corporations engaged in the supply
and distribution of water and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as provided for under R.A. No.
6938; and

(e) Machinery and equipment used for pollution control and environment protection.

Except as provided herein, any exemption from payment of real property tax previously granted
to, or presently enjoyed by, all persons, whether natural or juridical, including all government-
owned or controlled corporations are hereby withdrawn upon the effectivity of this Code.

The Court of Appeals held that as a government-owned corporation, MIAA’s tax exemption under
Section 21 of EO 903 has already been withdrawn upon the effectivity of the Local Government
Code in 1992.

In Manila International Airport Authority v. Court of Appeals6 (2006 MIAA case), this Court
already resolved the issue of whether the airport lands and buildings of MIAA are exempt from
tax under existing laws. The 2006 MIAA case originated from a petition for prohibition and
injunction which MIAA filed with the Court of Appeals, seeking to restrain the City of Parañaque
from imposing real property tax on, levying against, and auctioning for public sale the airport lands
and buildings located in Parañaque City. The only difference between the 2006 MIAA case and
this case is that the 2006 MIAA case involved airport lands and buildings located in Parañaque
City while this case involved airport lands and buildings located in Pasay City. The 2006 MIAA
case and this case raised the same threshold issue: whether the local government can impose real
property tax on the airport lands, consisting mostly of the runways, as well as the airport buildings,
of MIAA. In the 2006 MIAA case, this Court held:

To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13)

of the Introductory Provisions of the Administrative Code because it is not organized as a stock or
non-stock corporation. Neither is MIAA a government-owned or controlled corporation under
Section 16, Article XII of the 1987 Constitution because MIAA is not required to meet the test of
economic viability. MIAA is a government instrumentality vested with corporate powers and
performing essential public services pursuant to Section 2(10) of the Introductory Provisions of
the Administrative Code. As a government instrumentality, MIAA is not subject to any kind of tax
by local governments under Section 133(o) of the Local Government Code. The exception to the
exemption in Section 234(a) does not apply to MIAA because MIAA is not a taxable entity under
the Local Government Code. Such exception applies only if the beneficial use of real property
owned by the Republic is given to a taxable entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus
are properties of public dominion. Properties of public dominion are owned by the State or the
Republic. Article 420 of the Civil Code provides:

Art. 420. The following things are property of public dominion:

 (1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;

(2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth.

The term "ports x x x constructed by the State" includes airports and seaports. The Airport Lands
and Buildings of MIAA are intended for public use, and at the very least intended for public
service. Whether intended for public use or public service, the Airport Lands and Buildings
are properties of public dominion. As properties of public dominion, the Airport Lands and
Buildings are owned by the Republic and thus exempt from real estate tax under Section 234(a) of
the Local Government Code.7 (Emphasis in the original)

The definition of "instrumentality" under Section 2(10) of the Introductory Provisions of the
Administrative Code of 1987 uses the phrase "includes x x x government-owned or controlled
corporations" which means that a government "instrumentality" may or may not be a "government-
owned or controlled corporation." Obviously, the term government "instrumentality"
is broader than the term "government-owned or controlled corporation." Section 2(10) provides:

SEC. 2. General Terms Defined.– x x x

(10) Instrumentality refers to any agency of the national Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some
if not all corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter. This term includes regulatory agencies, chartered institutions and
government-owned or controlled corporations.

The term "government-owned or controlled corporation" has a separate definition under Section
2(13)8 of the Introductory Provisions of the Administrative Code of 1987:

SEC. 2. General Terms Defined.– x x x

(13) Government-owned 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 directly or through its instrumentalities either
wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one
(51) percent of its capital stock: Provided, That government-owned or controlled corporations may
further be categorized by the department of Budget, the Civil Service Commission, and the
Commission on Audit for the purpose of the exercise and discharge of their respective powers,
functions and responsibilities with respect to such corporations.

The fact that two terms have separate definitions means that while a government "instrumentality"
may include a "government-owned or controlled corporation," there may be a government
"instrumentality" that will not qualify as a "government-owned or controlled corporation."

A close scrutiny of the definition of "government-owned or controlled corporation" in Section

2(13) will show that MIAA would not fall under such definition. MIAA is a government
"instrumentality" that does not qualify as a "government-owned or controlled corporation."
As explained in the 2006 MIAA case:

A government-owned or controlled corporation must be "organized as a stock or non-stock

corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders or voting
shares. x x x

Section 3 of the Corporation Code defines a stock corporation as one whose "capital stock is
divided into shares and x x x authorized to distribute to the holders of such shares dividends x x
x." MIAA has capital but it is not divided into shares of stock. MIAA has no stockholders or voting
shares. Hence, MIAA is not a stock corporation.

xxx

MIAA is also not a non-stock corporation because it has no members. Section 87 of the
Corporation Code defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." A non-stock corporation must have
members. Even if we assume that the Government is considered as the sole member of MIAA, this
will not make MIAA a non-stock corporation. Non-stock corporations cannot distribute any part
of their income to their members. Section 11 of the MIAA Charter mandates MIAA to remit 20%
of its annual gross operating income to the National Treasury. This prevents MIAA from
qualifying as a non-stock corporation.

Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific,
social, civil service, or similar purposes, like trade, industry, agriculture and like chambers."
MIAA is not organized for any of these purposes. MIAA, a public utility, is organized to operate
an international and domestic airport for public use.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA within the
National Government?

MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only difference
is that MIAA is vested with corporate powers. x x x

When the law vests in a government instrumentality corporate powers, the instrumentality does
not become a corporation. Unless the government instrumentality is organized as a stock or non-
stock corporation, it remains a government instrumentality exercising not only governmental but
also corporate powers. Thus, MIAA exercises the governmental powers of eminent domain, police
authority and the levying of fees and charges. At the same time, MIAA exercises "all the powers
of a corporation under the Corporation Law, insofar as these powers are not inconsistent with the
provisions of this Executive Order."9

Thus, MIAA is not a government-owned or controlled corporation but a government

instrumentality which is exempt from any kind of tax from the local governments. Indeed, the
exercise of the taxing power of local government units is subject to the limitations enumerated in
Section 133 of the Local Government Code.10 Under Section 133(o)11 of the Local Government
Code, local government units have no power to tax instrumentalities of the national government
like the MIAA. Hence, MIAA is not liable to pay real property tax for the NAIA Pasay properties.

Furthermore, the airport lands and buildings of MIAA are properties of public dominion intended
for public use, and as such are exempt from real property tax under Section 234(a) of the Local
Government Code. However, under the same provision, if MIAA leases its real property to a
taxable person, the specific property leased becomes subject to real property tax.12 In this case,
only those portions of the NAIA Pasay properties which are leased to taxable persons like private
parties are subject to real property tax by the City of Pasay.

WHEREFORE, we GRANT the petition. We SET ASIDE the Decision dated 30 October 2002
and the Resolution dated 19 March 2004 of the Court of Appeals in CA-G.R. SP No. 67416.
We DECLARE the NAIA Pasay properties of the Manila International Airport
Authority EXEMPT from real property tax imposed by the City of Pasay. We declare VOID all
the real property tax assessments, including the final notices of real property tax delinquencies,
issued by the City of Pasay on the NAIA Pasay properties of the Manila International Airport
Authority, except for the portions that the Manila International Airport Authority has leased to
private parties.

No costs.

SO ORDERED.
REPUBLIC PLANTERS BANK, petitioner, vs. HON. ENRIQUE A. AGANA, SR., ROBES-
FRANCISCO REALTY & DEVELOPMENT CORPORATION and ADALIA F.
ROBES, respondents.
G.R. No. 51765, March 3, 1997, HERMOSISIMA, JR., J.

This is a petition for certiorari seeking the annulment of the Decision[1] of the then Court of First
Instance of Rizal[2] for having been rendered in grave abuse of discretion. Private respondents
Robes-Francisco Realty and Development Corporation (hereafter, "the Corporation") and Adalia
F. Robes filed in the court a quo, an action for specific performance to compel petitioner to redeem
800 preferred shares of stock with a face value of P8,000.00 and to pay 1% quarterly interest
thereon as quarterly dividend owing them under the terms and conditions of the certificates of
stock.

The court a quo rendered judgment in favor of private respondents; hence, this instant petition.

Herein parties debate only legal issues, no issues of fact having been raised by them in the
court a quo. For ready reference, however, the following narration of pertinent transactions and
events is in order:

On September 18, 1961, private respondent Corporation secured a loan from petitioner in the
amount of P120,000.00. As part of the proceeds of the loan, preferred shares of stocks were issued
to private respondent Corporation, through its officers then, private respondent Adalia F. Robes
and one Carlos F. Robes. In other words, instead of giving the legal tender totaling to the full
amount of the loan, which is P120,000.00, petitioner lent such amount partially in the form of
money and partially in the form of stock certificates numbered 3204 and 3205, each for 400 shares
with a par value of P10.00 per share, or for P4,000.00 each, for a total of P8,000.00. Said stock
certificates were in the name of private respondent Adalia F. Robes and Carlos F. Robes, who
subsequently, however, endorsed his shares in favor of Adalia F. Robes.

Said certificates of stock bear the following terms and conditions:

"The Preferred Stock shall have the following rights, preferences, qualifications and limitations,
to wit:

1. Of the right to receive a quarterly dividend of One Per Centum (1%),

cumulative and participating.

xxx

2. That such preferred shares may be redeemed, by the system of

drawing lots, at any time after two (2) years from the date of issue
at the option of the Corporation. x x x."

On January 31, 1979, private respondents proceeded against petitioner and filed a Complaint
anchored on private respondents' alleged rights to collect dividends under the preferred shares in
question and to have petitioner redeem the same under the terms and conditions of the stock
certificates. Private respondents attached to their complaint, a letter-demand dated January 5, 1979
which, significantly, was not formally offered in evidence.

Petitioner filed a Motion to Dismiss[3] private respondents' Complaint on the following

grounds: (1) that the trial court had no jurisdiction over the subject-matter of the action; (2) that
the action was unenforceable under substantive law; and (3) that the action was barred by the
statute of limitations and/or laches.

Petitioner's Motion to Dismiss was denied by the trial court in an Order dated March 16,
1979.[4] Petitioner then filed its Answer on May 2, 1979.[5] Thereafter, the trial court gave the
parties ten (10) days from July 30, 1979 to submit their respective memoranda after the submission
of which the case would be deemed submitted for resolution.[6]

On September 7, 1979, the trial court rendered the herein assailed decision in favor of private
respondents. In ordering petitioner to pay private respondents the face value of the stock
certificates as redemption price, plus 1% quarterly interest thereon until full payment, the trial
court ruled:

"There being no issue of fact raised by either of the parties who filed their respective memoranda
delineating their respective contentions, a judgment on the pleadings, conformably with an earlier
order of the Court, appears to be in order.

From a further perusal of the pleadings, it appears that the provision of the stock certificates in
question to the effect that the plaintiffs shall have the right to receive a quarterly dividend of One
Per Centum (1%), cumulative and participating, clearly and unequivocably [sic] indicates that the
same are 'interest bearing stocks' which are stocks issued by a corporation under an agreement to
pay a certain rate of interest thereon (5 Thompson, Sec. 3439). As such, plaintiffs become entitled
to the payment thereof as a matter of right without necessity of a prior declaration of dividend.

On the question of the redemption by the defendant of said preferred shares of stock, the very
wordings of the terms and conditions in said stock certificates clearly allows the same.

To allow the herein defendant not to redeem said preferred shares of stock and/or pay the interest
due thereon despite the clear import of said provisions by the mere invocation of alleged Central
Bank Circulars prohibiting the same is tantamount to an impairment of the obligation of contracts
enshrined in no less than the fundamental law itself.

Moreover, the herein defendant is considered in estoppel from taking shelter behind a General
Banking Act provision to the effect that it cannot buy its own shares of stocks considering that the
very terms and conditions in said stock certificates allowing their redemption are its own
handiwork.

As to the claim by the defendant that plaintiffs' cause of action is barred by prescription, suffice it
to state that the running of the prescriptive period was considered interrupted by the written
extrajudicial demands made by the plaintiffs from the defendant."[7]
 Aggrieved by the decision of the trial court, petitioner elevated the case before us essentially
on pure questions of law. Petitioner's statement of the issues that it submits for us to adjudicate
upon, is as follows:

"A. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION

AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ORDERING
PETITIONER TO PAY RESPONDENT ADALIA F. ROBES THE AMOUNT
OF P8,213.69 AS INTERESTS FROM 1961 To 1979 ON HER PREFERRED
SHARES.

B. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION

AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ORDERING
PETITIONER TO REDEEM RESPONDENT ADALIA F. ROBES' PREFERRED
SHARES FOR P8,000.00

C. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN
DISREGARDING THE ORDER OF THE CENTRAL BANK TO PETITIONER
TO DESIST FROM REDEEMING ITS PREFERRED SHARES AND FROM
PAYING DIVIDENDS THEREON x x x.

D. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE

COMPLAINT DOES NOT STATE A CAUSE OF ACTION.

E. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE CLAIM

OF RESPONDENT ADALIA F. ROBES IS BARRED BY PRESCRIPTION OR
LACHES."[8]

The petition is meritorious.

Before passing upon the merits of this petition, it may be pertinent to provide an overview on
the nature of preferred shares and the redemption thereof, considering that these issues lie at the
heart of the dispute.

A preferred share of stock, on one hand, is one which entitles the holder thereof to certain
preferences over the holders of common stock. The preferences are designed to induce persons to
subscribe for shares of a corporation.[9] Preferred shares take a multiplicity of forms. The most
common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred shares
as to dividends. The former is a share which gives the holder thereof preference in the distribution
of the assets of the corporation in case of liquidation;[10] the latter is a share the holder of which is
entitled to receive dividends on said share to the extent agreed upon before any dividends at all are
paid to the holders of common stock.[11] There is no guaranty, however, that the share will receive
any dividends. Under the old Corporation Law in force at the time the contract between the
petitioner and the private respondents was entered into, it was provided that "no corporation shall
make or declare any dividend except from the surplus profits arising from its business, or distribute
its capital stock or property other than actual profits among its members or stockholders until after
the payment of its debts and the termination of its existence by limitation or lawful
dissolution."[12] Similarly, the present Corporation Code[13] provides that the board of directors of
a stock corporation may declare dividends only out of unrestricted retained earnings.[14] The Code,
in Section 43, adopting the change made in accounting terminology, substituted the phrase
unrestricted retained earnings," which may be a more precise term, in place of "surplus profits
arising from its business" in the former law. Thus, the declaration of dividends is dependent upon
the availability of surplus profit or unrestricted retained earnings, as the case may be. Preferences
granted to preferred stockholders, moreover, do not give them a lien upon the property of the
corporation nor make them creditors of the corporation, the right of the former being always
subordinate to the latter. Dividends are thus payable only when there are profits earned by the
corporation and as a general rule, even if there are existing profits, the board of directors has the
discretion to determine whether or not dividends are to be declared.[15] Shareholders, both common
and preferred, are considered risk takers who invest capital in the business and who can look only
to what is left after corporate debts and liabilities are fully paid.[16]

Redeemable shares, on the other hand, are shares usually preferred, which by their terms are
redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or
both at a certain redemption price.[17] A redemption by the corporation of its stock is, in a sense, a
repurchase of it for cancellation.[18] The present Code allows redemption of shares even if there
are no unrestricted retained earnings on the books of the corporation. This is a new provision which
in effect qualifies the general rule that the corporation cannot purchase its own shares except out
of current retained earnings.[19] However, while redeemable shares may be redeemed regardless of
the existence of unrestricted retained earnings, this is subject to the condition that the corporation
has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital
stock. Redemption, therefore, may not be made where the corporation is insolvent or if such
redemption will cause insolvency or inability of the corporation to meet its debts as they mature.[20]

We come now to the merits of the case. The petitioner argues that it cannot be compelled to
redeem the preferred shares issued to the private respondent. We agree. Respondent judge, in
ruling that petitioner must redeem the shares in question, stated that:

"On the question of the redemption by the defendant of said preferred shares of stock, the very
wordings of the terms and conditions in said stock certificates clearly allows the same."[21]

What respondent Judge failed to recognize was that while the stock certificate does allow
redemption, the option to do so was clearly vested in the petitioner bank. The redemption therefore
is clearly the type known as "optional". Thus, except as otherwise provided in the stock certificate,
the redemption rests entirely with the corporation and the stockholder is without right to either
compel or refuse the redemption of its stock.[22] Furthermore, the terms and conditions set forth
therein use the word "may". It is a settled doctrine in statutory construction that the word "may"
denotes discretion, and cannot be construed as having a mandatory effect. We fail to see how
respondent judge can ignore what, in his words, are the "very wordings of the terms and conditions
in said stock certificates" and construe what is clearly a mere option to be his legal basis for
compelling the petitioner to redeem the shares in question.

The redemption of said shares cannot be allowed. As pointed out by the petitioner, the Central
Bank made a finding that said petitioner has been suffering from chronic reserve deficiency,[23] and
that such finding resulted in a directive, issued on January 31, 1973 by then Gov. G. S. Licaros of
the Central Bank, to the President and Acting Chairman of the Board of the petitioner bank
prohibiting the latter from redeeming any preferred share, on the ground that said redemption
would reduce the assets of the Bank to the prejudice of its depositors and creditors.[24] Redemption
of preferred shares was prohibited for a just and valid reason. The directive issued by the Central
Bank Governor was obviously meant to preserve the status quo, and to prevent the financial ruin
of a banking institution that would have resulted in adverse repercussions, not only to its depositors
and creditors, but also to the banking industry as a whole. The directive, in limiting the exercise
of a right granted by law to a corporate entity, may thus be considered as an exercise of police
power. The respondent judge insists that the directive constitutes an impairment of the obligation
of contracts. It has, however, been settled that the Constitutional guaranty of non-impairment of
obligations of contract is limited by the exercise of the police power of the state, the reason being
that public welfare is superior to private rights.[25]

The respondent judge also stated that since the stock certificate granted the private
respondents the right to receive a quarterly dividend of one Per Centum (1%), cumulative and
participating, it "clearly and unequivocably (sic) indicates that the same are 'interest bearing stocks'
or stocks issued by a corporation under an agreement to pay a certain rate of interest thereon. As
such, plaintiffs (private respondents herein) become entitled to the payment thereof as a matter of
right without necessity of a prior declaration of dividend."[26] There is no legal basis for this
observation. Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code
prohibit the issuance of any stock dividend without the approval of stockholders, representing not
less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called
for the purpose. These provisions underscore the fact that payment of dividends to a stockholder
is not a matter of right but a matter of consensus. Furthermore, "interest bearing stocks", on which
the corporation agrees absolutely to pay interest before dividends are paid to common
stockholders, is legal only when construed as requiring payment of interest as dividends from net
earnings or surplus only.[27] Clearly, the respondent judge, in compelling the petitioner to redeem
the shares in question and to pay the corresponding dividends, committed grave abuse of discretion
amounting to lack or excess of jurisdiction in ignoring both the terms and conditions specified in
the stock certificate, as well as the clear mandate of the law.

Anent the issue of prescription, this Court so holds that the claim of private respondent is
already barred by prescription as well as laches. Art. 1144 of the New Civil Code provides that a
right of action that is founded upon a written contract prescribes in ten (10) years. The letter-
demand made by the private respondents to the petitioner was made only on January 5, 1979, or
almost eighteen years after receipt of the written contract in the form of the stock certificate. As
noted earlier, this letter-demand, significantly, was not formally offered in evidence, nor were any
other evidence of demand presented. Therefore, we conclude that the only time the private
respondents saw it fit to assert their rights, if any, to the preferred shares of stock, was after the
lapse of almost eighteen years. The same clearly indicates that the right of the private respondents
to any relief under the law has already prescribed. Moreover, the claim of the private respondents
is also barred by laches. Laches has been defined as the failure or neglect, for an unreasonable
length of time, to do that which by exercising due diligence could or should have been done earlier;
it is negligence or omission to assert a right within a reasonable time, warranting a presumption
that the party entitled to assert it either has abandoned it or declined to assert it.[28]

Considering that the terms and conditions set forth in the stock certificate clearly indicate that
redemption of the preferred shares may be made at any time after the lapse of two years from the
date of issue, private respondents should have taken it upon themselves, after the lapse of the said
period, to inquire from the petitioner the reason why the said shares have not been redeemed. As
it is, not only two years had lapsed, as agreed upon, but an additional sixteen years passed before
the private respondents saw it fit to demand their right. The petitioner, at the time it issued said
preferred shares to the private respondents in 1961, could not have known that it would be suffering
from chronic reserve deficiency twelve years later. Had the private respondents been vigilant in
asserting their rights, the redemption could have been effected at a time when the petitioner bank
was not suffering from any financial crisis.

WHEREFORE, the instant petition, being impressed with merit, is hereby GRANTED. The
challenged decision of respondent judge is set aside and the complaint against the petitioner is
dismissed.

Costs against the private respondents.

SO ORDERED.
 HI-YIELD REALTY, INC., petitioner, vs. COURT OF APPEALS, HONORABLE
MAURICIO RIVERA AS PRESIDING JUDGE OF THE REGIONAL TRIAL COURT,
ANTIPOLO CITY, BRANCH 73 AND NOLI FRANCISCO, respondents.
G.R. No. 138978, September 12, 2002, CORONA, J.

THE FACTS

On August 10, 1987, private respondent Noli Francisco, as attorney-in-fact of spouses Servulo
Carawatan and Felicidad Leyva, and petitioner Hi-Yield Realty, Inc. entered into a Deed of Real
Estate Mortgage with Francisco as mortgagor and Hi-Yield Realty, Inc. as mortgagee. The
property subject of the mortgage, which was owned by the spouses Carawatan, was situated at
Lumang Dayap, Cainta, Rizal and covered by Transfer Certificate of Title No. 297171. It was
mortgaged as security for the loan of P100,000 which was payable in three (3) months.

Private respondent failed to pay and settle the amount loaned despite repeated demands by
petitioner. Hence, on February 27, 1992, petitioner extrajudicially foreclosed the mortgage on the
property. The property was sold for P285,000 with petitioner as the highest bidder. Subsequently,
a Certificate of Sale[2] was issued in favor of petitioner. This was registered on August 13, 1992.
Under the law, private respondent thus had a twelve-month redemption period expiring on August
13, 1993.

On August 13, 1993, however, private respondent, claiming that he offered to redeem the
property twice prior to the expiration of the said redemption period but that petitioner allegedly
refused to accept the offer and instead demanded more than P1,500,000 as redemption price, filed
a petition with the Regional Trial Court, Branch 23 of Antipolo, Rizal, with the following prayer:

1. ordering the respondent to have the subject real property be redeemed by the petitioner after
paying the amount of P285,000.00, plus 1% per month interest therein and other amount which
the purchaser may have paid thereon after purchase;

2. Notifying the Register of Deeds for the Province of Rizal of the instant petition and hence, title
to the aforesaid real property not be consolidated to and in favor of the respondent foreclosure
sale/buyer.

And in the meantime, Petitioner further prays before the Honorable Court, that he be allowed to
consign/deposit the amount of P285,000.00 plus interest of 1% per month beginning August 12,
1992 in favor of respondent, to show his good faith in paying the redemption price.[3]

On January 31, 1994, the trial court declared that the issue as manifested by the parties in the
pre-trial conference was merely to determine the amount of the capital gains tax and documentary
stamps as computed by the Marikina BIR office. Thus, it ordered private respondent to pay the
corresponding amount of taxes within thirty (30) days or on March 15, 1994.

On March 15, 1994, the trial court issued an order directing petitioner to submit within two
(2) days an updated statement of account which was to be the basis for the payment of the
redemption price by private respondent. In the same order, private respondent was also directed to
pay the redemption price within fifteen (15) days from receipt of the order.
 In compliance with the order, petitioner submitted to the trial court a detailed computation of
the total redemption price as of March 17, 1994. Private respondent received his copy on March
24, 1994 and therefore had until April 8, 1994 to pay the redemption price in full. He, however,
failed to pay it by that date. Instead, on April 8, 1994, private respondent filed an Urgent Motion
for Extension of Time[4] with the trial court asking for an extra time of forty-five (45) days within
which to pay the redemption price. He reasoned that his debtor was not able to pay him the amount
he needed to augment his cash on hand and that he was then waiting for a bank loan for P150,000.
Simply put, private respondent did not have sufficient money to tender.

The trial court denied private respondents motion in its order dated May 4, 1994, recognizing
the right of petitioner to consolidate the property in its name.[5] The order stated:

Acting on the motion for extension of time filed by the petitioner in this case praying that they be
granted a period of 45 days from April 8, 1994 within which to pay the redemption price to the
respondent and considering that since April 8, 1994 up to the present, a period of 26 days have
elapsed without any pleading filed by the petitioner that they are ready and willing to pay the
redemption price and considering the opposition filed by the respondent/oppositor, the motion is
found to be without merit and, therefore, the Court denies the motion.

Wherefore, the respondent has the right to consolidate the property in its name.

Subsequently, petitioner filed a motion to compel private respondent to deliver the original
owners copy of title (TCT No. 297171).

On May 26, 1994, private respondent moved to reconsider, offering to pay the amount of
P510,000 in managers check and P38, 872.93 in personal check.

In a surprising turn-around, the trial court issued an order on June 13, 1994 directly
contradicting its May 4, 1994 order: it now allowed private respondent to pay petitioner the
redemption price in the amount of P548, 872.93 plus 1% per month from April 8, 1994 to June 30,
1994 within five (5) days from receipt of the order. Not only that. Petitioner was also ordered to
accept the payment offered by respondent as the full redemption price.

When petitioner refused to accept private respondents tender of payment, private respondent,
on June 28, 1994, filed a motion[6] with the trial court to consign the amount of P561, 247.61 as
the full and final redemption price.

On July 8, 1994, petitioner moved to reconsider the June 13, 1994 order arguing that the period
of redemption could not be extended as it is fixed by law. But the trial court, on July 16, 1997, not
only denied petitioners motion for reconsideration but also granted private respondents motion for
consignation.

Aggrieved, petitioner filed a petition for certiorari at the Court of Appeals, alleging that the
orders of the trial court dated January 31, 1994, March 15, 1994, June 13, 1994 and July 16, 1997
were issued in excess of the trial courts jurisdiction. Petitioner argued that the trial court in effect
extended the twelve-month period of redemption of a duly foreclosed property by almost four
years.
 The Court of Appeals, however, did not find merit in the petition on the basis of the following:

x x x the one-year redemption period should be reckoned from 13 August 1992. In this regard,
NOLI was able to effectively exercise his right of redemption on 13 August 1993.

The records show that on two occasions, within the redemption period, NOLI offered to redeem
the subject property. Failing to afford the redemption price stated by HYRI, he filed an action
before the trial court with the purpose of determining the subject property. To show his good faith
in paying the redemption price, NOLI offered to consign/deposit the amount of P285,000.00 plus
1% interest per month beginning 12 August 1992 in favor of HYRI.

NOLIs petition filed on 13 August 1993 had the effect of a formal offer to redeem. As stated
in Belisario vs. Intermediate Appellate Court, the filing of a complaint to enforce
repurchase within the period of redemption is equivalent to an offer to redeem and has the effect
of preserving the right to redemption. To explain, a formal offer to redeem, accompanied by a bona
fide tender of the redemption price, although proper, is not essential where x x x the right to redeem
is exercised thru the filing of judicial action. Where the action is filed after the statutory period has
expired, the determination of whether the plaintiff consigned the redemption price with the court
simultaneous with the filing of the action is necessary to see if the right of redemption sans judicial
action was validly exercised. Thus, to reiterate, the filing of the action itself within the redemption
period is equivalent to a formal offer to redeem. (Underscoring provided)

In view thereof, the petition filed before the trial court was timely made and was rightfully acted
on.

xxxxxxxxx

In the instant case, the assailed Orders were issued merely to determine the amount of capital gains
tax and documentary stamps, as computed by BIR Marikina and to consider the granting of NOLIs
right to redeem the subject property. x x x In view thereof, there was no extension of the
redemption period. As heretofore stated, the period of redemption expired on 13 August 1993. And
within the said period, NOLI has effectively exercised his right of redemption. Having so
established the same, the contention of extending the redemption period finds no support in the
records of the instant case.[7]

Frustrated in its attempt to stymie private respondents efforts to redeem the subject property
on a petition to the Court of Appeals, petitioner now seeks a review of the respondent courts
decision under the following

ASSIGNMENT OF ERRORS

A. THE HONORABLE COURT OF APPEALS ERRED IN SUSTAINING THE

ORDERS OF THE TRIAL COURT EXTENDING THE PERIOD OF
REDEMPTION AND GRANTING A RELIEF IN EQUITY WHERE THE
APPLICABLE LAW AND JURISPRUDENCE SPECIFICALLY PROVIDES
OTHERWISE.
 B. THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE
ORDERS OF THE TRIAL COURT WHICH ERRED IN ITS APPLICATION AND
INTERPRETATION OF SECTION 28, RULE 39 OF THE 1997 RULES OF CIVIL
PROCEDURE.

C. THE HONORABLE COURT OF APPEALS ERRED IN APPLYING THE

RULINGS IN THE BELISARIO CASE IN THE CASE AT BAR.[8]

THE ISSUES

In a nutshell, petitioner argues that the trial court erred in allowing redemption after April 8,
1994, the date when private respondent lost all his redemptive rights. Stated otherwise, the trial
court should not have allowed private respondent forty-five (45) more days beyond April 8, 1994
within which to redeem the foreclosed property.

Petitioner contends that the motions dated May 26, 1994 and June 28, 1994 filed by private
respondent to consign and tender the payment of the redemption price were merely designed to
stretch the time for redemption of the subject property. Private respondent did not have the ability
to redeem the subject property as he had no money at the outset. The redemption price he initially
offered was woefully inadequate because it did not include the taxes, interest and other expenses
petitioner incurred during the foreclosure proceedings.Petitioner therefore felt it was justified in
refusing to accept private respondents initial offer to redeem. Hence, private respondents action in
the Antipolo RTC, filed on August 13, 1993 (the original expiration date of the period of
redemption), was merely a subterfuge to forestall the running of the redemption period.

Furthermore, according to petitioner, even if private respondent had been legally allowed to
redeem the property until April 8, 1994 (as authorized by the March 15, 1994 order of the trial
court), the latter never made any actual tender or consignation of payment and therefore no
redemption was ever made. Thus, private respondent had already lost all his redemptive rights as
of that date and the order dated June 13, 1994 granting a further forty-five (45) day extension to
redeem after April 8, 1994 was completely beyond the trial courts power to give.

THE QUESTIONED ORDERS

Petitioner challenged before the respondent Court of Appeals the authority of the trial court
to issue the following orders

(a) dated January 31, 1994 which defined the issue involved in the case as merely
determining the amount of taxes and which mandated private respondent to pay the
corresponding amount of taxes within thirty (30) days;

(b) dated March 15, 1994 which directed petitioner to submit an updated statement of
account and private respondent to pay the redemption price (the updated statement of
account as basis therefor) within fifteen (15) days from receipt of the order;

(c) dated June 13, 1994 which allowed private respondent to redeem upon payment to
petitioner of the redemption price of P548,872.93 and
 (d) dated July 16, 1997 which denied petitioners motion for reconsideration of the June
13, 1994 order and which granted private respondents motion for consignation.

Petitioner now seeks to correct in this Court the error of the Court of Appeals in sustaining
the four above-mentioned orders of the trial court.

THIS COURTS RULING

Section 28, Rule 39 of the Rules of Court provides:

SEC. 28. Time and manner of, and amounts payable on, successive redemptions; notice to be given
and filed. The judgment obligor, or redemptioner, may redeem the property from the purchaser, at
any time within one (1) year from the date of the registration of the certificate of sale, by paying
the purchaser the amount of his purchase, with one per centum per month interest thereon in
addition, up to the time of redemption, together with the amount of any assessments or taxes which
the purchaser may have paid thereon after purchase, and interest on such last named amount of the
same rate; and if the purchaser be also a creditor having a prior lien to that of the redemptioner,
other than the judgment under which such purchase was made, the amount of such other lien, with
interest.

Pursuant to the abovementioned rule, the right of redemption should be exercised within the
specified time limit, which is one year from the date of registration of the certificate of
sale.Moreover, the redemptioner should make an actual tender in good faith of the full amount of
the purchase price as provided above, which means the auction price of the property plus the
creditors other legitimate expenses like taxes, registration fees, etc.

The rule works well if both parties agree on the amount to be tendered on or before the end of
the redemption period. In this case, however, the parties could not agree on the amount as in fact
the private respondent claimed he twice tried to redeem the property but the petitioner refused
because they could not agree on the redemption price.

What is the redemptioners option therefore when the redemption period is about to expire and
the redemption cannot take place on account of disagreement over the redemption price?

According to jurisprudence,[9] the redemptioner faced with such a problem may preserve his
right of redemption through judicial action which in every case must be filed within the one-year
period of redemption. The filing of the court action to enforce redemption, being equivalent to a
formal offer to redeem, would have the effect of preserving his redemptive rights and freezing the
expiration of the one-year period. This is a fair interpretation provided the action is filed on time
and in good faith, the redemption price is finally determined and paid within a reasonable time,
and the rights of the parties are respected.

Stated otherwise, the foregoing interpretation, as applied to the case at bar, has three critical
dimensions: (1) timely redemption or redemption by expiration date (or, as what happened in this
case, the redemptioner was forced to resort to judicial action to freeze the expiration of the
redemption period); (2) good faith as always, meaning, the filing of the private respondents action
on August 13, 1993 must have been for the sole purpose of determining the redemption price and
not to stretch the redemptive period indefinitely; and (3) once the redemption price is determined
within a reasonable time, the redemptioner must make prompt payment in full.

Conversely, if private respondent had to resort to judicial action to stall the expiration of the
redemptive period on August 13, 1993 because he and the petitioner could not agree on the
redemption price which still had to be determined, private respondent could not thereby be
expected to tender payment simultaneously with the filing of the action on said date.

Accordingly, the trial court did not err when it resolved to allow private respondent to redeem
the property through its orders dated January 31, 1994 and March 15, 1994. The order dated March
15, 1994 thus preserved private respondents right to redeem pending the computation of the taxes
to be added to the total amount of the redemption price.

Private respondent could not be reproached, at least initially, for offering to pay less than the
full amount of the redemption price as the amount of taxes and expenses, at that point, was not yet
clearly determined. Proof of this is the fact that petitioner had to be required by the March 15, 1994
order of the trial court to submit an updated account of the total capital gains tax and interest added
to the purchase price. Petitioner did not oppose the said order. Instead, on March 17, 1994, it
promptly complied with the directive of the trial court. Which could have only meant that
petitioner itself recognized that the redemption price was uncertain and could not therefore be
settled yet at that point.

However, after petitioner, pursuant to the trial court order on March 15, 1994, furnished
private respondent the updated statement of account on March 24, 1994, the latter should have
redeemed the foreclosed property within 15 days, that is, on or before April 8, 1994. The private
respondent should have promptly tendered by then the complete and updated redemption price as
computed. Should the amount allow redemption, the redemptioner should then pay the amount
already adverted to.[10]

But on April 8, 1994, the deadline set by the trial court, private respondent did not tender any
payment. Instead, he asked for an extension of 45 days because his money was not enough. The
trial court was therefore correct when it denied, on May 4, 1994,[11] private respondents plea for a
45-day extension for payment. It was also correct in declaring, in the same order, the right of
petitioner to consolidate the property in its name on account of private respondents failure to
redeem the property on or before April 8, 1994.

Strangely, however, the trial court had a sudden change of heart and reversed itself after
private respondent filed a motion for reconsideration on May 26, 1994. This is where we draw the
line between the judicious and injudicious use of discretion by the trial court.

On June 13, 1994 and July 16, 1997, it issued two orders which effectively allowed an
extension of the redemptive period and consignation of the redemption price. We raise a quizzical
eyebrow, to say the least.

The trial court resolved to allow private respondent to redeem and pay the redemption price
of the property in the interest of justice and on the ground of equity way beyond what was
reasonable and contemplated by the law. We cannot upbraid the trial court for sympathizing with
private respondent but this exercise of discretion cannot be allowed to trample upon the other
partys rights.

The pendency of the right of redemption depresses the market value of the land until the period
expires. Permitting private respondent to file a suit for redemption, with either party unable to
foresee when final judgment will come, renders meaningless the period fixed by the statute for
effecting the redemption. It makes the redemptive period indefinite and cripples any effort of the
landowner to realize the value of his land. In the same way, the buyer cannot immediately recover
his investment.[12] Thus, unless and until the redemption is resolved with finality, both the
landowners and buyers needs cannot be met. Petitioner and private respondent herein were thus
basically posed on similar footing before redemption. But whoever of them stands to be irreparably
injured in the long run deserves the Courts equitable protection.[13] Thus we have held that:

Equity has been defined as justice outside law, being ethical rather than jural and belonging to the
sphere of morals than of law. It is grounded on the precepts of conscience and not on any sanction
of positive law.[14]

Private respondent may have elicited the sympathy of the trial court. We cannot, however, be
blind to the rights of petitioner. It was serious error to make the final redemption of the foreclosed
property dependent on the financial condition of private respondent. It may have been difficult for
private respondent to raise the money to redeem the property but financial hardship is not a ground
to extend the period of redemption.[15]

Thus, this Court cannot apply the same leniency as it did in Belisario vs.
IAC.[16] The Belisario case is not on all fours with the instant case. For one, in Belisario, the
petitioners therein manifested their desire to redeem the property through a letter addressed to
PNB. Enclosed in the letter was a postal money order in the amount of P630 as partial payment,
with the balance to be paid in 12 equal monthly installments. There was a definite tender of
payment by petitioners therein although at the outset the amount tendered was incomplete and
made with a proposal to pay on installment. This Court held that (t)here (was) no cogent reason
for requiring the vendee to accept payment by installments from the redemptioner as it would
ultimately result in an indefinite extension of the redemption period. In the instant case, however,
there was no definite tender of payment to petitioner when private respondent allegedly offered to
redeem the property on August 13, 1993.

Had private respondents act of filing a suit for redemption really been in good faith, private
respondent could have at least consigned or deposited what he thought to be the correct amount
simultaneously with the filing of the action to redeem on August 13, 1993 - to show not only good
faith but also his intention and capability of paying in full what he believed to be the reasonable
price. But even as he petitioned the court for the consignation of the redemption price, no actual
consignation was made. He instead sought a 45-day extension of the period to pay the redemption
price. This was downright reflective of private respondents financial inability to redeem from the
very start.

For another, the controversy in the Belisario case involved the determination of the proper
reckoning of the period of redemption. This Court held there that
(t)he redemption period, for purposes of determining the time when a final Deed of Sale may be
executed or issued and the ownership of the registered land consolidated in the purchaser at an
extrajudicial foreclosure sale under Act 3135, should be reckoned from the date of the registration
of the Certificate of Sale in the Office of the Register of Deeds concerned and not from the date of
public auction.

In the instant case, however, the fact that private respondent made a formal offer to redeem
before the expiration of the period to redeem was not squarely at issue. The focal issue here is
whether or not the extension of the redemptive period by the trial court was well within private
respondents preserved right to redeem. The circumstances clearly show it was not.

The Court of Appeals thus cited the Belisario case out of context because the incidents of said
case are different from those of the case at bar.

Precedents are helpful in deciding cases when they are on all fours or at least substantially identical
with previous litigations. Argumentum a simili valet in lege. x x x Except when there is a need to
reverse them because of an emergent viewpoint or an altered situation x x x.[17]

The opportunity to redeem the subject property was never denied to private respondent. His
timely formal offer through judicial action to redeem was likewise recognized. But that is where
it ends. We cannot sanction and grant every succeeding motion or petition specially if frivolous or
unreasonable filed by him because this would manifestly and unreasonably delay the final
resolution of ownership of the subject property.

And we cannot be clearer on this point: as a result of the trial courts grant of a 45-day extended
period to redeem, almost nine (9) years have elapsed with both parties claims over the property
dangling in limbo, to the serious impairment of petitioners rights.

We cannot thus help but call the trial courts attention to the prejudice it has wittingly or
unwittingly caused the petitioner. It was really all too simple. The trial court should have seen, as
in fact it had already initially seen, that the 45-day extension sought by private respondent on April
8, 1994 was just a play to cover up his lack of funds to redeem the foreclosed property.

WHEREFORE, the petition is PARTLY GRANTED. The decision of the Court of Appeals
under review is hereby MODIFIED as follows: (1) the orders dated January 31, 1994 and March
15, 1994 of the trial court are hereby SUSTAINED; (2) the orders dated June 13, 1994 and July
16, 1997 of the trial court are hereby SET ASIDE and NULLIFIED. Consequently, for failure of
private respondent to redeem the property within the period set by the trial court in its order
dated March 15, 1994, the petitioner is hereby allowed to consolidate the title to the subject
property in its name.

SO ORDERED.
 DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS
and LYDIA CUBA, respondents.
G.R. No. 118342, January 5, 1998, DAVIDE, JR., J.

These two consolidated cases stemmed from a complaint[1] filed against the Development
Bank of the Philippines (hereafter DBP) and Agripina Caperal filed by Lydia Cuba (hereafter
CUBA) on 21 May 1985 with the Regional Trial Court of Pangasinan, Branch 54. The said
complaint sought (1) the declaration of nullity of DBPs appropriation of CUBAs rights, title, and
interests over a 44-hectare fishpond located in Bolinao, Pangasinan, for being violative of Article
2088 of the Civil Code; (2) the annulment of the Deed of Conditional Sale executed in her favor
by DBP; (3) the annulment of DBPs sale of the subject fishpond to Caperal; (4) the restoration of
her rights, title, and interests over the fishpond; and (5) the recovery of damages, attorneys fees,
and expenses of litigation.

After the joinder of issues following the filing by the parties of their respective pleadings, the
trial court conducted a pre-trial where CUBA and DBP agreed on the following facts, which were
embodied in the pre-trial order:[2]

1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new)
dated May 13, 1974 from the Government;

2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the Philippines
in the amounts of P109,000.00; P109,000.00; and P98,700.00 under the terms stated
in the Promissory Notes dated September 6, 1974; August 11, 1975; and April 4,
1977;

3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment
of her Leasehold Rights;

4. Plaintiff failed to pay her loan on the scheduled dates thereof in accordance with the
terms of the Promissory Notes;

5. Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP

appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in
question;

6. After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cuba
over the fishpond in question, defendant DBP, in turn, executed a Deed of
Conditional Sale of the Leasehold Rights in favor of plaintiff Lydia Cuba over the
same fishpond in question;

7. In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters to the
Manager DBP, Dagupan City dated November 6, 1979 and December 20,
1979. DBP thereafter accepted the offer to repurchase in a letter addressed to
plaintiff dated February 1, 1982;

8. After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a
new Fishpond Lease Agreement No. 2083-A dated March 24, 1980 was issued by
 the Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba only, excluding
her husband;

9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of
Conditional Sale;

10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of
Conditional Sale, she entered with the DBP a temporary arrangement whereby in
consideration for the deferment of the Notarial Rescission of Deed of Conditional
Sale, plaintiff Lydia Cuba promised to make certain payments as stated in temporary
Arrangement dated February 23, 1982;

11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated March
13, 1984, and which was received by plaintiff Lydia Cuba;

12. After the Notice of Rescission, defendant DBP took possession of the Leasehold
Rights of the fishpond in question;

13. That after defendant DBP took possession of the Leasehold Rights over the fishpond
in question, DBP advertised in the SUNDAY PUNCH the public bidding dated June
24, 1984, to dispose of the property;

14. That the DBP thereafter executed a Deed of Conditional Sale in favor of defendant
Agripina Caperal on August 16, 1984;

15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083-A
on December 28, 1984 by the Ministry of Agriculture and Food.

Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the pre-trial
order. [3]

Trial was thereafter had on other matters.

The principal issue presented was whether the act of DBP in appropriating to itself CUBAs
leasehold rights over the fishpond in question without foreclosure proceedings was contrary to
Article 2088 of the Civil Code and, therefore, invalid. CUBA insisted on an affirmative
resolution. DBP stressed that it merely exercised its contractual right under the Assignments of
Leasehold Rights, which was not a contract of mortgage. Defendant Caperal sided with DBP.

The trial court resolved the issue in favor of CUBA by declaring that DBPs taking possession
and ownership of the property without foreclosure was plainly violative of Article 2088 of the
Civil Code which provides as follows:

ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void.

It disagreed with DBPs stand that the Assignments of Leasehold Rights were not contracts of
mortgage because (1) they were given as security for loans, (2) although the fishpond land in
question is still a public land, CUBAs leasehold rights and interest thereon are alienable rights
which can be the proper subject of a mortgage; and (3) the intention of the contracting parties to
treat the Assignment of Leasehold Rights as a mortgage was obvious and unmistakable; hence,
upon CUBAs default, DBPs only right was to foreclose the Assignment in accordance with law.

The trial court also declared invalid condition no. 12 of the Assignment of Leasehold Rights
for being a clear case of pactum commissorium expressly prohibited and declared null and void by
Article 2088 of the Civil Code. It then concluded that since DBP never acquired lawful ownership
of CUBAs leasehold rights, all acts of ownership and possession by the said bank were
void. Accordingly, the Deed of Conditional Sale in favor of CUBA, the notarial rescission of such
sale, and the Deed of Conditional Sale in favor of defendant Caperal, as well as the Assignment of
Leasehold Rights executed by Caperal in favor of DBP, were also void and ineffective.

As to damages, the trial court found ample evidence on record that in 1984 the representatives
of DBP ejected CUBA and her caretakers not only from the fishpond area but also from the
adjoining big house; and that when CUBAs son and caretaker went there on 15 September 1985,
they found the said house unoccupied and destroyed and CUBAs personal belongings,
machineries, equipment, tools, and other articles used in fishpond operation which were kept in
the house were missing. The missing items were valued at about P550,000. It further found that
when CUBA and her men were ejected by DBP for the first time in 1979, CUBA had stocked the
fishpond with 250,000 pieces of bangus fish (milkfish), all of which died because the DBP
representatives prevented CUBAs men from feeding the fish. At the conservative price of P3.00
per fish, the gross value would have been P690,000, and after deducting 25% of said value as
reasonable allowance for the cost of feeds, CUBA suffered a loss of P517,500. It then set the
aggregate of the actual damages sustained by CUBA at P1,067,500.

The trial court further found that DBP was guilty of gross bad faith in falsely representing to
the Bureau of Fisheries that it had foreclosed its mortgage on CUBAs leasehold rights. Such
representation induced the said Bureau to terminate CUBAs leasehold rights and to approve the
Deed of Conditional Sale in favor of CUBA. And considering that by reason of her unlawful
ejectment by DBP, CUBA suffered moral shock, degradation, social humiliation, and serious
anxieties for which she became sick and had to be hospitalized the trial court found her entitled to
moral and exemplary damages. The trial court also held that CUBA was entitled to P100,000
attorneys fees in view of the considerable expenses she incurred for lawyers fees and in view of
the finding that she was entitled to exemplary damages.

In its decision of 31 January 1990, [4] the trial court disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff:

1. DECLARING null and void and without any legal effect the act of defendant Development
Bank of the Philippines in appropriating for its own interest, without any judicial or extra-
judicial foreclosure, plaintiffs leasehold rights and interest over the fishpond land in
question under her Fishpond Lease Agreement No. 2083 (new);

2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and between the
defendant Development Bank of the Philippines and plaintiff (Exh. E and Exh. 1) and the
 acts of notarial rescission of the Development Bank of the Philippines relative to said sale
(Exhs. 16 and 26) as void and ineffective;

3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and between
the Development Bank of the Philippines and defendant Agripina Caperal (Exh. F and
Exh. 21), the Fishpond Lease Agreement No. 2083-A dated December 28, 1984 of
defendant Agripina Caperal (Exh. 23) and the Assignment of Leasehold Rights dated
February 12, 1985 executed by defendant Agripina Caperal in favor of the defendant
Development Bank of the Philippines (Exh. 24) as void ab initio;

4. ORDERING defendant Development Bank of the Philippines and defendant Agripina

Caperal, jointly and severally, to restore to plaintiff the latters leasehold rights and
interests and right of possession over the fishpond land in question, without prejudice to
the right of defendant Development Bank of the Philippines to foreclose the securities
given by plaintiff;

5. ORDERING defendant Development Bank of the Philippines to pay to plaintiff the

following amounts:

a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED PESOS

(P1,067,500.00), as and for actual damages;

b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as moral damages;

c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for exemplary damages;

d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as and for
attorneys fees;

6. And ORDERING defendant Development Bank of the Philippines to reimburse and pay to
defendant Agripina Caperal the sum of ONE MILLION FIVE HUNDRED THIRTY-
TWO THOUSAND SIX HUNDRED TEN PESOS AND SEVENTY-FIVE
CENTAVOS (P1,532,610.75) representing the amounts paid by defendant Agripina
Caperal to defendant Development Bank of the Philippines under their Deed of
Conditional Sale.

CUBA and DBP interposed separate appeals from the decision to the Court of Appeals. The
former sought an increase in the amount of damages, while the latter questioned the findings of
fact and law of the lower court.

In its decision [5] of 25 May 1994, the Court of Appeals ruled that (1) the trial court erred in
declaring that the deed of assignment was null and void and that defendant Caperal could not
validly acquire the leasehold rights from DBP; (2) contrary to the claim of DBP, the assignment
was not a cession under Article 1255 of the Civil Code because DBP appeared to be the sole
creditor to CUBA - cession presupposes plurality of debts and creditors; (3) the deeds of
assignment represented the voluntary act of CUBA in assigning her property rights in payment of
her debts, which amounted to a novation of the promissory notes executed by CUBA in favor of
DBP; (4) CUBA was estopped from questioning the assignment of the leasehold rights, since she
agreed to repurchase the said rights under a deed of conditional sale; and (5) condition no. 12 of
the deed of assignment was an express authority from CUBA for DBP to sell whatever right she
had over the fishpond. It also ruled that CUBA was not entitled to loss of profits for lack
of evidence, but agreed with the trial court as to the actual damages of P1,067,500. It, however,
deleted the amount of exemplary damages and reduced the award of moral damages
from P100,000 to P50,000 and attorneys fees, from P100,000 to P50,000.

The Court of Appeals thus declared as valid the following: (1) the act of DBP in appropriating
Cubas leasehold rights and interest under Fishpond Lease Agreement No. 2083; (2) the deeds of
assignment executed by Cuba in favor of DBP; (3) the deed of conditional sale between CUBA
and DBP; and (4) the deed of conditional sale between DBP and Caperal, the Fishpond Lease
Agreement in favor of Caperal, and the assignment of leasehold rights executed by Caperal in
favor of DBP. It then ordered DBP to turn over possession of the property to Caperal as lawful
holder of the leasehold rights and to pay CUBA the following amounts: (a) P1,067,500 as actual
damages; P50,000 as moral damages; and P50,000 as attorneys fees.

Since their motions for reconsideration were denied,[6] DBP and CUBA filed separate
petitions for review.

In its petition (G.R. No. 118342), DBP assails the award of actual and moral damages and
attorneys fees in favor of CUBA.

Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the Court of
Appeals erred (1) in not holding that the questioned deed of assignment was a pactum
commissorium contrary to Article 2088 of the Civil Code; (b) in holding that the deed of
assignment effected a novation of the promissory notes; (c) in holding that CUBA was estopped
from questioning the validity of the deed of assignment when she agreed to repurchase her
leasehold rights under a deed of conditional sale; and (d) in reducing the amounts of moral
damages and attorneys fees, in deleting the award of exemplary damages, and in not increasing the
amount of damages.

We agree with CUBA that the assignment of leasehold rights was a mortgage contract.

It is undisputed that CUBA obtained from DBP three separate loans totalling P335,000, each
of which was covered by a promissory note. In all of these notes, there was a provision that: In the
event of foreclosure of the mortgage securing this notes, I/We further bind myself/ourselves,
jointly and severally, to pay the deficiency, if any. [7]

Simultaneous with the execution of the notes was the execution of Assignments of Leasehold
Rights [8] where CUBA assigned her leasehold rights and interest on a 44-hectare fishpond,
together with the improvements thereon. As pointed out by CUBA, the deeds of assignment
constantly referred to the assignor (CUBA) as borrower; the assigned rights, as mortgaged
properties; and the instrument itself, as mortgage contract. Moreover, under condition no. 22 of
the deed, it was provided that failure to comply with the terms and condition of any of the loans
shall cause all other loans to become due and demandable and all mortgages shall be
foreclosed. And, condition no. 33 provided that if foreclosure is actually accomplished, the usual
10% attorneys fees and 10% liquidated damages of the total obligation shall be imposed. There is,
therefore, no shred of doubt that a mortgage was intended.

Besides, in their stipulation of facts the parties admitted that the assignment was by way of
security for the payment of the loans; thus:

3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of
her Leasehold Rights.

In Peoples Bank & Trust Co. vs. Odom,[9] this Court had the occasion to rule that an
assignment to guarantee an obligation is in effect a mortgage.

We find no merit in DBPs contention that the assignment novated the promissory notes in that
the obligation to pay a sum of money the loans (under the promissory notes) was substituted by
the assignment of the rights over the fishpond (under the deed of assignment). As correctly pointed
out by CUBA, the said assignment merely complemented or supplemented the notes; both could
stand together. The former was only an accessory to the latter. Contrary to DBPs submission, the
obligation to pay a sum of money remained, and the assignment merely served as security for the
loans covered by the promissory notes. Significantly, both the deeds of assignment and the
promissory notes were executed on the same dates the loans were granted. Also, the last paragraph
of the assignment stated: The assignor further reiterates and states all terms, covenants, and
conditions stipulated in the promissory note or notes covering the proceeds of this loan, making
said promissory note or notes, to all intent and purposes, an integral part hereof.

Neither did the assignment amount to payment by cession under Article 1255 of the Civil
Code for the plain and simple reason that there was only one creditor, the DBP. Article 1255
contemplates the existence of two or more creditors and involves the assignment of all the debtors
property.

Nor did the assignment constitute dation in payment under Article 1245 of the civil Code,
which reads: Dation in payment, whereby property is alienated to the creditor in satisfaction of a
debt in money, shall be governed by the law on sales. It bears stressing that the assignment, being
in its essence a mortgage, was but a security and not a satisfaction of indebtedness.[10]

We do not, however, buy CUBAs argument that condition no. 12 of the deed of assignment
constituted pactum commissorium. Said condition reads:

12. That effective upon the breach of any condition of this assignment, the Assignor hereby
appoints the Assignee his Attorney-in-fact with full power and authority to take actual possession
of the property above-described, together with all improvements thereon, subject to the approval
of the Secretary of Agriculture and Natural Resources, to lease the same or any portion thereof and
collect rentals, to make repairs or improvements thereon and pay the same, to sell or otherwise
dispose of whatever rights the Assignor has or might have over said property and/or its
improvements and perform any other act which the Assignee may deem convenient to protect its
interest. All expenses advanced by the Assignee in connection with purpose above indicated which
shall bear the same rate of interest aforementioned are also guaranteed by this Assignment. Any
amount received from rents, administration, sale or disposal of said property may be supplied by
the Assignee to the payment of repairs, improvements, taxes, assessments and other incidental
expenses and obligations and the balance, if any, to the payment of interest and then on the capital
of the indebtedness secured hereby. If after disposal or sale of said property and upon application
of total amounts received there shall remain a deficiency, said Assignor hereby binds himself to
pay the same to the Assignee upon demand, together with all interest thereon until fully paid. The
power herein granted shall not be revoked as long as the Assignor is indebted to the Assignee and
all acts that may be executed by the Assignee by virtue of said power are hereby ratified.

The elements of pactum commissorium are as follows: (1) there should be a property
mortgaged by way of security for the payment of the principal obligation, and (2) there should be
a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-
payment of the principal obligation within the stipulated period.[11]

Condition no. 12 did not provide that the ownership over the leasehold rights would
automatically pass to DBP upon CUBAs failure to pay the loan on time. It merely provided for the
appointment of DBP as attorney-in-fact with authority, among other things, to sell or otherwise
dispose of the said real rights, in case of default by CUBA, and to apply the proceeds to the
payment of the loan. This provision is a standard condition in mortgage contracts and is in
conformity with Article 2087 of the Civil Code, which authorizes the mortgagee to foreclose the
mortgage and alienate the mortgaged property for the payment of the principal obligation.

DBP, however, exceeded the authority vested by condition no. 12 of the deed of
assignment. As admitted by it during the pre-trial, it had [w]ithout foreclosure proceedings,
whether judicial or extrajudicial, appropriated the [l]easehold [r]ights of plaintiff Lydia Cuba over
the fishpond in question. Its contention that it limited itself to mere administration by posting
caretakers is further belied by the deed of conditional sale it executed in favor of CUBA. The deed
stated:

WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its favor by the
herein vendees [Cuba spouses] the former acquired all the rights and interest of the latter over the
above-described property;

The title to the real estate property [sic] and all improvements thereon shall remain in the name of
the Vendor until after the purchase price, advances and interest shall have been fully
paid.(Emphasis supplied).

It is obvious from the above-quoted paragraphs that DBP had appropriated and taken
ownership of CUBAs leasehold rights merely on the strength of the deed of assignment.

DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its act of
appropriating the leasehold rights. As stated earlier, condition no. 12 did not provide that CUBAs
default would operate to vest in DBP ownership of the said rights. Besides, an assignment to
guarantee an obligation, as in the present case, is virtually a mortgage and not an absolute
conveyance of title which confers ownership on the assignee.[12]

At any rate, DBPs act of appropriating CUBAs leasehold rights was violative of Article 2088
of the Civil Code, which forbids a creditor from appropriating, or disposing of, the thing given as
security for the payment of a debt.
 The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP did not
estop her from questioning DBPs act of appropriation. Estoppel is unavailing in this case.As held
by this Court in some cases,[13] estoppel cannot give validity to an act that is prohibited by law or
against public policy. Hence, the appropriation of the leasehold rights, being contrary to Article
2088 of the Civil Code and to public policy, cannot be deemed validated by estoppel.

Instead of taking ownership of the questioned real rights upon default by CUBA, DBP should
have foreclosed the mortgage, as has been stipulated in condition no. 22 of the deed of
assignment. But, as admitted by DBP, there was no such foreclosure. Yet, in its letter dated 26
October 1979, addressed to the Minister of Agriculture and Natural Resources and coursed through
the Director of the Bureau of Fisheries and Aquatic Resources, DBP declared that it had foreclosed
the mortgage and enforced the assignment of leasehold rights on March 21, 1979 for failure of said
spouses [Cuba spouces] to pay their loan amortizations.[14] This only goes to show that DBP was
aware of the necessity of foreclosure proceedings.

In view of the false representation of DBP that it had already foreclosed the mortgage, the
Bureau of Fisheries cancelled CUBAs original lease permit, approved the deed of conditional sale,
and issued a new permit in favor of CUBA. Said acts which were predicated on such false
representation, as well as the subsequent acts emanating from DBPs appropriation of the leasehold
rights, should therefore be set aside. To validate these acts would open the floodgates to
circumvention of Article 2088 of the Civil Code.

Even in cases where foreclosure proceedings were had, this Court had not hesitated to nullify
the consequent auction sale for failure to comply with the requirements laid down by law, such as
Act No. 3135, as amended.[15] With more reason that the sale of property given as security for the
payment of a debt be set aside if there was no prior foreclosure proceeding.

Hence, DBP should render an accounting of the income derived from the operation of the
fishpond in question and apply the said income in accordance with condition no. 12 of the deed of
assignment which provided: Any amount received from rents, administration, may be applied to
the payment of repairs, improvements, taxes, assessment, and other incidental expenses and
obligations and the balance, if any, to the payment of interest and then on the capital of the
indebtedness.

We shall now take up the issue of damages.

Article 2199 provides:

Except as provided by law or by stipulation, one is entitled to an adequate compensation only for
such pecuniary loss suffered by him as he has duly proved. Such compensation is referred to as
actual or compensatory damages.

Actual or compensatory damages cannot be presumed, but must be proved with reasonable
degree of certainty.[16] A court cannot rely on speculations, conjectures, or guesswork as to the fact
and amount of damages, but must depend upon competent proof that they have been suffered by
the injured party and on the best obtainable evidence of the actual amount thereof.[17] It must point
out specific facts which could afford a basis for measuring whatever compensatory or actual
damages are borne.[18]
 In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual damages
consisting of P550,000 which represented the value of the alleged lost articles of CUBA
and P517,500 which represented the value of the 230,000 pieces of bangus allegedly stocked in
1979 when DBP first ejected CUBA from the fishpond and the adjoining house. This award was
affirmed by the Court of Appeals.

We find that the alleged loss of personal belongings and equipment was not proved by clear
evidence. Other than the testimony of CUBA and her caretaker, there was no proof as to the
existence of those items before DBP took over the fishpond in question. As pointed out by DBP,
there was not inventory of the alleged lost items before the loss which is normal in a project which
sometimes, if not most often, is left to the care of other persons. Neither was a single receipt or
record of acquisition presented.

Curiously, in her complaint dated 17 May 1985, CUBA included losses of property as among
the damages resulting from DBPs take-over of the fishpond. Yet, it was only in September 1985
when her son and a caretaker went to the fishpond and the adjoining house that she came to know
of the alleged loss of several articles. Such claim for losses of property, having been made before
knowledge of the alleged actual loss, was therefore speculative. The alleged loss could have been
a mere afterthought or subterfuge to justify her claim for actual damages.

With regard to the award of P517,000 representing the value of the alleged 230,000 pieces of
bangus which died when DBP took possession of the fishpond in March 1979, the same was not
called for. Such loss was not duly proved; besides, the claim therefor was delayed
unreasonably. From 1979 until after the filing of her complaint in court in May 1985, CUBA did
not bring to the attention of DBP the alleged loss. In fact, in her letter dated 24 October
1979,[19] she declared:

1. That from February to May 1978, I was then seriously ill in Manila and within the same period
I neglected the management and supervision of the cultivation and harvest of the produce of the
aforesaid fishpond thereby resulting to the irreparable loss in the produce of the same in the amount
of about P500,000.00 to my great damage and prejudice due to fraudulent acts of some of my
fishpond workers.

Nowhere in the said letter, which was written seven months after DBP took possession of the
fishpond, did CUBA intimate that upon DBPs take-over there was a total of 230,000 pieces of
bangus, but all of which died because of DBPs representatives prevented her men from feeding
the fish.

The award of actual damages should, therefore, be struck down for lack of sufficient basis.

In view, however, of DBPs act of appropriating CUBAs leasehold rights which was contrary
to law and public policy, as well as its false representation to the then Ministry of Agriculture and
Natural Resources that it had foreclosed the mortgage, an award of moral damages in the amount
of P50,000 is in order conformably with Article 2219(10), in relation to Article 21, of the Civil
Code. Exemplary or corrective damages in the amount of P25,000 should likewise be awarded by
way of example or correction for the public good.[20] There being an award of exemplary damages,
attorneys fees are also recoverable.[21]
 WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV No.
26535 is hereby REVERSED, except as to the award of P50,000 as moral damages, which is
hereby sustained. The 31 January 1990 Decision of the Regional Trial Court of Pangasinan,
Branch 54, in Civil Case No. A-1574 is MODIFIED setting aside the finding that condition no. 12
of the deed of assignment constituted pactum commissorium and the award of actual damages; and
by reducing the amounts of moral damages from P100,000 to P50,000; the exemplary damages,
from P50,000 to P25,000; and the attorneys fees, from P100,000 to P20,000. The Development
Bank of the Philippines is hereby ordered to render an accounting of the income derived from the
operation of the fishpond in question.

Let this case be REMANDED to the trial court for the reception of the income statement of
DBP, as well as the statement of the account of Lydia P. Cuba, and for the determination of each
partys financial obligation to one another.

SO ORDERED.
 PREMIUM MARBLE RESOURCES, INC., petitioner, vs. THE COURT OF APPEALS
and INTERNATIONAL CORPORATE BANK, respondents.
G.R. No. 96551, November 4, 1996, TORRES, JR., J.

FACTS:

On July 18, 1986, Premium Marble Resources, Inc. (Premium for brevity), assisted by Atty.
Arnulfo Dumadag as counsel, filed an action for damages against International Corporate Bank
which was docketed as Civil Case No. 14413. The complaint states, inter alia:

3. Sometime in August to October 1982, Ayala Investment and Development Corporation issued
three (3) checks [Nos. 097088, 097414 & 27884] in the aggregate amount of P31,663.88 payable
to the plaintiff and drawn against Citibank;

xxx

5. On or about August to October 1982, former officers of the plaintiff corporation headed by
Saturnino G. Belen, Jr., without any authority whatsoever from the plaintiff deposited the above-
mentioned checks to the current account of his conduit corporation, Intervest Merchant Finance
(Intervest, for brevity) which the latter maintained with the defendant bank under account No.
0200-02027-8;

6. Although the checks were clearly payable to the plaintiff corporation and crossed on their face
and for payees account only, defendant bank accepted the checks to be deposited to the current
account of Intervest and thereafter presented the same for collection from the drawee bank which
subsequently cleared the same thus allowing Intervest to make use of the funds to the prejudice of
the plaintiff;

xxx

14. The plaintiff has demanded upon the defendant to restitute the amount representing the value
of the checks but defendant refused and continue to refuse to honor plaintiffs demands up to the
present;

15. As a result of the illegal and irregular acts perpetrated by the defendant bank, the plaintiff was
damaged to the extent of the amount of P31,663.88.

Premium prayed that judgment be rendered ordering defendant bank to pay the amount
of P31,663.88 representing the value of the checks plus interest, P100,000.00 as exemplary
damages; and P30,000.00 as attorneys fees.

In its Answer International Corporate Bank alleged, inter alia, that Premium has no
capacity/personality/authority to sue in this instance and the complaint should, therefore, be
dismissed for failure to state a cause of action.

A few days after Premium filed the said case, Printline Corporation, a sister company of
Premium also filed an action for damages against International Corporate Bank docketed as Civil
Case No. 14444. Thereafter, both civil cases were consolidated.
 Meantime, the same corporation, i.e., Premium, but this time represented by Siguion Reyna,
Montecillio and Ongsiako Law Office as counsel, filed a motion to dismiss on the ground that the
filing of the case was without authority from its duly constituted board of directors as shown by
the excerpt of the minutes of the Premiums board of directors meeting.[2]

In its opposition to the motion to dismiss, Premium thru Atty. Dumadag contended that the
persons who signed the board resolution namely Belen, Jr., Nograles & Reyes, are not directors of
the corporation and were allegedly former officers and stockholders of Premium who were
dismissed for various irregularities and fraudulent acts; that Siguion Reyna Law office is the
lawyer of Belen and Nograles and not of Premium and that the Articles of Incorporation of
Premium shows that Belen, Nograles and Reyes are not majority stockholders.

On the other hand, Siguion Reyna Law firm as counsel of Premium in a rejoinder, asserted
that it is the general information sheet filed with the Securities and Exchange Commission, among
others, that is the best evidence that would show who are the stockholders of a corporation and not
the Articles of Incorporation since the latter does not keep track of the many changes that take
place after new stockholders subscribe to corporate shares of stocks.

In the interim, defendant bank filed a manifestation that it is adopting in toto Premiums
motion to dismiss and, therefore, joins it in praying for the dismissal of the present case on the
ground that Premium lacks authority from its duly constituted board of directors to institute the
action.

In its Order, the lower court concluded that:

Considering that the officers (directors) of plaintiff corporation enumerated in the Articles of
Incorporation, filed on November 9, 1979, were to serve until their successors are elected and
qualified and considering further that as of March 4, 1981, the officers of the plaintiff corporation
were Alberto Nograles, Fernando Hilario, Augusto Galace, Jose L.R. Reyes, Pido Aguilar and
Saturnino Belen, Jr., who presumably are the officers represented by the Siguion Reyna Law Firm,
and that together with the defendants, they are moving for the dismissal of the above-entitled case,
the Court finds that the officers represented by Atty. Dumadag do not as yet have the legal capacity
to sue for and in behalf of the plaintiff corporation and/or the filing of the present action (Civil
Case 14413) by them before Case No. 2688 of the SEC could be decided is a premature exercise
of authority or assumption of legal capacity for and in behalf of plaintiff corporation.

The issues raised in Civil Case No. 14444 are similar to those raised in Civil Case No. 14413. This
Court is of the opinion that before SEC Case No. 2688 could be decided, neither the set of officers
represented by Atty. Dumadag nor that set represented by the Siguion Reyna, Montecillo and
Ongsiako Law Office, may prosecute cases in the name of the plaintiff corporation.

It is clear from the pleadings filed by the parties in these two cases that the existence of a cause of
action against the defendants is dependent upon the resolution of the case involving intra-corporate
controversy still pending before the SEC.[3]

On appeal, the Court of Appeals affirmed the trial courts Order[4] which dismissed the
consolidated cases. Hence, this petition.
 ISSUE: Whether or not the filing of the case for damages against private respondent was
authorized by a duly constituted Board of Directors of the petitioner corporation.

Petitioner, through the first set of officers, viz., Mario Zavalla, Oscar Gan, Lionel Pengson,
Jose Ma. Silva, Aderito Yujuico and Rodolfo Millare, presented the Minutes[5] of the meeting of
its Board of Directors held on April 1, 1982, as proof that the filing of the case against private
respondent was authorized by the Board. On the other hand, the second set of officers, viz.,
Saturnino G. Belen, Jr., Alberto C. Nograles and Jose L.R. Reyes, presented a
Resolution[6] dated July 30, 1986, to show that Premium did not authorize the filing in its behalf
of any suit against the private respondent International Corporate Bank.

Later on, petitioner submitted its Articles of Incorporation[7] dated November 6, 1979 with the
following as Directors: Mario C. Zavalla, Pedro C. Celso, Oscar B. Gan, Lionel Pengson, and Jose
Ma. Silva.

However, it appears from the general information sheet and the Certification issued by the
SEC on August 19, 1986[8] that as of March 4, 1981, the officers and members of the board of
directors of the Premium Marble Resources, Inc. were:
Alberto C. Nograles President/Director
Fernando D. Hilario Vice President/Director
Augusto I. Galace Treasurer
Jose L.R. Reyes Secretary/Director
Pido E. Aguilar Director
Saturnino G. Belen, Jr. Chairman of the Board.

While the Minutes of the Meeting of the Board on April 1, 1982 states that the newly elected
officers for the year 1982 were Oscar Gan, Mario Zavalla, Aderito Yujuico and Rodolfo Millare,
petitioner failed to show proof that this election was reported to the SEC. In fact, the last entry in
their General Information Sheet with the SEC, as of 1986 appears to be the set of officers elected
in March 1981.

We agree with the finding of public respondent Court of Appeals, that in the absence of any
board resolution from its board of directors the [sic] authority to act for and in behalf of the
corporation, the present action must necessarily fail. The power of the corporation to sue and be
sued in any court is lodged with the board of directors that exercises its corporate powers. Thus,
the issue of authority and the invalidity of plaintiff-appellants subscription which is still pending,
is a matter that is also addressed, considering the premises, to the sound judgment of the Securities
& Exchange Commission.[9]

By the express mandate of the Corporation Code (Section 26), all corporations duly organized
pursuant thereto are required to submit within the period therein stated (30 days) to the Securities
and Exchange Commission the names, nationalities and residences of the directors, trustees and
officers elected.

Sec. 26 of the Corporation Code provides, thus:

Sec. 26. Report of election of directors, trustees and officers. Within thirty (30) days after the
election of the directors, trustees and officers of the corporation, the secretary, or any other officer
of the corporation, shall submit to the Securities and Exchange Commission, the names,
nationalities and residences of the directors, trustees and officers elected. xxx

Evidently, the objective sought to be achieved by Section 26 is to give the public information,
under sanction of oath of responsible officers, of the nature of business, financial condition and
operational status of the company together with information on its key officers or managers so that
those dealing with it and those who intend to do business with it may know or have the means of
knowing facts concerning the corporations financial resources and business responsibility.[10]

The claim, therefore, of petitioners as represented by Atty. Dumadag, that Zaballa, et al., are
the incumbent officers of Premium has not been fully substantiated. In the absence of an authority
from the board of directors, no person, not even the officers of the corporation, can validly bind
the corporation.[11]

We find no reversible error in the decision sought to be reviewed.

ACCORDINGLY, for lack of merit, the petition is hereby DENIED.

SO ORDERED.
MARSH THOMSON, petitioner, vs. COURT OF APPEALS and THE AMERICAN
CHAMBER OF COMMERCE OF THE PHILIPPINES, INC., respondents.
G.R. No. 116631, October 28, 1998, QUISUMBING, J.

FACTS:

Petitioner Marsh Thomson (Thomson) was the Executive Vice-President and, later on, the
Management Consultant of private respondent, the American Chamber of Commerce of the
Philippines, Inc. (AmCham) for over ten years, 1979-1989.

While petitioner was still working with private respondent, his superior, A. Lewis Burridge,
retired as AmChams President. Before Burridge decided to return to his home country, he wanted
to transfer his proprietary share in the Manila Polo Club (MPC) to petitioner. However, through
the intercession of Burridge, private respondent paid for the share but had it listed in petitioners
name. This was made clear in an employment advice dated January 13, 1986, wherein petitioner
was informed by private respondent as follows:

xxxxxxxxx

11. If you so desire, the Chamber is willing to acquire for your use a membership in the
Manila Polo Club. The timing of such acquisition shall be subject to the discretion of the
Board based on the Chambers financial position. All dues and other charges relating to
such membership shall be for your personal account. If the membership is acquired in
your name, you would execute such documents as necessary to acknowledge beneficial
ownership thereof by the Chamber.[2]

xxxxxxxxx

On April 25, 1986, Burridge transferred said proprietary share to petitioner, as confirmed in a
letter[3] of notification to the Manila Polo Club.

Upon his admission as a new member of the MPC, petitioner paid the transfer fee
of P40,000.00 from his own funds; but private respondent subsequently reimbursed this
amount. On November 19, 1986, MPC issued Proprietary Membership Certificate Number 3398
in favor of petitioner. But petitioner, however, failed to execute a document recognizing private
respondents beneficial ownership over said share.

Following AmChams policy and practice, there was a yearly renewal of employment contract
between the petitioner and private respondent. Separate letters of employment advice dated
October 1, 1986,[4] as well March 4, 1988[5] and January 7, 1989,[6] mentioned the MPC share. But
petitioner never acknowledged that private respondent is the beneficial owner of the share as
requested in follow-up requests, particularly one dated March 4, 1988 as follows:

Dear Marsh:

xxxxxxxxx
All other provisions of your compensation/benefit package will remain the same and are
summarized as follows:

xxxxxxxxx

9) The Manila Polo Club membership provided by the Chamber for you and your family
will continue on the same basis, to wit: all dues and other charges relating to such
membership shall be for your personal account and, if you have not already done
so, you will execute such documents as are necessary to acknowledge that the
Chamber is the beneficial owner of your membership in the Club.[7]

When petitioners contract of employment was up for renewal in 1989, he notified private
respondent that he would no longer be available as Executive Vice President after September 30,
1989. Still, the private respondent asked the petitioner to stay on for another six (6)
months. Petitioner indicated his acceptance of the consultancy arrangement with a counter-
proposal in his letter dated October 8, 1989, among others as follows:

11.) Retention of the Polo Club share, subject to my reimbursing the purchase price to the
Chamber, or one hundred ten thousand pesos (P110,000.00).[8]

Private respondent rejected petitioners counter-proposal.

Pending the negotiation for the consultancy arrangement, private respondent executed on
September 29, 1989 a Release and Quitclaim,[9] stating that AMCHAM, its directors, officers and
assigns, employees and/or representatives do hereby release, waive, abandon and discharge J.
MARSH THOMSON from any and all existing claims that the AMCHAM, its directors, officers
and assigns, employees and/or representatives may have against J. MARSH
THOMSON.[10] The quitclaim, expressed in general terms, did not mention specifically the MPC
share.

On April 5, 1990, private respondent, through counsel sent a letter to the petitioner demanding
the return and delivery of the MPC share which it (AmCham) owns and placed in your (Thomsons)
name.[11]

Failing to get a favorable response, private respondent filed on May 15, 1990, a complaint
against petitioner praying, inter alia, that the Makati Regional Trial Court render judgment
ordering Thomson to return the Manila Polo Club share to the plaintiff and transfer said share to
the nominee of plaintiff.[12]

On February 28, 1992, the trial court promulgated its decision,[13] thus:

The foregoing considered judgment is rendered as follows:

1.) The ownership of the contested Manila Polo Club share is adjudicated in favor of
defendant Marsh Thomson; and;

2.) Defendant shall pay plaintiff the sum of P300,000.00

Because both parties thru their respective faults have somehow contributed to the birth of this case,
each shall bear the incidental expenses incurred.[14]

In said decision, the trial court awarded the MPC share to defendant (petitioner now) on the
ground that the Articles of Incorporation and By-laws of Manila Polo Club prohibit artificial
persons, such as corporations, to be club members, ratiocinating in this manner:

An assessment of the evidence adduced by both parties at the trial will show clearly that it was the
intention of the parties that a membership to Manila Polo Club was to be secured by plaintiff
[herein private respondent] for defendants [herein petitioner] use. The latter was to execute the
necessary documents to acknowledge ownership of the Polo membership in favor of
plaintiff. (Exh. C par 9) However, when the parties parted ways in disagreement and with some
degree of bitterness, the defendant had second thoughts and decided to keep the membership for
himself. This is evident from the exhibits (E & G) where defendant asked that he retained the Polo
Club membership upon reimbursement of its purchase price; and where he showed his profound
disappointment, both at the previous Boards unfair action, and at what I consider to be harsh terms,
after my long years of dedication to the Chambers interest.

xxxxxxxxx

Notwithstanding all these evidence in favor of plaintiff, however, defendant may not be declared
the owner of the contested membership nor be compelled to execute documents transferring the
Polo Membership to plaintiff or the latters nominee for the reason that this is prohibited by Polo
Clubs Articles & By-Laws. x x x

It is for the foregoing reasons that the Court rules that the ownership of the questioned Polo Club
membership be retained by defendant.[15] x x x.

Not satisfied with the trial courts decision, private respondent appealed to the Court of
Appeals.

On May 19, 1994, the Court of Appeals (Former Special Sixth Division) promulgated its
decision[16] in said CA-G.R. CV No. 38417, reversing the trial courts judgment and ordered herein
petitioner to transfer the MPC share to the nominee of private respondent, reasoning thus:

xxxxxxxxx

The significant fact in the instant case is that the appellant [herein private respondent] purchased
the MPC share for the use of the appellee [herein petitioner] and the latter expressly conformed
thereto as shown in Exhibits A-1, B, B-1, C, C-1, D, D-1. By such express conformity of the
appellee, the former was bound to recognize the appellant as the owner of the said share for a
contract has the force of law between the parties. (Alim vs. CA, 200 SCRA 450; Sasuhura
Company, Inc., Ltd. vs. IAC, 205 SCRA 632) Aside from the foregoing, the appellee conceded
the true ownership of the said share to the appellant when (1) he offered to buy the MPC share
from the appellant (Exhs. E and E-1) upon the termination of his employment; (2) he obliged
himself to return the MPC share after his six month consultancy contract had elapsed, unless its
return was earlier requested in writing (Exh. I); and (3) on cross-examination, he admitted that the
proprietary share listed as one of the assets of the appellant corporation in its 1988 Corporate
Income Tax Return, which he signed as the latters Executive Vice President (prior to its filing),
refers to the Manila Polo Club share (tsn., pp. 19-20, August 30, 1991). x x x[17]

On 16 June 1994, petitioner filed a motion for reconsideration[18] of said decision. By

resolution[19] promulgated on August 4, 1994, the Court of Appeals denied the motion for
reconsideration.

In this petition for review, petitioner alleges the following errors of public respondent as
grounds for our review:

I. The respondent Court of Appeals erred in setting aside the Decision dated 28 February
1992 of the Regional Trial Court, NCJR, Branch 65, Makati, Metro Manila, in its Civil
Case No. 90-1286, and in not confirming petitioners ownership over the MPC
membership share.

II. The respondent Court of Appeals erred in ruling that the Quitclaim executed by
AmCham in favor of petitioner on September 29, 1989 was superseded by the
contractual agreement entered into by the parties on October 13, 1989 wherein again
the appellee acknowledged that the appellant owned the MPC share, there being
absolutely no evidence to support such a conclusion and/or such inference is
manifestly mistaken.

III. The respondent Court of Appeals erred in rendering judgment ordering petitioner to
transfer the contested MPC share to a nominee of respondent AmCham
notwithstanding that: (a) AmCham has no standing in the Manila Polo Club (MPC),
and being an artificial person, it is precluded under MPCs Articles of
Incorporation and governing rules and regulations from owning a proprietary share or
from becoming a member thereof; and (b) even under AmChams Articles of
Incorporation, and the purposes for which it is dedicated, becoming a stockholder or
shareholder in other corporations is not one of the express or implied powers fixed in
AmChams said corporate franchise.[20]

As posited above, these assigned errors show the disputed matters herein are mainly factual.
As such they are best left to the trial and appellate courts disposition. And this Court could have
dismissed the petition outright, were it not for the opposite results reached by the courts below.
Moreover, for the enhanced appreciation of the jural relationship between the parties involving
trust, this Court has given due course to the petition, which we now decide.

After carefully considering the pleadings on record, we find there are two main issues to be
resolved: (1) Did respondent court err in holding that private respondent is the beneficial owner of
the disputed share? (2) Did the respondent court err in ordering petitioner to transfer said share to
private respondents nominee?

Petitioner claims ownership of the MPC share, asserting that he merely incurred a debt to
respondent when the latter advanced the funds for the purchase of the share. On the other hand,
private respondent asserts beneficial ownership whereby petitioner only holds the share in his
name, but the beneficial title belongs to private respondent. To resolve the first issue, we must
clearly distinguish a debt from a trust.
 The beneficiary of a trust has beneficial interest in the trust property, while a creditor has
merely a personal claim against the debtor. In trust, there is a fiduciary relation between a trustee
and a beneficiary, but there is no such relation between a debtor and creditor. While a debt implies
merely an obligation to pay a certain sum of money, a trust refers to a duty to deal with a specific
property for the benefit of another. If a creditor-debtor relationship exists, but not a fiduciary
relationship between the parties, there is no express trust. However, it is understood that when the
purported trustee of funds is entitled to use them as his or her own (and commingle them with his
or her own money), a debtor-creditor relationship exists, not a trust.[21]

In the present case, as the Executive Vice-President of AmCham, petitioner occupied a

fiduciary position in the business of Amcham. AmCham released the funds to acquire a share in
the Club for the use of petitioner but obliged him to execute such document as necessary to
acknowledge beneficial ownership thereof by the Chamber.[22] A trust relationship is, therefore,
manifestly indicated.

Moreover, petitioner failed to present evidence to support his allegation of being merely a
debtor when the private respondent paid the purchase price of the MPC share. Applicable here is
the rule that a trust arises in favor of one who pays the purchase money of property in the name of
another, because of the presumption that he who pays for a thing intends a beneficial interest
therein for himself.[23]

Although petitioner initiated the acquisition of the share, evidence on record shows that
private respondent acquired said share with its funds. Petitioner did not pay for said share, although
he later wanted to, but according to his own terms, particularly the price thereof.

Private respondents evident purpose in acquiring the share was to provide additional incentive
and perks to its chosen executive, the petitioner himself. Such intention was repeated in the yearly
employment advice prepared by AmCham for petitioners concurrence. In the cited employment
advice, dated March 4, 1988, private respondent once again, asked the petitioner to execute proof
to recognize the trust agreement in writing:

The Manila Polo membership provided by the Chamber for you and your family will continue on
the same basis, to wit: all dues and other charges relating to such membership shall be for your
personal account and, if you have not already done so, you will execute such documents as are
necessary to acknowledge that the Chamber is the beneficial owner of your membership in
the Club.[24]

Petitioner voluntarily affixed his signature to conform with the employment advice, including
his obligation stated therein -- for him to execute the necessary document to recognize his
employer as the beneficial owner of the MPC share. Now, we cannot hear him claiming otherwise,
in derogation of said undertaking, without legal and equitable justification.

For private respondents intention to hold on to its beneficial ownership is not only presumed;
it was expressed in writing at the very outset. Although the share was placed in the name of
petitioner, his title is limited to the usufruct, that is, to enjoy the facilities and privileges of such
membership in the club appertaining to the share. Such arrangement reflects a trust relationship
governed by law and equity.
 While private respondent paid the purchase price for the share, petitioner was given legal title
thereto. Thus, a resulting trust is presumed as a matter of law. The burden then shifted to the
transferee to show otherwise, that it was just a loan. Such resulting trust could have been rebutted
by proof of a contrary intention by a showing that, in fact, no trust was intended. Petitioner could
have negated the trust agreement by contrary, consistent and convincing evidence on
rebuttal. However, on the witness stand, petitioner failed to do so persuasively.

On cross-examination, the petitioner testified as follows:

ATTY. AQUINO (continuing)
Q. Okay, let me go to the cash advance that you mentioned Mr. Witness, is there any document
proving that you claimed cash advance signed by an officer of the Chamber?
A. I believe the best evidence is the check.
Q. Is there any document?
COURT
Other than the Check?
MR. THOMSON
Nothing more.
ATTY. AQUINO
Is there any application filed in the Chamber to avail of this cash advance?
A. Verbal only.
Q. Nothing written, and can you tell to this Honorable Court what are the stipulations or
conditions, or terms of this transaction of securing this cash advance or loan?
xxxxxxxxx
COURT
How are you going to repay the cash advance?
MR THOMSON

The cash advance, we never stipulate when I have to repay it, but I presume that I would, when
able to repay the money.[25]

In deciding whether the property was wrongfully appropriated or retained and what the intent
of the parties was at the time of the conveyance, the court must rely upon its impression of the
credibility of the witnesses.[26] Intent is a question of fact, the determination of which is not
reviewable unless the conclusion drawn by the trier is one which could not reasonably be
drawn.[27] Petitioners denial is not adequate to rebut the trust. Time and again, we have ruled that
denials, if unsubstantiated by clear and convincing evidence, are deemed negative and self-serving
evidence, unworthy of credence.[28]

The trust between the parties having been established, petitioner advanced an alternative
defense that the private respondent waived the beneficial ownership of MPC share by issuing the
Release and Quitclaim in his favor.

This argument is less than persuasive. The quitclaim executed by private respondent does not
clearly show the intent to include therein the ownership over the MPC share. Private respondent
even asserts that at the time the Release and Quitclaim was executed on September 29, 1989, the
ownership of the MPC share was not controversial nor contested. Settled is the rule that a waiver
to be valid and effective must, in the first place, be couched in clear and unequivocal terms which
leave no doubt as to the intention of a party to give up a right or benefit which legally pertains to
him.[29] A waiver may not be attributed to a person when the terms thereof do not explicitly and
clearly evidence an intent to abandon a right vested in such person.[30] If we apply the standard
rule that waiver must be cast in clear and unequivocal terms, then clearly the general terms of the
cited release and quitclaim indicates merely a clearance from general accountability, not
specifically a waiver of AmChams beneficial ownership of the disputed shares.

Additionally, the intention to waive a right or advantage must be shown clearly and
convincingly, and when the only proof of intention rests in what a party does, his act should be so
manifestly consistent with, and indicative of, an intent to voluntarily relinquish the particular right
or advantage that no other reasonable explanation of his conduct is possible.[31] Considering the
terms of the quitclaim executed by the President of private respondent, the tenor of the document
does not lead to the purported conclusion that he intended to renounce private respondents
beneficial title over its share in the Manila Polo Club. We, therefore, find no reversible error in the
respondent Courts holding that private respondent, AmCham, is the beneficial owner of the share
in dispute.

Turning now to the second issue, the petitioner contends that the Articles of Incorporation and
By-laws of Manila Polo Club prohibit corporate membership. However, private respondent does
not insist nor intend to transfer the club membership in its name but rather to its designated
nominee. For as properly ruled by the Court of Appeals:

The matter prayed for does not involve the transfer of said share to the appellant, an artificial
person. The transfer sought is to the appellants nominee. Even if the MPC By-Laws and Articles
prohibit corporate membership, there would be no violation of said prohibition for the appellants
nominee to whom the said share is sought to be transferred would certainly be a natural person. x
xx

As to whether or not the transfer of said share to the appellants nominee would be disapproved by
the MPC, is a matter that should be raised at the proper time, which is only if such transfer is
disapproved by the MPC.[32]

The Manila Polo Club does not necessarily prohibit the transfer of proprietary shares by its
members. The Club only restricts membership to deserving applicants in accordance with its rules,
when the amended Articles of Incorporation states that: No transfer shall be valid except between
the parties, and shall be registered in the Membership Book unless made in accordance with these
Articles and the By-Laws.[33] Thus, as between parties herein, there is no question that a transfer
is feasible. Moreover, authority granted to a corporation to regulate the transfer of its stock does
not empower it to restrict the right of a stockholder to transfer his shares, but merely authorizes
the adoption of regulations as to the formalities and procedure to be followed in effecting
transfer.[34]

In this case, the petitioner was the nominee of the private respondent to hold the share and
enjoy the privileges of the club. But upon the expiration of petitioners employment as officer and
consultant of AmCham, the incentives that go with the position, including use of the MPC share,
also ceased to exist. It now behooves petitioner to surrender said share to private respondents next
nominee, another natural person. Obviously this arrangement of trust and confidence cannot be
defeated by the petitioners citation of the MPC rules to shield his untenable position, without doing
violence to basic tenets of justice and fair dealing.

However, we still have to ascertain whether the rights of herein parties to the trust still
subsist. It has been held that so long as there has been no denial or repudiation of the trust, the
possession of the trustee of an express and continuing trust is presumed to be that of the
beneficiary, and the statute of limitations does not run between them.[35] With regard to a
constructive or a resulting trust, the statute of limitations does not begin to run until the trustee
clearly repudiates or disavows the trust and such disavowal is brought home to the other
party, cestui que trust.[36] The statute of limitations runs generally from the time when the act was
done by which the party became chargeable as a trustee by operation of law or when the beneficiary
knew that he had a cause of action,[37] in the absence of fraud or concealment.

Noteworthy in the instant case, there was no declared or explicit repudiation of the trust
existing between the parties. Such repudiation could only be inferred as evident when the petitioner
showed his intent to appropriate the MPC share for himself. Specifically, this happened when he
requested to retain the MPC share upon his reimbursing the purchase price of P110,000, a request
denied promptly by private respondent. Eventually, petitioner refused to surrender the share
despite the written demand of private respondent. This act could then be construed as repudiation
of the trust. The statute of limitation could start to set in at this point in time. But private respondent
took immediate positive action. Thus, on May 15, 1990, private respondent filed an action to
recover the MPC share. Between the time of implicit repudiation of the trust on October 9, 1989,
as evidenced by petitioners letter of said date, and private respondents institution of the action to
recover the MPC share on May 15, 1990, only about seven months had lapsed. Our laws on the
matter provide that actions to recover movables shall prescribe eight years from the time the
possession thereof is lost,[38] unless the possessor has acquired the ownership by prescription for a
less period of four years if in good faith.[39] Since the private respondent filed the necessary action
on time and the defense of good faith is not available to the petitioner, there is no basis for any
purported claim of prescription, after repudiation of the trust, which will entitle petitioner to
ownership of the disputed share. As correctly held by the respondent court, petitioner has the
obligation to transfer now said share to the nominee of private respondent.

WHEREFORE, the Petition for Review on Certiorari is DENIED. The Decision of the
Court of Appeals of May 19, 1994, is AFFIRMED.

COSTS against petitioner.

SO ORDERED.
 MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY AND
NEPOMUCENO REDOVAN, petitioners, vs. THE HONORABLE COURT OF APPEALS,
EDGARDO D. PABALAN, MANUEL A. TORRES, JR., MARIA THERESA V. VELOSO
AND CASTRENSE C. VELOSO, respondents.
G.R. No. 91889, August 27, 1993, NOCON, J.

This is a petition for review on certiorari to annul and set aside the decision 1 of the Court of
Appeals affirming the decision2 of the Regional Trial Court of Pasay, Branch 114 Civil Cases Nos.
8198-P, and 2880-P, the dispositive portion of which reads, as follows:

Wherefore, in view of all the foregoing considerations, in this Court hereby renders judgment,
as follows:

In Civil Case No. 2880-P, the petition filed by Manuel R. Dulay Enterprises, Inc. and Virgilio
E. Dulay for annulment or declaration of nullity of the decision of the Metropolitan Trial Court,
Branch 46, Pasay City, in its Civil Case No. 38-81 entitled "Edgardo D. Pabalan, et al., vs.
Spouses Florentino Manalastas, et al.," is dismissed for lack of merits;

In Civil Case No. 8278-P, the complaint filed by Manuel R. Dulay Enterprises, Inc. for
cancellation of title of Manuel A. Torres, Jr. (TCT No. 24799 of the Register of Deeds of Pasay
City) and reconveyance, is dismissed for lack or merit, and,

In Civil Case No. 8198-P, defendants Manuel R. Dulay Enterprises, Inc. and Virgilio E. Dulay
are ordered to surrender and deliver possession of the parcel of land, together with all the
improvements thereon, described in Transfer Certificate of Title No. 24799 of the Register of
Deeds of Pasay City, in favor of therein plaintiffs Manuel A. Torres, Jr. as owner and Edgardo
D. Pabalan as real estate administrator of said Manuel A. Torres, Jr.; to account for and return
to said plaintiffs the rentals from dwelling unit No. 8-A of the apartment building (Dulay
Apartment) from June 1980 up to the present, to indemnify plaintiffs, jointly and severally,
expenses of litigation in the amount of P4,000.00 and attorney's fees in the sum of P6,000.00,
for all the three (3) cases. Co-defendant Nepomuceno Redovan is ordered to pay the current
and subsequent rentals on the premises leased by him to plaintiffs.

The counterclaim of defendants Virgilio E. Dulay and Manuel R. Dulay Enterprises, Inc. and
N. Redovan, dismissed for lack of merit. With costs against the three (3) aforenamed
defendants. 3

The facts as found by the trial court are as follows:

Petitioner Manuel R. Dulay Enterprises, Inc, a domestic corporation with the following as
members of its Board of Directors: Manuel R. Dulay with 19,960 shares and designated as
president, treasurer and general manager, Atty. Virgilio E. Dulay with 10 shares and designated as
vice-president; Linda E. Dulay with 10 shares; Celia Dulay-Mendoza with 10 shares; and Atty.
Plaridel C. Jose with 10 shares and designated as secretary, owned a property covered by TCT No.
17880 4 and known as Dulay Apartment consisting of sixteen (16) apartment units on a six hundred
eighty-nine (689) square meters lot, more or less, located at Seventh Street (now Buendia
Extension) and F.B. Harrison Street, Pasay City.
Petitioner corporation through its president, Manuel Dulay, obtained various loans for the
construction of its hotel project, Dulay Continental Hotel (now Frederick Hotel). It even had to
borrow money from petitioner Virgilio Dulay to be able to continue the hotel project. As a result
of said loan, petitioner Virgilio Dulay occupied one of the unit apartments of the subject property
since property since 1973 while at the same time managing the Dulay Apartment at his
shareholdings in the corporation was subsequently increased by his father. 5

On December 23, 1976, Manuel Dulay by virtue of Board Resolution

No 186 of petitioner corporation sold the subject property to private respondents spouses Maria
Theresa and Castrense Veloso in the amount of P300,000.00 as evidenced by the Deed of Absolute
Sale.7 Thereafter, TCT No. 17880 was cancelled and TCT No. 23225 was issued to private
respondent Maria Theresa Veloso. 8 Subsequently, Manuel Dulay and private respondents spouses
Veloso executed a Memorandum to the Deed of Absolute Sale of December 23, 1976 9 dated
December 9, 1977 giving Manuel Dulay within (2) years or until December 9, 1979 to repurchase
the subject property for P200,000.00 which was, however, not annotated either in TCT No. 17880
or TCT No. 23225.

On December 24, 1976, private respondent Maria Veloso, without the knowledge of Manuel
Dulay, mortgaged the subject property to private respondent Manuel A. Torres for a loan of
P250,000.00 which was duly annotated as Entry No. 68139 in TCT No. 23225. 10

Upon the failure of private respondent Maria Veloso to pay private respondent Torres, the subject
property was sold on April 5, 1978 to private respondent Torres as the highest bidder in an
extrajudicial foreclosure sale as evidenced by the Certificate of Sheriff's Sale 11 issued on April
20, 1978.

On July 20, 1978, private respondent Maria Veloso executed a Deed of Absolute Assignment of
the Right to Redeem 12 in favor of Manuel Dulay assigning her right to repurchase the subject
property from private respondent Torres as a result of the extra sale held on April 25, 1978.

As neither private respondent Maria Veloso nor her assignee Manuel Dulay was able to redeem
the subject property within the one year statutory period for redemption, private respondent Torres
filed an Affidavit of Consolidation of Ownership 13 with the Registry of Deeds of Pasay City and
TCT No. 24799 14 was subsequently issued to private respondent Manuel Torres on April 23, 1979.

On October 1, 1979, private respondent Torres filed a petition for the issuance of a writ of
possession against private respondents spouses Veloso and Manuel Dulay in LRC Case No. 1742-
P. However, when petitioner Virgilio Dulay was never authorized by the petitioner corporation to
sell or mortgage the subject property, the trial court ordered private respondent Torres to implead
petitioner corporation as an indispensable party but the latter moved for the dismissal of his petition
which was granted in an Order dated April 8, 1980.

On June 20, 1980, private respondent Torres and Edgardo Pabalan, real estate administrator of
Torres, filed an action against petitioner corporation, Virgilio Dulay and Nepomuceno Redovan, a
tenant of Dulay Apartment Unit No. 8-A for the recovery of possession, sum of money and
damages with preliminary injunction in Civil Case, No. 8198-P with the then Court of First
Instance of Rizal.
On July 21, 1980, petitioner corporation filed an action against private respondents spouses Veloso
and Torres for the cancellation of the Certificate of Sheriff's Sale and TCT No. 24799 in Civil Case
No. 8278-P with the then Court of First Instance of Rizal.

On January 29, 1981, private respondents Pabalan and Torres filed an action against spouses
Florentino and Elvira Manalastas, a tenant of Dulay Apartment Unit No. 7-B, with petitioner
corporation as intervenor for ejectment in Civil Case No. 38-81 with the Metropolitan Trial Court
of Pasay City which rendered a decision on April 25, 1985, dispositive portion of which reads, as
follows:

Wherefore, judgment is hereby rendered in favor of the plaintiff (herein private respondents)
and against the defendants:

1. Ordering the defendants and all persons claiming possession under them to vacate the
premises.

2. Ordering the defendants to pay the rents in the sum of P500.000 a month from May, 1979
until they shall have vacated the premises with interest at the legal rate;

3. Ordering the defendants to pay attorney's fees in the sum of P2,000.00 and P1,000.00 as
other expenses of litigation and for them to pay the costs of the suit.15

Thereafter or on May 17, 1985, petitioner corporation and Virgilio Dulay filed an action against
the presiding judge of the Metropolitan Trial Court of Pasay City, private respondents Pabalan and
Torres for the annulment of said decision with the Regional Trial Court of Pasay in Civil Case No.
2880-P.

Thereafter, the three (3) cases were jointly tried and the trial court rendered a decision in favor of
private respondents.

Not satisfied with said decision, petitioners appealed to the Court of Appeals which rendered a
decision on October 23, 1989, the dispositive portion of which reads, as follows:

PREMISES CONSIDERED, the decision being appealed should be as it is hereby

AFFIRMED in full. 16

On November 8, 1989, petitioners filed a Motion for Reconsideration which was denied on January
26, 1990.

Hence, this petition.

During the pendency of this petition, private respondent Torres died on April 3, 1991 as shown in
his death certificate 17 and named Torres-Pabalan Realty & Development Corporation as his heir
in his holographic will 18dated October 31, 1986.

Petitioners contend that the respondent court had acted with grave abuse of discretion when it
applied the doctrine of piercing the veil of corporate entity in the instant case considering that the
sale of the subject property between private respondents spouses Veloso and Manuel Dulay has no
binding effect on petitioner corporation as Board Resolution No. 18 which authorized the sale of
the subject property was resolved without the approval of all the members of the board of directors
and said Board Resolution was prepared by a person not designated by the corporation to be its
secretary.

We do not agree.

Section 101 of the Corporation Code of the Philippines provides:

Sec. 101. When board meeting is unnecessary or improperly held. Unless the by-laws provide
otherwise, any action by the directors of a close corporation without a meeting shall
nevertheless be deemed valid if:

1. Before or after such action is taken, written consent thereto is signed by all the directors, or

2. All the stockholders have actual or implied knowledge of the action and make no prompt
objection thereto in writing; or

3. The directors are accustomed to take informal action with the express or implied acquiese
of all the stockholders, or

4. All the directors have express or implied knowledge of the action in question and none of
them makes prompt objection thereto in writing.

If a directors' meeting is held without call or notice, an action taken therein within the corporate
powers is deemed ratified by a director who failed to attend, unless he promptly files his written
objection with the secretary of the corporation after having knowledge thereof.

In the instant case, petitioner corporation is classified as a close corporation and consequently a
board resolution authorizing the sale or mortgage of the subject property is not necessary to bind
the corporation for the action of its president. At any rate, corporate action taken at a board meeting
without proper call or notice in a close corporation is deemed ratified by the absent director unless
the latter promptly files his written objection with the secretary of the corporation after having
knowledge of the meeting which, in his case, petitioner Virgilio Dulay failed to do.

It is relevant to note that although a corporation is an entity which has a personality distinct and
separate from its individual stockholders or members, 19 the veil of corporate fiction may be
pierced when it is used to defeat public convenience justify wrong, protect fraud or defend
crime. 20 The privilege of being treated as an entity distinct and separate from its stockholder or
members is therefore confined to its legitimate uses and is subject to certain limitations to prevent
the commission of fraud or other illegal or unfair act. When the corporation is used merely as an
alter ego or business conduit of a person, the law will regard the corporation as the act of that
person. 21 The Supreme Court had repeatedly disregarded the separate personality of the
corporation where the corporate entity was used to annul a valid contract executed by one of its
members.

Petitioners' claim that the sale of the subject property by its president, Manuel Dulay, to private
respondents spouses Veloso is null and void as the alleged Board Resolution No. 18 was passed
without the knowledge and consent of the other members of the board of directors cannot be
sustained. As correctly pointed out by the respondent Court of Appeals:

Appellant Virgilio E. Dulay's protestations of complete innocence to the effect that he never
participated nor was even aware of any meeting or resolution authorizing the mortgage or sale
of the subject premises (see par. 8, affidavit of Virgilio E. Dulay, dated May 31, 1984, p. 14,
Exh. "21") is difficult to believe. On the contrary, he is very much privy to the transactions
involved. To begin with, he is a incorporator and one of the board of directors designated at
the time of the organization of Manuel R. Dulay Enterprise, Inc. In ordinary parlance, the said
entity is loosely referred to as a "family corporation". The nomenclature, if imprecise, however,
fairly reflects the cohesiveness of a group and the parochial instincts of the individual members
of such an aggrupation of which Manuel R. Dulay Enterprises, Inc. is typical: four-fifths of its
incorporators being close relatives namely, three (3) children and their father whose name
identifies their corporation (Articles of Incorporation of Manuel R. Dulay Enterprises, Inc.
Exh. "31-A"). 22

Besides, the fact that petitioner Virgilio Dulay on June 24, 1975 executed an affidavit 23 that he
was a signatory witness to the execution of the post-dated Deed of Absolute Sale of the subject
property in favor of private respondent Torres indicates that he was aware of the transaction
executed between his father and private respondents and had, therefore, adequate knowledge about
the sale of the subject property to private respondents.

Consequently, petitioner corporation is liable for the act of Manuel Dulay and the sale of the
subject property to private respondents by Manuel Dulay is valid and binding. As stated by the
trial court:

. . . the sale between Manuel R. Dulay Enterprises, Inc. and the spouses Maria Theresa V.
Veloso and Castrense C. Veloso, was a corporate act of the former and not a personal
transaction of Manuel R. Dulay. This is so because Manuel R. Dulay was not only president
and treasurer but also the general manager of the corporation. The corporation was a closed
family corporation and the only non-relative in the board of directors was Atty. Plaridel C. Jose
who appeared on paper as the secretary. There is no denying the fact, however, that Maria
Socorro R. Dulay at times acted as secretary. . . ., the Court can not lose sight of the fact that
the Manuel R. Dulay Enterprises, Inc. is a closed family corporation where the incorporators
and directors belong to one single family. It cannot be concealed that Manuel R. Dulay as
president, treasurer and general manager almost had absolute control over the business and
affairs of the corporation. 24

Moreover, the appellate courts will not disturb the findings of the trial judge unless he has plainly
overlooked certain facts of substance and value that, if considered, might affect the result of the
case, 25 which is not present in the instant case.

Petitioners' contention that private respondent Torres never acquired ownership over the subject
property since the latter was never in actual possession of the subject property nor was the property
ever delivered to him is also without merit.

Paragraph 1, Article 1498 of the New Civil Code provides:

 When the sale is made through a public instrument, the execution thereof shall be
equivalent to the delivery of the thing which is the object of the contract, if from
the deed the contrary do not appear or cannot clearly be inferred.

Under the aforementioned article, the mere execution of the deed of sale in a public document is
equivalent to the delivery of the property. Likewise, this Court had held that:

It is settled that the buyer in a foreclosure sale becomes the absolute owner of the
property purchased if it is not redeemed during the period of one year after the
registration of the sale. As such, he is entitled to the possession of the said property
and can demand it at any time following the consolidation of ownership in his name
and the issuance to him of a new transfer certificate of title. The buyer can in fact
demand possession of the land even during the redemption period except that he
has to post a bond in accordance with Section 7 of Act No. 3133 as amended. No
such bond is required after the redemption period if the property is not redeemed.
Possession of the land then becomes an absolute right of the purchaser as confirmed
owner. 26

Therefore, prior physical delivery or possession is not legally required since the execution of the
Deed of Sale in deemed equivalent to delivery.

Finally, we hold that the respondent appellate court did not err in denying petitioner's motion for
reconsideration despite the fact that private respondents failed to submit their comment to said
motion as required by the respondent appellate court from resolving petitioners' motion for
reconsideration without the comment of the private respondent which was required merely to aid
the court in the disposition of the motion. The courts are as much interested as the parties in the
early disposition of cases before them. To require otherwise would unnecessarily clog the courts'
dockets.

WHEREFORE, the petition is DENIED and the decision appealed from is hereby AFFIRMED.

SO ORDERED.
 EXCELLENT QUALITY APPAREL, INC., petitioner, vs. WIN MULTI RICH
BUILDERS, INC., WILSON G. CHUA, respondent.
G.R. No. 175048, February 10, 2009, TINGA, J.

On 26 March 1996, petitioner Excellent Quality Apparel, Inc. (petitioner) then represented
by Max L.F. Ying, Vice-President for Productions, and Alfiero R. Orden, Treasurer, entered into
a contract[5] with Multi-Rich Builders (Multi-Rich) represented by Wilson G. Chua (Chua), its
President and General Manager, for the construction of a garment factory within the Cavite
Philippine Economic Zone Authority (CPEZ).[6] The duration of the project was for a maximum
period of five (5) months or 150 consecutive calendar days. Included in the contract is an
arbitration clause which is as follows:

Article XIX : ARBITRATION CLAUSE

Should there be any dispute, controversy or difference between the parties

arising out of this Contract that may not be resolved by them to their mutual
satisfaction, the matter shall be submitted to an Arbitration Committee of three (3)
members; one (1) chosen by the OWNER; one (1) chosen by the CONTRACTOR;
and the Chairman thereof to be chosen by two (2) members. The decision of the
Arbitration Committee shall be final and binding on both the parties hereto. The
Arbitration shall be governed by the Arbitration Law (R.A. [No.] 876). The cost
of arbitration shall be borned [sic] jointly by both CONTRACTOR and OWNER
on 50-50 basis.[7]

The construction of the factory building was completed on 27 November 1996.

Respondent Win Multi-Rich Builders, Inc. (Win) was incorporated with the Securities and
Exchange Commission (SEC) on 20 February 1997[8] with Chua as its President and General
Manager. On 26 January 2004, Win filed a complaint for a sum of money[9] against petitioner and
Mr. Ying amounting to P8,634,448.20. It also prayed for the issuance of a writ of attachment
claiming that Mr. Ying was about to abscond and that petitioner was about to close. Win obtained
a surety bond[10] issued by Visayan Surety & Insurance Corporation. On 10 February 2004, the
RTC issued the Writ of Attachment[11] against the properties of petitioner.

On 16 February 2004, Sheriff Salvador D. Dacumos of the RTC of Manila, Branch 32, went to the
office of petitioner in CPEZ to serve the Writ of Attachment, Summons[12]and the Complaint.
Petitioner issued Equitable PCIBank (PEZA Branch) Check No. 160149, dated 16 February 2004,
in the amount of P8,634,448.20, to prevent the Sheriff from taking possession of its
properties.[13] The check was made payable to the Office of the Clerk of Court of the RTC of
Manila as a guarantee for whatever liability there may be against petitioner.

Petitioner filed an Omnibus Motion[14] claiming that it was neither about to close. It also denied
owing anything to Win, as it had already paid all its obligations to it. Lastly, it questioned the
jurisdiction of the trial court from taking cognizance of the case. Petitioner pointed to the presence
of the Arbitration Clause and it asserted that the case should be referred to the Construction
Industry Arbitration Commission (CIAC) pursuant to Executive Order (E.O.) No. 1008.
In the hearing held on 10 February 2004, the counsel of Win moved that its name in the case be
changed from Win Multi-Rich Builders, Inc. to Multi-Rich Builders, Inc. It was only then that
petitioner apparently became aware of the variance in the name of the plaintiff. In the
Reply[15] filed by petitioner, it moved to dismiss the case since Win was not the contractor and
neither a party to the contract, thus it cannot institute the case. Petitioner obtained a Certificate of
Non-Registration of Corporation/Partnership[16] from the SEC which certified that the latter did
not have any records of a Multi-Rich Builders, Inc. Moreover, Win in its Rejoinder[17] did not

oppose the allegations in the Reply. Win admitted that it was only incorporated on 20 February
1997 while the construction contract was executed on 26 March 1996. Likewise, it admitted that
at the time of execution of the contract, Multi-Rich was a registered sole proprietorship and was
issued a business permit[18] by the Office of the Mayor of Manila.

In an Order[19] dated 12 April 2004, the RTC denied the motion and stated that the issues can be
answered in a full-blown trial. Upon its denial, petitioner filed its Answer and prayed for the
dismissal of the case.[20] Win filed a Motion[21] to deposit the garnished amount to the court to
protect its legal rights. In a Manifestation,[22] petitioner vehemently opposed the deposit of the
garnished amount. The RTC issued an Order[23] dated 20 April 2004, which granted the motion to
deposit the garnished amount. On the same date, Win filed a motion[24] to release the garnished
amount to it. Petitioner filed its opposition[25] to the motion claiming that the release of the money
does not have legal and factual basis.

On 18 June 2004, petitioner filed a petition for review on certiorari[26] under Rule 65 before the
Court of Appeals, which questioned the jurisdiction of the RTC and challenged the orders issued
by the lower court with a prayer for the issuance of a temporary retraining order and a writ of
preliminary injunction. Subsequently, petitioner filed a Supplemental Manifestation and
Motion[27] and alleged that the money deposited with the RTC was turned over to Win. Win
admitted that the garnished amount had already been released to it. On 14 March 2006, the Court
of Appeals rendered its Decision[28] annulling the 12 April and 20 April 2004 orders of the RTC.
It also ruled that the RTC had jurisdiction over the case since it is a suit for collection of sum of
money. Petitioner filed a Motion for Reconsideration[29] which was subsequently denied in a
resolution.[30]

Hence this petition.

Petitioner raised the following issues to wit: (1) does Win have a legal personality to institute the
present case; (2) does the RTC have jurisdiction over the case notwithstanding the presence of the
arbitration clause; and (3) was the issuance of the writ of attachment and the subsequent
garnishment proper.
A suit may only be instituted by the real party in interest. Section 2, Rule 3 of the Rules of Court
defines parties in interest in this manner:

A real party in interest is the party who stands to be benefited or injured by the
judgment in the suit, or the party entitled to the avails of the suit. Unless otherwise
authorized by law or these Rules, every action must be prosecuted or defended in
the name of the real party in interest.

Is Win a real party in interest? We answer in the negative.

Win admitted that the contract was executed between Multi-Rich and petitioner. It further admitted
that Multi-Rich was a sole proprietorship with a business permit issued by the Office of the Mayor
of Manila. A sole proprietorship is the oldest, simplest, and most prevalent form of business
enterprise.[31] It is an unorganized business owned by one person. The sole proprietor is personally
liable for all the debts and obligations of the business.[32] In the case of Mangila v. Court of
Appeals,[33] we held that:

x x x In fact, there is no law authorizing sole proprietorships to file a suit in

court.

A sole proprietorship does not possess a juridical personality separate and

distinct from the personality of the owner of the enterprise. The law merely
recognizes the existence of a sole proprietorship as a form of business organization
conducted for profit by a single individual and requires its proprietor or
owner to secure licenses and permits, register its business name, and pay taxes to
the national government. The law does not vest a separate legal personality on the
sole proprietorship or empower it to file or defend an action in court.

The original petition was instituted by Win, which is a SEC-registered corporation. It filed
a collection of sum of money suit which involved a construction contract entered into by petitioner
and Multi-Rich, a sole proprietorship. The counsel of Win wanted to change the name of the
plaintiff in the suit to Multi-Rich. The change cannot be countenanced. The plaintiff in the
collection suit is a corporation. The name cannot be changed to that of a sole proprietorship. Again,
a sole proprietorship is not vested with juridical personality to file or defend an action.[34]

Petitioner had continuously contested the legal personality of Win to institute the case. Win was
given ample opportunity to adduce evidence to show that it had legal personality.It failed to do
so. Corpus Juris Secundum, notes:
x x x where an individual or sole trader organizes a corporation to take over his
business and all his assets, and it becomes in effect merely an alter ego of the
incorporator, the corporation, either on the grounds of implied assumption of the
debts or on the grounds that the business is the same and is merely being conducted
under a new guise, is liable for the incorporator's preexisting debts and liabilities.
 Clearly, where the corporation assumes or accepts the debt of its predecessor in
business it is liable and if the transfer of assets is in fraud of creditors it will be
liable to the extent of the assets transferred. The corporation is not liable on an
implied assumption of debts from the receipt of assets where the incorporator
retains sufficient assets to pay the indebtedness, or
where none of his assets are transferred to the corporation, or
where, although all the assets of the incorporator have been transferred, there is a
change in the persons carrying on the business and the corporation is not merely
an alter ego of the person to whose business it succeeded.[35]

In order for a corporation to be able to file suit and claim the receivables of its predecessor
in business, in this case a sole proprietorship, it must show proof that the corporation had acquired
the assets and liabilities of the sole proprietorship. Win could have easily presented or attached
any document e.g., deed of assignment which will show whether the assets, liabilities and
receivables of Multi-Rich were acquired by Win. Having been given the opportunity to rebut the
allegations made by petitioner, Win failed to use that opportunity. Thus, we cannot presume that
Multi-Rich is the predecessor-in-business of Win and hold that the latter has standing to institute
the collection suit.

Assuming arguendo that Win has legal personality, the petition will still be granted.

Section 4 of E.O. No. 1008[36] provides for the jurisdiction of the Construction Industry Arbitration
Commission, to wit:

Section 4. Jurisdiction.The CIAC shall have original and exclusive jurisdiction

over disputes arising from, or connected with, contracts entered into by parties
involved in construction in the Philippines, whether the disputes arises before or
after the completion of the contract, or after the abandonment or breach thereof.
These disputes may involve government or private contracts. For the Board to
acquire jurisdiction, the parties to a dispute must agree to submit the same to
voluntary arbitration.

The jurisdiction of the CIAC may include but is not limited to violation of
specifications for materials and workmanship; violation of the terms of agreement;
interpretation and/or application of contractual time and delays; amount of
damages and penalties; commencement time and delays; maintenance and defects;
payment, default of employer or contractor and changes in contract cost.

Excluded from the coverage of this law are disputes from employer-employee
relationships which shall continue to be covered by the Labor Code of
the Philippines.

There is nothing in the law which limits the exercise of jurisdiction to complex or difficult
cases. E.O. No. 1008 does not distinguish between claims involving payment of money or
not.[37] The CIAC acquires jurisdiction over a construction contract by the mere fact that the parties
agreed to submit to voluntary arbitration.[38] The law does not preclude parties from stipulating a
preferred forum or arbitral body but they may not divest the CIAC of jurisdiction as provided by
law.[39] Arbitration is an alternative method of dispute resolution which is highly
encouraged.[40] The arbitration clause is a commitment on the part of the parties to submit to
arbitration the disputes covered since that clause is binding, and they are expected to
abide by it in good faith.[41] Clearly, the RTC should not have taken cognizance of the collection
suit. The presence of the arbitration clause vested jurisdiction to the CIAC over all construction
disputes between Petitioner and Multi-Rich. The RTC does not have jurisdiction.[42]

Based on the foregoing, there is no need to discuss the propriety of the issuance of the writ of
attachment. However, we cannot allow Win to retain the garnished amount which was turned over
by the RTC. The RTC did not have jurisdiction to issue the questioned writ of attachment and to
order the release of the garnished funds.

VII. DISPOSITIVE PORTION:

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals is

hereby MODIFIED. Civil Case No. 04-108940 is DISMISSED. Win Multi-Rich Builders, Inc.
is ORDERED to return the garnished amount of EIGHT MILLION SIX HUNDRED THIRTY-
FOUR THOUSAND FOUR HUNDRED FORTY-EIGHT PESOS AND FORTY CENTAVOS
(P8,634,448.40), which was turned over by the Regional Trial Court, to petitioner with legal
interest of 12 percent (12%) per annum upon finality of this Decision until payment.

SO ORDERED.